RULE NO. 424(b)(5)
REGISTRATION NO. 333-56213
PROSPECTUS
Asset Backed Certificates
Asset Backed Notes
(ISSUABLE IN SERIES)
ACE Securities Corp.
Depositor
The Asset Backed Certificates (the "Certificates") and Asset Backed Notes (the
"Notes" and, together with the Certificates, the "Securities") offered hereby
and by Supplements to this Prospectus (the "Offered Securities") will be offered
from time to time in one or more series. Each series of Certificates will
represent in the aggregate the entire beneficial ownership interest in a trust
fund (with respect to any series, the "Trust Fund") consisting of one or more
segregated pools of various types of single family and/or multifamily mortgage
loans (or certain balances thereof) (collectively, the "Mortgage Loans"),
unsecured home improvement installment sales contracts and installment loans
("Unsecured Home Improvement Loans"), manufactured housing installment sale
contracts or installment loan agreements ("Contracts"), a combination of
Mortgage Loans, Unsecured Home Improvement Loans and/or Contracts or beneficial
interests in such assets (which may include Mortgage Securities, as defined
herein) or pass-through or participation certificates issued or guaranteed by
the Government National Mortgage Association ("Ginnie Mae"), Fannie Mae ("Fannie
Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (any such
certificates, "Agency Securities") (with respect to any series, collectively,
"Assets"). If so specified in the related Prospectus Supplement, all or a
portion of the Mortgage Loans will consist of Sub-prime Mortgage Loans as
described under "Risk Factors--Increased Risk of Delinquencies and Foreclosures
on Sub-prime Mortgage Loans." If a series of Securities includes Notes, such
Notes will be issued and secured pursuant to an indenture and will represent
indebtedness of the Trust Fund. If so specified in the related Prospectus
Supplement, the Trust Fund for a series of Securities may include letters of
credit, insurance policies, guarantees, reserve funds or other types of credit
support, or any combination thereof (with respect to any series, collectively,
"Credit Support"), and currency or interest rate exchange agreements and other
financial assets, or any combination thereof (with respect to any series,
collectively, "Cash Flow Agreements"). In addition, as so specified in the
related Prospectus Supplement, the Trust Fund will include monies on deposit in
one or more trust accounts to be established with a Trustee, which may include a
Pre-Funding Account, as described herein, which would be used to purchase
additional Assets for the related Trust Fund during the period specified in the
related Prospectus Supplement. See "Description of the Trust Funds,"
"Description of the Securities" and "Description of Credit Support."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OF EACH SERIES WILL NOT REPRESENT AN OBLIGATION OF OR INTEREST
IN THE DEPOSITOR, DEUTSCHE BANK SECURITIES INC., ANY MASTER SERVICER, ANY
SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT TO THE
LIMITED EXTENT DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES NOR, EXCEPT AS SET FORTH HEREIN OR IN THE RELATED
PROSPECTUS SUPPLEMENT, ANY ASSETS IN THE RELATED TRUST FUND (OTHER THAN ASSETS
IDENTIFIED AS FHA LOANS OR VA LOANS IN THE RELATED PROSPECTUS SUPPLEMENT) WILL
BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
ALTHOUGH PAYMENT OF PRINCIPAL AND INTEREST ON AGENCY SECURITIES WILL BE
GUARANTEED AS DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT BY
GINNIE MAE, FANNIE MAE OR FREDDIE MAC, THE SECURITIES OF ANY SERIES EVIDENCING
INTERESTS IN A TRUST FUND INCLUDING SUCH AGENCY SECURITIES WILL NOT BE SO
GUARANTEED.
Prospective investors should review the material risks appearing under the
caption "Risk Factors" beginning on page 23 herein and such information as may
be set forth under the caption "Risk Factors" in the related Prospectus
Supplement before purchasing any Offered Security.
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 Offered
Securities will develop or that, if it does develop, it will continue. It is
not expected that any application will be made to list the Securities of a
series on any securities exchange. Accordingly the liquidity of the Securities
may be limited. This Prospectus may not be used to consummate sales of the
Offered Securities of any series unless accompanied by the Prospectus Supplement
for such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, including Deutsche Bank
Securities Inc., as more fully described under "Methods of Distribution" herein
and in the related Prospectus Supplement.
The date of this Prospectus is November 10, 1999.
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. An Index of Defined Terms is included at the end of
this Prospectus beginning on page 159.
Title of Securities.... Asset Backed Certificates and Asset Backed Notes (the
"Notes" and, together with the Certificates, the
"Securities"), issuable in series.
Depositor.............. ACE Securities Corp. (the "Depositor"), a Delaware
corporation. Neither the Depositor nor any of its
affiliates will insure or guarantee the Securities or
the Assets or be otherwise obligated in respect
thereof.
Issuer................. With respect to each series of Securities, the Trust
Fund to be formed pursuant to either a deposit trust
agreement or a pooling and servicing agreement.
Servicers.............. To the extent specified in the related Prospectus
Supplement, one or more entities identified therein
(each, a "Servicer") that will service the Assets
contained in each Trust Fund. In the event there is
only one Servicer performing the servicing functions
with respect to the Assets in a Trust Fund, such Assets
will be serviced pursuant to a related pooling and
servicing agreement (each, a "Pooling and Servicing
Agreement"). In the event there are multiple Servicers,
or in the event the Securities consist of Notes, each
Servicer will perform such servicing functions pursuant
to a related servicing agreement (each, an "Underlying
Servicing Agreement"). A Servicer may be an affiliate
of the Depositor. See "Description of the Agreements."
Master Servicer........ In the event that there is more than one Servicer for
the Assets of the Trust Fund relating to a series of
Certificates, a master servicer (the "Master Servicer")
may be appointed to perform certain administration,
calculation and reporting functions with respect to the
Trust Fund and may supervise the Servicers pursuant to
a Pooling and Servicing Agreement. In addition, to the
extent described in the related Prospectus Supplement,
if advances are required to be made with respect to
delinquent scheduled payments on the Assets in the
Trust Fund the Master Servicer may be required to make
such advances to the extent the related Servicer fails
to do so. The Master Servicer may be an affiliate of
the Depositor.
See "Description of the Agreements" and "Description of
the Securities--Advances in Respect of Delinquencies."
Trustee; Indenture
Trustee............... The trustee (the "Trustee") or indenture trustee
(the "Indenture Trustee") for each series of Securities
will be named in the related Prospectus Supplement.
See "Description of the Agreements--Material Terms of
the Pooling and Servicing Agreements and Underlying
Servicing Agreements--The Trustee."
The Trust Assets....... Each series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a
Trust Fund. If a series of Securities includes Notes,
such Notes will represent indebtedness of the Trust
Fund and will be secured by a security interest in the
Assets of the
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Trust Fund. A Trust Fund will consist primarily of any
of the following assets: the Mortgage Loans, Unsecured
Home Improvement Loans, Contracts, Agency Securities
and Mortgage Securities.
(a) Special Payment
Provisions............ The Assets included in a Trust Fund may be
subject to various types of payment provisions as
specified in the related Prospectus Supplement, and may
include Level Payment Assets, Adjustable Rate Assets,
Buydown Assets, GPM Assets, Step-up Rate Assets,
Interest Reduction Assets, GEM Assets, Balloon Payment
Assets, Convertible Assets, Bi-Weekly Assets or
Increasing Payment Assets. See "Description of the
Trust Funds--Assets." The characteristics of the Assets
included in a Trust Fund will not vary by more than
five percent (by aggregate principal balance as of the
Cut-off Date) from the characteristics thereof that are
described in the related Prospectus Supplement.
(b) Mortgage Loans..... The Mortgage Loans with respect to a series of
Securities will consist of a pool of single family
and/or multifamily loans (or certain balances thereof).
The Mortgage Loans will not be guaranteed or insured by
the Depositor or any of its affiliates. The Mortgage
Loans will be guaranteed or insured by a governmental
agency or instrumentality or other person only if and
to the extent expressly provided in the related
Prospectus Supplement. If so specified in the
Prospectus Supplement, the Mortgage Loans may be
insured by the Federal Housing Administration (the
"FHA") or partially guaranteed by the Veterans
Administration (the "VA"). The Mortgage Loans will be
secured by first and/or junior liens on (i) one- to
four-family residential real properties (including
manufactured housing) or security interests in shares
issued by cooperative housing corporations ("Single
Family Properties") and/or (ii) primarily residential
properties consisting of five or more residential
dwelling units and which may include limited retail,
office or other commercial space ("Multifamily
Properties") (Single Family Properties and Multifamily
Properties are sometimes referred to herein
collectively as "Mortgaged Properties"). The Mortgaged
Properties will 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 Mortgage
Loans may include (i) closed-end and/or revolving home
equity loans or certain balances thereof ("Home Equity
Loans") and/or (ii) secured home improvement
installment sales contracts and secured installment
loan agreements ("Home Improvement Contracts"). In
addition, the Mortgage Loans may include certain
Mortgage Loans evidenced by contracts ("Land Sale
Contracts") for the sale of properties pursuant to
which the mortgagor promises to pay the amount due
thereon to the holder thereof with fee title to the
related property held by such holder until the
mortgagor has made all of the payments required
pursuant to such Land Sale Contract, at which time fee
title is conveyed to the mortgagor. All Mortgage Loans
will have been originated by persons other than the
Depositor, and all Mortgage Loans will have been
purchased, either directly or indirectly, by the
Depositor on or before the date of initial issuance of
the related series of Securities or, if the related
Trust Fund includes a Pre-Funding Account, as described
herein, within the period specified in the related
Prospectus Supplement following such date. The related
Prospectus Supplement will indicate if any such persons
are affiliates of the Depositor. To the extent
specified in the related Prospectus Supplement, all or
a portion of the Mortgage Loans will be Sub-prime
Mortgage Loans, as described under "Risk Factors--Sub-
prime
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Mortgage Loans May be More Likely to Default or to be
Foreclosed." Each Mortgage Loan may provide for accrual
of interest thereon at an interest rate (a "Mortgage
Rate") that is fixed over its term or that adjusts from
time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a fixed to
an adjustable Mortgage Rate, from time to time at the
mortgagor's election, in each case as described in the
related Prospectus Supplement. Adjustable Mortgage
Rates on the Mortgage Loans in a Trust Fund may be
based on one or more indices. Each Mortgage Loan may
provide for scheduled payments to maturity, payments
that adjust from time to time to accommodate changes in
the Mortgage Rate or to reflect the occurrence of
certain events, and may provide for negative
amortization or accelerated amortization, in each case
as described in the related Prospectus Supplement. Each
Mortgage Loan may be fully amortizing or require a
balloon payment due on its stated maturity date, in
each case as described in the related Prospectus
Supplement. Each Mortgage Loan may contain prohibitions
on prepayment or require payment of a premium or a
yield maintenance penalty in connection with a
prepayment, in each case as described in the related
Prospectus Supplement. The Mortgage Loans may provide
for payments of principal, interest or both, on due
dates that occur monthly, quarterly, semi-annually or
at such other interval as is specified in the related
Prospectus Supplement. See "Description of the Trust
Funds--Assets."
(c) Unsecured Home
Improvement Loans..... The Assets with respect to a series of Securities may
consist of or include home improvement installment
sales contracts or Unsecured Home Improvement Loans.
The Unsecured Home Improvement Loans will not be
insured or guaranteed by the Depositor or any of its
affiliates. The Unsecured Home Improvement Loans will
be insured or guaranteed by a governmental agency or
instrumentality or other person only if and to the
extent expressly provided in the related Prospectus
Supplement. If so specified in the related Prospectus
Supplement, the Unsecured Home Improvement Loans may be
insured by the FHA. The Unsecured Home Improvement
Loans may have any of the features described under "--
(b) Mortgage Loans" above, except that they will not be
secured by a lien on or other security interest in any
property.
(d) Contracts.......... The Contracts with respect to a series of Securities
will consist of manufactured housing installment sale
contracts and installment loan agreements secured by a
security interest in a new or used manufactured home
(each, a "Manufactured Home"), and, to the extent, if
any, indicated in the related Prospectus Supplement, by
real property. The Contracts will not be insured or
guaranteed by the Depositor or any of its affiliates.
The Contracts will be insured or guaranteed by a
governmental agency or instrumentality or other person
only if and to the extent expressly provided in the
related Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Contracts may be
insured by the FHA. All Contracts will have been
originated by persons other than the Depositor, and all
Contracts will have been purchased, either directly or
indirectly, by the Depositor on or before the date of
initial issuance of the related series of Securities
or, if the related Trust Fund includes a Pre-Funding
Account, as described herein, within the period
specified in the related
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Prospectus Supplement following such date. The related
Prospectus Supplement will indicate if any such persons
are affiliates of the Depositor. Each Contract may
provide for an annual percentage rate thereon (a
"Contract Rate") that is fixed over its term or that
adjusts as described in the related Prospectus
Supplement. The manner of determining scheduled
payments due on the Contract will be described in the
Prospectus Supplement. The Prospectus Supplement will
describe the minimum principal balance of the Contracts
at origination and the maximum original term to
maturity of the Contracts.
(e) Agency Securities.. If so provided in the related Prospectus Supplement,
the Trust Fund may include any combination of "fully
modified pass-through" mortgage-backed certificates
("Ginnie Mae Certificates") guaranteed by Ginnie Mae,
guaranteed mortgage pass-through securities ("Fannie
Mae Certificates") issued by Fannie Mae ("Fannie Mae")
and mortgage participation certificates ("Freddie Mac
Certificates") issued by Freddie Mac.
(f) Mortgage
Securities............ If so provided in the related Prospectus Supplement,
the Trust Fund may include asset-backed certificates,
collateralized mortgage obligations or participation
certificates (each, and collectively, "Mortgage
Securities") evidencing interests in, or collateralized
by, mortgage loans or Agency Securities. Mortgage
Securities included in a Trust Fund (i) will have been
issued by an entity other than the Depositor or its
affiliates, (ii) will have been acquired in bona fide
secondary market transactions from persons other than
the issuer thereof or its affiliates and (iii) will
have previously been (a) offered and distributed to the
public pursuant to an effective registration statement
or (b) purchased in a transaction not involving any
public offering from a person who is not an affiliate
of the issuer of such securities at the time of sale
(nor an affiliate thereof at any time during the three
preceding months); provided a period of two years has
elapsed since the later of the date the securities were
acquired from the issuer or an affiliate thereof.
Although individual assets underlying the Mortgage
Securities may be insured or guaranteed by the United
States or an agency or instrumentality thereof, they
need not be, and the Mortgage Securities themselves
will not be, so insured or guaranteed. See
"Description of the Trust Funds--Mortgage Securities."
Payments on the Mortgage Securities will be distributed
directly to the Trustee or other person specified in
the related Prospectus Supplement as registered owner
of such Mortgage Securities.
(g) Collection
Accounts.............. Each Trust Fund will include one or more accounts
established and maintained on behalf of the
Securityholders into which the person or persons
designated in the related Prospectus Supplement will,
to the extent described herein and in such Prospectus
Supplement, deposit all payments and collections
received or advanced with respect to the Assets and
other assets in the Trust Fund. Such an account may be
maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as
cash or invested in certain short-term, investment
grade obligations, in each case as described in the
related Prospectus Supplement. See "Description of the
Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--
Collection Account and Related Accounts."
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(h) Credit Support..... If so provided in the related Prospectus Supplement,
partial or full protection against certain defaults and
losses on the Assets in the related Trust Fund may be
provided to one or more classes of Securities of the
related series in the form of subordination of one or
more other classes of Securities of such series, which
other classes may include one or more classes of
Offered Securities, or by one or more other types of
credit support, such as a letter of credit, insurance
policy, guarantee, reserve fund or another type of
credit support, or a combination thereof. The amount
and types of coverage, the identification of the entity
providing the coverage (if applicable) and related
information with respect to each type of Credit
Support, if any, will be described in the Prospectus
Supplement for a series of Securities. See "Risk
Factors--Credit Support is Limited in Amount and
Coverage" and "Description of Credit Support."
(i) Cash Flow
Agreements............ If so provided in the related Prospectus Supplement,
the Trust Fund may include guaranteed investment
contracts pursuant to which moneys held in the funds
and accounts established for the related series will be
invested at a specified rate. The Trust Fund may also
include certain other agreements, such as interest rate
exchange agreements, interest rate cap or floor
agreements, currency exchange agreements or similar
agreements provided to reduce the effects of interest
rate or currency exchange rate fluctuations on the
Assets or on one or more classes of Securities.
Currency exchange agreements might be included in the
Trust Fund if some or all of the Assets (such as
Mortgage Loans secured by Mortgaged Properties located
outside the United States) were denominated in a non-
United States currency. The principal terms of any
such guaranteed investment contract or other agreement,
including, without limitation, provisions relating to
the timing, manner and amount of payments thereunder
and provisions relating to the termination thereof,
will be described in the Prospectus Supplement for the
related series. In addition, the related Prospectus
Supplement will provide certain information with
respect to the obligor under any such Cash Flow
Agreement. See "Description of the Trust Funds--Cash
Flow Agreements."
(j) Pre-Funding
Account............... To the extent provided in the related Prospectus
Supplement, a portion of the proceeds of the issuance
of Securities may be deposited into an account
maintained with the Trustee (a "Pre-Funding Account").
In such event, the Depositor will be obligated (subject
only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related
series of Securities will be obligated to purchase
(subject to the satisfaction of certain conditions
described in the applicable Agreement), additional
Assets (the "Subsequent Assets") from time to time (as
frequently as daily) within the period (not to exceed
three months) specified in the Prospectus Supplement
(the "Pre-Funding Period") after the issuance of such
series of Securities having an aggregate principal
balance approximately equal to the amount on deposit in
the Pre-Funding Account (the "Pre-Funded Amount") for
such series on date of such issuance. The Pre-Funded
Amount with respect to a series is not expected to
exceed 25% of the aggregate initial Security Balance of
the related Securities. Except as set forth in the
following sentence, the Pre-Funded Amount will be used
only to purchase Subsequent Mortgage Loans. Any
portion of the Pre-Funded Amount remaining in the Pre-
Funding Account at the end of the Pre-Funding Period
will be used to prepay one or more classes of
Securities
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in the amounts and in the manner specified in the
related Prospectus Supplement. In addition, if
specified in the related Prospectus Supplement, the
Depositor may be required to deposit cash into an
account maintained by the Trustee (the "Capitalized
Interest Account") for the purpose of assuring the
availability of funds to pay interest with respect to
the Securities during the Pre-Funding Period. Any
amount remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period will be remitted as
specified in the related Prospectus Supplement. Amounts
deposited in the Pre-Funding and Capitalized Interest
Accounts will be permitted to be invested, pending
application thereof, only in eligible investments
authorized by each applicable Rating Agency. See
"Description of the Trust Funds--Pre-Funding Account."
Description of
Securities............ Each series of Certificates will evidence an interest
in the related Trust Fund and will be issued pursuant
to a Pooling and Servicing Agreement. If a series of
Securities includes Notes, such Notes will represent
indebtedness of the related Trust Fund (which will be
formed pursuant to a deposit trust agreement (each, a
"Deposit Trust Agreement") between the Depositor and an
owner trustee specified in the related Prospectus
Supplement) and will be secured by a security interest
in the Assets of the Trust Fund (or a specified group
thereof) pursuant to an indenture (each, an
"Indenture"). Some or all of the Assets in a Trust Fund
may be serviced pursuant to one or more Underlying
Servicing Agreements. The Pooling and Servicing
Agreements and Underlying Servicing Agreements are
referred to herein as the "Agreements." Each series of
Securities will include one or more classes. Each class
of Securities (other than certain Strip Securities, as
defined below) will have a stated principal amount (a
"Security Balance") and except for certain Strip
Securities, as defined below, will accrue interest
thereon based on a fixed, variable or adjustable
interest rate (in the case of Certificates, a "Pass-
Through Rate"). The related Prospectus Supplement will
specify the Security Balance, if any, and the Pass-
Through Rate or interest rate for each class of
Securities or, in the case of a variable or adjustable
Pass-Through Rate or interest rate, the method for
determining the Pass-Through Rate or interest rate.
Distributions on
Securities............ Each series of Securities will consist of one or more
classes of Securities that may (i) provide for the
accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior
Securities") or subordinate (collectively, "Subordinate
Securities") to one or more other classes of Securities
in respect of certain distributions on the Securities;
(iii) be entitled either to (A) principal
distributions, with disproportionately low, nominal or
no interest distributions or (B) interest
distributions, with disproportionately low, nominal or
no principal distributions (collectively, "Strip
Securities"); (iv) provide for distributions of accrued
interest thereon commencing only following the
occurrence of certain events, such as the retirement of
one or more other classes of Securities of such series
(collectively, "Accrual Securities"); (v) provide for
distributions of principal as described in the related
Prospectus Supplement; and/or (vi) provide for
distributions based on a combination of two or more
components thereof with one or more of the
characteristics described in this paragraph, including
one or more Strip Security or Accrual Security
components, to the extent of
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available funds, in each case as described in the
related Prospectus Supplement. If so specified in the
related Prospectus Supplement, distributions on one or
more classes of a series of Securities may be limited
to collections from a designated portion of the Assets
in the related Trust Fund (each such portion of Assets,
an "Asset Group"). See "Description of the Securities--
General." Any such classes may include classes of
Offered Securities. With respect to Securities with two
or more components, references herein to Security
Balance, notional amount and Pass-Through Rate or
interest rate refer to the principal balance, if any,
notional amount, if any, and the Pass-Through Rate or
interest rate, if any, for any such component.
The Securities will not represent any interest in or
obligation of the Depositor or any affiliate thereof
except as set fort herein, nor will the Securities, any
Assets (other than Assets identified as FHA Loans or VA
Loans in the related Prospectus Supplement) or Mortgage
Securities be insured or guaranteed by any governmental
agency or instrumentality. Although payment of
principal and interest on Agency Securities will be
guaranteed as described herein and in the related
Prospectus Supplement by Ginnie Mae, Fannie Mae or
Freddie Mac, the Securities of any series including
such Agency Securities will not be so guaranteed. See
"Risk Factors--Limited Assets for Payment of
Securities" and "Description of the Securities."
(a) Interest........... Interest on each class of Offered Securities (other
than certain classes of Strip Securities) of each
series will accrue at the applicable Pass-Through Rate
or interest rate on the outstanding Security Balance
thereof and will be distributed to Securityholders as
provided in the related Prospectus Supplement. The
specified date on which distributions are to be made is
a "Distribution Date." Distributions with respect to
interest on certain classes of Strip Securities may be
made on each Distribution Date on the basis of a
notional amount as described in the related Prospectus
Supplement. Distributions of interest with respect to
one or more classes of Securities may be reduced to the
extent of certain delinquencies, losses, prepayment
interest shortfalls, and other contingencies described
herein and in the related Prospectus Supplement. See
"Risk Factors--Rate of Prepayments on Assets and
Priority of Payment of Securities May Adversely Affect
Average Lives and Yields of Securities," "Yield
Considerations" and "Description of the Securities--
Distributions of Interest on the Securities."
(b) Principal.......... The Securities of each series initially will have an
aggregate Security Balance no greater than the
outstanding principal balance of the Assets as of,
unless the related Prospectus Supplement provides
otherwise, the close of business on the first day of
the month of formation of the related Trust Fund (the
"Cut-off Date"), after application of scheduled
payments due on or before such date, whether or not
received. The Security Balance of a Security
outstanding from time to time represents the maximum
amount that the holder thereof is then entitled to
receive in respect of principal from future cash flow
on the assets in the related Trust Fund. Distributions
of principal will be made on each Distribution Date to
the class or classes of Securities in the amounts and
in accordance with the priorities specified in the
related Prospectus Supplement. Distributions of
principal of any class of Securities will be made on a
pro rata basis among all of the Securityholders of such
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class, by random selection, or as described in the
related Prospectus Supplement. Certain classes of
Strip Securities with no Security Balance will not
receive distributions in respect of principal. See
"Description of the Securities--Distributions of
Principal of the Securities."
Advances............... To the extent specified in the related Prospectus
Supplement, the Servicer will be obligated as part of
its servicing responsibilities to make certain advances
that in its good faith judgment it deems recoverable
with respect to delinquent scheduled payments on the
Assets serviced by such Servicer in such Trust Fund. If
so specified in the related Prospectus Supplement, the
Master Servicer, the Trustee or other entity so
specified will be required to make such advances in the
event a Servicer fails to do so. Neither the Depositor
nor, except to the extent specified in the related
Prospectus Supplement, any of its affiliates will have
any responsibility to make such advances. Advances are
reimbursable generally from subsequent recoveries in
respect of such Assets and otherwise to the extent
described herein and in the related Prospectus
Supplement. If and to the extent provided in the
Prospectus Supplement for any series, a Servicer or
another entity will be entitled to receive interest on
its outstanding advances, payable from amounts in the
related Trust Fund. See "Description of the
Securities--Advances in Respect of Delinquencies."
Termination............ To the extent specified in the related Prospectus
Supplement, a series of Securities may be subject to
optional early termination through the repurchase of
the Assets in the related Trust Fund by the party
specified therein, under the circumstances and in the
manner set forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of the
Security Balance of a specified class or classes of
Securities to a specified percentage or on and after a
date specified in such Prospectus Supplement, the party
specified therein will solicit bids for the purchase of
all of the Assets of the Trust Fund, or of a sufficient
portion of such Assets to retire such class or classes,
or purchase such Assets at a price set forth in the
related Prospectus Supplement. Any such purchase or
solicitation of bids may be made only when the
aggregate security balance of such class or classes
declines to a percentage of the initial Security
Balance of such Securities (generally not to exceed
10%) specified in the related Prospectus Supplement. In
addition, if so provided in the related Prospectus
Supplement, certain classes of Securities may be
purchased or redeemed in the manner set forth therein.
In either case, the purchase price will at least equal
the outstanding Security Balance of all Securities, or
of the Securities to be purchased or redeemed, if less
than all of the Securities, and any accrued and unpaid
interest thereon. See "Description of the Securities--
Termination."
Registration of
Securities............ If so provided in the related Prospectus Supplement,
one or more classes of the Offered Securities will
initially be represented by one or more certificates or
notes, as applicable, registered in the name of Cede &
Co., as the nominee of DTC. No person acquiring an
interest in Offered Securities so registered will be
entitled to receive a definitive certificate or note,
as applicable, representing such person's interest
except in the event that definitive certificates or
notes, as applicable, are issued under the limited
circumstances described herein. See "Risk Factors--
Owners of Book-Entry Securities Not Entitled to
Exercise
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Rights of Holders of Securities" and "Description of
the Securities--Book-Entry Registration and Definitive
Securities."
Tax Status of
the Securities........ The following discussion represents the opinion of
Cadwalader, Wickersham & Taft. The Securities of each
series offered hereby will constitute either (i)
"regular interests" ("Regular Securities") and
"residual interests" ("Residual Securities") in a Trust
Fund treated as a real estate mortgage investment
conduit under Sections 860A through 860G of the
Internal Revenue Code of 1986, as amended (the "Code"),
(ii) interests ("Grantor Trust Securities") in a Trust
Fund treated as a grantor trust under applicable
provisions of the Code, (iii) interests ("Partnership
Securities") in a Trust Fund treated as a partnership
under applicable provisions of the Code, or (iv)
evidences of indebtedness ("Debt Securities") of a
Trust Fund treated as debt instruments for federal
income tax purposes. In general, to the extent the
assets and income of the Trust Fund are treated as
qualifying assets and income under the following
sections of the Code, Regular Securities (i) owned by a
"domestic building and loan association" will be
treated as "loans . . . secured by an interest in real
property which is . . . residential real property"
within the meaning of Code Section 7701(a)(19)(C) and
(ii) owned by a real estate investment trust will be
treated as "real estate assets" for purposes of Section
856(c)(4)(A) of the Code and interest income therefrom
will be treated as "interest on obligations secured by
mortgages on real property" for purposes of Section
856(c)(3)(B) of the Code. In addition, Regular
Securities will be "qualified mortgages" within the
meaning of Section 860G(a)(3) of the Code if
transferred to another REMIC on its startup in exchange
for regular or residual interests therein. Moreover, if
95% or more of the assets and the income of the Trust
Fund qualify for any of the foregoing treatments, the
Regular Securities will qualify for the foregoing
treatments in their entirety. Residual Securities
generally will be treated as representing an interest
in qualifying assets and income to the same extent
described above for institutions subject to Sections
7701(a)(19)(C), 856(c)(4)(A) and 856(c)(3)(B) of the
Code. A portion (or, in certain cases, all) of the
income from Residual Securities (i) may not be offset
by any losses from other activities of the holder of
such Residual Securities, (ii) may be treated as
unrelated business taxable income, for holders of
Residual Securities that are subject to tax on
unrelated business taxable income (as defined in
Section 511 of the Code), and (iii) may be subject to
U.S. federal income tax withholding rules. In addition,
transfers of certain Residual Securities may be
disregarded under some circumstances for all federal
income tax purposes. See "Material Federal Income Tax
Considerations--REMICs --Taxation of Owners of Residual
Securities herein. Grantor Trust Securities may be
either Standard Securities having the same percentage
ownership of principal and interest payments on the
Mortgage Loans or Strip Securities having a different
percentage ownership interests in such principal and
interest payments. Holders of Grantor Trust Securities
generally will be treated as owning an interest in
qualifying assets and income under Sections
7701(a)(19)(C), 856(c)(4)(A), 856(c)(3)(B) and
860G(a)(3)(A) of the Code. Partnership Securities will
be treated as partnership interests for purposes of
federal income taxation, and accordingly, will not
represent an interest in qualifying assets for purposes
of Section 7701(a)(19)(C) of the Code, but will
represent qualifying assets and income under Sections
856(c)(4)(A) and 856(c)(3)(B) of the Code to the extent
their
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proportionate share of the assets of the related Trust
Fund so qualify. Debt Securities will not represent
qualifying assets or income for purposes of any of the
preceding sections. See "Material Federal Income Tax
Considerations" herein and in the related Prospectus
Supplement.
Legal Investment
Considerations........ The Prospectus Supplement for each series of Securities
will specify which class or classes of Offered
Securities of such series, if any, will constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"). Investors whose investment authority
is subject to legal restrictions should consult their
own legal advisors to determine whether and to what
extent the Offered Securities constitute legal
investments for them. See "Legal Investment
Considerations" herein and in the related Prospectus
Supplement.
ERISA Considerations... An investment in Offered Securities by an employee
benefit plan or other retirement plan or arrangement
that is subject to Title I of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or
Section 4975 of the Code (each, a "Plan") may cause the
Assets of the related Trust Fund to be deemed "plan
assets" and could give rise to a "prohibited
transaction" within the meaning of ERISA and the Code.
The U.S. Department of Labor has issued an individual
exemption, Prohibited Transaction Exemption 97-34 (the
"Exemption"), to Deutsche Bank Securities Inc. ("DBSI")
that generally exempts from the application of certain
of the prohibited transaction provisions of ERISA and
the excise taxes imposed on such prohibited
transactions by Section 4975 of the Code, transactions
relating to the purchase, sale and holding of pass-
through securities underwritten by DBSI and the
servicing and operation of pools of assets such as
certain of the Assets, provided that certain conditions
are satisfied. To the extent the Securities are not
treated as equity interests in the related Trust Fund
for purposes of ERISA, a Plan's investment in such
Securities would not cause the Assets to be deemed
"plan assets." However, the purchase or holding of such
non-equity Securities by a Plan with respect to which
an affiliate of the Depositor or an equity investor is
a "party in interest" (within the meaning of ERISA) or
a "disqualified person" (within the meaning of the
Code) could give rise to a prohibited transaction
unless one or more statutory or administrative
exemptions apply to such investment. The Prospectus
Supplement with respect to a series of Securities may
contain additional information regarding the
application of the Exemption or any other exemption
with respect to the Securities offered thereby. See
"ERISA Considerations" herein.
Rating................. At the date of issuance, as to each series, each class
of Offered Securities will be rated in one of the four
highest rating categories by one or more nationally
recognized statistical rating agencies (each, a "Rating
Agency"). A security rating is not a recommendation to
buy, sell or hold such Securities and is subject to
revision or withdrawal at any time by the assigning
Rating Agency. Further, such ratings do not address the
possibility that, as a result of principal prepayments,
holders of Securities may receive a lower than
anticipated yield. If a series of Securities provides
for the establishment of a Pre-Funding Account, it will
be an express condition to the purchase of Subsequent
Assets that, after notice to each assigning Rating
Agency, no Rating
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Agency notifies the Depositor that such purchase would
result in the withdrawal or downgrade of the ratings
assigned to such Securities. See "Rating" herein.
Material Risks......... Prospective investors are urged to read "Risk Factors"
herein and in the applicable Prospectus Supplement for
a discussion of the material risks associated with an
investment in the Securities.
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RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors.
Limited Liquidity for Securities
At the time of issuance of a series of Securities, there will be no secondary
market for any of the Securities. Deutsche Bank Securities Inc. and the other
underwriters, if any, specified in the related Prospectus Supplement, currently
expect to make a secondary market in the Offered Securities, but have no
obligation to do so. There can be no assurance that a secondary market for the
Securities of any series will develop or, if it does develop, that it will
provide holders with liquidity of investment or will continue while Securities
of such series remain outstanding. It is not expected that any application will
be made to list the Securities of a series on any securities exchange.
Accordingly, the liquidity of the Securities may be limited.
Limited Assets for Payment of Securities
The Securities will not represent an interest in or obligation of the
Depositor, any Master Servicer, any Servicer, the Trustee or any of their
affiliates. The only obligations with respect to the Securities or the Assets
will be the obligations (if any) of the Warranting Party (as defined herein)
pursuant to certain limited representations and warranties made with respect to
the Assets, the Master Servicer's obligations and any Servicer's servicing
obligations under the related Agreement (including the limited obligation to
make certain advances in the event of delinquencies on the Assets, but only to
the extent deemed recoverable) and, if and to the extent expressly described in
the related Prospectus Supplement, certain limited obligations of a Servicer or
Master Servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible ARM Loan (as defined herein)
upon conversion to a fixed rate or a different index. Since certain
representations and warranties with respect to the Assets may have been made
and/or assigned in connection with transfers of such Assets prior to the
issuance of the Securities, the rights of the Trustee and the Securityholders
with respect to such representations or warranties will be limited to their
rights as an assignee thereof. Except to the extent, if any, specified in the
related Prospectus Supplement, none of the Depositor, any Master Servicer, any
Servicer, the Trustee or any of their affiliates will have any obligation with
respect to representations or warranties made by any other entity. Except to
the extent, if any, specified in the related Prospectus Supplement, neither the
Securities nor the underlying Assets will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, any Master
Servicer, any Servicer, the Trustee or any of their affiliates. Proceeds of the
assets included in the related Trust Fund for each series of Securities
(including the Assets and any form of credit enhancement) will be the sole
source of payments on the Securities, and there will be no recourse to the
Depositor or any other entity in the event that such proceeds are insufficient
or otherwise unavailable to make all payments provided for under the Securities.
Except to the extent, if any, specified in the related Prospectus Supplement,
a series of Securities will not have any claim against or security interest in
the Trust Funds for any other series and the Assets included in the related
Trust Fund will be the sole source of payments on the Securities of a series.
If the related Trust Fund is insufficient to make payments on such Securities,
no other assets will be available for payment of the deficiency. Additionally,
certain amounts remaining in certain funds or accounts, including the Collection
Accounts and any accounts maintained as Credit Support, may be withdrawn under
certain conditions, as described in the related Prospectus Supplement. In the
event of such withdrawal, such amounts will not be available for future payment
of principal of or interest on the Securities. If so provided in the Prospectus
Supplement for a series of Securities containing one or more classes of
Subordinate Securities, on any Distribution Date in respect of which losses or
shortfalls in collections on the Assets have been incurred, the amount of such
losses or shortfalls will be borne first by one or more classes of the
Subordinate Securities, and, thereafter, by the remaining classes of Securities
in the priority and manner and subject to the limitations specified in such
Prospectus Supplement.
Rate of Prepayments on Assets May Adversely Affect Average Lives and Yields of
Securities
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund (or, in the case of Agency Securities and Mortgage Securities, the
underlying assets related thereto) generally will result in a faster rate of
-12-
principal payments on one or more classes of the related Securities than if
payments on such Assets were made as scheduled. Thus, the prepayment experience
on the Assets may affect the average life of each class of related Securities.
The rate of principal payments on pools of mortgage loans or manufactured
housing contracts varies between pools and from time to time is influenced by a
variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the assets
underlying or comprising the Assets in any Trust Fund or that the rate of
payments will conform to any model described herein or in any Prospectus
Supplement. If prevailing interest rates fall significantly below the
applicable mortgage interest rates, principal prepayments are likely to be
higher than if prevailing rates remain at or above the rates borne by the assets
underlying or comprising the Assets in any Trust Fund. As a result, the actual
maturity of any class of Securities evidencing an interest in or an obligation
of a Trust Fund containing Mortgage Loans, Contracts, Unsecured Home Improvement
Loans, Agency Securities or Mortgage Securities could occur significantly
earlier than expected. Conversely, if prevailing interest rates rise
significantly above the applicable mortgage interest rates, principal
prepayments are likely to be lower than if prevailing rates remain at or below
the rates borne by the assets underlying or comprising the Assets in any Trust
Fund and the maturity of any class of Securities evidencing an interest in or an
obligation of such Trust Fund could occur significantly later than expected.
The relationship of prevailing interest rates and prepayment rates on Contracts
will be discussed in the related Prospectus Supplement. In addition, certain
prepayments may result in the collection of less interest than would otherwise
be the case in the month of prepayment.
Priority of Payment of Securities May Adversely Affect Average Lives and Yields
of Securities
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Assets and, where the amount of interest payable with respect to
a class is disproportionately high, as compared to the amount of principal, as
with certain classes of Strip Securities, a holder might, in some prepayment
scenarios, fail to recoup its original investment. A series of Securities may
include one or more classes of Securities, including classes of Offered
Securities, that provide for distribution of principal thereof from amounts
attributable to interest accrued but not currently distributable on one or more
classes of Accrual Securities and, as a result, yields on such Securities will
be sensitive to (a) the provisions of such Accrual Securities relating to the
timing of distributions of interest thereon and (b) if such Accrual Securities
accrue interest at a variable or adjustable Pass-Through Rate or interest rate,
changes in such rate. See "Yield Considerations" herein and, if applicable, in
the related Prospectus Supplement.
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Securities will reflect
such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Assets 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 or redemption of the series of Securities. 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. Each Prospectus Supplement will identify any payment to
which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating.
Real Estate Market Conditions Affect Mortgage Loan Performance
An investment in securities such as the Securities which represent interests
in Mortgage Loans may be affected generally by, among other things, a decline in
real estate values and changes in the mortgagors' financial condition. No
assurance can be given that values of the Mortgaged Properties have remained or
will remain at their levels on the dates of origination of the related Mortgage
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the Mortgage
Loans, and any secondary financing on the Mortgaged Properties, become equal to
or greater than the value of the Mortgaged Properties, the
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actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. In addition,
in the case of Mortgage Loans that are subject to negative amortization, due to
the addition to the principal balance of deferred interest, the principal
balances of such Mortgage Loans could be increased to an amount equal to or in
excess of the value of the underlying Mortgaged Properties, thereby increasing
the likelihood of default. To the extent that such losses are not covered by the
applicable Credit Support, if any, holders of Securities of the series
evidencing interests in the related Mortgage Loans will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the Mortgaged Properties for recovery of the outstanding principal and
unpaid interest on the defaulted Mortgage Loans.
Variable Payment Provisions in Mortgage Loans May Increase Rate of Default
Certain of the types of Mortgage Loans may involve additional uncertainties
not present in traditional types of loans. For example, certain Mortgage Loans
provide for escalating or variable payments by the mortgagor under the Mortgage
Loan, as to which the mortgagor is generally qualified on the basis of the
initial payment amount. In some instances the mortgagors' income may not be
sufficient to enable them to continue to make their loan payments as such
payments increase and thus the likelihood of default will increase.
Geographic Concentration May Increase Rates of Loss and Delinquency
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. The Mortgage Loans underlying certain
series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Additionally, a
decline in the value of the Mortgaged Properties will increase the risk of loss
particularly with respect to any related junior Mortgage Loans. See "--Junior
Mortgage Loans are More Likely to Experience Losses on Foreclosure."
Multifamily Properties May Experience Increased Defaults and Foreclosures
Mortgage Loans secured by Multifamily Properties may entail risks of
delinquency and foreclosure, and risks of loss in the event thereof, that are
greater than similar risks associated with loans secured by Single Family
Properties. The ability of a borrower to repay a loan secured by an income-
producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property
typically is directly related to the net operating income derived from such
property. If the net operating income of the property is reduced (for example,
if rental or occupancy rates decline or real estate tax rates or other operating
expenses increase), the borrower's ability to repay the loan may be impaired.
In addition, the concentration of default, foreclosure and loss risk for a pool
of Mortgage Loans secured by Multifamily Properties may be greater than for a
pool of Mortgage Loans secured by Single Family Properties of comparable
aggregate unpaid principal balance because the pool of Mortgage Loans secured by
Multifamily Properties is likely to consist of a smaller number of higher
balance loans.
If applicable, certain legal aspects of the Mortgage Loans for a series of
Securities may be described in the related Prospectus Supplement. See also
"Certain Legal Aspects of Mortgage Loans" herein.
Balloon Payment Assets are More Likely to Experience Losses on Foreclosure if
Obligor is Unable to Refinance or Sell Related Property
Certain of the Mortgage Loans (the "Balloon Payment Assets") 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. Mortgage Loans with balloon payments involve a greater degree of risk
because the ability of an obligor 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 mortgagor to accomplish either of these
goals will be affected by a number of factors, including the level of available
mortgage interest rates at the time of sale or refinancing, the obligor's equity
in the related property, the financial condition of the obligor, the value of
the property, tax laws,
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prevailing general economic conditions and the availability of credit for single
family or multifamily real properties generally.
Junior Mortgage Loans are More Likely to Experience Losses on Foreclosure
Certain of the Mortgage Loans may be secured by junior liens and the related
first and other senior liens, if any (collectively, the "senior lien"), may not
be included in the Trust Fund. 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 senior lien to satisfy
fully both the senior lien and the Mortgage Loan. In the event that a holder of
the senior lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court costs
and fees in connection with the foreclosure, second to real estate taxes, third
in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the senior
lien. The claims of the holder of the senior lien will be satisfied in full out
of proceeds of the liquidation of the Mortgaged Property, if such proceeds are
sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If a Servicer were to foreclose on
any Mortgaged Property, it would do so subject to any related senior lien. In
order for the debt related to the Mortgaged Property to be paid in full at such
sale, a bidder at the foreclosure sale of such Mortgage Loan would have to bid
an amount sufficient to pay off all sums due under the Mortgage Loan and the
senior lien or purchase the Mortgaged Property subject to the senior lien. In
the event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate, the
Trust Fund, as the holder of the junior lien, and, accordingly, holders of the
related Securities, would bear the risk of delay in distributions while a
deficiency judgment against the borrower was being obtained and the risk of loss
if the deficiency judgment were not realized upon. Moreover, deficiency
judgments may not be available in certain jurisdictions. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgage.
Sub-prime Mortgage Loans May be More Likely to Default or be Foreclosed
All or a portion of the Assets may consist of mortgage loans underwritten in
accordance with the underwriting for "Sub-prime Mortgage Loans". A Sub-prime
Mortgage Loan is a mortgage loan that is ineligible for purchase by Fannie Mae
or Freddie Mac under their traditional mortgage loan purchase programs due to
borrower credit characteristics, property characteristics, loan documentation
guidelines or other credit characteristics that do not meet Fannie Mae or
Freddie Mac underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie
Mac underwriting guidelines and a borrower who may have a record of major
derogatory credit items such as default on a prior mortgage loan, credit write-
offs, outstanding judgments or prior bankruptcies. As a consequence,
delinquencies and foreclosures can be expected to be more prevalent with respect
to Sub-prime Mortgage Loans than with respect to mortgage loans originated in
accordance with Fannie Mae or Freddie Mac underwriting guidelines, and changes
in the values of the Mortgaged Properties may have a greater effect on the loss
experience of Sub-prime Mortgage Loans than on mortgage loans originated in
accordance with Fannie Mae or Freddie Mac underwriting guidelines.
Potential for Losses Increases if Assets are Delinquent
A portion of the Assets may be delinquent upon the issuance of the related
Securities. Credit enhancement provided with respect to a particular series of
Securities may not cover all losses related thereto. Prospective investors
should consider the risk that the inclusion of such Assets in the Trust Fund for
a series may cause the rate of defaults and prepayments on the Assets to
increase and, in turn, may cause losses to exceed the available credit
enhancement for such series and affect the yield on the Securities of such
series.
Effects of Failure to Comply with Consumer Protection Laws; Other Legal
Considerations
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and may require licensing of the persons who
originated the Mortgage Loans (the "Originators") and Servicers. 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
Mortgage Loans. Depending on the provisions of the applicable law and the
specific facts and circumstances
-15-
involved, violations of these laws, policies and principles may limit the
ability of a Servicer to collect all or part of the principal of or interest on
the Mortgage Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject such Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of Mortgage Loans."
The Mortgage 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 Mortgage
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)
the National Housing Act of 1934 (the "Housing Act") with respect to Mortgage
Loans insured thereunder.
The Mortgage Loans may be subject to the Home Ownership and Equity Protection
Act of 1994 (the "Home Ownership Act"), which amended the Federal Truth in
Lending Act as it applies to mortgages subject to the Home Ownership Act. The
Home Ownership Act requires certain additional disclosures, specifies the timing
of such disclosures and limits or prohibits the inclusion of certain provisions
in mortgages subject to the Home Ownership Act. The Home Ownership Act also
provides that any purchaser or assignee of a mortgage covered by the Home
Ownership Act is subject to all of the claims and defenses which the borrower
could assert against the original lender. The maximum damages that may be
recovered in an action under the Home Ownership Act from an assignee is the
remaining amount of indebtedness plus the total amount paid by the borrower in
connection with the mortgage loan. Any Trust Fund for which the Mortgage Loans
include Mortgage Loans subject to the Home Ownership Act would be subject to all
of the claims and defenses that the borrower could assert against the original
lender. Any violation of the Home Ownership Act that would result in such
liability would be a breach of the applicable Warranting Party's representations
and warranties, and the Warranting Party would be obligated to cure, repurchase
or, if permitted by the related Agreement, substitute for the Mortgage Loan in
question.
General Economic Conditions Increases the Potential for Losses on Contracts and
Manufactured Homes
An investment in Securities evidencing an interest in or obligation of a Trust
Fund containing Contracts may be affected by, among other things, a downturn in
national, regional or local economic conditions. The geographic location of the
Manufactured Homes securing the Contracts in any Trust Fund at origination of
the related Contract will be set forth in the related Prospectus Supplement.
Regional and local economic conditions are often volatile and, historically,
regional and local economic conditions, as well as national economic conditions,
have affected the delinquency, loan loss and repossession experience of
manufactured housing installment sales contracts and/or installment loan
contracts (hereinafter generally referred to as "contracts" or "manufactured
housing contracts").
Depreciation in Value Increases the Potential for Losses on Contracts and
Manufactured Homes
Regardless of its location, manufactured housing generally depreciates in
value. Thus, Securityholders should expect that, as a general matter, the
market value of any Manufactured Home will be lower than the outstanding
principal balance of the related Contract. Sufficiently high delinquencies and
liquidation losses on the Contracts in a Trust Fund will have the effect of
reducing, and could eliminate, the protection against loss afforded by any
credit enhancement supporting any class of the related Securities. If such
protection is eliminated with respect to a class of Securities, the holders of
such Securities will bear all risk of loss on the related Contracts and will
have to rely on the value of the related Manufactured Homes for recovery of the
outstanding principal of and unpaid interest on any defaulted Contracts in the
related Trust Fund. See "Description of Credit Support."
Grant of Security Interest in Contracts; Risks of Defective Security Interest
and Effects of Certain Other Legal Aspects of the Contracts
The Asset Seller in respect of a Contract will represent that such Contract is
secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title
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statutes. The steps necessary to perfect the security interest in a Manufactured
Home will vary from state to state. The Servicer will not amend any certificates
of title to change the lienholder specified therein from the Asset Seller to the
Trustee and will not deliver any certificate of title to the Trustee or note
thereon the Trustee's interest. Consequently, in some states, in the absence of
such an amendment, the assignment to the Trustee of the security interest in the
Manufactured Home may not be effective or such security interest may not be
perfected and, in the absence of such notation or delivery to the Trustee, the
assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller or a trustee in bankruptcy of
the Asset Seller. In addition, numerous federal and state consumer protection
laws impose requirements on lending under installment sales contracts and
installment loan agreements such as the Contracts, and the failure by the lender
or seller of goods to comply with such requirements could give rise to
liabilities of assignees for amounts due under such agreements and claims by
such assignees may be subject to set-off as result of such lender's or seller's
noncompliance. These laws would apply to the Trustee as assignee of the
Contracts. The Asset Seller of the Contracts to the Depositor will warrant that
each Contract complies with all requirements of law and will make certain
warranties relating to the validity, subsistence, perfection and priority of the
security interest in each Manufactured Home securing a Contract. A breach of any
such warranty that materially adversely affects any Contract would create an
obligation of the Asset Seller to repurchase, or if permitted by the applicable
Agreement, substitute for, such Contract unless such breach is cured. If the
Credit Support is exhausted and recovery of amounts due on the Contracts is
dependent on repossession and resale of Manufactured Homes securing Contracts
that are in default, certain other factors may limit the ability to realize upon
the Manufactured Home or may limit the amount realized by Securityholders to
less than the amount due. See "Certain Legal Aspects of the Contracts."
Bankruptcy of Borrower May Prevent Collections on Unsecured Home Improvement
Loans
The obligations of the borrower under any Unsecured Home Improvement Loan
included in a Trust Fund will not be secured by an interest in the related real
estate or any other property, and the Trust Fund will be a general unsecured
creditor as to such obligations. In the event of a default under an Unsecured
Home Improvement Loan, the related Trust Fund will have recourse only against
the borrower's assets generally, along with all other general unsecured
creditors of the borrower. In a bankruptcy or insolvency proceeding relating to
a borrower on an Unsecured Home Improvement Loan, the obligations of the
borrower under such Unsecured Home Improvement Loan may be discharged in their
entirety, notwithstanding the fact that the portion of such borrower's assets
made available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
Credit Support is Limited in Amount and Coverage
The Prospectus Supplement for a series of Securities will describe any Credit
Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Support may not cover all potential losses or
risks; for example, Credit Support may or may not cover fraud or negligence by a
mortgage loan or contract originator or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form
of Credit Support covers more than one series of Securities (each, a "Covered
Trust"), holders of Securities evidencing an interest in a Covered Trust will be
subject to the risk that such Credit Support will be exhausted by the claims of
other Covered Trusts.
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The amount of any applicable Credit Support supporting one or more classes of
Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Assets will not exceed such
assumed levels. See "--Limited Nature of Ratings," "Description of the
Securities" and "Description of Credit Support."
Regardless of the form of credit enhancement provided, the amount of coverage
will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Servicer or the Master
Servicer will generally be permitted to reduce, terminate or substitute all or a
portion of the credit enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will not
be adversely affected.
Lowering of Rating on Securities May Decrease Value and Liquidity
The rating of any series of Securities by any applicable Rating Agency may be
lowered following the initial issuance thereof as a result of the downgrading of
the obligations of any applicable Credit Support provider, or as a result of
losses on the related Assets substantially in excess of the levels contemplated
by such Rating Agency at the time of its initial rating analysis. The lowering
of a rating on a series or class of Securities may adversely affect the market
value of such Securities and the liquidity of such Securities. None of the
Depositor, any Master Servicer, any Servicer or any of their affiliates will
have any obligation to replace or supplement any Credit Support or to take any
other action to maintain any rating of any series of Securities.
Subordinated Securities Bear Risk of Loss Before More Senior Securities
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Servicer (to the extent of its servicing fee, including any
unpaid servicing fees with respect to one or more prior Due Periods, and is
reimbursed for certain unreimbursed advances and unreimbursed liquidation
expenses), any Master Servicer (to the extent of its master servicing fee,
including any unpaid master servicing fee with respect to one or more prior Due
Periods, and is reimbursed for certain unreimbursed advances) and the Senior
Securityholders to the extent described in the related Prospectus Supplement.
As a result of the foregoing, investors must be prepared to bear the risk that
they may be subject to delays in payment and may not recover their initial
investments in the Subordinate Securities. See "Description of the Securities--
General" and "--Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
Residual Securities May Have Adverse Tax Attributes
Holders of Residual Securities will be required to report on their federal
income tax returns as ordinary income their pro rata share of the taxable income
of the related REMIC, regardless of the amount or timing of their receipt of
cash payments, as described in "Material Federal Income Tax Considerations--
REMICs." Accordingly, under certain circumstances, holders of Offered Securities
that constitute Residual Securities may have taxable income and tax liabilities
arising from such investment during a taxable year in excess of the cash
received during such period. Individual holders of Residual Securities may be
limited in their ability to deduct servicing fees and other expenses of the
REMIC. In addition, Residual Securities are subject to certain restrictions on
transfer. Because of the special tax treatment of Residual Securities, the
taxable income arising in a given year on a Residual Security will not be equal
to the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Securities may be significantly
less than that of a corporate bond or stripped instrument having similar cash
flow characteristics. Additionally, prospective purchasers of Residual
Securities should be aware that applicable regulations prevent the ability to
mark-to-market REMIC residual interests. See "Material Federal Income Tax
Considerations--REMICs."
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Owners of Book-Entry Securities Not Entitled to Exercise Rights of Holders of
Securities
If so provided in the Prospectus Supplement, one or more classes of the
Offered Securities will be initially represented by one or more certificates or
notes registered in the name of Cede, the nominee for DTC, and will not be
registered in the names of the Security Owners or their nominees. Because of
this, unless and until Securities are issued in fully registered, certificated
form ("Definitive Securities"), Security Owners will not be recognized by the
Trustee as "Securityholders" (as that term is to be used in the related
Agreement). Hence, until such time, Security Owners will be able to exercise
the rights of Securityholders only indirectly through DTC and its participating
organizations. See "Description of the Securities--Book-Entry Registration and
Definitive Securities."
Financial Instruments are Subject to Counterparty Risk
The assets of a Trust Fund may, if specified in the related Prospectus
Supplement, include financial instruments such as interest rate swap, cap, floor
or similar agreements (each, a "Financial Instrument"), which will require the
provider of such instrument (the "Counterparty") to make payments to the Trust
Fund under the circumstances described in the Prospectus Supplement. To the
extent that payments on the Securities of the related series depend in part on
payments to be received under a Financial Instrument, the ability of the Trust
Fund to make payments on the Securities will be subject to the credit risk of
the Counterparty. The Prospectus Supplement for a series of Securities will
describe any mechanism, such as the payment of "breakage fees," which may exist
to facilitate replacement of a Financial Instrument upon the default or credit
impairment of the related Counterparty. However, there can be no assurance that
any such mechanism will result in the ability of the Servicer to obtain a
replacement Financial Instrument.
DESCRIPTION OF THE TRUST FUNDS
Assets
The primary assets of each Trust Fund will include (i) single family and/or
multifamily mortgage loans (or certain balances thereof) (collectively, the
"Mortgage Loans"), including without limitation, Home Equity Loans, Home
Improvement Contracts and Land Sale Contracts, (ii) home improvement installment
sales contracts or Unsecured Home Improvement Loans, (iii) manufactured housing
installment sale contracts or installment loan agreements, (iv) any combination
of "fully modified pass-through" mortgage-backed certificates ("Ginnie Mae
Certificates") guaranteed by Ginnie Mae, guaranteed mortgage pass-through
securities ("Fannie Mae Certificates") issued by Fannie Mae and mortgage
participation certificates ("Freddie Mac Certificates") issued by Freddie Mac,
(v) previously issued asset-backed certificates, collateralized mortgage
obligations or participation certificates (each, and collectively, "Mortgage
Securities") evidencing interests in, or collateralized by, Mortgage Loans,
Unsecured Home Improvement Loans, Contracts or Agency Securities or (vi) a
combination of Mortgage Loans, Unsecured Home Improvement Loans, Contracts,
Agency Securities and/or Mortgage Securities. The Mortgage Loans will not be
guaranteed or insured by the Depositor or any of its affiliates. The Mortgage
Loans will be guaranteed or insured by a governmental agency or instrumentality
or other person only if and to the extent expressly provided in the related
Prospectus Supplement. Each Asset will be selected by the Depositor for
inclusion in a Trust Fund from among those purchased, either directly or
indirectly, from a prior holder thereof (an "Asset Seller"), which may be an
affiliate of the Depositor and which prior holder may or may not be the
originator of such Mortgage Loan, Unsecured Home Improvement Loan or Contract.
The Assets included in the Trust Fund for a series may be subject to various
types of payment provisions. Such Assets may consist of (1) "Level Payment
Assets," which may provide for the payment of interest and full repayment of
principal in level monthly payments with a fixed rate of interest computed on
their declining principal balances; (2) "Adjustable Rate Assets," which may
provide for periodic adjustments to their rates of interest to equal the sum
(which may be rounded) of a fixed margin and an index; (3) "Buy Down Assets,"
which are Assets for which funds have been provided by someone other than the
related Obligors to reduce the Obligors' monthly payments during the early
period after origination of such Assets; (4) "Increasing Payment Assets," as
described below; (5) "Interest Reduction Assets," which provide for the one-time
reduction of the interest rate payable thereon; (6) "GEM Assets," which provide
for (a) monthly payments during the first year after origination that are at
least sufficient to pay interest due thereon, and (b) an increase in such
monthly payments in subsequent years at a predetermined rate resulting in full
repayment over a shorter term than the initial amortization terms of such
Assets;
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(7) "GPM Assets," which allow for payments during a portion of their terms which
are or may be less than the amount of interest due on the unpaid principal
balances thereof, and which unpaid interest will be added to the principal
balances of such Assets and will be paid, together with interest thereon, in
later years; (8) "Step-up Rate Assets" which provide for interest rates that
increase over time; (9) "Balloon Payment Assets;" (10) "Convertible Assets"
which are Adjustable Rate Assets subject to provisions pursuant to which,
subject to certain limitations, the related Obligors may exercise an option to
convert the adjustable interest rate to a fixed interest rate; and (11) "Bi-
weekly Assets," which provide for Obligor payments to be made on a bi-weekly
basis.
An Increasing Payment Asset is an Asset that provides for monthly payments
that are fixed for an initial period to be specified in the related Prospectus
Supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the related Prospectus Supplement from the date of
origination, after which the monthly payment is fixed at a level-payment amount
so as to fully amortize the Asset over its remaining term to maturity. The
scheduled monthly payment with respect to an Increasing Payment Asset is the
total amount required to be paid each month in accordance with its terms and
equals the sum of (1) the Obligor's monthly payments referred to in the
preceding sentence and (2) payments made by the respective Servicers pursuant to
buy-down or subsidy agreements. The Obligor's initial monthly payments for each
Increasing Payment Asset are set at the level-payment amount that would apply to
an otherwise identical Level Payment Asset having an interest rate a certain
number of percentage points below the Asset Rate of such Increasing Payment
Asset. The Obligor's Monthly Payments on each Increasing Payment Asset,
together with any payments made thereon by the related Servicers pursuant to
buy-down or subsidy agreements, will in all cases be sufficient to allow payment
of accrued interest on such Increasing Payment Asset at the related interest
rate, without negative amortization. An Obligor's monthly payments on such an
Asset may, however, not be sufficient to result in any reduction of the
principal balance of such Asset until after the period when such payments may be
increased.
The Securities will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Depositor. If specified in the related
Prospectus Supplement, the assets of a Trust Fund will consist of certificates
representing beneficial ownership interests in, or indebtedness of, another
trust fund that contains the Assets.
Mortgage Loans
General
Each Mortgage Loan will generally be secured by a lien on (i) a one- to four-
family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property" and the related Mortgage Loan a "Single Family Mortgage Loan") or (ii)
a primarily residential property which consists of five or more residential
dwelling units, and which may include limited retail, office or other commercial
space (a "Multifamily Property" and the related Mortgage Loan, a "Multifamily
Mortgage Loan"). Single Family Properties and Multifamily Properties are
sometimes referred to herein collectively as "Mortgaged Properties." To the
extent specified in the related Prospectus Supplement, the Mortgage Loans will
be secured by first and/or junior mortgages or deeds of trust or other similar
security instruments creating a first or junior lien on Mortgaged Property. The
Mortgaged Properties may include apartments owned by cooperative housing
corporations ("Cooperatives"). The Mortgaged Properties may include leasehold
interests in properties, the title to which is held by third party lessors. The
term of any such leasehold shall exceed the term of the related mortgage note by
at least five years or such other time period specified in the related
Prospectus Supplement. The Mortgage Loans may include (i) closed-end and/or
revolving home equity loans or certain balances thereof ("Home Equity Loans")
and/or (ii) secured home improvement installment sales contracts and Home
Improvement Contracts. In addition, the Mortgage Loans may include certain
Mortgage Loans evidenced by Land Sale Contracts for the sale of properties
pursuant to which the mortgagor promises to pay the amount due thereon to the
holder thereof with fee title to the related property held by such holder until
the mortgagor has made all of the payments required pursuant to such Land Sale
Contract, at which time fee title is conveyed to the mortgagor. The Originator
of each Mortgage Loan will have been a person other than the Depositor. The
related Prospectus Supplement will indicate if any Originator is an affiliate of
the Depositor. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or other security
instruments (the "Mortgages") creating a lien on the Mortgaged Properties. The
Mortgaged Properties will be
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located in any one of the fifty states, the District of Columbia, Guam, Puerto
Rico or any other territory of the United States. If so provided in the related
Prospectus Supplement, Mortgage Loans may include loans insured by the FHA ("FHA
Loans") or partially guaranteed by the VA ("VA Loans"). See "--FHA Loans and VA
Loans" below.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan to the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property, other than with respect to Refinance Loans, is generally 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. "Refinance Loans" are loans made to refinance existing loans. Unless
otherwise set forth in the related Prospectus Supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The value of a Mortgaged Property as of the date of initial issuance of
the related series of Securities may be less than the Value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates specified
in such Prospectus Supplement and to the extent then applicable and specifically
known to the Depositor, with respect to the Mortgage Loans, including (i) the
aggregate outstanding principal balance and the largest, smallest and average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans, (iii) the weighted
average (by principal balance) of the original and remaining terms to maturity
of the Mortgage Loans, (iv) the earliest and latest origination date and
maturity date of the Mortgage Loans, (v) the range of the Loan-to-Value Ratios
at origination of the Mortgage Loans, (vi) the Mortgage Rates or range of
Mortgage Rates and the weighted average Mortgage Rate borne by the Mortgage
Loans, (vii) the state or states in which most of the Mortgaged Properties are
located, (viii) information with respect to the prepayment provisions, if any,
of the Mortgage Loans, (ix) with respect to Mortgage Loans with adjustable
Mortgage Rates ("ARM Loans"), the index, the frequency of the adjustment dates,
the range of margins added to the index, and the maximum Mortgage Rate or
monthly payment variation at the time of any adjustment thereof and over the
life of the ARM Loan, (x) information regarding the payment characteristics of
the Mortgage Loans, including without limitation balloon payment and other
amortization provisions, (xi) the number of Mortgage Loans that are delinquent
and the number of days or ranges of the number of days such Mortgage Loans are
delinquent and (xii) the material underwriting standards used for the Mortgage
Loans. If specific information respecting the Mortgage Loans is not known to
the Depositor at the time Securities are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement, and specific information will be set forth in a report which will be
available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission within fifteen days after such initial
issuance. Notwithstanding the foregoing, the characteristics of the Mortgage
Loans included in a Trust Fund will not vary by more than five percent (by
aggregate principal balance as of the Cut-off Date) from the characteristics
thereof that are described in the related Prospectus Supplement.
The related Prospectus Supplement will specify whether the Mortgage Loans
include (i) Home Equity Loans, which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) Home Improvement
Contracts originated by a home improvement contractor and secured by a Mortgage
on the related Mortgaged Property that is junior to other liens on the Mortgaged
Property. The home improvements purchased with the Home Improvement Contracts
typically include replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods, solar heating panels,
patios, decks, room additions and garages. The related Prospectus Supplement
will specify whether the Home Improvement Contracts are FHA Loans and, if so,
the limitations on any FHA insurance. In addition, the related Prospectus
Supplement will specify whether the Mortgage Loans contain certain Mortgage
Loans evidenced by Land Sale Contracts.
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Payment Provisions of the Mortgage Loans
All of the Mortgage Loans will provide for payments of principal, interest or
both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus Supplement or for
payments in another manner described in the related Prospectus Supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at a Mortgage Rate that is fixed over its term or that adjusts from time
to time, or that may be converted from an adjustable to a fixed Mortgage Rate or
a different adjustable Mortgage Rate, or from a fixed to an adjustable Mortgage
Rate, from time to time pursuant to an election or as otherwise specified on the
related Mortgage Note, in each case as described in the related Prospectus
Supplement. Each Mortgage Loan may provide for scheduled payments to maturity
or payments that adjust from time to time to accommodate changes in the Mortgage
Rate or to reflect the occurrence of certain events or that adjust on the basis
of other methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or require a balloon payment due on
its stated maturity date, in each case as described in the related Prospectus
Supplement. Each Mortgage Loan may contain prohibitions on prepayment (a "Lock-
out Period" and, the date of expiration thereof, a "Lock-out Date") or require
payment of a premium or a yield maintenance penalty (a "Prepayment Premium") in
connection with a prepayment, in each case as described in the related
Prospectus Supplement. In the event that holders of any class or classes of
Offered Securities will be entitled to all or a portion of any Prepayment
Premiums collected in respect of Mortgage Loans, the related Prospectus
Supplement will specify the method or methods by which any such amounts will be
allocated. See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the related Prospectus Supplement, the Mortgage
Loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid. If specified in the related Prospectus Supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such Prospectus Supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
Unsecured Home Improvement Loans
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans, unsecured installment loans and unsecured home
improvement loans which are FHA Loans. See "--FHA Loans and VA Loans" below and
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees." Except as otherwise set forth in the related Prospectus Supplement,
the Unsecured Home Improvement Loans will be fully amortizing and will bear
interest at a fixed or variable annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates specified
in such Prospectus Supplement and to the extent then applicable and specifically
known to the Depositor, with respect to the Unsecured Home Improvement Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Unsecured Home
Improvement Loans as of the applicable Cut-Off Date, (ii) the
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weighted average (by principal balance) of the original and remaining terms to
maturity of the Unsecured Home Improvement Loans, (iii) the earliest and latest
origination date and maturity date of the Unsecured Home Improvements Loans,
(iv) the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans, (v) the state or
states in which most of the Unsecured Home Improvement Loans were originated,
(vi) information with respect to the prepayment provisions, if any, of the
Unsecured Home Improvement Loans, (vii) with respect to the Unsecured Home
Improvement Loans with adjustable interest rates ("ARM Unsecured Home
Improvement Loans"), the index, the frequency of the adjustment dates, the range
of margins added to the index, and the maximum interest rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Unsecured Home Improvement Loan, (viii) information regarding the payment
characteristics of the Unsecured Home Improvement Loan, (ix) the number of
Unsecured Home Improvement Loans that are delinquent and the number of days or
ranges of the number of days such Unsecured Home Improvement Loans are
delinquent and (x) the material underwriting standards used for the Unsecured
Home Improvement Loans. If specific information respecting the Unsecured Home
Improvement Loans is not known to the Depositor at the time Securities are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance. Notwithstanding the foregoing,
the characteristics of the Unsecured Home Improvement Loans included in a Trust
Fund will not vary by more than five percent (by aggregate principal balance as
of the Cut-off Date) from the characteristics thereof that are described in the
related Prospectus Supplement.
Contracts
General
To the extent provided in the related Prospectus Supplement, each Contract
will be secured by a security interest in a new or used Manufactured Home. To
the extent specified in the related Prospectus Supplement, the Contracts may
include Contracts which are FHA Loans. See "--FHA Loans and VA Loans" below and
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees." Such Prospectus Supplement will specify the states or other
jurisdictions in which the Manufactured Homes are located as of the related Cut-
off Date. The method of computing the "Loan-to-Value Ratio" of a Contract will
be described in the related Prospectus Supplement.
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Contracts, including
(i) the aggregate outstanding principal balance and the largest, smallest and
average outstanding principal balance of the Contracts as of the applicable Cut-
off Date, (ii) whether the Manufactured Homes were new or used as of the
origination of the related Contracts, (iii) the weighted average (by principal
balance) of the original and remaining terms to maturity of the Contracts, (iv)
the earliest and latest origination date and maturity date of the Contracts, (v)
the range of the Loan-to-Value Ratios at origination of the Contracts, (vi) the
Contract Rates or range of Contract Rates and the weighted average Contract Rate
borne by the Contracts, (vii) the state or states in which most of the
Manufactured Homes are located at origination, (viii) information with respect
to the prepayment provisions, if any, of the Contracts, (ix) with respect to
Contracts with adjustable Contract Rates ("ARM Contracts"), the index, the
frequency of the adjustment dates, and the maximum Contract Rate or monthly
payment variation at the time of any adjustment thereof and over the life of the
ARM Contract, (x) the number of Contracts that are delinquent and the number of
days or ranges of the number of days such Contracts are delinquent, (xi)
information regarding the payment characteristics of the Contracts and (xii) the
material underwriting standards used for the Contracts. If specific information
respecting the Contracts is not known to the Depositor at the time Securities
are initially offered, more general information of the nature described above
will be provided in the Prospectus Supplement, and specific information will be
set forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance. Notwithstanding the foregoing,
the characteristics of the Contracts included in a Trust Fund will not vary by
more than five percent
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(by aggregate principal balance as of the Cut-off Date) from the characteristics
thereof that are described in the related Prospectus Supplement.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest or both,
on due dates that occur monthly or at such other interval as is specified in the
related Prospectus Supplement or for payments in another manner described in the
Prospectus Supplement. Each Contract may provide for no accrual of interest or
for accrual of interest thereon at an annual percentage rate that is fixed over
its term or that adjusts from time to time, or as otherwise specified in the
related Prospectus Supplement. Each Contract may provide for scheduled payments
to maturity or payments that adjust from time to time to accommodate changes in
the Contract Rate as otherwise described in the related Prospectus Supplement.
See "--Assets" above.
Agency Securities
The Agency Securities will consist of any combination of Ginnie Mae
Certificates, Fannie Mae Certificates and Freddie Mac Certificates, which may
include Stripped Agency Securities, as described below.
Ginnie Mae
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Section 306(g) of Title
III of the Housing Act authorizes Ginnie Mae to guarantee the timely payment of
the principal of and interest on certificates that are based on and backed by a
pool of FHA Loans, VA Loans or by pools of other eligible residential loans.
Section 306(g) of the Housing Act provides that "the full faith and credit of
the United States is pledged to the payment of all amounts which may be required
to be paid under any guaranty under this subsection." In order to meet its
obligations under such guaranty, Ginnie Mae is authorized, under Section 306(d)
of the Housing Act, to borrow from the United States Treasury with no
limitations as to amount, to perform its obligations under its guarantee.
Ginnie Mae Certificates
Each Ginnie Mae Certificate will be a "fully modified pass-through" mortgage-
backed certificate issued and serviced by an issuer approved by Ginnie Mae or
Fannie Mae as a seller-servicer of FHA Loans or VA Loans, except as described
below with respect to Stripped Agency Securities (as defined below). The loans
underlying Ginnie Mae Certificates may consist of FHA Loans, VA Loans and other
loans eligible for inclusion in loan pools underlying Ginnie Mae Certificates.
Ginnie Mae Certificates may be issued under either or both of the Ginnie Mae I
program and the Ginnie Mae II program, as described in the related Prospectus
Supplement. The Prospectus Supplement for Certificates of each Series
evidencing interests in a Trust Fund including Ginnie Mae Certificates will set
forth additional information regarding the Ginnie Mae guaranty program, the
characteristics of the pool underlying such Ginnie Mae Certificates, the
servicing of the related pool, the payment of principal and interest on Ginnie
Mae Certificates to the extent not described herein and other relevant matters
with respect to the Ginnie Mae Certificates.
Except as otherwise specified in the related Prospectus Supplement or as
described below with respect to Stripped Agency Securities, each Ginnie Mae
Certificate will provide for the payment, by or on behalf of the issuer, to the
registered holder of such Ginnie Mae Certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the
aggregate amount of the monthly principal and interest payments on each related
FHA Loan or VA Loan, less servicing and guaranty fees aggregating the excess of
the interest on such FHA Loan or VA Loan over the Ginnie Mae Certificates pass-
through rate. In addition, each payment to a holder of a Ginnie Mae Certificate
will include proportionate pass-through payments to such holder of any
prepayments of principal of the FHA Loans or VA Loans underlying the Ginnie Mae
Certificate and the holder's proportionate interest in the remaining principal
balance in the event of a foreclosure or other disposition of any such FHA Loan
or VA Loan.
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The Ginnie Mae Certificates do not constitute a liability of, or evidence any
recourse against, the issuer of the Ginnie Mae Certificates, the Depositor or
any affiliates thereof, and the only recourse of a registered holder, such as
the Trustee, is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
Certificates included in a Trust Fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of such Ginnie Mae Certificates.
Pursuant to such agreement, such issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA Loans and VA Loans,
including collecting payments from borrowers and remitting such collections to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
in order to make timely payments of all amounts due on the Ginnie Mae
Certificate, even if the payments received by such issuer on the loans backing
the Ginnie Mae Certificate are less than the amounts due thereon. If the issuer
is unable to make payments on a Ginnie Mae Certificate as they become due, it
must promptly notify Ginnie Mae and request Ginnie Mae to make such payment.
Upon such notification and request, Ginnie Mae will make such payments directly
to the registered holder of the Ginnie Mae Certificate. In the event no payment
is made by the issuer and the issuer fails to notify and request Ginnie Mae to
make such payment, the registered holder of the Ginnie Mae Certificate has
recourse against only Ginnie Mae to obtain such payment. The Trustee or its
nominee, as registered holder of the Ginnie Mae Certificates included in a Trust
Fund, is entitled to proceed directly against Ginnie Mae under the terms of the
guaranty agreement or contract relating to such Ginnie Mae Certificates for any
amounts that are not paid when due under each Ginnie Mae Certificate.
The Ginnie Mae Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above so long as such
Ginnie Mae Certificates and underlying residential loans meet the criteria of
the Rating Agency or Agencies. Such Ginnie Mae Certificates and underlying
residential loans will be described in the related Prospectus Supplement.
Fannie Mae
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage loans
from lenders. Fannie Mae acquires funds to purchase loans from many capital
market investors, thereby expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. In addition, Fannie Mae issues
mortgage-backed securities primarily in exchange for pools of mortgage loans
from lenders. Fannie Mae receives fees for its guaranty of timely payment of
principal and interest on its mortgage-backed securities.
Fannie Mae Certificates
Fannie Mae Certificates are Guaranteed Mortgage Pass-Through Certificates
typically issued pursuant to a prospectus which is periodically revised by
Fannie Mae. Fannie Mae Certificates represent fractional undivided interests in
a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program. Mortgage
loans underlying Fannie Mae Certificates included in a Trust Fund will consist
of conventional mortgage loans, FHA Loans or VA Loans. The Prospectus
Supplement for Securities of each series evidencing interests in a Trust Fund
including Fannie Mae Certificates will set forth additional information
regarding the Fannie Mae program, the characteristics of the pool underlying
such Fannie Mae Certificates, the servicing of the related pool, payment of
principal and interest on the Fannie Mae Certificates to the extent not
described herein and other relevant matters with respect to the Fannie Mae
Certificates.
Except as described below with respect to Stripped Agency Securities, Fannie
Mae guarantees to each registered holder of a Fannie Mae Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest at the applicable pass-through rate provided
for by such Fannie Mae
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Certificate on the underlying mortgage loans, whether or not received, and such
holder's proportionate share of the full principal amount of any prepayment or
foreclosed or other finally liquidated mortgage loan, whether or not such
principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations solely of
Fannie Mae and are not backed by, nor entitled to, the full faith and credit of
the United States. If Fannie Mae were unable to satisfy such obligations,
distributions to the holders of Fannie Mae Certificates would consist solely of
payments and other recoveries on the underlying loans and, accordingly, monthly
distributions to the holders of Fannie Mae Certificates would be affected by
delinquent payments and defaults on such loans.
Fannie Mae Certificates evidencing interests in pools of mortgage loans formed
on or after May 1, 1985 (other than Fannie Mae Certificates backed by pools
containing graduated payment mortgage loans or multifamily loans) are available
in book-entry form only. With respect to a Fannie Mae Certificate issued in
book-entry form, distributions thereon will be made by wire, and with respect to
a fully registered Fannie Mae Certificate, distributions thereon will be made by
check.
The Fannie Mae Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above, so long as such
Fannie Mae Certificates and underlying mortgage loans meet the criteria of the
Rating Agency or Rating Agencies rating the Certificates of such Series. Such
Fannie Mae Certificates and underlying mortgage loans will be described in the
related Prospectus Supplement.
Freddie Mac
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in such mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac Certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests therein which it deems
to be of such quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
Freddie Mac Certificates
Each Freddie Mac Certificate represents an undivided interest in a pool of
residential loans that may consist of first lien conventional residential loans,
FHA Loans or VA Loans (the "Freddie Mac Certificate Group"). Each such mortgage
loan must meet the applicable standards set forth in the Freddie Mac Act. A
Freddie Mac Certificate Group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac Certificate Group. The Prospectus Supplement for
Securities of each series evidencing interests in a Trust Fund including Freddie
Mac Certificates will set forth additional information regarding the Freddie Mac
guaranty program, the characteristics of the pool underlying such Freddie Mac
Certificate, the servicing of the related pool, payment of principal and
interest on the Freddie Mac Certificate to the extent not described herein and
other relevant matters with respect to the Freddie Mac Certificates.
Except as described below with respect to Stripped Agency Securities, Freddie
Mac guarantees to each registered holder of a Freddie Mac Certificate the timely
payment of interest on the underlying mortgage loans to the extent of the
applicable pass-through rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by such Freddie Mac Certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac Certificate collection by such holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
such holder's pro rata share thereof, but does not, except if and to the extent
specified in the related Prospectus Supplement, guarantee the timely payment of
scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying
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mortgage loan, but not later than 30 days following the latest of (i)
foreclosure sale, (ii) payment of the claim by any mortgage insurer and (iii)
the expiration of any right of redemption, but in any event no later than one
year after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac Certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment with respect to the mortgage loans in the same manner as for
mortgage loans which it has purchased but not sold. The length of time necessary
for Freddie Mac to determine that a mortgage loan should be accelerated varies
with the particular circumstances of each mortgagor, and Freddie Mac has not
adopted servicing standards that require that the demand be made within any
specified period.
Freddie Mac Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac Certificates would be affected by delinquent payments and defaults
on such Mortgage Loans.
The Freddie Mac Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above, so long as such
Freddie Mac Certificates and underlying mortgage loans meet the criteria of the
Rating Agency or Rating Agencies rating the Securities of such Series. Such
Freddie Mac Certificates and underlying mortgage loans will be described in the
related Prospectus Supplement.
Stripped Agency Securities
The Ginnie Mae Certificates, Fannie Mae Certificates or Freddie Mac
Certificates may be issued in the form of certificates ("Stripped Agency
Securities") which represent an undivided interest in all or 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 or interest distributions (but not all of such
distributions), on an underlying pool of mortgage loans or certain other Ginnie
Mae Certificates, Fannie Mae Certificates or Freddie Mac Certificates. Ginnie
Mae, Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped
Agency Security to the same extent as such entity guarantees the underlying
securities backing such Stripped Agency Securities or to the extent described
above with respect to a Stripped Agency Security backed by a pool of mortgage
loans, unless otherwise specified in the related Prospectus Supplement. The
Prospectus Supplement for Securities of each series evidencing interests in a
Trust Fund including Stripped Agency Securities will set forth additional
information regarding the characteristics of the assets underlying such Stripped
Agency Securities, the payments of principal and interest on the Stripped Agency
Securities and other relevant matters with respect to the Stripped Agency
Securities.
Mortgage Securities
The Mortgage Securities will represent beneficial interests in loans of the
type that would otherwise be eligible to be Mortgage Loans, Unsecured Home
Improvement Loans, Contract, or Agency Securities, or collateralized obligations
secured by Mortgage Loans, Unsecured Home Improvement Loans, Contracts or Agency
Securities. The Mortgage Securities (i) will have been issued by an entity
other than the Depositor or its affiliates, (ii) will have been acquired in bona
fide secondary market transactions from persons other than the issuer thereof or
its affiliates and (iii) will have been (a) offered and distributed to the
public pursuant to an effective registration statement or (b) purchased in a
transaction not involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of sale (nor an affiliate
thereof at any time during the preceding three months); provided a period of two
years elapsed since the later of the date the securities were acquired from the
issuer. Although individual Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality thereof, they need not be, and
Mortgage Securities themselves will not be so insured or guaranteed. Except as
otherwise set forth in the related Prospectus Supplement, Mortgage Securities
will generally be similar to Securities offered hereunder.
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The Prospectus Supplement for Securities of each series evidencing interests
in a Trust Fund including Mortgage Securities will include a description of such
Mortgage Securities and any related credit enhancement, and the related Mortgage
Loans, Unsecured Home Improvement Loans, Contracts or Agency Securities will be
described together with any other Mortgage Loans, Unsecured Home Improvement
Loans, Contracts or Agency Securities included in the Trust Fund relating to
such series. As to any such series of Securities, as used herein the terms
"Mortgage Loans," "Unsecured Home Improvement Loans" and "Contracts" include the
Mortgage Loans, Unsecured Home Improvement Loans or Contracts, as applicable,
underlying such Mortgage Securities. References herein to advances to be made
and other actions to be taken by the Master Servicer in connection with the
Assets may include such advances made and other actions taken pursuant to the
terms of such Mortgage Securities.
FHA Loans and VA Loans
FHA Loans will be insured by the FHA as authorized under the Housing Act, and
the United States Housing Act of 1937, as amended. One- to four-family FHA
Loans will be insured under various FHA programs including the standard FHA 203-
b programs to finance the acquisition of one- to four-family housing units and
the FHA 245 graduated payment mortgage program. Such FHA Loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA Loan. No FHA Loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of such FHA Loan.
Mortgage Loans, Unsecured Home Improvement Loans and Contracts that are FHA
Loans are insured by the FHA (as described in the related Prospectus Supplement,
up to an amount equal to 90% of the sum of the unpaid principal of the FHA Loan,
a portion of the unpaid interest and certain other liquidation costs) pursuant
to Title I of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD
to insure multifamily loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a multifamily loan may be up to 40 years and the ratio of the loan
amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily loans made
for the purchase or refinancing of existing apartment projects that are at least
three years old. Section 244 also provides for co-insurance of mortgage loans
made under Section 223(f). Under Section 223(f), the loan proceeds cannot be
used for substantial rehabilitation work, but repairs may be made for up to, in
general, the greater of 15% of the value of the project and a dollar amount per
apartment unit established from time to time by HUD. In general the loan term
may not exceed 35 years and a loan-to-value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"').
The Servicemen's Readjustment Act 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 purchasers and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no VA Loan will have an
original principal amount greater than five times the partial VA guarantee for
such VA Loan. The maximum guarantee that may be issued by the VA under this
program will be set forth in the related Prospectus Supplement.
Pre-Funding Account
To the extent provided in a Prospectus Supplement, a portion of the proceeds
of the issuance of Securities may be deposited into an account maintained with
the Trustee (a "Pre-Funding Account"). In such event, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the availability thereof), additional Assets from time
to time (as frequently as daily) within the period (not to exceed three months)
specified in the related Prospectus Supplement after the issuance of such series
of Securities having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account for such series on the date of such
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issuance. The Pre-Funded Amount with respect to a series is not expected to
exceed 25% of the aggregate initial Security Balance of the related Securities.
Any Subsequent Assets will be required to satisfy certain eligibility criteria
more fully set forth in the related Prospectus Supplement, which eligibility
criteria will be consistent with the eligibility criteria of the Assets
initially included in the Trust Fund, subject to such exceptions as are
expressly stated in the Prospectus Supplement. For example, the Subsequent
Assets will be subject to the same underwriting standards, representations and
warranties as the Assets initially included in the Trust Fund. In addition,
certain conditions must be satisfied before the Subsequent Assets are
transferred into the Trust Fund such as the delivery to the Rating Agencies and
the Trustee of certain opinions of counsel (including bankruptcy, corporate and
tax opinions).
Except as set forth in the following sentence, the Pre-Funded Amount will be
used only to purchase Subsequent Mortgage Loans. Any portion of the Pre-Funded
Amount remaining in the Pre-Funding Account at the end of the Pre-Funding Period
will be used to prepay one or more classes of Securities in the amounts and in
the manner specified in the related Prospectus Supplement. In addition, if
specified in the related Prospectus Supplement, the Depositor may be required to
deposit cash into an account maintained by the Trustee for the purpose of
assuring the availability of funds to pay interest with respect to the
Securities during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related Prospectus Supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts will be
permitted to be invested, pending application thereof, only in eligible
investments authorized by each applicable Rating Agency.
Accounts
Each Trust Fund will include one or more accounts, established and maintained
on behalf of the Securityholders into which the person or persons designated in
the related Prospectus Supplement will, to the extent described herein and in
such Prospectus Supplement deposit all payments and collections received or
advanced with respect to the Assets and other assets in the Trust Fund. Such an
account may be maintained as an interest bearing or a non-interest bearing
account, and funds held therein may be held as cash or invested in certain
short-term, investment grade obligations, in each case as described in the
related Prospectus Supplement. See "Description of the Agreements--Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
Credit Support
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series or by one or more other types of credit support, such as a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof. The amount and types of coverage, the
identification of the entity providing the coverage (if applicable) and related
information with respect to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a series of Securities. See "Risk
Factors--Credit Support is Limited in Amount and Coverage" and "Description of
Credit Support."
Cash Flow Agreements
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets or
on one or more classes of Securities. (Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Loans were denominated
in a non-United States currency.) The principal terms of any such guaranteed
investment contract or other agreement, including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder and
provisions relating to the termination thereof, will be described in the
Prospectus
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Supplement for the related series. In addition, the related Prospectus
Supplement will provide certain information with respect to the obligor under
any such Cash Flow Agreement.
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 Assets, or the repayment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
General
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related Trust Fund (which may be affected by prepayments,
defaults, liquidations or repurchases). See "Risk Factors."
Pass-Through Rate and Interest Rate
Securities of any class within a series may have fixed, variable or adjustable
Pass-Through Rates or interest rates, which may or may not be based upon the
interest rates borne by the Assets in the related Trust Fund. The Prospectus
Supplement with respect to any series of Securities will specify the Pass-
Through Rate or interest rate for each class of such Securities or, in the case
of a variable or adjustable Pass-Through Rate or interest rate, the method of
determining the Pass-Through Rate or interest rate; the effect, if any, of the
prepayment of any Asset on the Pass-Through Rate or interest rate of one or more
classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield to
maturity to each holder of Securities entitled to payments of interest will be
below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period (each, an "Interest Accrual Period"), the
distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under "--Pass-Through Rate and Interest Rate," if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related thereto), including principal
prepayments resulting from both voluntary prepayments by the borrowers and
involuntary liquidations. The rate at which such principal prepayments occur
will be affected by a variety of factors, including, without limitation, the
terms of the Assets (or, in the case of Mortgage Securities and Agency
Securities, the underlying assets related thereto), the level of prevailing
interest rates, the availability of mortgage credit and economic, demographic,
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geographic, tax, legal and other factors. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Assets in a
particular Trust Fund (or, in the case of Mortgage Securities and Agency
Securities, the underlying assets related thereto), such assets are likely to be
the subject of higher principal prepayments than if prevailing rates remain at
or above the rates borne by such assets. In this regard, it should be noted
that certain Assets (or, in the case of Mortgage Securities and Agency
Securities, the underlying assets related thereto) may consist of loans with
different interest rates. The rate of principal payment on Mortgage Securities
will also be affected by the allocation of principal payments on the underlying
assets among the Mortgage Securities or Agency Securities and other Mortgage
Securities or Agency Securities of the same series. The rate of principal
payments on the Assets in the related Trust Fund (or, in the case of Mortgage
Securities and Agency Securities, the underlying assets related thereto) is
likely to be affected by the existence of any Lock-out Periods and Prepayment
Premium provisions of the mortgage loans underlying or comprising such Assets,
and by the extent to which the servicer of any such mortgage loan is able to
enforce such provisions. Mortgage Loans with a Lock-out Period or a Prepayment
Premium provision, to the extent enforceable, generally would be expected to
experience a lower rate of principal prepayments than otherwise identical
mortgage loans without such provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums. Because of the depreciating nature of manufactured
housing, which limits the possibilities for refinancing, and because the terms
and principal amounts of manufactured housing contracts are generally shorter
and smaller than the terms and principal amounts of mortgage loans secured by
site-built homes, changes in interest rates have a correspondingly smaller
effect on the amount of the monthly payments on manufactured housing contracts
than on the amount of the monthly payments on mortgage loans secured by site-
built homes. Consequently, changes in interest rates may play a smaller role in
prepayment behavior of manufactured housing contracts than they do in the
prepayment behavior of loans secured by mortgage on site-built homes.
Conversely, local economic conditions and certain of the other factors mentioned
above may play a larger role in the prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgages
on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related thereto), the actual yield to maturity will be lower than that so
calculated. Conversely, if the purchaser of a Security offered at a premium
calculates its anticipated yield to maturity based on an assumed rate of
distributions of principal that is slower than that actually experienced on the
Assets (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related thereto), the actual yield to maturity will be lower
than that so calculated. In either case, if so provided in the Prospectus
Supplement for a series of Securities, the effect on yield on one or more
classes of the Securities of such series of prepayments of the Assets in the
related Trust Fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to such classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the obligor
is charged interest on the principal amount of the Mortgage Loan or Contract so
prepaid for the number of days in the month actually elapsed up to the date of
the prepayment or such other period specified in the related Prospectus
Supplement. Generally, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Securities entitled
to payments of interest because interest on the principal amount of any Mortgage
Loan or Contract so prepaid will be paid only to the date of prepayment rather
than for a full month. A partial prepayment of principal is applied so as to
reduce the outstanding principal balance of the related Mortgage Loan or
Contract as of the Due Date in the month in which such partial prepayment is
receive or such other date as is specified in the related Prospectus Supplement.
The timing of changes in the rate of principal payments on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related thereto) may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is consistent
with an investor's expectation. In general, the earlier a principal payment is
received on the Mortgage Loans and distributed on a Security, the greater the
effect on such investor's yield to maturity. The effect on an investor's yield
of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a given period may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
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Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets included in
or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of such
series. Prepayments on the Mortgage Loans or Contracts comprising or underlying
the Assets in a particular Trust Fund will generally accelerate the rate at
which principal is paid on some or all of the classes of the Securities of the
related series.
If so provided in the Prospectus Supplement for a series of Securities, one or
more classes of Securities may have a final scheduled Distribution Date, which
is the date on or prior to which the Security Balance thereof is scheduled to be
reduced to zero, calculated on the basis of the assumptions applicable to such
series set forth therein. Weighted average life refers to the average amount of
time that will elapse from the date of issue of a security until each dollar of
principal of such security will be repaid to the investor. The weighted average
life of a class of Securities of a series will be influenced by the rate at
which principal on the Assets is paid to such class, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments, in whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Assets in a Trust Fund. If any Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the classes of Securities of
the related series, one or more classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates or Contract
Rates and maturities of the Mortgage Loans or Contracts comprising or underlying
such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans for
the life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Securities of such series and the percentage of the
initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans or Contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
Other Factors Affecting Weighted Average Life
Type of Asset
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity (which, based on the
amortization schedule of such Mortgage Loans, may be a substantial amount),
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and because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Balloon Payment Assets may
default at maturity. The ability to obtain refinancing will depend on a number
of factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the mortgagor's financial situation,
prevailing mortgage loan interest rates, the mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Neither
the Depositor, the Servicer, the Master Servicer, nor any of their affiliates
will be obligated to refinance or repurchase any Mortgage Loan or to sell the
Mortgaged Property except to the extent provided in the related Prospectus
Supplement. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the mortgagor or adverse conditions in the
market where the property is located. In order to minimize losses on defaulted
Mortgage Loans, the Servicer may modify Mortgage Loans that are in default or as
to which a payment default is reasonably foreseeable. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan will tend
to extend the weighted average life of the Securities and may thereby lengthen
the period of time elapsed from the date of issuance of a Security until it is
retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage Rate
at origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Rate or Contract Rate in effect at
origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Rate or Contract Rate.
In addition, certain Mortgage Loans may be subject to temporary buydown plans
("Buydown Mortgage Loans") pursuant to which the monthly payments made by the
mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments thereon (the "Buydown Period"). The periodic
increase in the amount paid by the mortgagor of a Buydown Mortgage Loan during
or at the end of the applicable Buydown Period may create a greater financial
burden for the mortgagor, who might not have otherwise qualified for a mortgage,
and may accordingly increase the risk of default with respect to the related
Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related class or
classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Securities,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Securities were purchased.
As may be described in the related Prospectus Supplement, the related
Agreement may provide that all or a portion of the principal collected on or
with respect to the related Mortgage Loans may be applied by the related Trustee
to the acquisition of additional Mortgage Loans during a specified period
(rather than used to fund payments of principal to Securityholders during such
period) with the result that the related securities possess an interest-only
period, also commonly referred to as a revolving period, which will be followed
by an amortization period. Any such interest-only or revolving period may, upon
the occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement, the
related Agreement may provide that all or a portion of such collected principal
may be retained by the Trustee (and held in certain temporary
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investments, including Mortgage Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of such
principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Termination
If so specified in the related Prospectus Supplement, a series of Securities
may be subject to optional early termination through the repurchase of the
Assets in the related Trust Fund by the party specified therein, on any date on
which the aggregate Security Balance of the Securities of such series declines
to a percentage specified in the related Prospectus Supplement (generally not to
exceed 10%) of the Initial Security Balance, under the circumstances and in the
manner set forth therein. In addition, if so provided in the related Prospectus
Supplement, certain classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Securities.
In general, defaults on mortgage loans or contracts are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans and Contracts will be affected by the general
economic condition of the region of the country in which the related Mortgage
Properties or Manufactured Homes are located. The risk of delinquencies and
loss is greater and 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.
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans or Contracts comprising
or underlying the Assets and that of the related series of Securities.
Refinancing
At the request of a mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan or Contract in any Trust Fund by accepting prepayments thereon and
permitting a new loan secured by a mortgage on the same property. In the event
of such a refinancing, the new loan would not be included in the related Trust
Fund and, therefore, such refinancing would have the same effect as a prepayment
in full of the related Mortgage Loan or Contract. A Servicer may, from time to
time, implement programs designed to encourage refinancing. Such programs may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
Servicers may encourage the refinancing of Mortgage Loans or Contracts,
including defaulted Mortgage Loans or Contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of such Mortgage Loans or
Contracts.
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Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets, other than FHA Loans and VA Loans, may include "due-on-sale clauses"
that allow the holder of the Mortgage Loans to demand payment in full of the
remaining principal balance of the Mortgage Loans upon sale, transfer or
conveyance of the related Mortgaged Property.
With respect to any Mortgage Loans, except as set forth in the related
Prospectus Supplement, the Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law; provided, however, that the Servicer will not take any action in
relation to the enforcement of any due-on-sale provision which would adversely
affect or jeopardize coverage under any applicable insurance policy. See
"Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description
of the Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Due-on-Sale Clauses." The Contracts, in
general, prohibit the sale or transfer of the related Manufactured Homes without
the consent of the Servicer and permit the acceleration of the maturity of the
Contracts by the Servicer upon any such sale or transfer that is not consented
to. It is expected that the Servicer will permit most transfers of Manufactured
Homes and not accelerate the maturity of the related Contracts. In certain
cases, the transfer may be made by a delinquent obligor in order to avoid a
repossession of the Manufactured Home. In the case of a transfer of a
Manufactured Home after which the Servicer desires to accelerate the maturity of
the related Contract, the Servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale clause". See "Certain Legal
Aspects of the Contracts--Transfers of Manufactured Homes; Enforceability of
Due-on-Sale Clauses."
THE DEPOSITOR
ACE Securities Corp., the Depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the Depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
Depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the Depositor are, in general, to acquire, own and
sell mortgage loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in Mortgage
Loans and other financial assets, collections thereon and related assets; and to
engage in any acts which are incidental to, or necessary, suitable or convenient
to accomplish, the foregoing.
All of the shares of capital stock of the Depositor are held by Altamont
Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
General
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an Indenture. Each series of
Securities will consist of one or more classes of Securities that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior or subordinate to one or more other classes of
Securities in respect of certain distributions on the Securities; (iii) be
entitled either to (A) principal distributions, with disproportionately low,
nominal or no interest distributions or (B) interest distributions, with
disproportionately low, nominal or no principal distributions; (iv) provide for
distributions of accrued interest thereon commencing only following the
occurrence of certain events, such as the retirement of one or more other
classes of Securities of such series (collectively, "Accrual Securities"); (v)
provide for payments of principal as described in the related Prospectus
Supplement, from all or only a portion of the Assets in such Trust Fund, to the
extent of available funds, in each case as described in the related Prospectus
Supplement; and/or
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(vi) provide for distributions based on a combination of two or more components
thereof with one or more of the characteristics described in this paragraph
including a Strip Security component. If so specified in the related Prospectus
Supplement, distributions on one or more classes of a series of Securities may
be limited to collections from a designated portion of the Assets in the related
Trust Fund. Any such classes may include classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
classes of Strip Securities, notional amounts or percentage interests specified
in the related Prospectus Supplement. The transfer of any Offered Securities
may be registered and such Securities may be exchanged without the payment of
any service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued as Definitive Securities
or in book-entry form ("Book-Entry Securities"), as provided in the related
Prospectus Supplement. See "Risk Factors--Owners of Book-Entry Securities Not
Entitled to Exercise Rights of Holders of Securities" and "Description of the
Securities--Book-Entry Registration and Definitive Securities." Definitive
Securities will be exchangeable for other Securities of the same class and
series of a like aggregate Security Balance, notional amount or percentage
interest but of different authorized denominations. See "Risk Factors--Limited
Liquidity for Securities" and "--Limited Assets for Payment of Securities."
Distributions
Distributions on the Securities of each series will be made by or on behalf of
the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close of
business on, unless a different date is specified in the related Prospectus
Supplement, the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securityholders in such class
or by random selection or as described in the related Prospectus Supplement.
Payments will be made either by wire transfer in immediately available funds to
the account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder has so notified the Trustee or other
person required to make such payments no later than the date specified in the
related Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), or by
check mailed to the address of the person entitled thereto as it appears on 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 location specified in the notice to Securityholders of such
final distribution.
Available Distribution Amount
All distributions on the Securities of each series on each Distribution Date
will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement.
Generally, the "Available Distribution Amount" for each Distribution Date equals
the sum of the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless a
different period is specified in the related Prospectus Supplement, a
"Due Period" with respect to any Distribution Date will commence on the
second day of the month in which the immediately preceding Distribution
Date occurs, or the day after the Cut-off Date in the case of the first
Due Period, and will end on the first day of the month of the related
Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of any
FHA insurance, VA Guaranty Policy or insurance policies to be maintained
in respect of each Asset (to the extent such proceeds are not applied to
the restoration of the Asset or
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released in accordance with the normal servicing procedures of a
Servicer, subject to the terms and conditions applicable to the related
Asset) (collectively, "Insurance Proceeds"), all other amounts received
and retained in connection with the liquidation of Assets in default in
the Trust Fund ("Liquidation Proceeds"), and other unscheduled
recoveries received subsequent to the related Due Period,
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a Servicer,
the Master Servicer or any other entity as specified in the related
Prospectus Supplement or that are payable in respect of certain expenses
of the related Trust Fund, and
(d) all amounts received for a repurchase of an Asset from the
Trust Fund for defective documentation or a breach of representation or
warranty received subsequent to the related Due Period;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Servicer or the Master Servicer or any
other entity as specified in the related Prospectus Supplement with respect
to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so provides,
amounts paid by a Servicer or any other entity as specified in the related
Prospectus Supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Collection Account as
of the corresponding Determination Date, any amounts collected under, from
or in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related Prospectus Supplement for a series of Securities will describe any
variation in the calculation of the Available Distribution Amount for such
series.
Distributions of Interest on the Securities
Each class of Securities (other than classes of Strip Securities that have no
Pass-Through Rate or interest rate) may have a different Pass-Through Rate or
interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such class or a component thereof (the "Pass-Through
Rate" in the case of Certificates). The related Prospectus Supplement will
specify the Pass-Through Rate or interest rate for each class or component or,
in the case of a variable or adjustable Pass-Through Rate or interest rate, the
method for determining the Pass-Through Rate or interest rate. Interest on the
Securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless the related Prospectus Supplement specifies a
different basis.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Strip Securities that are not entitled
to any distributions of interest) based on the Accrued Security Interest for
such class and such Distribution Date, subject to the sufficiency of the portion
of the Available Distribution Amount allocable to such class on such
Distribution Date. Prior to the time interest is distributable on any class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Interest
Accrual Period on the outstanding Security Balance thereof immediately prior to
the Distribution Date, at the
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applicable Pass-Through Rate or interest rate, reduced as described below.
Accrued Security Interest on certain classes of Strip Securities will be equal
to interest accrued during the related Interest Accrual Period on the
outstanding notional amount thereof immediately prior to each Distribution Date,
at the applicable Pass-Through Rate or interest rate, reduced as described
below, or interest accrual in the manner described in the related Prospectus
Supplement. The method of determining the notional amount for a certain class of
Strip Securities will be described in the related Prospectus Supplement.
Reference to notional amount is solely for convenience in certain calculations
and does not represent the right to receive any distributions of principal.
Unless otherwise provided in the related Prospectus Supplement, the Accrued
Security Interest on a series of Securities will be reduced in the event of
prepayment interest shortfalls, which are shortfalls in collections of interest
for a full accrual period resulting from prepayments prior to the due date in
such accrual period on the Mortgage Loans or Contracts comprising or underlying
the Assets in the Trust Fund for such series. The particular manner in which
such shortfalls are to be allocated among some or all of the classes of
Securities of that series will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will also describe the extent to
which the amount of Accrued Certificate Interest that is otherwise distributable
on (or, in the case of Accrual Securities, that may otherwise be added to the
Security Balance of) a class of Offered Securities may be reduced as a result of
any other contingencies, including delinquencies, losses and deferred interest
on or in respect of the Mortgage Loans or Contracts comprising or underlying the
Assets in the related Trust Fund. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Security Interest
otherwise distributable on a class of Securities by reason of the allocation to
such class of a portion of any deferred interest on the Mortgage Loans or
Contracts comprising or underlying the Assets in the related Trust Fund will
result in a corresponding increase in the Security Balance of such class. See
"Risk Factors--Rate of Prepayments on Assets May Adversely Affect Average Lives
and Yields of Securities" and "--Priority of Payment of Securities May Adversely
Affect Average Lives and Yields of Securities," and "Yield Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain classes of Strip Securities,
will have a "Security Balance" which, at any time, will equal the then maximum
amount that the holder will be entitled to receive in respect of principal out
of the future cash flow on the Assets and other assets included in the related
Trust Fund. The outstanding Security Balance of a Security will be reduced to
the extent of distributions of principal thereon from time to time and, if and
to the extent so provided in the related Prospectus Supplement, by the amount of
losses incurred in respect of the related Assets, may be increased in respect of
deferred interest on the related Mortgage Loans to the extent provided in the
related Prospectus Supplement and, in the case of Accrual Securities prior to
the Distribution Date on which distributions of interest are required to
commence, will be increased by any related Accrued Security Interest. If so
specified in the related Prospectus Supplement, the initial aggregate Security
Balance of all classes of Securities of a series will be greater than the
outstanding aggregate principal balance of the related Assets as of the
applicable Cut-off Date. The initial aggregate Security Balance of a series and
each class thereof will be specified in the related Prospectus Supplement.
Distributions of principal will be made on each Distribution Date to the class
or classes of Securities in the amounts and in accordance with the priorities
specified in the related Prospectus Supplement. Certain classes of Strip
Securities with no Security Balance are not entitled to any distributions of
principal.
Components
To the extent specified in the related Prospectus Supplement, distribution on
a class of Securities may be based on a combination of two or more different
components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interest on the Securities" and
"--Distributions of Principal of the Securities" above also relate to components
of such a class of Securities. In such case, reference in such sections to
Security Balance and Pass-Through Rate or interest rate refer to the principal
balance, if any, of any such component and the Pass-Through Rate or interest
rate, if any, on any such component, respectively.
Distributions on the Securities of Prepayment Premiums
If so provided in the related Prospectus Supplement, Prepayment Premiums that
are collected on the Mortgage Loans in the related Trust Fund will be
distributed on each Distribution Date to the class or classes of Securities
entitled thereto in accordance with the provisions described in such Prospectus
Supplement.
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Allocation of Losses and Shortfalls
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
The Prospectus Supplement for a series of Securities will describe the
entitlement, if any, of a class of Securities whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to such class from
amounts received on the Assets. However, if the Security Balance of a class of
Securities has been reduced to zero as the result of principal distributions,
the allocation of losses on the Assets, an optional termination or an optional
purchase or redemption, such class will no longer be entitled to receive
principal distributions from amounts received on the assets of the related Trust
Fund, including distributions in respect of principal losses previously
allocated to such class.
Advances in Respect of Delinquencies
With respect to any series of Securities evidencing an interest in a Trust
Fund, if so provided in the related Prospectus Supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the related Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Due Period and were delinquent
on the related Determination Date, subject to the Servicer's (or another
entity's) good faith determination that such advances will be reimbursable from
Related Proceeds (as defined below). In the case of a series of Securities that
includes one or more classes of Subordinate Securities and if so provided in the
related Prospectus Supplement, the Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary to
make the required distributions on one or more classes of Senior Securities
and/or may be subject to the Servicer's (or another entity's) good faith
determination that such advances will be reimbursable not only from Related
Proceeds but also from collections on other Assets otherwise distributable on
one or more classes of such Subordinate Securities. See "Description of Credit
Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets (including amounts received under any form of Credit
Support) respecting which such advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the related Prospectus
Supplement, including out of any amounts otherwise distributable on one or more
classes of Subordinate Securities of such series; provided, however, that any
such advance will be reimbursable from any amounts in the related Collection
Account prior to any distributions being made on the Securities to the extent
that the Servicer (or such other entity) shall determine in good faith that such
advance (a "Nonrecoverable Advance") is not ultimately recoverable from Related
Proceeds or, if applicable, from collections on other Assets otherwise
distributable on such Subordinate Securities. If advances have been made by the
Servicer from excess funds in the related Collection Account, the Servicer is
required to replace such funds in such Collection Account on any future
Distribution Date to the extent that funds in such Collection Account on such
Distribution Date are less than payments required to be made to Securityholders
on such date. If so specified in the related Prospectus Supplement, the
obligations of the Servicer (or another entity) to make advances may be secured
by a cash advance reserve fund, a surety bond, a letter of credit or another
form of limited guaranty. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay itself
such interest periodically from general collections on the Assets prior to any
payment to Securityholders or as otherwise provided in the related Agreement and
described in such Prospectus Supplement.
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If specified in the related Prospectus Supplement, the Master Servicer or the
Trustee will be required to make advances, subject to certain conditions
described in the Prospectus Supplement, in the event of a Servicer default.
Reports to Securityholders
With each distribution to holders of any class of Securities of a series, the
Servicer, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, will forward or cause to be forwarded to each such
holder, to the Depositor and to such other parties as may be specified in the
related Agreement, a statement containing the information specified in the
Prospectus Supplement, or if no such information is specified in the Prospectus
Supplement, generally setting forth, in each case to the extent applicable and
available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment Premiums;
(iv) the amount of related servicing compensation and such other
customary information as is required to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution, and
the aggregate amount of unreimbursed advances at the close of business on
such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Mortgage Loans or
Contracts in respect of which (a) one scheduled payment is delinquent, (b) two
scheduled payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Mortgage Loan or Contract liquidated during
the related Due Period, (a) the portion of such liquidation proceeds payable or
reimbursable to a Servicer (or any other entity) in respect of such Mortgage
Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (an "REO Property") relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due Period,
the date of acquisition;
(x) with respect to each REO Property relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due Period,
(a) the book value, (b) the principal balance of the related Mortgage Loan or
Contract immediately following such Distribution Date (calculated as if such
Mortgage Loan or Contract were still outstanding taking into account certain
limited modifications to the terms thereof specified in the Agreement), (c) the
aggregate amount of unreimbursed servicing expenses and unreimbursed advances in
respect thereof and (d) if applicable, the aggregate amount of interest accrued
and payable on related servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such sales
proceeds payable or reimbursable to the Master Servicer in respect of such REO
Property or the related Mortgage Loan or Contract and (c) the amount of any loss
to Securityholders in respect of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date, separately
identifying any reduction in such Security Balance due to the allocation of any
loss and increase in the Security Balance of a class of Accrual Securities in
the event that Accrued Security Interest has been added to such balance;
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(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding Distribution
Date, as calculated in accordance with the method specified in the related
Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the close
of business on such Distribution Date;
(xx) during the Pre-Funding Period, the remaining Pre-Funded Amount and
the portion of the Pre-Funding Amount used to acquire Subsequent Mortgage Loans
since the preceding Distribution Date;
(xxi) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(xxii) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees collected
during the related Due Period.
Within a reasonable period of time after the end of each calendar year, the
Servicer, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, will furnish to each Securityholder of record at any time
during the calendar year such information required by the Code and applicable
regulations thereunder to enable Securityholders to prepare their tax returns.
See "Description of the Securities--Book-Entry Registration and Definitive
Securities."
Termination
The obligations created by the related Agreement for each series of Securities
will terminate upon the payment to Securityholders of that series of all amounts
held in the Collection Accounts or by a Servicer, the Master Servicer, if any,
or the Trustee and required to be paid to them pursuant to such Agreement
following the earlier of (i) the final payment or other liquidation of the last
Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Mortgage Loan or Contract subject thereto and (ii) the
purchase of all of the assets of the Trust Fund by the party entitled to effect
such termination, under the circumstances and in the manner set forth in the
related Prospectus Supplement. In no event, however, will the Trust Fund
continue beyond the date specified in the related Prospectus Supplement.
Written notice of termination of the Agreement will be given to each
Securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice of
termination.
If so specified in the related Prospectus Supplement, a series of Securities
may be subject to optional early termination through the repurchase of the
Assets in the related Trust Fund by the party specified therein, under the
circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage, the party
specified therein will solicit bids for the purchase of all assets of the Trust
Fund, or of a sufficient portion of such assets to retire such class or classes
or purchase such class or classes at a price set forth in the related Prospectus
Supplement, in each case, under the circumstances and in the manner set forth
therein. Such price will at least equal the outstanding Security Balances and
any accrued and unpaid interest thereon (including any unpaid interest
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shortfalls for prior Distribution Dates). Any sale of the Assets of the Trust
Fund will be without recourse to the Trust Fund or the Securityholders. Any
such purchase or solicitation of bids may be made only when the aggregate
Security Balance of such class or classes declines to a percentage of the
Initial Security Balance of such Securities (not to exceed 10%) specified in the
related Prospectus Supplement. In addition, if so provided in the related
Prospectus Supplement, certain classes of Securities may be purchased or
redeemed in the manner set forth therein at a price at least equal to the
outstanding Security Balance of each class so purchased or redeemed and any
accrued and unpaid interest thereon (including any unpaid interest shortfalls
for prior Distribution Dates).
Optional Purchases
Subject to the provisions of the applicable Agreement, the Depositor, the
Servicer or such other party specified in the related Prospectus Supplement may,
at such party's option, repurchase any Mortgage Loan which is in default or as
to which default is reasonably foreseeable if, in the Depositor's, the
Servicer's or such other party's judgment, the related default is not likely to
be cured by the borrower or default is not likely to be averted, at a price
equal to the unpaid principal balance thereof plus accrued interest thereon and
under the conditions set forth in the applicable Prospectus Supplement.
Book-Entry Registration and Definitive Securities
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code ("UCC") and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("Participants") and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in their accounts, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in, Book-
Entry Securities may do so only through Participants and Indirect Participants
or in such other manner as is provided for in the related Prospectus Supplement.
In addition, such investors will receive all distributions on the Book-Entry
Securities through DTC and its Participants. Under a book-entry format,
Security Owners will receive payments after the related Distribution Date
because, while payments are required to be forwarded to Cede & Co., as nominee
for DTC, on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. The only "Securityholder" (as such term is used in the
Agreement or Indenture, as applicable) will be Cede, as nominee of DTC or such
other entity specified in the related Prospectus Supplement, and the Security
Owners will not be recognized by the Trustee as Securityholders under the
Agreement or Indenture, as applicable. Security Owners will be permitted to
exercise the rights of Securityholders under the related Agreement or Indenture,
as applicable, only indirectly through the Participants who in turn will
exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and its
operations, DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Book-Entry Securities and is required
to receive and transmit distributions of principal of and interest on the Book-
Entry Securities. Participants and Indirect Participants with which Security
Owners have accounts with respect to the Book-Entry Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on behalf
of Indirect Participants and certain banks, the ability of a Security Owner to
pledge its interest in the Book-Entry Securities to persons or entities
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that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Securities initially issued in book-entry form will be issued as Definitive
Securities to Security Owners or their nominees, rather than to DTC or its
nominee only (i) if the Depositor advises the Trustee in writing that DTC is no
longer willing or able to properly discharge its responsibilities as depository
with respect to the Securities and the Depositor is unable to locate a qualified
successor, (ii) if the Depositor, at its option, elects to terminate the book-
entry system through DTC or (iii) in accordance with such other provisions
described in the related Prospectus Supplement.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for registration, the Trustee will issue
(or cause to be issued) to the Security Owners identified in such instructions
the Definitive Securities to which they are entitled, and thereafter the Trustee
will recognize the holders of such Definitive Securities as Securityholders
under the Agreement.
None of the Depositor, any Master Servicer, any Servicer, the Trustee, or any
of their affiliates 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 or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion thereof, that
the Trustee will elect to have treated as a real estate mortgage investment
conduit under Sections 860A through 860G of the Code ("REMIC Securities"), or
Grantor Trust Securities will be issued, and the related Trust Fund will be
created, pursuant to a Pooling and Servicing Agreement among the Depositor, the
Trustee and the sole Servicer or Master Servicer, as applicable. The Assets of
such Trust Fund will be transferred to the Trust Fund and thereafter serviced in
accordance with the terms of the Pooling and Servicing Agreement. In the event
there are multiple Servicers of the Assets of such Trust Fund, or in the event
the Securities consist of Notes, each Servicer will perform such servicing
functions pursuant to a related servicing agreement.
Securities That Are Partnership Interests for Tax Purposes and Notes
Securities that are partnership interests for tax purposes will be issued, and
the related Trust Fund will be created, pursuant to a Pooling and Servicing
Agreement.
A series of Notes issued by a Trust Fund will be issued pursuant to an
Indenture between the related Trust Fund and an Indenture Trustee named in the
related Prospectus Supplement. The Trust Fund will be established pursuant to a
Deposit Trust Agreement between the Depositor and an owner trustee specified in
the Prospectus Supplement relating to such series of Notes. The Assets securing
payment on the Notes will be serviced in accordance with an Underlying Servicing
Agreement.
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Material Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
General
The following summaries describe the material provisions that may appear in
each Pooling and Servicing Agreement and Underlying Servicing Agreement (each an
"Agreement"). The Prospectus Supplement for a series of Securities will
describe any provision of the Agreement relating to such series that materially
differs from the description thereof contained in this Prospectus. The
summaries do not purport to be complete and are subject to, and are qualified by
reference to, all of the provisions of the Agreement for each Trust Fund and the
description of such provisions in the related Prospectus Supplement. 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. As
used herein with respect to any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. A form of a
Pooling and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Depositor will provide a copy
of the Pooling and Servicing Agreement (without exhibits) relating to any series
of Securities without charge upon written request of a Securityholder of such
series addressed to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211, Attention: Elizabeth S. Eldridge.
The Servicers, any Master Servicer and the Trustee with respect to any series
of Securities will be named in the related Prospectus Supplement. In the event
there are multiple Servicers for the Assets in a Trust Fund, a Master Servicer
will perform certain administration, calculation and reporting functions with
respect to such Trust Fund and will supervise the related Servicers pursuant to
a Pooling and Servicing Agreement. With respect to series involving a Master
Servicer, references in this Prospectus to the Servicer will apply to the Master
Servicer where non-servicing obligations are described. If so specified in the
related Prospectus Supplement, a manager or administrator may be appointed
pursuant to the Pooling and Servicing Agreement for any Trust Fund to administer
such Trust Fund.
Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the Depositor will assign
(or cause to be assigned) to the designated Trustee the Assets to be included in
the related Trust Fund, together with all principal and interest to be received
on or with respect to such Assets after the Cut-off Date, other than principal
and interest due on or before the Cut-off Date and other than any Retained
Interest. The Trustee will, concurrently with such assignment, deliver the
Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include detailed information to the extent available and relevant (i) in respect
of each Mortgage Loan included in the related Trust Fund, including without
limitation, the city and state of the related Mortgaged Property and type of
such property, the Mortgage Rate and, if applicable, the applicable index,
margin, adjustment date and any rate cap information, the original and remaining
term to maturity, the original and outstanding principal balance and balloon
payment, if any, the Loan-to-Value Ratio as of the date indicated and payment
and prepayment provisions, if applicable; (ii) in respect of each Contract
included in the related Trust Fund, including without limitation the outstanding
principal amount and the Contract Rate and (iii) in respect of each Mortgage
Security and Agency Security, the original and outstanding principal amount, if
any, and the pass-through rate thereon.
With respect to each Mortgage Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which will generally include the original Mortgage Note
endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in recordable
form. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to the Trustee if the
Depositor delivers to the Trustee or the custodian a copy or a duplicate
original of the Mortgage Note, together with an affidavit certifying that the
original thereof has been lost or destroyed. With respect to such Mortgage
Loans, the Trustee (or its nominee) may not be able to enforce the Mortgage Note
against the related borrower. The Asset Seller or other entity specified in the
related Prospectus Supplement will be required to agree to repurchase, or
substitute for, each such Mortgage Loan that is subsequently in default if the
enforcement thereof or of the related Mortgage is materially adversely affected
by the absence of the original Mortgage Note. The related Agreement
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will generally require the Depositor or another party specified in the related
Prospectus Supplement to promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records, except in
the State of California or in other states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, the
Servicer, the relevant Asset Seller or any other prior holder of the Mortgage
Loan.
The Trustee (or a custodian) will review such Mortgage Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Securityholders. If
any such document is found to be missing or defective in any material respect,
the Trustee (or such custodian) shall immediately notify the Servicer and the
Depositor, and the Servicer shall immediately notify the relevant Asset Seller
or other entity specified in the related Prospectus Supplement. If the Asset
Seller cannot cure the omission or defect within a specified number of days
after receipt of such notice, then the Asset Seller or other entity specified in
the related Prospectus Supplement will be obligated, within a specified number
of days of receipt of such notice, to repurchase the related Mortgage Loan from
the Trustee at a price equal to the sum of the unpaid principal balance thereof,
plus unpaid accrued interest at the interest rate for such Asset from the date
as to which interest was last paid to the due date in the Due Period in which
the relevant purchase is to occur, plus certain servicing expenses that are
payable to the Servicer or such other price as specified in the related
Prospectus Supplement (the "Purchase Price") or substitute for such Mortgage
Loan. There can be no assurance that an Asset Seller or other named entity will
fulfill this repurchase or substitution obligation, and neither the Servicer nor
the Depositor will be obligated to repurchase or substitute for such Mortgage
Loan if the Asset Seller or other named entity defaults on its obligation. This
repurchase or substitution obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the Trust Fund as a result of
such breach or defect.
Notwithstanding the preceding two paragraphs, the documents with respect to
Home Equity Loans, Home Improvement Contracts and Unsecured Home Improvement
Loans will be delivered to the Trustee (or a custodian) only to the extent
specified in the related Prospectus Supplement. Generally such documents will
be retained by the Servicer, which may also be the Asset Seller. In addition,
assignments of the related Mortgages to the Trustee will be recorded only to the
extent specified in the related Prospectus Supplement.
With respect to each Contract, the Servicer (which may also be the Asset
Seller) generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Trustee in the Contracts, the Depositor will
cause UCC-1 financing statements to be executed by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Depositor to the Trust Fund only to the extent specified in
the related Prospectus Supplement. 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 interest of the Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify the
Depositor and the relevant Asset Seller or other entity specified in the related
Prospectus Supplement. If the Asset Seller or such other entity cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or such other entity will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Contract from the Trustee at the Purchase Price or substitute for such Contract.
There can be no assurance that an Asset Seller or such other entity will fulfill
this repurchase or substitution obligation, and neither the Servicer nor the
Depositor will be obligated to repurchase or substitute for such Contract if the
Asset Seller or such other entity defaults on its obligation. This repurchase
or substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing
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any omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller may agree to cover any losses suffered by the Trust Fund
as a result of such breach or defect.
Mortgage Securities and Agency Securities will be registered in the name of
the Trustee or its nominee on the books of the issuer or guarantor or its agent
or, in the case of Mortgage Securities and Agency Securities issued only in
book-entry form, through the depository with respect thereto, in accordance with
the procedures established by the issuer or guarantor for registration of such
certificates, and distributions on such securities to which the Trust Fund is
entitled will be made directly to the Trustee.
Representations and Warranties; Repurchases
To the extent provided in the related Prospectus Supplement the Depositor
will, with respect to each Asset, assign certain representations and warranties,
as of a specified date (the person making such representations and warranties,
the "Warranting Party") covering, by way of example, the following types of
matters: (i) the accuracy of the information set forth for such Asset on the
schedule of Assets appearing as an exhibit to the related Agreement; (ii) in the
case of a Mortgage Loan, the existence of title insurance insuring the lien
priority of the Mortgage Loan and, in the case of a Contract, that the Contract
creates a valid first security interest in or lien on the related Manufactured
Home; (iii) the authority of the Warranting Party to sell the Asset; (iv) the
payment status of the Asset; (v) in the case of a Mortgage Loan, the existence
of customary provisions in the related Mortgage Note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the security of the
Mortgage; and (vi) the existence of hazard and extended perils insurance
coverage on the Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or such
other person acceptable to the Depositor and shall be identified in the related
Prospectus Supplement.
Representations and warranties made in respect of an Asset may have been made
as of a date prior to the applicable Cut-off Date. A substantial period of time
may have elapsed between such date and the date of initial issuance of the
related series of Securities evidencing an interest in such Asset. In the event
of a breach of any such representation or warranty, the Warranting Party will be
obligated to reimburse the Trust Fund for losses caused by any such breach or
either cure such breach or repurchase or replace the affected Asset as described
below. Since the representations and warranties may not address events that may
occur following the date as of which they were made, the Warranting Party will
have a reimbursement, cure, repurchase or substitution obligation in connection
with a breach of such a representation and warranty only if the relevant event
that causes such breach occurs prior to such date. Such party would have no
such obligations if the relevant event that causes such breach occurs after such
date.
Each Agreement will provide that the Servicer and/or Trustee or such other
entity identified in the related Prospectus Supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially and
adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the Warranting
Party was notified of such breach, at the Purchase Price therefor. If so
provided in the Prospectus Supplement for a series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related Prospectus Supplement. If so
provided in the Prospectus Supplement for a series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to Securityholders or the
Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting Party)
nor the Servicer will be obligated to purchase or substitute for an Asset if a
Warranting Party defaults on its obligation to do so, and no assurance can be
given that Warranting Parties will carry out such obligations with respect to
the Assets.
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A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the Agreement after the
discovery of the breach by Servicer or receipt of written notice of such breach
by the Servicer from the Trustee, the Depositor, the Issuer, or the holders of
Securities evidencing not less than 25% of the Voting Rights or such other
percentage specified in the related Agreement, will constitute an Event of
Default under such Agreement. See "--Events of Default" and "--Rights Upon
Event of Default."
Collection Account and Related Accounts
General. The Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account or
accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Securityholders have a claim with
respect to the funds in the Collection 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 institution with
which the Collection Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agency or
Agencies rating any class of Securities of such series. The collateral eligible
to secure amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ("Permitted Investments"). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held therein
may be invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Any interest or other income earned on funds in the
Collection Account will, unless otherwise specified in the related Prospectus
Supplement, be paid to the Servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution that
is an affiliate of the Servicer, if applicable, provided that such institution
meets the standards imposed by the Rating Agency or Agencies. If permitted by
the Rating Agency or Agencies, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Servicer or
serviced or master serviced by it on behalf of others.
Deposits. A Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for one or more Trust Funds on a daily basis, or such
other period provided in the related Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on its
behalf subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date, and exclusive of any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Servicer as its servicing compensation and net of any
Retained Interest;
(iii) net Liquidation Proceeds and Insurance Proceeds, together with
the net proceeds on a monthly basis with respect to any Assets acquired for
the benefit of Securityholders;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as
described under "Description of Credit Support;"
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(vi) any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds--Cash Flow Agreements;"
(vii) all proceeds of any Asset or, with respect to a Mortgage Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described above under
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"--Assignment of Assets; Repurchases" and "--Representations and Warranties;
Repurchases," all proceeds of any defaulted Mortgage Loan purchased as described
below under "--Realization Upon Defaulted Assets," and all proceeds of any Asset
purchased as described under "Description of the Securities--Termination;"
(viii) any amounts paid by a Servicer to cover certain interest
shortfalls arising out of the prepayment of Assets in the Trust Fund as
described below under "--Retained Interest; Servicing Compensation and Payment
of Expenses;"
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described below under "--Hazard Insurance Policies;"
(xi) any amount required to be deposited by a Servicer or the Trustee in
connection with losses realized on investments for the benefit of the
Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
Withdrawals. A Servicer or the Trustee may, from time to time as provided
in the related Agreement, make withdrawals from the Collection Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the Securityholders on each Distribution Date;
(ii) to reimburse a Servicer for unreimbursed amounts advanced as described
under "Description of the Securities--Advances in Respect of Delinquencies,"
such reimbursement to be made out of amounts received which were identified
and applied by the Servicer as late collections of interest (net of related
servicing fees and Retained Interest) on and principal of the particular
Assets with respect to which the advances were made or out of amounts drawn
under any form of Credit Support with respect to such Assets;
(iii) to reimburse a Servicer for unpaid servicing fees earned and certain
unreimbursed servicing expenses incurred with respect to Assets and properties
acquired in respect thereof, such reimbursement to be made out of amounts that
represent Liquidation Proceeds and Insurance Proceeds collected on the
particular Assets and properties, and net income collected on the particular
properties, with respect to which such fees were earned or such expenses were
incurred or out of amounts drawn under any form of Credit Support with respect
to such Assets and properties;
(iv) to reimburse a Servicer for any advances described in clause (ii)
above and any servicing expenses described in clause (iii) above which, in the
Servicer's good faith judgment, will not be recoverable from the amounts
described in clauses (ii) and (iii), respectively, such reimbursement to be
made from amounts collected on other Assets or, if and to the extent so
provided by the related Agreement and described in the related Prospectus
Supplement, just from that portion of amounts collected on other Assets that
is otherwise distributable on one or more classes of Subordinate Securities,
if any, remain outstanding, and otherwise any outstanding class of Securities,
of the related series;
(v) if and to the extent described in the related Prospectus Supplement, to
pay a Servicer interest accrued on the advances described in clause (ii) above
and the servicing expenses described in clause (iii) above while such advances
and servicing expenses remain outstanding and unreimbursed;
(vi) to reimburse a Servicer, the Depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described below under "--Certain Matters Regarding Servicers, the Master
Servicer and the Depositor;"
(vii) if and to the extent described in the related Prospectus Supplement,
to pay (or to transfer to a separate account for purposes of escrowing for the
payment of) the Trustee's fees;
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(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described below under "--
Certain Matters Regarding the Trustee;"
(ix) to pay a Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the benefit
of Securityholders by foreclosure or by deed in lieu of foreclosure or
otherwise, such payments to be made out of income received on such property;
(xii) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Material Federal Income Tax Considerations--REMICs--
Taxes That May Be Imposed on the REMIC Pool" or in the applicable Prospectus
Supplement, respectively;
(xiii) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a defaulted
Mortgage Loan or a property acquired in respect thereof in connection with the
liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained pursuant
to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver with
respect to the obligation of the Warranting Party to remedy any breach of
representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after its
removal from the Trust Fund whether by reason of purchase or substitution as
contemplated above under "--Assignment of Assets; Repurchase" and "--
Representations and Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related Agreement;
and
(xviii) to clear and terminate the Collection Account at the termination
of the Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so specified in
the related Prospectus Supplement, the Agreement for any series of Securities
may provide for the establishment and maintenance of a separate collection
account into which the Servicer will deposit on a daily basis, or such other
period provided in the related Agreement, the amounts described under "--
Deposits" above for one or more series of Securities. Any amounts on deposit in
any such collection account will be withdrawn therefrom and deposited into the
appropriate Collection Account by a time specified in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, any
amounts which could be withdrawn from the Collection Account as described under
"--Withdrawals" above, may also be withdrawn from any such collection account.
The Prospectus Supplement will set forth any restrictions with respect to any
such collection account, including investment restrictions and any restrictions
with respect to financial institutions with which any such collection account
may be maintained.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made
Collection and Other Servicing Procedures. The Servicer is required to make
reasonable efforts to collect all scheduled payments under the Assets and will
follow or cause to be followed such collection procedures as it would follow
with respect to assets that are comparable to the Assets and held for its own
account, provided such
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procedures are consistent with (i) the terms of the related Agreement and any
related hazard insurance policy or instrument of Credit Support, if any,
included in the related Trust Fund described herein or under "Description of
Credit Support," (ii) applicable law and (iii) the general servicing standard
specified in the related Prospectus Supplement or, if no such standard is so
specified, its normal servicing practices (in either case, the "Servicing
Standard"). In connection therewith, the Servicer will be permitted in its
discretion to waive any late payment charge or penalty interest in respect of a
late payment on an Asset.
Each Servicer will also be required to perform other customary functions of a
servicer of comparable assets, including maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder; maintaining, to the extent required by the
Agreement, escrow or impoundment accounts of obligors for payment of taxes,
insurance and other items required to be paid by any obligor pursuant to the
terms of the Assets; processing assumptions or substitutions in those cases
where the Servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
Prospectus Supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of Credit Support.
See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset in a
manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (ii) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due thereon. The Servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (i) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (ii)
in its judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. In the event of any modification, waiver or amendment
of any Asset, the Servicer will furnish a copy of any such modification, waiver
or amendment to the Trustee.
In the case of Multifamily Loans, a mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the Mortgage Loan debt, or may reflect the diversion of that income from the
servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the mortgagor if cure is likely, inspect
the related Multifamily Property and take such other actions as are consistent
with the related Agreement. A significant period of time may elapse before the
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose may vary considerably depending on the particular Multifamily
Loan, the Multifamily Property, the mortgagor, the presence of an acceptable
party to assume the Multifamily Loan and the laws of the jurisdiction in which
the Multifamily Property is located.
Realization Upon Defaulted Assets
Generally, the Servicer is required to monitor any Assets which are in
default, initiate corrective action in cooperation with the mortgagor or obligor
if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to which
a specified number of scheduled payments thereunder are delinquent. Any such
right granted to the holder of an Offered Security will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted
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to any person if the predetermined purchase price is less than the Purchase
Price described above under "--Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement and related Agreement,
the Servicer may offer to sell any defaulted Mortgage Loan or Contract described
in the preceding paragraph and not otherwise purchased by any person having a
right of first refusal with respect thereto, if and when the Servicer
determines, consistent with the Servicing Standard, that such a sale would
produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related Agreement
will provide that any such offering be made in a commercially reasonable manner
for a specified period and that the Servicer accept the highest cash bid
received from any person (including itself, an affiliate of the Servicer or any
Securityholder) that constitutes a fair price for such defaulted Mortgage Loan
or Contract. In the absence of any bid determined in accordance with the
related Agreement to be fair, the Servicer shall proceed with respect to such
defaulted Mortgage Loan or Contract as described below. Any bid in an amount at
least equal to the Purchase Price described above under "--Representations and
Warranties; Repurchases" will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute foreclosure
proceedings, exercise any power of sale contained in any mortgage, obtain a deed
in lieu of foreclosure, or otherwise acquire title to a Mortgaged Property
securing a Mortgage Loan by operation of law or otherwise and may at any time
repossess and realize upon any Manufactured Home, if such action is consistent
with the Servicing Standard and a default on such Mortgage Loan or Contract has
occurred or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to which a
REMIC election has been made, the Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property before the close of the third calendar
year after the year of acquisition, unless (i) the Internal Revenue Service
grants an extension of time to sell such property or (ii) the Trustee receives
an opinion of independent counsel to the effect that the holding of the property
by the Trust Fund subsequent to such period will not result in the imposition of
a tax on the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC
under the Code at any time that any Securities are outstanding. Subject to the
foregoing, the Servicer will be required to (i) solicit bids for any Mortgaged
Property so acquired in such a manner as will be reasonably likely to realize a
fair price for such property and (ii) accept the first (and, if multiple bids
are contemporaneously received, the highest) cash bid received from any person
that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions of
the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of
Mortgage Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of Credit
Support is not available, the Servicer nevertheless 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 Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the Agreement, the Trust Fund will realize a loss in the
amount of such difference. The Servicer will be entitled to withdraw or cause
to be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, prior to the distribution of such Liquidation
Proceeds to Securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the 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 Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
The Pooling and Servicing Agreement will require the Trustee, if it has not
received a distribution with respect to any Mortgage Security or Agency Security
by the fifth business day after the date on which such distribution was due and
payable pursuant to the terms of such Agency Security, to request the issuer or
guarantor, if any, of such
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Mortgage Security or Agency Security to make such payment as promptly as
possible and legally permitted to take such legal action against such issuer or
guarantor as the Trustee deems appropriate under the circumstances, including
the prosecution of any claims in connection therewith. The reasonable legal fees
and expenses incurred by the Trustee in connection with the prosecution of any
such legal action will be reimbursable to the Trustee out of the proceeds of any
such action and will be retained by the Trustee prior to the deposit of any
remaining proceeds in the Collection Account pending distribution thereof to
Securityholders of the related series. In the event that the proceeds of any
such legal action may be insufficient to reimburse the Trustee for its legal
fees and expenses, the Trustee will be entitled to withdraw from the Collection
Account 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.
As servicer of the Assets, a Servicer, on behalf of itself, the Trustee and
the Securityholders, will present claims to the obligor under each instrument of
Credit Support, and will take such reasonable steps as are necessary to receive
payment or to permit recovery thereunder with respect to defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of Credit
Support with respect to any defaulted Assets, the Servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of such
proceeds, prior to distribution thereof to Securityholders, amounts representing
its normal servicing compensation on such Asset, unreimbursed servicing expenses
incurred with respect to the Asset and any unreimbursed advances of delinquent
payments made with respect to the Asset. See "Hazard Insurance Policies" and
"Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each Mortgage
Loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent such property is located in a federally designated
flood area in such amount as is required under applicable Federal Emergency
Management Agency guidelines) providing for such coverage as is required under
the related Mortgage or, if any Mortgage permits the holder thereof to dictate
to the mortgagor the insurance coverage to be maintained on the related
Mortgaged Property, then such coverage as is consistent with the Servicing
Standard. Such coverage will be in general in an amount equal to the lesser of
the principal balance owing on such Mortgage Loan (but not less than the amount
necessary to avoid the application of any co-insurance clause contained in the
hazard insurance policy) and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis or such other amount specified in the related Prospectus Supplement.
The ability of the Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by mortgagors. All amounts collected by the Servicer under any such
policy (except for amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the mortgagor in accordance with the
Servicer's normal servicing procedures, subject to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the Collection
Account in accordance with the related Agreement. The Agreement may provide
that the Servicer may satisfy its obligation to cause each mortgagor to maintain
such a hazard insurance policy by the Servicer's maintaining a blanket policy
insuring against hazard losses on the Mortgage Loans. If such blanket policy
contains a deductible clause, the Servicer will be required to deposit in the
Collection Account from its own funds all sums that 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 of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
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The hazard insurance policies covering the Mortgaged Properties securing the
Mortgage Loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (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.
Each Agreement for a Trust Fund comprised of Mortgage Loans will require the
Servicer to cause the mortgagor on each Mortgage Loan to maintain all such other
insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Servicer in maintaining any such insurance policy
will be added to the amount owing under the Mortgage Loan where the terms of the
Mortgage Loan so permit; provided, however, that the addition of such cost will
not be taken into account for purposes of calculating the distribution to be
made to Securityholders. Such costs may be recovered by the Servicer from the
Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the Mortgage Loans, mortgagors will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Servicer, on behalf of the Trustee and
Securityholders, is obligated to present or cause to be presented claims under
any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Mortgage Loans. However, the ability of the Servicer to
present or cause to be presented such claims is dependent upon the extent to
which information in this regard is furnished to the Servicer by mortgagors.
Contracts. Generally, the terms of the Agreement for a Trust Fund comprised
of Contracts will require the Servicer to cause to be maintained with respect to
each Contract one or more hazard insurance policies which provide, at a minimum,
the same coverage as a standard form fire and extended coverage insurance policy
that is customary for manufactured housing, issued by a company authorized to
issue such policies in the state in which the Manufactured Home is located, and
in an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the obligor on the related
Contract, whichever is less; provided, however, that the amount of coverage
provided by each such hazard insurance policy shall be sufficient to avoid the
application of any co-insurance clause contained therein. When a Manufactured
Home's location was, at the time of origination of the related Contract, within
a federally designated special flood hazard area, the Servicer shall cause such
flood insurance to be maintained, which coverage shall be at least equal to the
minimum amount specified in the preceding sentence or such lesser amount as may
be available under the federal flood insurance program. Each hazard insurance
policy caused to be maintained by the Servicer shall contain a standard loss
payee clause in favor of the Servicer and its successors and assigns. If any
obligor is in default in the payment of premiums on its hazard insurance policy
or policies, the Servicer shall pay such premiums out of its own funds, and may
add separately such premium to the obligor's obligation as provided by the
Contract, but may not add such premium to the remaining principal balance of the
Contract.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the obligor
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the obligor's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
FHA Insurance and VA Guarantees
FHA Loans will be insured by the FHA as authorized under the Housing Act.
Certain FHA 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, the FHA 245 graduated payment mortgage program and the FHA Title
I Program.
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These programs generally limit the principal amount and interest rates of the
mortgage loans insured. The Prospectus Supplement for Securities of each series
evidencing interests in a Trust Fund including FHA Loans will set forth
additional information regarding the regulations governing the applicable FHA
insurance programs. Except as otherwise specified in the related Prospectus
Supplement, the following describes FHA insurance programs and regulations as
generally in effect with respect to FHA Loans.
The insurance premiums for FHA Loans are collected by lenders approved by the
Department of Housing and Urban Development ("HUD") or by the 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 Loan, the Servicer is
limited in its ability to initiate foreclosure proceedings. When it is
determined, either by the Servicer or HUD, that default was caused by
circumstances beyond the mortgagor's control, the Servicer is expected to make
an effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the 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 FHA
Loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by such circumstances is accompanied by certain
other criteria, HUD may provide relief by making payments to the Servicer in
partial or full satisfaction of amounts due under the FHA Loan (which payments
are to be repaid by the mortgagor to HUD) or by accepting assignment of the loan
from the Servicer. With certain exceptions, at least three full monthly
installments must be due and unpaid under the FHA Loan, and HUD must have
rejected any request for relief from the mortgagor before the Servicer may
initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the related Prospectus
Supplement, the Servicer of each single family FHA Loan will be obligated to
purchase any such debenture issued in satisfaction of such FHA Loan upon default
for an amount equal to the principal amount of any such debenture.
Other than in relation to the FHA Title I Program, the amount of insurance
benefits generally paid by the FHA is equal to the entire unpaid principal
amount of the defaulted FHA Loan adjusted to reimburse the Servicer for certain
costs and expenses and to deduct certain amounts received or retained by the
Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid prior to 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 FHA Loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA 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.
VA Loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). With respect to a defaulted VA Loan,
the Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Mortgaged Property.
The amount payable under the guarantee will be the percentage of the VA 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 such VA Loan, interest
accrued on the unpaid balance of such VA Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
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Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Servicer. The related Agreement will allow the Servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the Servicer so long as certain criteria set forth in the
Agreement are met.
Due-on-Sale Clauses
The Mortgage Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-sale
clauses entitling the mortgagee to accelerate payment of the Mortgage Loan upon
any sale, transfer or conveyance of the related Mortgaged Property. The
Servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the Servicer will not take any action in relation to the enforcement of any
due-on-sale clause which would (i) adversely affect or jeopardize coverage under
any applicable insurance policy (ii) result in legal action by Mortgagor, or
(iii) materially increase the risk of default or delinquency on, or materially
impair the security for, such Mortgage Loan. Any fee collected by or on behalf
of the Servicer for entering into an assumption agreement will be retained by or
on behalf of the Servicer as additional servicing compensation. See "Certain
Legal Aspects of Mortgage Loans--Due-on-Sale Clauses." The Contracts may also
contain such clauses. The Servicer will generally permit such transfer so long
as the transferee satisfies the Servicer's then applicable underwriting
standards. The purpose of such transfers is often to avoid a default by the
transferring obligor. See "Certain Legal Aspects of the Contracts--Transfers of
Manufactured Homes; Enforceability of "Due-on-Sale" Clauses."
Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A "Retained
Interest" in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
Prospectus Supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
Prospectus Supplement with respect to a series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans or Contracts may provide
that, as additional compensation, the Servicer may retain all or a portion of
assumption fees, modification fees, late payment charges or Prepayment Premiums
collected from mortgagors and any interest or other income which may be earned
on funds held in the Collection Account or any account established by a Servicer
pursuant to the Agreement.
The Servicer may, to the extent provided in the related Prospectus Supplement,
pay from its servicing compensation certain expenses incurred in connection with
its servicing and managing of the Assets, including, without limitation, 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. Certain other expenses, including certain expenses
relating to defaults and liquidations on the Assets and, to the extent so
provided in the related Prospectus Supplement, interest thereon at the rate
specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
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Evidence as to Compliance
Each Agreement relating to Assets which include Mortgage Loans or Contracts
will provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee, the
Issuer and each Rating Agency, with a copy to each of the underwriters, to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or such other program used by the Servicer, the servicing by or on behalf of the
Servicer of mortgage loans under agreements substantially similar to each other
(including the related Agreement) was conducted in compliance with the terms of
such agreements or such program except for any significant exceptions or errors
in records that, in the opinion of the firm, either the Audit Program for
Mortgages serviced for Freddie Mac, or paragraph 4 of the Uniform Single
Attestation Program for Mortgage Bankers, or such other program, requires it to
report.
Each such Agreement will also provide for delivery to the Trustee, the Issuer,
and each Rating Agency, with a copy to each of the underwriters, on or before a
specified date in each year, of an officer's certificate of the Servicer to the
effect that the Servicer has fulfilled its obligations under the Agreement
throughout the preceding calendar year or other specified twelve-month period.
Copies of such annual accountants' statement and such statements of officers
will be obtainable by Securityholders without charge upon written request to the
Servicer or other entity specified in the related Prospectus Supplement at the
address set forth in the related Prospectus Supplement.
Certain Matters Regarding Servicers, the Master Servicer and the Depositor
The Servicers and Master Servicer under each Agreement will be named in the
related Prospectus Supplement. The entities serving as Servicer or Master
Servicer may be affiliates of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. Reference
herein to the Servicer shall be deemed to be to the Master Servicer, if
applicable.
The related Agreement will provide that the Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing such a conflict being
of a type and nature carried on by the Servicer at the date of the Agreement.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither any Servicer, the Depositor
nor any director, officer, employee, or agent of a 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; provided, however, that neither a Servicer, the
Depositor nor any such person will be protected against any breach of a
representation, warranty or covenant made in such Agreement, or against any
liability specifically imposed thereby, or against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder or by reason
of reckless disregard of obligations and duties thereunder. Each Agreement will
further provide that any Servicer, the Depositor and any director, officer,
employee or agent of a Servicer or the Depositor will be entitled to
indemnification by the related Trust Fund and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Agreement or the Securities; provided, however, that such indemnification
will not extend to any loss, liability or expense (i) specifically imposed by
such Agreement or otherwise incidental to the performance of obligations and
duties thereunder, including, in the case of a Servicer, the prosecution of an
enforcement action in respect of any specific Mortgage Loan or Mortgage Loans or
Contract or Contracts (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to such Agreement); (ii) incurred in connection
with any breach of a representation, warranty or covenant made in such
Agreement; (iii) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder, or by reason
of reckless disregard of such obligations or duties; (iv) incurred in connection
with any violation of any state or federal securities law; or (v) imposed by any
taxing authority if such loss, liability or expense is not specifically
reimbursable pursuant to the terms of the related Agreement. In addition, each
Agreement will provide that neither any Servicer nor the
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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. Any such 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 Securityholders, and the Servicer or the Depositor,
as the case may be, will be entitled to be reimbursed therefor and to charge the
Collection Account.
Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Servicer or the Depositor is a party, or any person succeeding to the
business of the Servicer or the Depositor, may be the successor of the Servicer
or the Depositor, as the case may be, under the terms of the related Agreement.
Special Servicers
If and to the extent specified in the related Prospectus Supplement, a special
servicer (a "Special Servicer") may be a party to the related Agreement or may
be appointed by the Servicer or another specified party to perform certain
specified duties in respect of servicing the related Mortgage Loans that would
otherwise be performed by the Servicer (for example, the workout and/or
foreclosure of defaulted Mortgage Loans). The rights and obligations of any
Special Servicer will be specified in the related Prospectus Supplement, and the
Servicer will be liable for the performance of a Special Servicer only if, and
to the extent, set forth in such Prospectus Supplement.
Events of Default under the Agreement
Events of default under the related Agreement will generally include (i) any
failure by the Servicer to distribute or cause to be distributed to
Securityholders, or to remit to the Trustee for distribution to Securityholders,
any required payment that continues after a grace period, if any; (ii) any
failure by the Servicer duly to observe or perform in any material respect any
of its other covenants or obligations under the Agreement which continues
unremedied for 30 days after written notice of such failure has been given to
the Servicer by the Trustee or the Depositor, or to the Servicer, the Depositor
and the Trustee by Securityholders evidencing not less than 25% of the Voting
Rights; (iii) any breach of a representation or warranty made by the Servicer
under the Agreement which materially and adversely affects the interests of
Securityholders and which continues unremedied for 30 days after written notice
of such breach has been given to the Servicer by the Trustee or the Depositor,
or to the Servicer, the Depositor and the Trustee by the holders of Securities
evidencing not less than 25% of the Voting Rights; (iv) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings and certain actions by or on behalf of the Servicer
indicating its insolvency or inability to pay its obligations; and (v) any Event
of Default under the related Agreement. Material variations to the foregoing
events of default (other than to shorten cure periods or eliminate notice
requirements) will be specified in the related Prospectus Supplement. The
Trustee will, not later than the later of 60 days or such other period specified
in the related Prospectus Supplement after the occurrence of any event which
constitutes or, with notice or lapse of time or both, would constitute an event
of default and five days after certain officers of the Trustee become aware of
the occurrence of such an event, transmit by mail to the Depositor and all
Securityholders of the applicable series notice of such occurrence, unless such
default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
Rights Upon Event of Default under the Agreements
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
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall terminate all of
the rights and obligations of the Servicer under the Agreement and in and to the
Mortgage Loans (other than as a Securityholder or as the owner of any Retained
Interest), whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Servicer under the Agreement (except that if the
Trustee is prohibited by law from obligating itself to make advances regarding
delinquent Assets, or if the related Prospectus Supplement so specifies, then
the Trustee will not
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be obligated to make such advances) and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may or, at the written request of the holders of Securities entitled to at least
51% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights, it shall appoint, or petition a court of competent
jurisdiction for the appointment of, a loan servicing institution acceptable to
the Rating Agency with a net worth at the time of such appointment of at least
$15,000,000 (or such other amount specified in the related Prospectus Supplement
or in the Agreement) to act as successor to the 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
Servicer under the Agreement.
The holders of Securities representing at least 66 2/3% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
allocated to the respective classes of Securities affected by any event of
default will be entitled to waive such event of default; provided, however, that
an Event of Default involving a failure to distribute a required payment to
Securityholders described in clause (i) under "Events of Default under the
Agreements" may be waived only by all of the Securityholders. Upon any such
waiver of an event of default, such event of default shall cease to exist and
shall be deemed to have been remedied for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights 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
(or such other number of days specified in the related Prospectus Supplement)
has neglected or refused to institute any such proceeding. The Trustee,
however, is under no obligation to exercise any of the trusts or powers vested
in it by any 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
Securityholders covered by such Agreement, unless such Securityholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the consent of
any Securityholders covered by the Agreement, (i) to cure any ambiguity or
mistake, (ii) to correct, modify or supplement any provision therein which may
be inconsistent with any other provision therein or with the related Prospectus
Supplement, (iii) to make any other provisions with respect to matters or
questions arising under the Agreement which are not materially inconsistent with
the provisions thereof, or (iv) to comply with any requirements imposed by the
Code; provided that, in the case of clause (iii), such amendment will not
adversely affect in any material respect the interests of any Securityholders
covered by the Agreement as evidenced either by an opinion of counsel to such
effect or the delivery to the Trustee of written notification from each Rating
Agency that provides, at the request of the Depositor, a rating for the Offered
Securities of the related series to the effect that such amendment or supplement
will not cause such Rating Agency to lower or withdraw the then current rating
assigned to such Securities. Each Agreement may also be amended by the
Depositor, the Servicer, if any, and the Trustee, with the consent of the
Securityholders affected thereby evidencing not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights,
for any purpose; provided, however, no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received or advanced on
Assets which are required to be distributed on any Security without the consent
of the Securityholder or (ii) reduce the consent percentages described in this
paragraph without the consent of all the Securityholders covered by such
Agreement then outstanding. However, with respect to any series of Securities
as to which a REMIC election is to be made, the Trustee will not consent to any
amendment of the Agreement unless it shall first have received an opinion of
counsel to the effect that such amendment will not result in the imposition of a
tax on the related Trust Fund or cause the related Trust Fund to fail to qualify
as a REMIC, at any time that the related Securities are outstanding.
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The Trustee
The Trustee under each Agreement will be named in the related Prospectus
Supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates, with any Servicer and its affiliates and
with any Master Servicer and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or sufficiency of
any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or any
other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those duties
specifically required under the related Agreement, as applicable. However, upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreement.
Certain Matters Regarding the Trustee
The Trustee and any director, officer, employee or agent of the Trustee shall
be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests of the Securityholders during the continuance of an
Event of Default, (ii) defending or prosecuting any legal action in respect of
the related Agreement or series of Securities, (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not less than 25% (or such other percentage as is specified in the
related Agreement with respect to any particular matter) of the Voting Rights
for such series; provided, however, that such indemnification will not extend to
any loss, liability or expense that constitutes a specific liability of the
Trustee pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Issuer, the Depositor and each
Rating Agency. Upon receiving such notice of resignation, the Depositor is
required promptly to appoint a successor trustee acceptable to the Servicer, if
any. If no successor trustee shall have been so appointed and have accepted
appointment within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the Depositor, Issuer
and/or a party specified in the related Agreement may remove the Trustee and
appoint a successor trustee acceptable to the Master Servicer, if any, according
to the terms of the related Agreement. Securityholders of any series entitled to
at least 51% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights for such series may at any time remove the
Trustee without cause and appoint a successor trustee.
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Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
Material Terms of the Indenture
General
The following summary describes the material provisions that may appear in
each Indenture. The Prospectus Supplement for a series of Notes will describe
any provision of the Indenture relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified by reference to,
all of the provisions of the Indenture for a series of Notes. A form of an
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Depositor will provide a copy of the Indenture
(without exhibits) relating to any series of Notes without charge upon written
request of a Securityholder of such series addressed to ACE Securities Corp.,
6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention:
Elizabeth S. Eldridge.
Events of Default
Events of default under the Indenture for each series of Notes will generally
include: (i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement or Indenture) 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 Issuer, Depositor or the Trust Fund in the Indenture
which continues for a period of sixty (60) days (or such other number of days
specified in such Prospectus Supplement or Indenture) after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the Issuer, 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 (or such other number
of days specified in such Prospectus Supplement or Indenture) 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, subject to and in accordance with the
terms of the Indenture, either the Indenture Trustee or the Securityholders 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 are Accrual
Securities, 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
Securityholders of a majority in aggregate outstanding amount 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 Indenture
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 Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an event of default, other
than a default in the payment of any principal or interest on any Note of such
series for thirty (30) days or more, unless (a) the Securityholders of 100% (or
such other percentage specified in the related Prospectus Supplement or
Indenture) of the then aggregate outstanding amount 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
Indenture 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
Indenture Trustee obtains the consent of the Securityholders of 66 2/3% (or such
other percentage specified in the related Prospectus Supplement or Indenture) of
the then aggregate outstanding amount of the Notes of such series.
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In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any 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 Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
To the extent provided 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 Securityholders 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
Indenture Trustee, in case an event of default shall occur and be continuing
with respect to a series of Notes, the Indenture 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 Securityholders of such series, unless such
holders offered to the Indenture 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
Securityholders 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 Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with respect
to the Notes of such series, and the Securityholders 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
Securityholders of the outstanding Notes of such series affected thereby.
Discharge of Indenture
The Indenture will be discharged, subject to the provisions of the Indenture,
with respect to a series of Notes (except with respect to certain continuing
rights specified in the Indenture) upon the delivery to the Indenture Trustee
for cancellation of all the Notes of such series or, with certain limitations,
upon deposit with the Indenture Trustee of funds sufficient for the payment in
full of all of the Notes of 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 specified in the
Indenture including obligations relating to temporary Notes and exchange of
Notes, to register the transfer of or exchange Notes of such series, to replace
stolen, lost or mutilated Notes of such series, to maintain paying agencies and
to hold monies for payment in trust) upon the deposit with the Indenture
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 maturity 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.
Indenture Trustee's Annual Report
The Indenture Trustee for each series of Notes will be required to mail each
year to all related Securityholders a brief report relating to its eligibility
and qualification to continue as Indenture Trustee under the related Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of certain indebtedness owing by such Trust to the applicable
Indenture Trustee in its individual capacity, the property and funds physically
held by such Indenture Trustee as such and any action taken by it that
materially affects such Notes and that has not been previously reported.
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The Indenture Trustee
The Indenture Trustee for a series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee for any series may resign at any
time in accordance with the provisions of the Indenture, in which event the
Depositor will be obligated to appoint a successor trustee for such series. The
Depositor or the appropriate party designated in the Indenture may also remove
any such Indenture Trustee if such Indenture Trustee ceases to be eligible to
continue as such under the related Indenture, if such Indenture Trustee becomes
insolvent or any other grounds specified in the Indenture. In such
circumstances the Depositor or the parties specified in the Indenture will be
obligated to appoint a successor trustee for the applicable series of Notes.
Any resignation or removal of the Indenture Trustee and appointment of a
successor trustee for any series of Notes does not become effective until
acceptance of the appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates, a Servicer or any of
its affiliates or the Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
General
For any series of Securities, Credit Support may be provided with respect to
one or more classes thereof or the related Assets. Credit Support may be in the
form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
The coverage provided by any Credit Support will be described in the related
Prospectus Supplement. Generally, such coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by Credit Support or that are
not covered by Credit Support, Securityholders will bear their allocable share
of deficiencies. Moreover, if a form of Credit Support covers more than one
series of Securities, Securityholders evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business, (iii) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See "Risk Factors--Credit Support is Limited in Amount
and Coverage."
Subordinate Securities
If so specified in the related Prospectus Supplement, one or more classes of
Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of
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subordination of a class or classes of Subordinate 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 be effected.
Cross-Support Provisions
If the Assets for a series are divided into separate groups, each supporting a
separate class or classes of Securities of a series, Credit Support may be
provided by cross-support provisions requiring that distributions be made on
Senior Securities evidencing interests in one group of Mortgage Loans prior to
distributions on Subordinate Securities evidencing interests in a different
group of Mortgage Loans within the Trust Fund. The Prospectus Supplement for a
series that includes a cross-support provision will describe the manner and
conditions for applying such provisions.
Limited Guarantee
If so specified in the related Prospectus Supplement with respect to a series
of Securities, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Financial Guaranty Insurance Policy or Surety Bond
If so specified in the related Prospectus Supplement with respect to a series
of Securities, credit enhancement may be provided in the form of a financial
guaranty insurance policy or a surety bond issued by an insurer named therein.
Letter of Credit
Alternative credit support with respect to a series of Securities may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the related Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued with respect to a series of Securities will be set forth in the
Prospectus Supplement relating to such series.
Pool Insurance Policies
If so specified in the related Prospectus Supplement relating to a series of
Securities, a pool insurance policy for the Mortgage Loans in the related Trust
Fund will be obtained. The pool insurance policy will cover any loss (subject
to the limitations described in the related Prospectus Supplement) by reason of
default to the extent a related Mortgage Loan is not covered by any primary
mortgage insurance policy. The amount and principal terms of any such coverage
will be set forth in the Prospectus Supplement.
Special Hazard Insurance Policies
If so specified in the related Prospectus Supplement, a special hazard
insurance policy may also be obtained for the related Trust Fund in the amount
set forth in such Prospectus Supplement. The special hazard insurance policy
will, subject to the limitations described in the related Prospectus Supplement,
protect against loss by reason of damage to Mortgaged Properties caused by
certain hazards not insured against under the standard form of hazard insurance
policy for the respective states, in which the Mortgaged Properties are located.
The amount and principal terms of any such coverage will be set forth in the
Prospectus Supplement.
Mortgagor Bankruptcy Bond
If so specified in the related Prospectus Supplement, losses resulting from a
bankruptcy proceeding relating to a mortgagor affecting the Mortgage Loans in a
Trust Fund with respect to a series of Securities will be covered under a
mortgagor bankruptcy bond (or any other instrument that will not result in a
downgrading of the rating of the Securities of a series by the Rating Agency or
Rating Agencies that rate such series). Any mortgagor bankruptcy bond or such
other instrument will provide for coverage in an amount meeting the criteria of
the Rating Agency or Rating Agencies rating the Securities of the related
series, which amount will be set forth in the related Prospectus Supplement.
The amount and principal terms of any such coverage will be set forth in the
Prospectus Supplement.
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Reserve Funds
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Securities. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the related Prospectus Supplement. To
the extent specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Servicer or another service provider as additional compensation. To the
extent specified in the related Prospectus Supplement, the reserve fund, if any,
for a series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth in the
related Prospectus Supplement, including the initial balance of such reserve
fund, the balance required to be maintained in the reserve fund, the manner in
which such required balance will decrease over time, the manner of funding such
reserve fund, the purposes for which funds in the reserve fund may be applied to
make distributions to Securityholders and use of investment earnings from the
reserve fund, if any.
Overcollateralization
If specified in the related Prospectus Supplement, subordination provisions of
a Trust Fund may be used to accelerate to a limited extent the amortization of
one or more classes of Securities relative to the amortization of the related
Assets. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, with respect to the Assets or
groups thereof, overcollateralization which results from the excess of the
aggregate principal balance of the related Assets, or a group thereof, over the
principal balance of the related class or classes of Securities. Such
acceleration may continue for the life of the related Security, or may be
limited. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to certain provisions specified in
the related Prospectus Supplement, such limited acceleration feature may cease,
unless necessary to maintain the required level of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature, of
certain legal aspects of loans secured by single-family or multi-family
residential properties. 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 Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. In this regard,
the following discussion does not fully reflect federal regulations with respect
to FHA Loans and VA Loans. See "Description of The Trust Funds--FHA Loans and
VA Loans," "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees" and "Description of the Trust Funds--Assets."
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General
All of the Mortgage Loans are loans evidenced by a note or bond and secured by
instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of real
property between two parties--a mortgagor (the borrower and usually the owner of
the subject property) and a mortgagee (the lender). In contrast, a deed of
trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a 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,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an assignment
of rents and leases, pursuant to which the Mortgagor assigns to the lender the
Mortgagor's right, title and interest as landlord under each lease and the
income derived therefrom, while retaining a revocable license to collect the
rents for so long as there is no default. If the Mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
Interest in Real Property
The real property covered by a mortgage, deed of trust, security deed or deed
to secure debt is most often the fee estate in land and improvements. However,
such an instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by such lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating such interest or in the mortgage, deed of trust, security deed or deed
to secure debt, to protect the mortgagee against termination of such interest
before the mortgage, deed of trust, security deed or deed to secure debt is
paid. The Depositor, the Asset Seller or other entity specified in the related
Prospectus Supplement will make certain representations and warranties in the
Agreement or certain representations and warranties will be assigned to the
Trustee with respect to any Mortgage Loans that are secured by an interest in a
leasehold estate. Such representation and warranties, if applicable, will be
set forth in the Prospectus Supplement.
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Cooperative Loans
If specified in the Prospectus Supplement relating to a series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and,
in most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the Cooperative is unable to
meet the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the Cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the Cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
Cooperative's interest in the property and termination of all proprietary leases
and occupancy agreement. In either event, a foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the tenant-
stockholder, the lender may sue for judgment on the promissory note, dispose of
the collateral at a public or private sale or otherwise proceed against the
collateral or tenant-stockholder as an individual as provided in the security
agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "--Foreclosure--Cooperative
Loans" below.
Land Sale Contracts
Under an installment land sale contract for the sale of real estate (a "land
sale contract") the contract seller (hereinafter referred to as the "contract
lender") retains legal title to the property and enters into an agreement with
the contract purchaser (hereinafter referred to as the "contract borrower") for
the payment of the purchase price,
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plus interest, over the term of the land sale contract. Only after full
performance by the borrower of the contract is the contract lender obligated to
convey title to the real estate to the purchaser. As with mortgage or deed of
trust financing, during the effective period of the land sale contract, the
contract borrower is 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 contract 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 its terms. The terms of land sale contracts
generally provide that upon default by the contract 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 contract
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
contract borrower has filed the land sale contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of contract borrower default during the early years of a
land sale 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 land sale contracts from the harsh consequences of forfeiture.
Under such statues, a judicial 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 contract
borrower with significant investment in the property under a land sale contract
for the sale of real estate to share 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 contract lender's procedures for
obtaining possession and clear title under a land sale contract for the sale of
real estate in a given state are simpler and less time consuming and costly than
are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to institute
foreclosure proceedings to sell the mortgaged property at public auction to
satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary from
state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having jurisdiction
over the mortgaged property. Generally, the action is initiated by the service
of legal pleadings upon all parties having an interest of record in the real
property. Delays in completion of the foreclosure may occasionally result from
difficulties in locating defendants. When the lender's right to foreclose is
contested, the legal proceedings can be time-consuming. Upon successful
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other officer to conduct a
public sale of the mortgaged property, the proceeds of which are used to satisfy
the judgment. Such sales are made in accordance with procedures that vary from
state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable principles
to limit the remedies available to a mortgagee in connection with foreclosure.
These equitable principles are generally designed to relieve the mortgagor from
the legal effect of mortgage defaults, to the extent that such effect is
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the lender
to undertake affirmative
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and expensive actions to determine the cause of the mortgagor's default and the
likelihood that the mortgagor will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
mortgagors who are suffering from a temporary financial disability. In other
cases, courts have limited the right of the lender to foreclose if the default
under the mortgage is not monetary, e.g., the mortgagor failed to maintain the
mortgaged property adequately or the mortgagor executed a junior mortgage on the
mortgaged property. The exercise by the court of its equity powers will depend
on the individual circumstances of each case presented to it. Finally, some
courts have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford constitutional
protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior lienholders.
A notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. The mortgagor or
junior lienholder may then have the right, during a reinstatement period
required in some states, to cure the default by paying the entire actual amount
in arrears (without acceleration) plus the expenses incurred in enforcing the
obligation. In other states, the mortgagor or the junior lienholder is not
provided a period to reinstate the loan, but has only the right to pay off the
entire debt to prevent the foreclosure sale. Generally, the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods are governed by state law and vary among the states.
Foreclosure of a deed to secure debt is also generally accomplished by a non-
judicial sale similar to that required by a deed of trust, except that the
lender or its agent, rather than a trustee, is typically empowered to perform
the sale in accordance with the terms of the deed to secure debt and applicable
law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make 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. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the
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enforcement of a "due-on-sale" clause contained in a senior mortgage, the junior
mortgagee may be required to pay the full amount of the senior mortgage to avoid
its foreclosure. Accordingly, with respect to those Mortgage Loans, if any, that
are junior mortgage loans, if the lender purchases the property the lender's
title will be subject to all senior mortgages, prior liens and certain
governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action.
Those having an equity of redemption must generally be made parties and joined
in the foreclosure proceeding in order for their equity of redemption to be cut
off and terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant
to a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held beyond the close of the third calendar
year after the year of its acquisition. With respect to a series of Securities
for which an election is made to qualify the Trust Fund or a part thereof as a
REMIC, the Agreement will permit foreclosed property to be held beyond such
period only if the Internal Revenue Service grants an extension of time within
which to sell such property or independent counsel renders an opinion to the
effect that holding such property for such additional period is permissible
under the REMIC Provisions.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such tenant-
stockholder. The proprietary lease or occupancy agreement generally permit the
Cooperative to terminate such lease or agreement in the event an obligor fails
to make payments or defaults in the performance of covenants required
thereunder. Typically, the lender and the Cooperative enter into a recognition
agreement which establishes the rights and obligations of both parties in the
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event of a default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
Pending Year 2000 Legislation
In July 1999, Congress approved legislation that would limit liability for
losses due to year 2000 computer-related errors. If signed by the President and
enacted into law, this legislation would, among other things, protect borrowers
from foreclosure if their residential mortgage loans become delinquent because
an actual year 2000 failure results in inability to accurately or timely process
their mortgage payments.
This legislation is not intended to extinguish or otherwise affect a
borrower's payment obligations but would instead delay the enforcement of
obligations on an otherwise defaulted mortgage loan. Borrowers seeking
foreclosure protection under this legislation must provide timely written notice
and documentation of that failure to the servicer. Absent an extension from the
lender, borrowers will then have four weeks to make up late payments on their
loans. This legislation would not apply to mortgage loans for which a default
occurs before December 15, 1999, or for which an imminent default is foreseeable
before that date. This legislation would also not protect borrowers who deliver
notice of a year 2000 failure after March 15, 2000. Mortgage loans that remain
in default after the applicable grace period will be subject to foreclosure or
other enforcement.
If enacted, this legislation could delay the ability of a Servicer to
foreclose on some Mortgage Loans during the first quarter of the year 2000.
These delays could affect the distributions on your Securities.
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Junior Mortgages
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings
by the holder of the senior mortgage or the sale pursuant to the deed of trust,
the junior mortgagee's or junior beneficiary's lien will be extinguished unless
the junior lienholder satisfies the defaulted senior loan or asserts its
subordinate interest in a property in foreclosure proceedings. See "--
Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Statutes in some states limit the right of a beneficiary under a deed of trust
or a mortgagee under a mortgage to obtain a deficiency judgment against the
mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor 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. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes
is generally to prevent a lender from obtaining a large deficiency judgment
against the former mortgagor as a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other federal
and state statutory provisions, including the federal bankruptcy laws and state
laws affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, numerous
statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a Mortgage Loan, to
realize upon collateral and/or enforce a deficiency judgment. For example,
under federal bankruptcy law, virtually all actions (including foreclosure
actions and deficiency judgment proceedings) are automatically stayed upon the
filing of a bankruptcy petition, and often no interest or principal payments are
made during the course of the bankruptcy proceeding. In a case under the
Bankruptcy Code, the secured party is precluded from foreclosing without
authorization from the bankruptcy court. In addition, a court with federal
bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or
Chapter 13 plan to cure a monetary default in respect of a Mortgage Loan by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court (provided
no foreclosure sale had yet occurred) prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
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If a Mortgage Loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits such Mortgage
Loan to be modified. Such modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
and reducing the lender's security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
Mortgage Loan. Some courts have permitted such modifications when the Mortgage
Loan is secured both by the debtor's principal residence and by personal
property.
In the case of income-producing Multifamily Properties, federal bankruptcy law
may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
Certain tax liens arising under the Code may in certain circumstances provide
priority over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. 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. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares and
the related proprietary lease or occupancy agreement. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; and/or management
of electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("Superliens"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the aggregate assets of the
property owner.
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The law is unclear as to whether and under what precise circumstances cleanup
costs, or the obligation to take remedial actions, could be imposed on a secured
lender such as the Trust Fund. Under the laws of some states and under CERCLA,
a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if such lender or its agents or employees have "participated in the management"
of the operations of the borrower, even though the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party. Excluded from CERCLA's definition of "owner or operator" is a person
"who without participating in the management of . . . [the] facility, holds
indicia of ownership primarily to protect his security interest" (the "secured-
creditor exemption"). This exemption for holders of a security interest such as
a secured lender applies only to the extent that a lender seeks to protect its
security interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of such facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under certain circumstances the secured-
creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the Eleventh
Circuit in United States v. Fleet Factors Corp. very narrowly construed CERCLA's
secured-creditor exemption. The court's opinion suggested that a lender need
not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the secured-creditor
exemption, leading to administrative and legislative efforts to provide guidance
to lenders on the scope of activities that would trigger CERCLA and/or RCRA
liability. Until recently, these efforts have failed to provide substantial
guidance.
On September 28, 1996, however, Congress enacted, and on September 30, 1996,
the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and RCRA. The Asset Conservation Act more
explicitly defined the kinds of "participation in management" that would trigger
liability under CERCLA and specified certain activities that would not
constitute "participation in management" or otherwise result in a forfeiture of
the secured-creditor exemption prior to foreclosure or during a workout period.
The Asset Conservation Act also clarified the extent of protection against
liability under CERCLA in the event of foreclosure and authorized certain
regulatory clarifications of the scope of the secured-creditor exemption for
purposes of RCRA, similar to the statutory protections under CERCLA. However,
since the courts have not yet had the opportunity to interpret the new statutory
provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It also is important to note that the
Asset Conservation Act does not offer complete protection to lenders and that
the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an action
for contribution against the owner or operator who created the environmental
contamination or against some other liable party, but that person or entity may
be bankrupt or otherwise judgment-proof. It is therefore possible that cleanup
or other environmental liability costs could become a liability of the Trust
Fund and occasion a loss to the Trust Fund and to Securityholders in certain
circumstances. The new secured creditor amendments to CERCLA, also, would not
necessarily affect the
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potential for liability in actions by either a state or a private party under
other federal or state laws which may impose liability on "owners or operators"
but do not incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to any
mortgaged property prior to the origination of the mortgage loan or prior to
foreclosure or accepting a deed-in-lieu of foreclosure. Neither the Depositor
nor any Servicer makes any representations or warranties or assumes any
liability with respect to: environmental conditions of such Mortgaged Property;
the absence, presence or effect of hazardous wastes or hazardous substances on,
near or emanating from such Mortgaged Property; the impact on Securityholders of
any environmental condition or presence of any substance on or near such
Mortgaged Property; or the compliance of any Mortgaged Property with any
environmental laws. In addition, no agent, person or entity otherwise
affiliated with the Depositor is authorized or able to make any such
representation, warranty or assumption of liability relative to any such
Mortgaged Property.
Due-on-Sale Clauses
The Mortgage Loans may contain due-on-sale clauses. These clauses generally
provide that the lender may accelerate the maturity of the loan if the mortgagor
sells, transfers or conveys the related Mortgaged Property. The enforceability
of due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of due-on-
sale clauses and permits lenders to enforce these clauses in accordance with
their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of Thrift
Supervision, which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St. Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. With respect to Mortgaged Properties that are owner-
occupied, it is anticipated that prepayment charges may not be imposed with
respect to many of the Mortgage Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Mortgage Loans having higher
Mortgage Rates, may increase the likelihood of refinancing or other early
retirement of such loans.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the mortgagor may
have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
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or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover,
the bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
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. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of such
mortgage loans, any such limitation under such state's usury law would not apply
to such mortgage loans.
In any state in which application of Title V has been expressly rejected or a
provision limiting discount points or other charges is adopted, no mortgage loan
originated after the date of such state action will be eligible for inclusion in
a Trust Fund unless (i) such mortgage loan provides for such interest rate,
discount points and charges as are permitted in such state or (ii) such mortgage
loan provides that the terms thereof shall be construed in accordance with the
laws of another state under which such interest rate, discount points and
charges would not be usurious and the mortgagor's counsel has rendered an
opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious loan.
One group of statutes requires the lender to forfeit the interest due above the
applicable limit or impose a specified penalty. Under this statutory scheme,
the mortgagor may cancel the recorded mortgage or deed of trust upon paying its
debt with lawful interest, and the lender may foreclose, but only for the debt
plus lawful interest. A second group of statutes is more severe. A violation
of this type of usury law results in the invalidation of the transaction,
thereby permitting the mortgagor to cancel the recorded mortgage or deed of
trust without any payment or prohibiting the lender from foreclosing.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans and
early ownership mortgage loans, originated by non-federally chartered lenders
have historically been subject to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining whether a
particular alternative mortgage instrument originated by a state-chartered
lender was in compliance with applicable law. These difficulties were
alleviated substantially as a result of the enactment of Title VIII of the Garn-
St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding any
state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other non-
federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative
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mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies
to mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Servicer to collect full amounts of interest
on certain of the Mortgage Loans. Any shortfalls in interest collections
resulting from the application of the Relief Act would result in a reduction of
the amounts distributable to the holders of the related series of Securities,
and would not be covered by advances. Such shortfalls will be covered by the
Credit Support provided in connection with such Securities only to the extent
provided in the related Prospectus Supplement. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected Mortgage Loan during the mortgagor's period of active duty
status, and, under certain circumstances, during an additional three month
period thereafter. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of drug-related
crimes or of criminal violations of the Racketeer Influenced and Corrupt
Organizations ("RICO") statute can be seized by the government if the property
was used in, or purchased with the proceeds of, such crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984 (the "Crime Control
Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the Contracts. 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 Contracts is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Contracts may be originated.
General
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the
Contracts are described more fully below.
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The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code in effect in the states in which the Manufactured Homes
initially were registered. 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 Agreement, the Servicer will transfer physical possession of
the Contracts to the Trustee or its custodian or may retain possession of the
Contracts as custodian for the Trustee. In addition, the Servicer 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. The Contracts will be
stamped or marked otherwise to reflect their assignment from the Depositor to
the Trustee only if provided in the related Prospectus Supplement. 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 Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50 states.
Security interests in manufactured homes may be perfected either by notation of
the secured party's lien on the certificate of title or by delivery of the
required documents and payment of a fee to the state motor vehicle authority,
depending on state law. In some nontitle states, perfection pursuant to the
provisions of the UCC is required. The Asset Seller may effect such notation or
delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the Asset Seller fails, due to clerical error, to
effect such notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect to
a series of Securities and if so described in the related Prospectus Supplement,
the Servicer may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. The Warranting Party will represent
that as of the date of the sale to the Depositor it has obtained a perfected
first priority security interest by proper notation or delivery of the required
documents and fees with respect to substantially all of the Manufactured Homes
securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes to
be assigned to the Trustee on behalf of the Securityholders. The Depositor or
the Trustee will amend the certificates of title (or file UCC-3 statements) to
identify the Trustee as the new secured party, and will deliver the certificates
of title to the Trustee or note thereon the interest of the Trustee only if
specified in the related Prospectus Supplement. Accordingly, the Asset Seller
(or other originator of the Contracts) will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In some
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and the
new secured party succeeds to Servicer's rights as the secured party. However,
in some states, in the absence of an amendment to the certificate of title (or
the filing of a UCC-3 statement), such assignment of the security interest in
the Manufactured Home may not be held effective or such security interests may
not be perfected and in the absence of such notation or delivery to the Trustee,
the assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller (or such other originator of the
Contracts) or a trustee in bankruptcy of the Asset Seller (or such other
originator).
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In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Asset Seller (or
other originator of the Contracts) on the certificate of title or delivery of
the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could be
released.
In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered, under
the laws of most states the perfected security interest in the Manufactured Home
would continue for four months after such relocation and thereafter only if and
after the owner re-registers the Manufactured Home in such state. If the owner
were to relocate a Manufactured Home to another state and not re-register the
Manufactured Home in such state, and if steps are not taken to re-perfect the
Trustee's security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Servicer must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states which provide for notation of lien, the Asset Seller (or
other originator) would receive notice of surrender if the security interest in
the Manufactured Home is noted on the certificate of title. Accordingly, the
Trustee would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing contracts, the Servicer takes steps to effect such re-perfection upon
receipt of notice of re-registration or information from the obligor as to
relocation. Similarly, when an obligor under a manufactured housing contract
sells a manufactured home, the Servicer must surrender possession of the
certificate of title or, if it is noted as lienholder on the certificate of
title, will receive notice as a result of its lien noted thereon and accordingly
will have an opportunity to require satisfaction of the related manufactured
housing conditional sales contract before release of the lien. Under the
Agreement, the Servicer is obligated to take such steps, at the Servicer's
expense, as are necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home and liens for personal property taxes take priority even over a perfected
security interest. The Warranting Party will represent in the Agreement that it
has no knowledge of any such liens with respect to any Manufactured Home
securing payment on any Contract. However, such liens could arise at any time
during the term of a Contract. No notice will be given to the Trustee or
Securityholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the related
Agreement, may take action to enforce the Trustee's security interest with
respect to Contracts in default by repossession and resale of the Manufactured
Homes securing such defaulted Contracts. So long as the Manufactured Home has
not become subject to the real estate law, a creditor can repossess a
Manufactured Home 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 so that the debtor may redeem at or before
such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
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 manufactured home securing such debtor's loan. However, some
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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.
Soldiers' and Sailors' Civil Relief Act of 1940
The terms of the Relief Act apply to an obligor on a Contract as described for
a mortgagor on a Mortgage Loan under "Certain Legal Aspects of Mortgage Loans--
Soldiers' and Sailors' Civil Relief Act of 1940."
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made
by a delinquent obligor in order to avoid a repossession proceeding with respect
to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the "due-
on-sale" clause. The Garn-St. Germain Depositary Institutions Act of 1982
preempts, subject to certain exceptions and conditions, state laws prohibiting
enforcement of "due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, as amended, provides that, subject to the following conditions, state
usury limitations shall not apply to any loan which is secured by a first lien
on certain kinds of manufactured housing. 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 or foreclosure with
respect to 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. The related Asset Seller will represent that all of the Contracts
comply with applicable usury law.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft as to the material federal income tax considerations of the purchase,
ownership and disposition of the Securities offered hereunder. This opinion
assumes compliance with all provisions of the Agreements pursuant to which the
Securities are issued. This discussion is directed solely to Securityholders
that hold the Securities as capital assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended, and does not purport to discuss
all federal income tax consequences that may be applicable to particular
categories of investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special rules. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Securities. See "State Income Tax
Considerations." The Depositor recommends that Securityholders consult their own
tax advisors concerning the federal, state, local or other tax consequences to
them of the purchase, ownership and disposition of the Securities offered
hereunder.
The following discussion addresses securities of four general types: (i)
securities representing interests in a Trust Fund, or a portion thereof, that
the Trustee will elect to have treated as a real estate mortgage investment
conduit under Sections 860A through 860G (the "REMIC Provisions") of the Code,
(ii) Grantor Trust Securities representing interests in a Trust Fund ("Grantor
Trust Fund") as to which no such election will be made, (iii) securities
representing interests in a Trust Fund ("Partnership Trust Fund") which is
treated as a partnership for federal income tax purposes, and (iv) Debt
Securities representing indebtedness of a Partnership Trust Fund for federal
income tax purposes. The Prospectus Supplement for each series of Securities
will indicate which of the foregoing treatments will apply to such series and,
if a REMIC election (or elections) will be made for the related Trust Fund, will
identify all "regular interests" and "residual interests" in the REMIC. For
purposes of this tax discussion, (i) references to a "Securityholder" or a
"holder" are to the beneficial owner of a Security, (ii) references to "REMIC
Pool" are to an entity or portion thereof as to which a REMIC election will be
made and (iii) to the extent specified in the applicable Prospectus Supplement,
references to "Mortgage Loans" include Contracts. Except to the extent
specified in the applicable Prospectus Supplement, no REMIC election will be
made with respect to Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271 through 1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Securities.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a FASIT will be considered a
Taxable Mortgage Pool if (i) substantially all of the assets of the entity
consist of debt obligations and more than 50% of such obligations consist of
"real estate mortgages," (ii) such entity is the obligor under debt obligations
with two or more maturities, and (iii) under the terms of the debt obligations
on which the entity is the obligor, payments on such obligations bear a
relationship to payments on the obligations held by the entity. Furthermore, a
group of assets held by an entity can be treated as a separate Taxable Mortgage
Pool if the assets are expected to produce significant cash flow that will
support one or more of the entity's issues of debt obligations. The Depositor
generally will structure offerings of non-REMIC Securities to avoid the
application of the Taxable Mortgage Pool rules.
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REMICS
Classification of REMICS
With respect to each series of REMIC Securities, assuming compliance with all
provisions of the related Pooling and Servicing Agreement, in the opinion of
Cadwalader, Wickersham & Taft, the related Trust Fund (or each applicable
portion thereof) will qualify as a REMIC and the REMIC Securities offered with
respect thereto will be considered to evidence ownership of Regular Securities
or "residual interests" in that REMIC within the meaning of the REMIC
Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. The Pooling and Servicing
Agreement with respect to each Series of REMIC Securities will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual Securities--
Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage,
which is any property that would have been treated as a qualified mortgage if it
were transferred to the REMIC Pool on the Startup Day and that is received
either (i) in exchange for any qualified mortgage within a three-month period
thereafter or (ii) in exchange for a "defective obligation" within a two-year
period thereafter. A "defective obligation" includes (i) a mortgage in default
or as to which default is reasonably foreseeable, (ii) a mortgage as to which a
customary representation or warranty made at the time of transfer to the REMIC
Pool has been breached, (iii) a mortgage that was fraudulently procured by the
mortgagor, and (iv) a mortgage that was not in fact principally secured by real
property (but only if such mortgage is disposed of within 90 days of discovery).
A Mortgage Loan that is "defective" as described in clause (iv) above that is
not sold or, if within two years of the Startup Day, exchanged, within 90 days
of discovery, ceases to be a qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve assets,
and foreclosure property. A cash flow investment is an investment, earning a
return in the nature of interest, of amounts received on or with respect to
qualified mortgages for a temporary period, not exceeding 13 months, until the
next scheduled distribution to holders of interests in the REMIC Pool. A
qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve
fund must be reduced "promptly and appropriately" as payments on the Mortgage
Loans are received. Foreclosure property is real property acquired by the REMIC
Pool in connection with the default or imminent
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default of a qualified mortgage and generally may not be held for more than
three taxable years after the taxable year of acquisition unless extensions are
granted by the Secretary of the Treasury.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests
or (ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, in the opinion of Cadwalader, Wickersham & Taft, the Regular
Securities of a Series will constitute one or more classes of regular interests,
and the Residual Securities with respect to that Series will constitute a single
class of residual interests with respect to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, no such regulations have
been issued. Any such relief, moreover, may be accompanied by sanctions, such
as the imposition of a corporate tax on all or a portion of the Trust Fund's
income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC Pool
will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
In the opinion of Cadwalader, Wickersham & Taft, the REMIC Securities will be
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC Pool underlying such Securities would be
so treated. Moreover, if 95% or more of the assets of the REMIC Pool qualify
for either of the foregoing treatments at all times during a calendar year, the
REMIC Securities will qualify for the corresponding status in their entirety for
that calendar year. If the assets of the REMIC Pool include Buydown Mortgage
Loans, it is possible that the percentage of such assets constituting "loans . .
. secured by an interest in real property which is . . . residential real
property" for purposes of Code Section 7701(a)(19)(C)(v) may be required to be
reduced by the amount of the related funds paid thereon (the "Buydown Funds").
No opinion is expressed as to the treatment of such Buydown Funds because the
law is unclear as to whether such Buydown Funds represent an account held by the
lender that reduces the lender's investment in the mortgage loan. Such a
reduction of a holder's investment may reduce the assets qualifying for the 60%
of assets test for meeting the definition of a "domestic building and loan
association." Interest (including original issue discount) on the Regular
Securities and income allocated to the class of Residual Securities will be
interest described in Section 856(c)(3)(B) of the Code to the extent that such
Securities are treated as "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code. In addition, in the opinion of Cadwalader, Wickersham
& Taft, the Regular Securities generally will be "qualified mortgages" within
the meaning of Section 860G(a)(3) of the Code if transferred to another REMIC on
its Startup Day in exchange for regular or residual interests therein. The
determination as to the percentage of the REMIC Pool's assets that constitute
assets described in the foregoing sections of the Code will be made with respect
to each calendar quarter based on the average
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adjusted basis of each category of the assets held by the REMIC Pool during such
calendar quarter. The REMIC will report those determinations to Securityholders
in the manner and at the times required by applicable Treasury regulations. The
Small Business Job Protection Act of 1996 (the "SBJPA of 1996") repealed the
reserve method of bad debts of domestic building and loan associations and
mutual savings banks, and thus has eliminated the asset category of "qualifying
real property loans" in former Code Section 593(d) for taxable years beginning
after December 31, 1995. The requirements in the SBJPA of 1996 that such
institutions must "recapture" a portion of their existing bad debt reserves is
suspended if a certain portion of their assets are maintained in "residential
loans" under Code Section 7701(a)(19)(C)(v), but only if such loans were made to
acquire, construct or improve the related real property and not for the purpose
of refinancing. However, no effort will be made to identify the portion of the
Mortgage Loans of any Series meeting this requirement, and no representation is
made in this regard.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property generally will
qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Securities, two or more separate elections may be
made to treat designated portions of the related Trust Fund as REMICs ("Tiered
REMICS") for federal income tax purposes. Upon the issuance of any such series
of REMIC Securities, Cadwalader, Wickersham & Taft will deliver its opinion
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Securities issued by the Tiered REMICS, respectively, will be considered
to evidence ownership of Regular Securities or Residual Securities in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Securities is interest described in Section
856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one REMIC.
Taxation of Owners of Regular Securities
(i) General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholder.
(ii) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may be,
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to such income. The following discussion
is based in part on temporary and final Treasury regulations issued on February
2, 1994, as amended on June 14, 1996, (the "OID Regulations") under Code Section
1271 through 1273 and 1275 and in part on the provisions of the Tax Reform Act
of 1986 (the "1986 Act"). Regular Securityholders should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Securities. To the extent
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such issues are not addressed in such regulations, the Seller intends to apply
the methodology described in the Conference Committee Report to the 1986 Act. No
assurance can be provided that the Internal Revenue Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result in light of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion therein and the appropriate
method for reporting interest and original issue discount with respect to the
Regular Securities.
Each Regular Security (except to the extent described below with respect to a
Regular Security on which principal is distributed in a single installment or by
lots of specified principal amounts upon the request of a Securityholder or by
random lot (a "Non-Pro Rata Security")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at maturity"
of the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this Prospectus generally is the first
price at which a substantial amount of such Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the Trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the Depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
period prior to the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude such amount
from the issue price and to recover it on the first Distribution Date. The
stated redemption price at maturity of a Regular Security always includes the
original principal amount of the Regular 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 a 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 Regular
Security. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Security, it is possible that
no interest on any Class of Regular Securities will be treated as qualified
stated interest. However, except as provided in the following three sentences
or in the applicable Prospectus Supplement, because the underlying Mortgage
Loans provide for remedies in the event of default, it is anticipated that the
Trustee will treat interest with respect to the Regular Securities as qualified
stated interest. Distributions of interest on an Accrual Security, or on other
Regular Securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of such Regular Securities includes all distributions of interest as
well as principal thereon. Likewise, it is anticipated that the Trustee will
treat an interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security will be
considered to be zero if such original issue discount is less than 0.25% of the
stated redemption price at maturity of the Regular Security multiplied by the
weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular 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 Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption with respect to a Series of Regular Securities will be set
forth in the applicable Prospectus Supplement. Holders generally must report de
minimis original issue discount pro rata as principal payments are received, and
such income will be capital gain if the Regular Security is held as a capital
asset. Under the OID Regulations, however, Regular Securityholders may elect to
accrue all de
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minimis original issue discount as well as market discount and market premium,
under the constant yield method. See "-Election to Treat All Interest Under the
Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The Trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period, and (b) the
distributions made on the Regular Security during the accrual period that are
included in the Regular Security's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Security at the issue date, (ii) events (including actual prepayments)
that have occurred prior to the end of the accrual period, and (iii) the
Prepayment Assumption. For these purposes, the adjusted issue price of a
Regular Security at the beginning of any accrual period equals the issue price
of the Regular Security, increased by the aggregate amount of original issue
discount with respect to the Regular Security that accrued in all prior accrual
periods and reduced by the amount of distributions included in the Regular
Security's stated redemption price at maturity that were made on the Regular
Security in such prior periods. The original issue discount accruing during any
accrual period (as determined in this paragraph) will then be divided by the
number of days in the period to determine the daily portion of original issue
discount for each day in the period. With respect to an initial accrual period
shorter than a full accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the Mortgage Loans with respect to a Series of Regular Securities
can result in both a change in the priority of principal payments with respect
to certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount with respect to such Regular
Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution in retirement of
the entire unpaid principal balance of any Non-Pro Rata Security (or portion of
such unpaid principal balance), (a) the remaining unaccrued original issue
discount allocable to such Security (or to such portion) will accrue at the time
of such distribution, and (b) the accrual of original issue discount allocable
to each remaining Security of such Class will be adjusted by reducing the
present value of the remaining payments on such Class and the adjusted issue
price of such Class to the extent attributable to the portion of the unpaid
principal balance thereof that was distributed. The Depositor believes that the
foregoing treatment is consistent with the "pro rata prepayment" rules of the
OID Regulations, but with the rate of accrual of original issue discount
determined based on the Prepayment Assumption for the Class as a whole.
Investors are advised to consult their tax advisors as to this treatment.
(iii) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption price
at maturity will be required to include in gross income the daily portions of
the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over such
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent
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purchaser may elect to treat all such acquisition premium under the constant
yield method, as described below under the heading "--Election to Treat All
Interest Under the Constant Yield Method" below.
(iv) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds. A multiple of a qualified
floating rate is considered a qualified floating rate only if the rate is equal
to either (a) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (b) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate. Such rate may also be subject to
a fixed cap or floor, or a cap or floor that is not reasonably expected as of
the issue date to affect the yield of the instrument significantly. An
objective rate is any rate (other than a qualified floating rate) that is
determined using a single fixed formula and that is based on objective financial
or economic information, provided that such information is not (i) within the
control of the issuer or a related party or (ii) unique to the circumstances of
the issuer or a related party. A qualified inverse floating rate is a rate
equal to a fixed rate minus a qualified floating rate that inversely reflects
contemporaneous variations in the cost of newly borrowed funds; an inverse
floating rate that is not a qualified inverse floating rate may nevertheless be
an objective rate. A Class of Regular Securities may be issued under this
Prospectus that does not have a variable rate under the foregoing rules, for
example, a Class that bears different rates at different times during the period
it is outstanding such that it is considered significantly "front-loaded" or
"back-loaded" within the meaning of the OID Regulations. It is possible that
such a Class may be considered to bear "contingent interest" within the meaning
of the OID Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to Regular Securities.
However, if final regulations dealing with contingent interest with respect to
Regular Securities apply the same principles as the OID Regulations, such
regulations may lead to different timing of income inclusion that would be the
case under the OID Regulations. Furthermore, application of such principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or variable rate as described in this
paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at a rate
that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates, including a rate based on the average cost of funds of one
or more financial institutions), or the product of such a rate and a positive or
a negative multiple (plus or minus a specified number of basis points), or that
represents a weighted average of rates on some or all of the Mortgage Loans,
including such a rate that is subject to one or more caps or floors, or (ii)
bearing one or more such variable rates for one or more periods, or one or more
fixed rates for one or more periods, and a different variable rate or fixed rate
for other periods, qualifies as a regular interest in a REMIC. Accordingly, it
is anticipated that the Trustee will treat Regular Securities that qualify as
regular interests under this rule in the same manner as obligations bearing a
variable rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on such Regular Security generally to be determined by assuming that
interest will be payable for the life of the Regular Security based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant Class. Unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat such
variable interest as qualified stated interest, other than variable interest on
an interest-only or super-premium Class or a Class bearing interest at a rate
equal to the weighted average of the net rates on the Mortgage Loans, which will
be treated as non-qualified stated interest includible in the stated redemption
price at maturity. Ordinary income reportable for any period will be adjusted
based on subsequent changes in the applicable interest rate index.
(v) Market Discount
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A subsequent purchaser of a Regular Security also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Security (i) is exceeded by the remaining outstanding
principal payments and interest payments other than qualified stated interest
payments due on a Regular Security, or (ii) in the case of a Regular Security
having original issue discount, is exceeded by the adjusted issue price of such
Regular Security at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Security as distributions includible in the stated redemption
price at maturity thereof are received, in an amount not exceeding any such
distribution. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption.
The Conference Committee Report to the 1986 Act provides that until such
regulations are issued, such market discount would accrue either (i) on the
basis of a constant interest rate, or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period plus
the remaining interest as of the end of such period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for such period plus the remaining original issue discount as
of the end of such period. Such purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable thereon. The deferred portion of such interest
expense in any taxable year generally will not exceed the accrued market
discount on the Regular Security for such year. Any such deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which such election may be deemed to be made. A person who purchases
a Regular Security at a price lower than the remaining amounts includible in the
stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount with respect to a Regular Security will be considered to be
zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under "--
Original Issue Discount" above) remaining after the date of purchase. It
appears that de minimis market discount would be reported in a manner similar to
de minimis original issue discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet been
issued, and uncertainty exists with respect to many aspects of those rules. Due
to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a given Class of Regular Securities. Prospective investors in
Regular Securities should consult their own tax advisors regarding the
application of the market discount rules to the Regular Securities. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
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(vi) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize such premium under a
constant yield method that reflects compounding based on the interval between
payments on the Regular Security. Such election will apply to all taxable debt
obligations (including REMIC regular interests) acquired by the Regular
Securityholder at a premium held in that taxable year or thereafter, unless
revoked with the permission of the Internal Revenue Service. The Conference
Committee Report to the 1986 Act indicates a Congressional intent that the same
rules that apply to the accrual of market discount on installment obligations
will also apply to amortizing bond premium under Code Section 171 on installment
obligations such as the Regular Securities, although it is unclear whether the
alternatives to the constant interest method described above under "Market
Discount" are available. Amortizable bond premium generally will be treated as
an offset to interest income on a Regular Security, rather than as a separate
deductible item. See "--Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
(vii) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own
tax advisors regarding the advisability of making such an election.
(viii) Treatment of Losses
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that such
losses are uncollectible. Accordingly, the holder of a Regular Security,
particularly a Subordinate Security, may have income, or may incur a diminution
in cash flow as a result of a default or delinquency, but may not be able to
take a deduction (subject to the discussion below) for the corresponding loss
until a subsequent taxable year. In this regard, investors are cautioned that
while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectible, the Internal Revenue Service
may take the position that original issue discount must continue to be accrued
in spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts
are applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss such loss
with respect to principal sustained during the taxable year on account of any
such Regular Securities becoming wholly or partially worthless, and that, in
general, Regular Securityholders that are not corporations and do not hold the
Regular Securities in connection with a trade or business should be allowed to
deduct as a short-term capital loss any loss sustained during the taxable year
on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at such time as
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The Internal Revenue Service,
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however, could take the position that non-corporate holders will be allowed a
bad debt deduction to reflect such losses only after all the Mortgage Loans
remaining in the Trust Estate have been liquidated or the applicable Class of
Regular Securities has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Securities are deductible based on
some other method that may defer such deductions for all holders, such as
reducing future cashflow for purposes of computing original issue discount.
This may have the effect of creating "negative" original issue discount which
would be deductible only against future positive original issue discount or
otherwise upon termination of the Class. Regular Securityholders are urged to
consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such Regular Securities. While
losses attributable to interest previously reported as income should be
deductible as ordinary losses by both corporate and non-corporate holders, the
Internal Revenue Service may take the position that losses attributable to
accrued original issue discount may only be deducted as capital losses in the
case of non-corporate holders who do not hold the Regular Securities in
connection with a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on Regular Securities.
(ix) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the Regular
Securityholder will recognize gain or loss equal to the difference, if any,
between the amount received and its adjusted basis in the Regular Security. The
adjusted basis of a Regular Security generally will equal the original cost of
the Regular Security to the seller, increased by any original issue discount or
market discount previously included in the seller's gross income with respect to
the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller, by any amortized premium, and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net investment
in the conversion transaction at 120% of the appropriate applicable federal rate
in effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, (ii) in the case of a non-
corporate taxpayer, to the extent such taxpayer has made an election under Code
Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or (iii) to the extent that such gain does not exceed the
excess, if any, of (a) the amount that would have been includible in the gross
income of the holder if its yield on such Regular Security were 110% of the
applicable federal rate as of the date of purchase, over (b) the amount of
income actually includible in the gross income of such holder with respect to
such Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Long-term capital
gains of certain noncorporate taxpayers generally are subject to a lower maximum
tax rate (20%) than ordinary income of such taxpayers (39.6%) for property held
for more than one year. Currently, the maximum tax rate for corporations is the
same with respect to both ordinary income and capital gains.
Taxation of Owners of Residual Securities
(i) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting,
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except that (i) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply, (ii) all bad loans will
be deductible as business bad debts, and (iii) the limitation on the
deductibility of interest and expenses related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the Mortgage Loans, other administrative expenses
of the REMIC Pool and realized losses on the Mortgage Loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Securities of any class of
the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will be
affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Securities, and (ii) the discount on the
Mortgage Loans which is includible in income may exceed the deduction allowed
upon such distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When there is
more than one Class of Regular Securities that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Securities when
distributions in reduction of principal are being made in respect of earlier
Classes of Regular Securities to the extent that such Classes are not issued
with substantial discount or are issued at a premium. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later maturing Classes of Regular
Securities are made. Taxable income may also be greater in earlier years than
in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a Series
of Regular Securities, may increase over time as distributions in reduction of
principal are made on the lower yielding Classes of Regular Securities, whereas,
to the extent the REMIC Pool consists of fixed rate Mortgage Loans, interest
income with respect to any given Mortgage Loan will remain constant over time as
a percentage of the outstanding principal amount of that loan. Consequently,
Residual Holders must have sufficient other sources of cash to pay any federal,
state, or local income taxes due as a result of such mismatching or unrelated
deductions against which to offset such income, subject to the discussion of
"excess inclusions" below under "--Limitations on Offset or Exemption of REMIC
Income." The timing of such mismatching of income and deductions described in
this paragraph, if present with respect to a Series of Securities, may have a
significant adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions; (ii) it will be considered unrelated business taxable
income to tax-exempt entities; and (iii) it is ineligible for any statutory or
treaty reduction in the 30% withholding tax otherwise available to a foreign
Residual Securityholder. See "--Limitations on Offset or Exemption of REMIC
Income" below. In addition, a Residual Holder's taxable income during certain
periods may exceed the income reflected by such Residual Holders for such
periods in accordance with generally accepted accounting principles. Investors
should consult their own accountants concerning the accounting treatment of
their investment in Residual Securities.
(ii) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account by
the Residual Holder is limited to the adjusted basis of the Residual Security as
of the close of the quarter (or time of disposition of the Residual Security if
earlier), determined without taking into account the net loss for the quarter.
The initial adjusted basis of a purchaser of a Residual Security is the amount
paid for such Residual Security. Such adjusted basis will be increased by the
amount of taxable income of the REMIC Pool reportable by the Residual Holder and
will be decreased (but not below zero), first, by a cash distribution from the
REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable by
the Residual Holder. Any loss that is disallowed on account of this limitation
may
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be carried over indefinitely with respect to the Residual Holder as to whom such
loss was disallowed and may be used by such Residual Holder only to offset any
income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Security as an offset to its share of the taxable income of the related
REMIC Pool. However, the taxable income will not include cash received by the
REMIC Pool that represents a recovery of the REMIC Pool's basis in its assets.
Although the law is unclear in certain respects, such recovery of basis by the
REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--Taxation
of REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis of
Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a Residual Security"
below regarding possible treatment of a loss upon termination of the REMIC Pool
as a capital loss.
(iii) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of premium will be
determined in the same manner as original issue discount income on Regular
Securities as described above under "--Taxation of Owners of Regular Securities-
- -Original Issue Discount" and "--Variable Rate Regular Securities," without
regard to the de minimis rule described therein, and "--Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of such
market discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Owners of Regular Securities--Amortizable Premium," a
person that holds a Mortgage Loan
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as a capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on Mortgage Loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an offset
to interest income on the Mortgage Loans, rather than as a separate deduction
item. Because substantially all of the mortgagors on the Mortgage Loans are
expected to be individuals, Code Section 171 will not be available for premium
on Mortgage Loans originated on or prior to September 27, 1985. Premium with
respect to such Mortgage Loans may be deductible in accordance with a reasonable
method regularly employed by the holder thereof. The allocation of such premium
pro rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that such premium should be
allocated in a different manner, such as allocating such premium entirely to the
final payment of principal.
(iv) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual Security
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of such daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Security prior to the beginning
of such quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
such income as the adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax
on unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "--Tax-Related Restrictions on
Transfer of Residual Securities--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign
Investors--Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities that
have "significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
Residual Securities continuously held by a thrift institution since November 1,
1995.
In addition, the SBJPA of 1996 provides three rules for determining the effect
of excess inclusions on the alternative minimum taxable income of a Residual
Holder. First, alternative minimum taxable income for a Residual Holder is
determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after
December 31, 1986, unless a Residual Holder elects to have such rules apply only
to taxable years beginning after August 20, 1996.
(v) Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a Residual
Security is transferred to a Disqualified Organization (as defined below), a tax
would be imposed in an amount equal to the product of (i) the present value of
the total anticipated excess inclusions with respect to such Residual Security
for periods after the
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transfer and (ii) the highest marginal federal income tax rate applicable to
corporations. The REMIC Regulations provide that the anticipated excess
inclusions are based on actual prepayment experience to the date of the transfer
and projected payments based on the Prepayment Assumption. The present value
rate equals the applicable federal rate under Code Section 1274(d) as of the
date of the transfer for a term ending with the last calendar quarter in which
excess inclusions are expected to accrue. Such rate is applied to the
anticipated excess inclusions from the end of the remaining calendar quarters in
which they arise to the date of the transfer. Such a tax generally would be
imposed on the transferor of the Residual Security, except that where such
transfer is through an agent (including a broker, nominee, or other middleman)
for a Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Security would in no event be liable for
such tax with respect to a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that such affidavit is false. The tax also may be waived by the
Internal Revenue Service if the Disqualified Organization promptly disposes of
the Residual Security and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Security is
actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the Pass-
Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing large
partnership" holds a Residual Security, all interests in the electing large
partnership are treated as held by Disqualified Organizations for purposes of
the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know such affidavits are false, is not available to an electing
large partnership.
For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors in
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a Pass-
Through Entity.
The Pooling and Servicing Agreement with respect to a Series will provide that
no legal or beneficial interest in a Residual Security may be transferred or
registered unless (i) the proposed transferee furnished to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual
Security with respect to a Series will bear a legend referring to such
restrictions on transfer, and each Residual Holder will be deemed to have
agreed, as a condition of ownership thereof, to any amendments to the related
Pooling and Servicing Agreement required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary to
compute an applicable excise tax must be furnished to the Internal Revenue
Service and to
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the requesting party within 60 days of the request, and the Seller or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Securities, in which case the transferor would continue to
be treated as the owner of the Residual Securities and thus would continue to be
subject to tax on its allocable portion of the net income of the REMIC Pool.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest" (as
defined below) to a Residual Holder (other than a Residual Holder who is not a
U.S. Person as defined below under "Foreign Investors") is disregarded to all
federal income tax purposes if a significant purpose of the transfer is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) 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 at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect 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 taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic residual
interest, the transferee may incur liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to each Series of Certificates will require
the transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading "--
Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may provide
that a Residual Security may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term "U.S. Person" means a
citizens or resident of the United States, a corporation, partnership (except as
provided in applicable Treasury regulations) or other entity treated as a
partnership or as a corporation created or organized in or under the laws of the
United States or of any state (including, for this purpose, the District of
Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision over the administration of such trust and one or
more such U.S. Persons have the authority to control all substantial decisions
of such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996, which are eligible to elect to
be treated as U.S. Persons).
(vi) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "--Taxation of Owners of
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Residual Securities--Basis and Losses") of such Residual Holder in such Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Holder's Residual Security, in which
case, if the Residual Holder has an adjusted basis in its Residual Security
remaining when its interest in the REMIC Pool terminates, and if it holds such
Residual Security as a capital asset under Code Section 1221, then it will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Any gain on the sale of a Residual Security will be treated as ordinary income
(i) if a Residual Security is held as part of a "conversion transaction" as
defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates. In
addition, gain or loss recognized from the sale of a Residual Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash sale
rules of Code Section 1091 will apply to dispositions of Residual Securities
where the seller of the Residual Security, during the period beginning six
months before the sale or disposition of the Residual Security and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual Security.
(vii) Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final regulations
(the "Mark to Market Regulations") under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. 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 Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
Taxes That May Be Imposed on the REMIC Pool
(i) Prohibited Transactions
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgages other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv) above, it is not a
prohibited transaction to sell a qualified mortgage or cash flow investment held
by a REMIC Pool to prevent a default on Regular Securities as a result of a
default on qualified mortgages or to facilitate a clean-up call (generally, an
optional termination to save administrative costs when no more than a small
percentage of the Securities is outstanding). The REMIC Regulations indicate
that the modification of a Mortgage Loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the Mortgage Loan, the waiver of a due-on-sale or due-on-
encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
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(ii) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
(iii) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. Generally, property acquired
by deed in lieu of foreclosure would be treated as "foreclosure property" until
the close of the third calendar year after the year in which the REMIC Pool
acquired such property, with possible extensions. Net income from foreclosure
property generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that the REMIC Pool will have any taxable net income from
foreclosure property.
(iv) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC Pool's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC Pool will not be subject to the prohibited transaction
rules on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims) to holders of Regular Securities and Residual
Holders within the 90-day period.
(v) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year basis
and to file federal income tax returns for federal income tax purposes in a
manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Master Servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same series would be
able to participate in such proceedings in appropriate circumstances.
(vi) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser or (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (subject to adjustment for inflation), or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
In the case of a REMIC Pool, such deductions may include deductions under Code
Section 212 for the Servicing Fee and all administrative and other expenses
relating to the REMIC Pool, or any similar expenses
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allocated to the REMIC Pool with respect to a regular interest it holds in
another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. With
respect to a REMIC Pool that would be classified as an investment trust in the
absence of a REMIC election or that is substantially similar to an investment
trust, any holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of such expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
applicable Prospectus Supplement will indicate if all such expenses will not be
allocable to the Residual Securities. In general, such allocable portion will be
determined based on the ratio that a REMIC Securityholder's income, determined
on a daily basis, bears to the income of all holders of Regular Securities and
Residual Securities with respect to a REMIC Pool. As a result, individuals,
estates or trusts holding REMIC Securities (either directly or indirectly
through a grantor trust, partnership, S corporation, REMIC, or certain other
pass-through entities described in the foregoing temporary Treasury regulations)
may have taxable income in excess of the interest income at the pass-through
rate on Regular Securities that are issued in a single class or otherwise
consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Securities.
Taxation of Certain Foreign Investors
(i) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other Non-
U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (i) such interest is not effectively connected
with the conduct of a trade or business in the United States of the
Securityholder, (ii) such Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (iii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") which would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective for payments made after December 31, 2000. The New
Regulations would require, in the case of Regular Certificates held by a foreign
partnership, that (x) the certification described above be provided by the
partners rather than by the foreign partnership and (y) the partnership provide
certain information, including a United States taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
(ii) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid to
Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (i) the
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Mortgage Loans were issued after July 18, 1984, and (ii) the Trust Estate or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163 (f) (1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, Residual Holders
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "--Taxation of Owners of Residual
Securities--Limitations on Offset or Exemption of REMIC Income" above. If the
amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See "--Tax-
Related Restrictions on Transfer of Residual Securities--Foreign Investors"
above concerning the disregard of certain transfers having "tax avoidance
potential." Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning Residual
Securities.
(iii) Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Holder complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Holder's federal
income tax liability.
(iv) Reporting Requirements
Reports of accrued interest, original issue discount and information necessary
to compute the accrual of market discount will be made annually to the Internal
Revenue Service and to individuals, estates, non-exempt and non-charitable
trusts, and partnerships who are either holders of record of Regular Securities
or beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in Internal Revenue Service Publication 938
with respect to a particular Series of Regular Securities. Holders through
nominees must request such information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing requirements,
information must be furnished quarterly to Residual Holders, furnished annually,
if applicable, to holders of Regular Securities, and filed annually with the
Internal Revenue Service concerning Code Section 67 expenses (see "Limitations
on Deduction of Certain Expenses" above) allocable to such holders.
Furthermore, under such regulations, information must be furnished quarterly to
Residual Holders, furnished annually to holders of Regular Securities, and filed
annually with the Internal Revenue Service concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under "--
Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of the
residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
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Treasury regulations provide that a Residual Holder is not required to treat
items on its return consistently with their treatment on the REMIC Pool's return
if the Holder owns 100% of the Residual Securities for the entire calendar year.
Otherwise, each Residual Holder is required to treat items on its returns
consistently with their treatment on the REMIC Pool's return, unless the Holder
either files a statement identifying the inconsistency or establishes that the
inconsistency resulted from incorrect information received from the REMIC Pool.
The Internal Revenue Service may assess a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC Pool level. A REMIC Pool typically will not register as
a tax shelter pursuant to Code Section 6111 because it generally will not have a
net loss for any of the first five taxable years of its existence. Any person
that holds a Residual Security as a nominee for another person may be required
to furnish the related REMIC Pool, in a manner to be provided in Treasury
regulations, with the name and address of such person and other specified
information.
Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each series of Grantor Trust Securities, assuming compliance
with all provisions of the related Agreement, in the opinion of Cadwalader,
Wickersham & Taft, the related Grantor Trust Fund will be classified as a
grantor trust under subpart E, part I of subchapter J of the Code and not as a
partnership, an association taxable as a corporation, or a "taxable mortgage
pool" within the meaning of Code Section 7701(i). Accordingly, each holder of a
Grantor Trust Security generally will be treated as the beneficial owner of an
undivided interest in the Mortgage Loans included in the Grantor Trust Fund.
Standard Securities
General
Where there is no Retained Interest or "excess" servicing with respect to the
Mortgage Loans underlying the Securities of a Series, and where such Securities
are not designated as "Stripped Securities," the holder of each such Security in
such Series (referred to herein as "Standard Securities") will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the Grantor Trust Fund represented by its Standard Security and will
be considered the beneficial owner of a pro rata undivided interest in each of
the Mortgage Loans, subject to the discussion below under "--Recharacterization
of Servicing Fees." Accordingly, the holder of a Standard Security of a
particular Series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Loans represented by
its Standard Security, including interest at the coupon rate on such Mortgage
Loans, original issue discount (if any), prepayment fees, assumption fees, and
late payment charges received by the Servicer, in accordance with such
Securityholder's method of accounting. A Securityholder generally will be able
to deduct its share of the Servicing Fee and all administrative and other
expenses of the Trust Estate in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered to
that Grantor Trust Fund. However, investors who are individuals, estates or
trusts who own Securities, either directly or indirectly through certain pass-
through entities, will be subject to limitations with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the Servicing Fee and all such administrative and other
expenses of the Grantor Trust Fund, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income. In
addition, Code Section 68 provides that itemized deductions otherwise allowable
for a taxable year of an individual taxpayer will be reduced by the lesser of
(i) 3% of the excess, if any, of adjusted gross income over $100,000 ($50,000 in
the case of a married individual filing a separate return) (in each case, as
adjusted for post-1991 inflation), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result, such investors
holding Standard Securities, directly or indirectly through a pass-through
entity, may have aggregate taxable income in excess of the aggregate amount of
cash received on such Standard Securities with respect to interest at the pass-
through rate or as discount income on such Standard Securities. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is Retained
Interest with respect to the Mortgage Loans underlying a Series of Securities or
where the servicing fees are in excess of reasonable servicing compensation, the
transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "--Stripped
Securities" and "--Recharacterization of Servicing Fees," respectively.
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Holders of Standard Securities, particularly any class of a Series which is a
Subordinate Security, may incur losses of interest or principal with respect to
the Mortgage Loans. Such losses would be deductible generally only as described
above under "--REMICs--Taxation of Owners of Regular Securities--Treatment of
Losses," except that Securityholders on the cash method of accounting would not
be required to report qualified stated interest as income until actual receipt.
(i) Tax Status
With respect to a series, in the opinion of Cadwalader, Wickersham & Taft,
except with respect to that portion of a Trust Fund consisting of Unsecured Home
Improvement Loans:
1. A Standard Security owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to represent
"loans . . . secured by an interest in real property which is . . . residential
real property" within the meaning of Code Section 7701(a)(19)(C)(v), provided
that the real property securing the Mortgage Loans represented by that Standard
Security is of the type described in such section of the Code.
2. A Standard Security owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(4)(A) to the extent that the assets of the related Grantor Trust Fund
consist of qualified assets, and interest income on such assets will be
considered "interest on obligations secured by mortgages on real property" to
such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Security owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial ownership
therein) which is principally secured by an interest in real property" within
the meaning of Code Section 860G(a)(3)(A) to the extent that the assets of the
related Grantor Trust Fund consist of "qualified mortgages" within the meaning
of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized in
their entirety under the Code provisions cited in clauses 1 and 2 of the
immediately preceding paragraph or whether the amount qualifying for such
treatment must be reduced by the amount of the Buydown Mortgage Funds. There is
indirect authority supporting treatment of an investment in a Buydown Mortgage
Loan as entirely secured by real property if the fair market value of the real
property securing the loan exceeds the principal amount of the loan at the time
of issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, Securityholders are urged to
consult their own tax advisors concerning the effects of such arrangements on
the characterization of such Securityholder's investment for federal income tax
purposes.
(ii) Premium and Discount
The Depositor recommends that Securityholders consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under "--REMICs--
Taxation of Owners of Residual Securities Premium."
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. The rules
allowing for the amortization of premium are available with respect to mortgage
loans originated after September 27, 1985. Under the OID Regulations, original
issue discount could arise by the charging of points by the originator of the
mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under certain circumstances, by the presence of
"teaser" rates on the Mortgage Loans. See "--Stripped Securities" below
regarding original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross income as
it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income. No
prepayment assumption will be assumed for purposes of such accrual except as set
forth in the
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applicable Prospectus Supplement. However, Code Section 1272 provides for a
reduction in the amount of original issue discount includible in the income of a
holder of an obligation that acquires the obligation after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if such Mortgage Loans acquired by a Securityholder are purchased at a price
equal to the then unpaid principal amount of such Mortgage Loans, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loans (i.e., points) will be
includible by such holder.
Market Discount. Securityholders also will be subject to the market discount
rules to the extent that the conditions for application of those sections are
met. Market discount on the Mortgage Loans will be determined and will be
reported as ordinary income generally in the manner described above under "--
REMICs--Taxation of Owners of Regular Securities--Market Discount," except that
the ratable accrual methods described therein will not apply. Rather, the
holder will accrue market discount pro rata over the life of the Mortgage Loans,
unless the constant yield method is elected. No prepayment assumption will be
assumed for purposes of such accrual except as set forth in the applicable
Prospectus Supplement.
(iii) Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans would be increased. Internal Revenue Service
guidance indicates that a servicing fee in excess of reasonable compensation
("excess servicing") will cause the Mortgage Loans to be treated under the
"stripped bond" rules. Such guidance provides safe harbors for servicing deemed
to be reasonable and requires taxpayers to demonstrate that the value of
servicing fees in excess of such amounts is not greater than the value of the
services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a Servicer
who receives a servicing fee in excess of such amounts would be viewed as
retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Securities," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder thereof. While Securityholders would
still be treated as owners of beneficial interests in a grantor trust for
federal income tax purposes, the corpus of such trust could be viewed as
excluding the portion of the Mortgage Loans the ownership of which is attributed
to the Servicer, or as including such portion as a second class of equitable
interest. Applicable Treasury regulations treat such an arrangement as a fixed
investment trust, since the multiple classes of trust interests should be
treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing or amount of income reported by a Securityholder, except
that the income reported by a cash method holder may be slightly accelerated.
See "--Stripped Securities" below for a further description of the federal
income tax treatment of stripped bonds and stripped coupons.
(iv) Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Security. In general, the aggregate adjusted basis will
equal the Securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported with respect
to the Standard Security and decreased by the amount of any losses previously
reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and except
for certain financial institutions
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subject to the provisions of Code Section 582(c), any such gain or loss
generally would be capital gain or loss if the Standard Security was held as a
capital asset. However, gain on the sale of a Standard Security will be treated
as ordinary income (i) if a Standard Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Securityholder's net investment in the conversion
transaction at 120% of the appropriate applicable federal rate in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior disposition of property
that was held as part of such transaction or (ii) in the case of a non-corporate
taxpayer, to the extent such taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at ordinary
income rates. Long-term capital gains of certain non-corporate taxpayers
generally are subject to a lower maximum tax rate (20%) than ordinary income or
short-term capital gains of such taxpayers (39.6%) for property held for more
than one year. The maximum tax rate for corporations currently is the same with
respect to both ordinary income and capital gains.
Stripped Securities
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "Stripped
Securities." In the opinion of Cadwalader, Wickersham & Taft, the Securities
will be subject to those rules if (i) the Depositor or any of its affiliates
retains (for its own account or for purposes of resale), in the form of Retained
Interest or otherwise, an ownership interest in a portion of the payments on the
Mortgage Loans, (ii) the Depositor or any of its affiliates is treated as having
an ownership interest in the Mortgage Loans to the extent it is paid (or
retains) servicing compensation in an amount greater than reasonable
consideration for servicing the Mortgage Loans (see "--Standard Securities--
Recharacterization of Servicing Fees" above), and (iii) a Class of Securities
are issued in two or more Classes or Subclasses representing the right to non-
pro-rata percentages of the interest and principal payments on the Mortgage
Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"--Standard Securities--Recharacterization of Servicing Fees." Although not free
from doubt, for purposes of reporting to Stripped Securityholders, the servicing
fees will be allocated to the classes of Stripped Securities in proportion to
the distributions to such Classes for the related period or periods. The holder
of a Stripped Security generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "--Standard Securities--
General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as an
obligation issued at an original issue discount on the date that such stripped
interest is purchased. Although the treatment of Stripped Securities for
federal income tax purposes is not clear in certain respects, particularly where
such Stripped Securities are issued with respect to a Mortgage Pool containing
variable-rate Mortgage Loans, in the opinion of Cadwalader, Wickersham & Taft,
(i) the Grantor Trust Fund will be treated as a grantor trust under subpart E,
Part I of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i), and (ii) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship
of Code Section 1286, Code Sections 1272 through 1275, and the OID Regulations.
Although it is possible that computations with respect to Stripped Securities
could be made in one of the ways described below under "--Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for
original issue discount purposes, all payments on any Stripped Securities should
be aggregated and treated as though they were made on a single debt instrument.
The Pooling and Servicing
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Agreement will require that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped Security
as a single debt instrument issued on the date it is purchased for purposes of
calculating any original issue discount. In addition, under such regulations, a
Stripped Security that represents a right to payments of both interest and
principal may be viewed either as issued with original issue discount or market
discount (as described below), at a de minimis original issue discount, or,
presumably, at a premium. This treatment indicates that the interest component
of such a Stripped Security would be treated as qualified stated interest under
the OID Regulations, assuming it is not an interest-only or super-premium
Stripped Security. Further, these regulations provide that the purchaser of
such a Stripped Security will be required to account for any discount as market
discount rather than original issue discount if either (i) the initial discount
with respect to the Stripped Security was treated as zero under the de minimis
rule, or (ii) no more than 100 basis points in excess of reasonable servicing is
stripped off the related Mortgage Loans. Any such market discount would be
reportable as described above under "--REMICs--Taxation of Owners of Regular
Securities--Market Discount," without regard to the de minimis rule therein,
assuming that a prepayment assumption is employed in such computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage Loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations on
deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any class of a Series which is a
Subordinate Security, may deduct losses incurred with respect to the Stripped
Security as described above under "--Standard Securities General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the Stripped
Securities, for federal income tax purposes, will be the same as that of the
Mortgage Loans. Although the issue is not free from doubt, in the opinion of
Cadwalader, Wickersham & Taft, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation [ s ] . . . principally
secured by an interest in real property which is . . . . residential real
estate" within the meaning of Code Section 860G(a)(3)(A), and "loans . . .
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Securities should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B), provided that in each case the Mortgage Loans and interest
on such Mortgage Loans qualify for such treatment. The application of such Code
provisions to Buydown Mortgage Loans is uncertain. See "--Standard Securities--
Tax Status" above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "--General," each
Stripped Security will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which may be prior to the receipt of the cash attributable to such
income. Based in part on the issue discount required to be included in the
income of a holder of a Stripped Security (referred to in this discussion as a
"Stripped Securityholder") in any taxable year likely will be computed generally
as described above under "--REMICs-- Taxation of Owners of Regular Securities--
Original Issue Discount" and "--Variable Rate Regular Securities." However, with
the apparent exception of a Stripped Security qualifying as a market discount
obligation as described above under "--General," the issue price of a Stripped
Security will be the purchase price paid by each holder thereof, and the stated
redemption price at maturity will include the aggregate amount of the payments
to be made on the Stripped Security to such Securityholder, presumably under the
Prepayment Assumption, other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that under
the Prepayment Assumption, a Securityholder's recognition of original issue
discount will be either accelerated or decelerated and the amount of
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such original issue discount will be either increased or decreased depending on
the relative interests in principal and interest on each Mortgage Loan
represented by such Securityholder's Stripped Security. While the matter is not
free from doubt, the holder of a Stripped Security should be entitled in the
year that it becomes certain (assuming no further prepayments) that the holder
will not recover a portion of its adjusted basis in such Stripped Security to
recognize a loss (which may be a capital loss) equal to such portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some or all of
the interest payments with respect to the Stripped Securities will not be made
if the Mortgage Loans are prepaid could lead to the interpretation that such
interest payments are "contingent" within the meaning of the OID Regulations.
The OID Regulations, as they relate to the treatment of contingent interest, are
by their terms not applicable to prepayable securities such as the Stripped
Securities. However, if final regulations dealing with contingent interest with
respect to the Stripped Securities apply the same principles as the OID
Regulations, such regulations may lead to different timing of income inclusion
that would be the case under the OID Regulations. Furthermore, application of
such principles could lead to the characterization of gain on the sale of
contingent interest Stripped Securities as ordinary income. Investors should
consult their tax advisors regarding the appropriate tax treatment of Stripped
Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under "--REMICs--
Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the Securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code Section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Securityholder other than an original Securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the Stripped
Securities discussed above are not the only possible interpretations of the
applicable Code provisions. For example, the Securityholder may be treated as
the owner of (i) one installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to interest on each
Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan, or (iii)
a separate installment obligation for each Mortgage Loan, representing the
Stripped Security's pro rata share of payments of principal and/or interest to
be made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Securities may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Security, or Classes of Stripped Securities in the aggregate, represent the same
pro rata portion of principal and interest on each such Mortgage Loan, and a
stripped bond or stripped coupon (as the case may be), treated as an installment
obligation or contingent payment obligation, as to the remainder. Treasury
regulations regarding original issue discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to such
regulations states that they are premised on the assumption that an aggregation
approach is appropriate for determining whether original issue discount on a
stripped bond or stripped coupon is de minimis, and solicits comments on
appropriate rules for aggregating stripped bonds and stripped coupons under Code
Section 1286.
Because of these possible varying characterizations of Stripped Securities and
the resultant differing treatment of income recognition, Securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
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Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, such
reporting will be based upon a representative initial offering price of each
Class of Stripped Securities except as set forth in the applicable Prospectus
Supplement. The Trustee will also file such original issue discount information
with the Internal Revenue Service. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, 31% backup
withholding may be required in respect of any reportable payments, as described
above under "--REMICs--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Loans that are
issued on or before July 18, 1984, interest or original issue discount paid by
the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid by
the Trustee or other withholding agent to a Non-U.S. Person evidencing ownership
interest in Mortgage Loans issued after July 18, 1984 will be "portfolio
interest" and will be treated in the manner, and such persons will be subject to
the same certification requirements, described above under "--REMICs--Taxation
of Certain Foreign Investors--Regular Securities."
Partnership Trust Funds
Classification of Partnership Trust Funds
With respect to each series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft will deliver its opinion that the Trust Fund will
not be a taxable mortgage pool or an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the related Agreement
and related documents will be complied with, and on counsel's opinion that the
nature of the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations.
Characterization of Investments in Partnership Securities and Debt Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as "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), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
Taxation of Debt Securityholders
(i) Treatment of the Debt Securities as Indebtedness
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The Depositor will agree, and the Securityholders will agree by their purchase
of Debt Securities, to treat the Debt Securities as debt for federal income tax
purposes. No regulations, published rulings, or judicial decisions exist that
discuss the characterization for federal income tax purposes of securities with
terms substantially the same as the Debt Securities. However, with respect to
each Series of Debt Securities, Cadwalader, Wickersham & Taft will deliver its
opinion that the Debt Securities will be classified as indebtedness for federal
income tax purposes. The discussion below assumes this characterization of the
Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
Partnership Trust, and the timing and amount of income allocable to holders of
such Debt Securities may be different than as described in the following
paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See "--REMICs--Taxation of
Owners of Regular Securities" and "--Sale or Exchange of Regular Securities."
Taxation of Owners of Partnership Securities
(i) Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Securityholders will agree by their purchase of Securities, to
treat the Partnership 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
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the Depositor 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
one or more of the classes of Partnership Securities have certain features
characteristic of debt, the Partnership Securities might be considered debt of
the Depositor or the Partnership Trust Fund. Any such characterization would
not result in materially adverse tax consequences to Securityholders as compared
to the consequences from treatment of the Partnership Securities as equity in a
partnership, described below. The following discussion assumes that the
Partnership Securities represent equity interests in a partnership.
(ii) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Securityholder will be required to separately take
into account such holder's allocated share of income, gains, losses, deductions
and credits of the Partnership Trust Fund. It is anticipated that the
Partnership Trust Fund's income will consist primarily of interest earned on the
Mortgage Loans (including appropriate adjustments for market discount, original
issue discount and bond premium) as described above under "--Grantor Trust
Funds--Standard Securities--General," and "--Premium and Discount" and any gain
upon collection or disposition of Mortgage Loans. The Partnership Trust Fund's
deductions will consist primarily of interest accruing with respect to the Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreement and related documents). The Agreement will provide, in general, that
the Securityholders will be allocated taxable income of the Partnership Trust
Fund for each Due Period equal to the sum of (i) the interest that accrues on
the Partnership Securities in accordance with their terms for such Due Period,
including interest accruing at the applicable pass-through rate for such Due
Period and interest on amounts previously due on the Partnership Securities but
not yet distributed; (ii) any Partnership Trust Fund income attributable to
discount on the Mortgage Loans that corresponds to any excess of the principal
amount of the Partnership Securities over their initial issue price; and (iii)
any other amounts of income payable to the
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Securityholders for such Due Period. Such allocation will be reduced by any
amortization by the Partnership Trust Fund of premium on Mortgage Loans that
corresponds to any excess of the issue price of Partnership Securities over
their principal amount. All remaining taxable income of the Partnership Trust
Fund will be allocated to the Depositor. Based on the economic arrangement of
the parties, this approach for allocating Partnership Trust Fund income should
be permissible under applicable Treasury regulations, although no assurance can
be given that the Internal Revenue Service would not require a greater amount of
income to be allocated to Securityholders. Moreover, even under the foregoing
method of allocation, Securityholders 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 Partnership Securities on the accrual basis and Securityholders
may become liable for taxes on Partnership Trust Fund income even if they have
not received cash from the Partnership Trust Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "--Grantor Trust Funds--Standard Securities--
General." Accordingly, 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 Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Grantor Trust Funds--Standard Securities--General" and "--Premium and Discount."
Notwithstanding such description, it is intended that the Partnership Trust Fund
will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the Internal Revenue Service were to require that such calculations
be made separately for each Mortgage Loan, the Partnership Trust Fund might be
required to incur additional expense, but it is believed that there would not be
a material adverse effect on Securityholders.
(iii) Discount and Premium
It is not anticipated that the Mortgage Loans will have been issued with
original issue discount and, therefore, the Partnership Trust Fund should not
have original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "--Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis.)
If the Partnership Trust Fund acquires the Mortgage Loans at a market discount
or premium, the Partnership Trust Fund will elect to include any such discount
in income currently as it accrues over the life of the Mortgage Loans or to
offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
(iv) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
interests in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a
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result, the Partnership 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 Partnership Trust Fund might not be able to
comply due to lack of data.
(v) Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A Securityholder's
tax basis in a Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includible in
income) and decreased by any distributions received with respect to such
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of such aggregate tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the holder's
share of unrecognized accrued market discount on the Mortgage Loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Partnership Trust Fund does not expect
to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Securities.
(vi) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of such Due
Period. As a result, a holder purchasing Partnership Securities 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 Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Securityholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
(vii) Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent that the amount of any money
distributed with respect to such Security exceeds the adjusted basis of such
Securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
(viii) Section 754 Election
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis in
the Partnership Securities than the selling Securityholder had. The tax basis
of the Partnership Trust Fund's assets would not be adjusted to reflect that
higher (or lower) basis unless the
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Partnership 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 Partnership Trust Fund will not make such an
election. As a result, Securityholder might be allocated a greater or lesser
amount of Partnership Trust Fund income than would be appropriate based on their
own purchase price for Partnership Securities.
(ix) Administrative Matters
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (Form 1065) with the Internal Revenue Service for
each taxable year of the Partnership Trust Fund and will report each
Securityholder's allocable share of items of Partnership Trust Fund income and
expense to holders and the Internal Revenue Service on Schedule K-1. The
Trustee will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and such nominees will be required to forward such information to the
beneficial owners of the Partnership Securities. Generally, holders must file
tax returns that are consistent with the information return filed by the
Partnership Trust Fund or be subject to penalties unless the holder notifies the
Internal Revenue Service of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership Securities
as a nominee at any time during a calendar year is required to furnish the
Partnership Trust Fund with a statement containing certain information on the
nominee, the beneficial owners and the Partnership Securities 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 Partnership Securities that were held,
bought or sold on behalf of such person throughout the year. In addition,
brokers and financial institutions that hold Partnership Securities through a
nominee are required to furnish directly to the Trustee information as to
themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling and
Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the Internal Revenue Service. 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 until three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Partnership Trust Fund by the
appropriate taxing authorities could result in an adjustment of the returns of
the Securityholders, and, under certain circumstances, a Securityholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust Fund. An adjustment could also result in an audit of a
Securityholder's returns and adjustments of items not related to the income and
losses of the Partnership Trust Fund.
(x) Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership 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 Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
the Partnership Trust Fund will withhold as if it were so engaged in order to
protect the Partnership Trust Fund from possible adverse consequences of a
failure to withhold. The Partnership Trust Fund expects to withhold on the
portion of its taxable income that is allocable to Securityholders who are Non-
U.S. Persons 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 Non-U.S.
Persons that are taxable as corporations and 39.6% for all other foreign
holders. Amounts withheld will be deemed distributed to the Non-U.S. Person
Securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its
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withholding procedures. In determining a holder's withholding status, the
Partnership Trust Fund may rely on Form W-8, Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each Non-U.S. Person 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 Partnership Trust Fund's income. Each Non-U.S.
Person holder must obtain a taxpayer identification number from the Internal
Revenue Service and submit that number to the Partnership Trust Fund on Form W-8
in order to assure appropriate crediting of the taxes withheld. A Non-U.S.
Person holder generally would be entitled to file with the Internal Revenue
Service a claim for refund with respect to taxes withheld by the Partnership
Trust Fund, taking the position that no taxes were due because the Partnership
Trust Fund was not engaged in a U.S. trade or business. However, interest
payments made (or accrued) to a Securityholder who is a Non-U.S. Person
generally will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the Partnership Trust Fund. If these
interest payments are properly characterized as guaranteed payments, then the
interest may not be considered "portfolio interest." As a result,
Securityholders who are Non-U.S. Persons may be subject to United States federal
income tax and withholding tax at a rate of 30%, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a Non-U.S. Person holder would
only be entitled to claim a refund for that portion of the taxes in excess of
the taxes that should be withheld with respect to the guaranteed payments.
(xi) Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale of
the Partnership Securities will be subject to a "backup" withholding tax of 31%
if, in general, the Securityholder fails to comply with certain identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE MAY NOT BE APPLICABLE DEPENDING
UPON A SECURITYHOLDER'S PARTICULAR TAX SITUATION. THE DEPOSITOR RECOMMENDS THAT
PROSPECTIVE PURCHASERS CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF REMIC
SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP SECURITIES AND DEBT
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Securities offered hereunder. State tax law may differ substantially
from the corresponding federal tax law, and the discussion above does not
purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Securities offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
the Code impose certain 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, that are
subject to Title I of ERISA and Section 4975 of the Code ("Plans") and on
persons who are fiduciaries with respect to such Plans in connection with the
investment of Plan assets. 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 Section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such plans
may be invested in Securities without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal, state
and local law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
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ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth
in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans, Agency Securities, Mortgage Securities and
other assets included in a related Trust Fund to be deemed Plan assets. Section
2510.3-101 of the regulations of the United States Department of Labor ("DOL")
provides that when a Plan acquires an equity interest in an entity, the Plan's
assets include both such equity interest and an undivided interest in each of
the underlying assets of the entity, unless certain exceptions not applicable
here apply, or unless the equity participation in the entity by "benefit plan
investors" (i.e., Plans and certain employee benefit plans not subject to ERISA)
is not "significant," both as defined therein. For this purpose, in general,
equity participation by benefit plan investors will be "significant" on any date
if 25% or more of the value of any class of equity interests in the entity is
held by benefit plan investors. To the extent the Securities are treated as
equity interests for purposes of DOL regulations Section 2510.3-101, equity
participation in a Trust Fund will be significant on any date if immediately
after the most recent acquisition of any Security, 25% or more of any class of
Securities is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement Loans,
Agency Securities, Mortgage Securities and other assets included in a Trust Fund
constitute Plan assets, then any party exercising management or discretionary
control regarding those assets, such as the Servicer or Master Servicer, may be
deemed to be a Plan "fiduciary" and thus subject to the fiduciary responsibility
provisions and prohibited transaction provisions of ERISA and the Code with
respect to the investing Plan. In addition, if the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans, Agency Securities, Mortgage Securities and
other assets included in a Trust Fund constitute Plan assets, the purchase of
Securities by a Plan, as well as the operation of the Trust Fund, may constitute
or involve a prohibited transaction under ERISA and the Code.
The DOL issued an individual exemption (the "Exemption"), to DBSI which
generally exempts from the application of the prohibited transaction provisions
of Sections 406(a) and 407 of ERISA, and the excise taxes imposed on such
prohibited transactions pursuant to Section 4975(a) and (b) of the Code, certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the purchase, sale and holding of Securities underwritten by an
Underwriter (as hereinafter defined), that (a) represent a beneficial ownership
interest in the assets of a Trust Fund and entitle the holder to pass-through
payments of principal, interest and/or other payments made with respect to the
assets of the Trust Fund or (b) are denominated as a debt instrument and
represent an interest in a REMIC, provided that certain conditions set forth in
the Exemption are satisfied. For purposes of this Section "ERISA
Considerations," the term "Underwriter" shall include (a) DBSI, (b) any person
directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with DBSI, and (c) any member of the
underwriting syndicate or selling group of which a person described in (a) or
(b) is a manager or co-manager with respect to a class of Securities.
The Exemption sets forth six general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder. First, the acquisition of Securities
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Securities evidencing rights and interests not
subordinated to the rights and interests evidenced by the other Securities of
the same series. Third, the Securities at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service ("Moody's"'), Duff & Phelps Credit Rating Co.
("DCR") or Fitch IBCA, Inc. ("Fitch"). Fourth, the Trustee cannot be an
affiliate of any member of the "Restricted Group" which consists of the
Underwriter, the Depositor, the Trustee, the Master Servicer, any Servicer, any
insurer and any obligor with respect to Assets constituting more than
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5% of the aggregate unamortized principal balance of the Assets in the related
Trust Fund as of the date of initial issuance of the Securities. Fifth, the sum
of all payments made to and retained by the Underwriter(s) must represent not
more than reasonable compensation for underwriting the Securities; the sum of
all payments made to and retained by the Depositor pursuant to the assignment of
the Assets to the related Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Servicer must represent not more than reasonable compensation
for such person's services under the related Agreement and reimbursement of such
person's reasonable expenses in connection therewith. Sixth, the investing Plan
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, as
amended. In addition, the Trust Fund must meet the following requirements: (i)
the assets of the Trust Fund must consist solely of assets of the type that have
been included in other investment pools; (ii) securities evidencing interests in
such other investment pools must have been rated in one of the three highest
generic rating categories by S&P, Moody's, DCR, or Fitch for at least one year
prior to the Plan's acquisition of the securities; and (iii) securities
evidencing interests in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's acquisition
of the Securities.
The Exemption was amended by Prohibited Transaction Exemption 97-34, 62
Fed. Reg. 39021 (July 21, 1997), which, among other changes, permits the
inclusion of a pre-funding account in a trust fund, provided that the following
conditions are met: (a) the pre-funding account may not exceed 25% of the total
amount of certificates being offered; (b) additional obligations purchased
generally must meet the same terms and conditions as those of the original
obligations used to create the trust fund; (c) the transfer of additional
obligations to the trust during the pre-funding period must not result in the
certificates receiving a lower rating at the termination of the pre-funding
period than the rating that was obtained at the time of the initial issuance of
the certificates; (d) the weighted average interest rate for all of the
obligations in the trust at the end of the pre-funding period must not be more
than 100 basis points less than the weighted average interest rate for the
obligations which were transferred to the trust on the closing date; (e) the
characteristics of the additional obligations must be monitored to confirm that
they are substantially similar to those which were acquired as of the closing
date either by a credit support provider or insurance provider independent of
the sponsor or by an independent accountant retained by the sponsor that
confirms such conformance in writing; (f) the pre-funding period must be
described in the prospectus or private placement memorandum provided to
investing plans; and (g) the trustee of the trust must be a substantial
financial institution or trust company experienced in trust activities and
familiar with its duties, responsibilities and liabilities as a fiduciary under
ERISA.
Further, the pre-funding period must be a period beginning on the closing date
and ending no later than the earliest to occur of (x) the date the amount on
deposit in the pre-funding account is less than the minimum dollar amount
specified in the pooling and servicing agreement; (y) the date on which an event
of default occurs under the pooling and servicing agreement; or (z) the date
which is the later of three months or 90 days after the closing date. It is
expected that a Pre-Funding Account for any Series of Certificates will meet all
of these requirements.
A fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied with
respect to such Security. However, to the extent Securities are subordinate,
the Exemption will not apply to an investment by a Plan. In addition, any
Securities representing a beneficial ownership interest in Unsecured Home
Improvement Loans or Revolving Credit Line Loans will not satisfy the general
conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407 of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c) (1)(A) through (D) of the Code) in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Securities by
Plans. However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Security on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of such
Excluded Plan. For purposes of the Securities, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (2) of ERISA and the taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Section 4975(c)(1)(E) of the Code in connection with (1)
the direct or indirect sale,
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exchange or transfer of Securities in the initial issuance of Securities between
the Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in the Securities is (a) an obligor with respect to 5% or less of the
fair market value of the Assets or (b) an affiliate of such a person, (2) the
direct or indirect acquisition or disposition in the secondary market of
Securities by a Plan and (3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Trust Fund. The
Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Securities so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code) for transactions
in connection with the servicing, management and operation of the Mortgage
Pools, provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having certain specified relationships to such a
person) solely as a result of the Plan's ownership of Securities.
To the extent the Securities are not treated as equity interests for purposes
of DOL regulations Section 2510.3-101, a Plan's investment in such Securities
("Non-Equity Securities") would not cause the assets included in a related Trust
Fund to be deemed Plan assets. However, the Depositor, the Servicer, the
Trustee, or Underwriter may be the sponsor of or investment advisor with respect
to one or more Plans. Because such parties may receive certain benefits in
connection with the sale of Non-Equity Securities, the purchase of Non-Equity
Securities using Plan assets over which any such parties has investment
authority might be deemed to be a violation of the prohibited transaction rules
of ERISA and the Code for which no exemption may be available. Accordingly,
Non-Equity Securities may not be purchased using the assets of any Plan if any
of the Depositor, the Servicer, the Trustee or Underwriter has investment
authority with respect to such assets.
In addition, certain affiliates of the Depositor might be considered or might
become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager," PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving bank
collective investment funds, PTCE 95-60, which exempts certain transactions
involving insurance company general accounts, or PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by certain "in-house" asset
managers. It should be noted, however, that even if the conditions specified in
one or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary which proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a pool of single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTCE 83-1,
which provides exemptive relief for certain transactions involving mortgage pool
investment trusts. The Prospectus Supplement with respect to a series of
Securities may contain additional information regarding the application of the
Exemption, PTCE 83-1 or any other exemption, with
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respect to the Securities offered thereby. In addition, any Plan fiduciary that
proposes to cause a Plan to purchase Strip Securities should consider the
federal income tax consequences of such investment.
Any Plan fiduciary considering whether to purchase a Security 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.
The sale of Securities to a Plan is in no respect a representation by the
Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT CONSIDERATIONS
The related Prospectus Supplement will specify which classes of the Offered
Securities, if any, will constitute "mortgage related securities" for purposes
of the SMMEA. Generally, only classes of Offered Securities that (i) are rated
in one of the two highest rating categories by one or more Rating Agencies and
(ii) are part of a series representing interests in, or secured by, a Trust Fund
consisting of loans secured by first liens on real property and originated by
certain types of originators specified in SMMEA, will be "mortgage related
securities" for purposes of SMMEA. Those classes of Offered Securities
qualifying as "mortgage related securities" will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance companies,
as well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991, cut-off for such enactments,
limiting to varying extents the ability of certain entities (in particular,
insurance companies) to invest in mortgage related securities secured by liens
on residential, or mixed residential and commercial, properties, in most cases
by requiring the affected investors to rely solely upon existing state law, and
not SMMEA.
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 "mortgage related
securities" without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase such securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
(S)24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, the Office of
the Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. (S)1.5), certain "Type IV
securities," defined in 12 C.F.R. (S)1.2(l) to include certain "residential
mortgage related securities." As so defined, "residential mortgage-related
security" means, in relevant part, "mortgage related security" within the
meaning of SMMEA. The National Credit Union Administration ("NCUA") has adopted
rules, codified at 12 C.F.R. Part 703, which permit federal credit unions to
invest in "mortgage related securities" under certain limited circumstances,
other than stripped mortgage related securities, residual interests in mortgage
related securities, and commercial mortgage related securities, unless the
credit union has obtained written approval from the NCUA to participate in the
"investment pilot program" described in 12 C.F.R. (S)703.140. The Office of
Thrift Supervision (the "OTS") has issued Thrift Bulletin 13a (December 1,
1998), "Management of Interest Rate Risk, Investment Securities, and Derivative
Activities," which thrift institutions subject to the jurisdiction of the OTS
should consider before investing in any of the Offered Securities.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the OTS, effective May 26,
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1998, and by the NCUA, effective October 1, 1998. The 1998 Policy Statement sets
forth general guidelines which depository institutions must follow in managing
risks (including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
classes under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase such Offered Securities, may
be subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by federal
or state authorities should review rules, policies and guidelines adopted from
time to time by such authorities before purchasing any Offered Securities, as
certain classes or subclasses may be deemed unsuitable investments, or may
otherwise be restricted, under such rules, policies or guidelines (in certain
instances irrespective of SMMEA).
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, percentage-of-assets limits provisions which may
restrict or prohibit investment in securities which are not "interest bearing"
or "income paying," and with regard to any Offered Securities issued in book-
entry form, provisions which may restrict or prohibit investments in securities
which are issued in book-entry form.
Except as to the status of certain classes of Offered Securities as "mortgage
related securities," no representation is made as to the proper characterization
of the Offered Securities for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase any Offered Securities under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Offered Securities) may adversely affect the liquidity of the Offered
Securities.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Securities of any class
constitute legal investments for them or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this Prospectus 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 Deutsche Bank Securities Inc. acting as underwriter with other underwriters,
if any, named therein. In such event, the 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 Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Securities will
be distributed by DBSI acting as agent or in some cases as principal with
respect to Securities which it has previously purchased or agreed to purchase.
If DBSI acts as agent in the sale of Securities, DBSI 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 Mortgage Loans 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 DBSI elects to purchase Securities as principal, DBSI 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
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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 DBSI and any underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments DBSI and any underwriters may be required to make in
respect thereof.
In the ordinary course of business, DBSI and the Depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the Depositor's mortgage loans pending the sale
of such mortgage loans 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. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to each series of Securities, only those classes rated in one of the four
highest rating categories by any Rating Agency will be offered hereby. Any
unrated class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Securityholders of an investment in the Securities of a Series, will be passed
upon for the Depositor by Cadwalader, Wickersham & Taft, New York, New York.
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 any class of Offered Securities that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
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.
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INDEX OF DEFINED TERMS
1
1986 Act.....................................................................84
1998 Policy Statement.......................................................115
A
Accrual Securities........................................................6, 36
Accrued Security Interest....................................................38
Adjustable Rate Assets.......................................................20
Agency Securities............................................................ 1
Agreement....................................................................44
ARM Contracts................................................................24
ARM Loans....................................................................21
ARM Unsecured Home Improvement Loans.........................................23
Asset Conservation Act.......................................................73
Asset Group...................................................................7
Asset Seller.................................................................19
Assets........................................................................1
Available Distribution Amount................................................37
B
Balloon Payment Assets.......................................................14
Bankruptcy Code..............................................................71
Bi-weekly Assets.............................................................20
Book-Entry Securities........................................................36
Buy Down Assets..............................................................20
Buydown Funds................................................................83
Buydown Mortgage Loans.......................................................33
Buydown Period...............................................................33
C
Capitalized Interest Account..................................................6
Cash Flow Agreements..........................................................1
Cede..........................................................................3
CERCLA.......................................................................73
Certificates..................................................................1
Charter Act..................................................................25
Cleanup Costs................................................................73
Code..........................................................................9
Collection Account...........................................................47
Commission....................................................................2
contract borrower............................................................67
contract lender..............................................................67
Contract Rate.................................................................4
Contracts.................................................................1, 28
Convertible Assets...........................................................20
Cooperative..................................................................66
Cooperative Loans............................................................66
Cooperatives.................................................................20
Counterparty.................................................................19
Covered Trust................................................................18
CPR..........................................................................32
Credit Support................................................................1
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Crime Control Act............................................................76
Cut-off Date..................................................................7
D
DBSI.........................................................................10
DCR.........................................................................112
Debt Securities...............................................................9
Definitive Securities........................................................19
Deposit Trust Agreement.......................................................6
Depositor.....................................................................1
Determination Date...........................................................36
Disqualified Organization....................................................93
DOL.........................................................................111
DTC.......................................................................3, 42
E
ERISA...................................................................10, 111
excess servicing............................................................101
Exchange Act..................................................................3
Excluded Plan...............................................................113
Exemption...............................................................10, 112
F
Fannie Mae.................................................................1, 4
Fannie Mae Certificates...................................................4, 19
FDIC.........................................................................47
FFIEC.......................................................................115
FHA...........................................................................2
FHA Loans....................................................................21
Financial Instrument.........................................................19
Fitch.......................................................................112
Foreign Investors............................................................94
Freddie Mac...................................................................1
Freddie Mac Act..............................................................26
Freddie Mac Certificate Group................................................26
Freddie Mac Certificates..................................................4, 19
G
Garn-St. Germain Act.........................................................74
GEM Assets...................................................................20
Ginnie Mae....................................................................1
Ginnie Mae Certificates...................................................4, 19
GPM Assets...................................................................20
Grantor Trust Fund...........................................................80
Grantor Trust Securities......................................................9
H
Home Equity Loans.........................................................2, 21
Home Improvement Contracts....................................................2
Home Ownership Act...........................................................16
Housing Act..................................................................16
HUD..........................................................................54
I
Increasing Payment Assets....................................................20
Indenture.....................................................................6
-118-
Indenture Trustee.............................................................1
Indirect Participants........................................................42
Insurance Proceeds...........................................................37
Interest Accrual Period......................................................30
Interest Reduction Assets....................................................20
L
land sale contract...........................................................67
Land Sale Contracts...........................................................2
Level Payment Assets.........................................................19
Liquidation Proceeds.........................................................37
Loan-to-Value Ratio......................................................21, 23
Lock-out Date................................................................22
Lock-out Period..............................................................22
M
Manufactured Home.............................................................3
manufactured housing contracts...............................................16
Mark to Market Regulations...................................................95
Master Servicer...............................................................1
Moody's.....................................................................112
Mortgage Loans....................................................1, 19, 28, 80
Mortgage Notes...............................................................21
Mortgage Rate.................................................................3
Mortgage Securities.......................................................4, 19
Mortgaged Properties..........................................................2
Mortgages....................................................................21
mortgagor....................................................................65
Multifamily Mortgage Loan....................................................20
Multifamily Properties........................................................2
N
NCUA........................................................................115
new partnership.............................................................108
New Regulations..............................................................98
Non-Equity Securities.......................................................113
Non-Pro Rata Security........................................................84
Nonrecoverable Advance.......................................................40
Non-U.S. Person..............................................................98
Notes.........................................................................1
O
OCC.........................................................................115
Offered Securities............................................................1
OID Regulations..........................................................80, 84
old partnership.............................................................108
Originators..................................................................15
P
Participants.................................................................42
Parties in Interest.........................................................111
Partnership Securities........................................................9
Partnership Trust Fund.......................................................80
Pass-Through Entity......................................................93, 94
Pass-Through Rate.........................................................6, 37
PCBs.........................................................................72
-119-
Permitted Investments........................................................47
Plan.........................................................................10
Plans.......................................................................111
Pooling and Servicing Agreement...............................................1
Pre-Funded Amount.............................................................5
Pre-Funding Account...........................................................5
Pre-Funding Period............................................................5
prepayment...................................................................32
Prepayment Assumption........................................................85
Prepayment Premium...........................................................22
PTCE........................................................................114
Purchase Price...............................................................45
R
Rating Agency................................................................10
RCRA.........................................................................73
Record Date..................................................................36
Registration Statement........................................................2
Regular Securities........................................................9, 98
Regular Securityholder.......................................................84
Related Proceeds.............................................................39
Relief Act...................................................................76
REMIC.........................................................................2
REMIC Pool...................................................................80
REMIC Provisions.............................................................80
REMIC Regulations............................................................80
REMIC Securities.............................................................43
REO Property.................................................................40
Residual Holders.............................................................90
Residual Securities...........................................................9
Restricted Group............................................................112
Retained Interest............................................................55
Revolving Credit Line Loans..................................................22
RICO.........................................................................76
S
S&P.........................................................................112
SBJPA of 1996................................................................83
secured-creditor exemption...................................................73
Securities....................................................................1
Security.....................................................................44
Security Balance..........................................................6, 38
Security Owners...............................................................3
Securityholders...........................................................3, 19
senior lien..................................................................15
Senior Securities.............................................................6
Servicemen's Readjustment Act................................................29
Servicer......................................................................1
Servicing Standard...........................................................50
Single Family Mortgage Loan..................................................20
Single Family Properties......................................................2
SMMEA........................................................................10
SPA..........................................................................32
Special Servicer.............................................................57
Standard Securities..........................................................99
Startup Day..................................................................81
-120-
Step-up Rate Assets..........................................................20
Strip Securities..............................................................6
Stripped Agency Securities...................................................27
Stripped Securityholder.....................................................104
Subordinate Securities........................................................6
Sub-prime Mortgage Loans.....................................................15
Subsequent Assets.............................................................5
Superliens...................................................................72
T
Taxable Mortgage Pools.......................................................81
thrift institutions..........................................................93
Tiered REMICS................................................................83
Title V......................................................................75
Title VIII...................................................................76
Trust Assets..................................................................2
Trust Fund....................................................................1
Trustee.......................................................................1
U
UCC..........................................................................42
Underlying Servicing Agreement................................................1
Unsecured Home Improvement Loans..........................................1, 28
UST..........................................................................73
V
VA............................................................................2
VA Guaranty Policy...........................................................55
VA Loans.....................................................................21
Value........................................................................21
Voting Rights................................................................58
W
Warranting Party.............................................................46
-121-
PROSPECTUS SUPPLEMENT 11/16/99
(To prospectus dated November 10, 1999)
- ---------------
Mortgage Lenders Network Home Equity Loan Trust 1999-2
Issuer
$144,953,790 7.583% Asset-Backed Notes, Series 1999-2, Class A
[MLN LOGO]
Mortgage Lenders Network USA, Inc.
Seller and Servicer
ACE Securities Corp.,
Depositor
Consider Mortgage Lenders Network Home Equity Loan Trust 1999-2
carefully the will issue the following asset-backed notes backed
risk factors solely by a pledge of the assets of the trust.
starting on page
S-9 of this The Notes--
prospectus
supplement and
page 18 of the The trust will issue one class of notes offered for sale
prospectus before by this prospectus supplement.
making a decision
to invest in the Interest and principal on the notes is scheduled to be
notes. paid monthly on the 25th day of the month or, if such
day is not a business day, the immediately following
business day. The first scheduled payment date is
The notes December 27, 1999.
represent asset-
backed debt Credit enhancement--
secured solely by
the mortgage
loans held by the The assets of the trust may exceed the principal balance
trust. The notes of the notes and, if so, will result in
are not interests overcollateralization which will be available to absorb
in or obligations losses.
of any other
person. The notes will be unconditionally and irrevocably
guaranteed as to the timely payment of scheduled
interest and the ultimate payment of principal pursuant
No governmental to the terms of a financial guaranty insurance policy to
agency or be issued by Financial Security Assurance Inc.
instrumentality
has insured or
guaranteed the
notes or the [FSA Logo]
underlying
mortgage loans.
This prospectus The notes will be offered by the underwriters from time
supplement may be to time to the public in negotiated transactions or
used to offer and otherwise at varying prices to be determined at the time
sell the notes of sale. Proceeds to the issuer from the sale of the
only if notes are anticipated to be approximately $144,589,000
accompanied by before the deduction of expenses payable by the issuer,
the prospectus. estimated to be approximately $300,000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Deutsche Bank Securities Inc. and First Union Securities, Inc., will offer the
notes for sale after the notes have been issued by the trust and purchased by
the underwriters.
The underwriters have the right to reject any order. The underwriters expect to
deliver the notes on or about November 18, 1999 through The Depository Trust
Company, Cedelbank or the Euroclear system.
Deutsche Banc Alex. Brown First Union Securities, Inc.
The date of this prospectus supplement is November 10, 1999
Important notice about the information presented in this prospectus supplement
and the accompanying prospectus
We provide information to you about the notes offered by this prospectus
supplement in two separate documents that progressively provide more detail:
(1) the accompanying prospectus, which provides general information, some of
which may not apply to your series of notes, and (2) this prospectus supplement,
which describes the specific terms of your series of notes.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone else to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and the prospectus is accurate as of any date other than the dates stated on
their respective covers.
Mortgage Lenders Network USA, Inc.'s principal offices are located at
Middlesex Corporate Center, 213 Court Street, Middletown, Connecticut 06457 and
its telephone number is (860) 344-5700.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-2
TABLE OF CONTENTS
SUMMARY....................................................................................................................... S-5
RISK FACTORS.................................................................................................................. S-9
Risks of the Mortgage Loans................................................................................................. S-9
Origination Risks; Seller's Reliance on Brokers and Correspondents.......................................................... S-10
Given its Limited Operating History for the Type of Mortgage Loans in the Trust, Mortgage Lenders Network USA, Inc. Does
Not Have Any Significant Historical Loss and Delinquency Data.............................................................. S-11
Prepayment of the Mortgage Loans May Adversely Affect the Yield to Maturity of the Notes.................................... S-11
Assignment of Mortgages Will Only Be Recorded under Limited Circumstances................................................... S-11
Insurance Policy Does Not Cover Certain Risks............................................................................... S-12
Credit Enhancement May Be Inadequate for the Notes.......................................................................... S-12
Payments of Excess Cash May Affect the Yield to Maturity on the Notes....................................................... S-12
Notes are Non-Recourse Obligations.......................................................................................... S-12
Book-Entry Registration..................................................................................................... S-12
Year 2000 Readiness Disclosure.............................................................................................. S-13
Year 2000 Legislation May Affect Timely Exercise of Remedies................................................................ S-14
DESCRIPTION OF THE NOTES...................................................................................................... S-15
General..................................................................................................................... S-15
Book-Entry Registration and Definitive Notes................................................................................ S-16
Assignment of Mortgage Loans................................................................................................ S-19
Payments on the Notes....................................................................................................... S-20
Note Account................................................................................................................ S-23
Overcollateralization Feature............................................................................................... S-25
Reports to Noteholders...................................................................................................... S-26
Redemption of the Notes..................................................................................................... S-27
Payments to the Holder(s) of the Residual Interest.......................................................................... S-28
The Indenture Trustee....................................................................................................... S-28
Voting...................................................................................................................... S-28
Note Events of Default...................................................................................................... S-29
The PMI Policy.............................................................................................................. S-29
THE ISSUER.................................................................................................................... S-30
Mortgage Lenders Network USA, Inc........................................................................................... S-30
DESCRIPTION OF THE MORTGAGE POOL.............................................................................................. S-30
General..................................................................................................................... S-30
Mortgage Loan Characteristics............................................................................................... S-31
Underwriting Standards...................................................................................................... S-38
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS................................................................................... S-42
General..................................................................................................................... S-42
Weighted Average Life....................................................................................................... S-44
SERVICING OF THE MORTGAGE LOANS............................................................................................... S-49
General..................................................................................................................... S-49
Customary Servicing Procedures.............................................................................................. S-49
The Servicing Agreement..................................................................................................... S-50
Servicing and Other Compensation; Payment of Expenses....................................................................... S-55
Historical Servicing Experience of the Servicer............................................................................. S-55
S-3
THE NOTE INSURANCE............................................................................................................ S-57
The Insurance Policy........................................................................................................ S-57
The Note Insurer............................................................................................................ S-59
ERISA CONSIDERATIONS.......................................................................................................... S-61
USE OF PROCEEDS............................................................................................................... S-62
LEGAL INVESTMENT CONSIDERATIONS............................................................................................... S-62
UNDERWRITING.................................................................................................................. S-62
EXPERTS....................................................................................................................... S-63
MATERIAL FEDERAL INCOME TAX CONSEQUENCES...................................................................................... S-63
STATE TAX CONSIDERATIONS...................................................................................................... S-65
LEGAL MATTERS................................................................................................................. S-65
RATING OF THE NOTES........................................................................................................... S-65
INDEX OF PRINCIPAL TERMS...................................................................................................... S-67
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENT PROCEDURES................................................................ A-1
S-4
SUMMARY
. This summary highlights selected information from this prospectus supplement
and does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of the
offering of the notes, it is necessary that you read carefully this entire
prospectus supplement and accompanying prospectus.
. While this summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding, you should read
carefully the full description of these calculations, cash flow priorities
and other information in this prospectus supplement and the accompanying
prospectus before making any investment decision.
. You can find a listing of the pages where capitalized terms used in this
prospectus supplement summary are defined under the caption "Index of
Principal Terms" beginning on page S-67 in this prospectus supplement and
under the caption "Index of Defined Terms" beginning on page 117 in the
accompanying prospectus.
- --------------------------------------------------------------------------------
PARTIES
The Trust or Issuer
Mortgage Lenders Network Home Equity Loan Trust 1999-2 is a Delaware business
trust, formed pursuant to a deposit trust agreement among ACE Securities Corp.,
Wilmington Trust Company, Norwest Bank Minnesota, National Association and
Mortgage Lenders Network USA, Inc.
The Seller
Mortgage Lenders Network USA, Inc., a Delaware corporation, has originated or
acquired the mortgage loans. It will convey its interest in the mortgage loans
to the depositor.
The Servicer
Mortgage Lenders Network USA, Inc. will act as servicer of the mortgage loans
held by the trust.
The Depositor
ACE Securities Corp., a Delaware corporation, will convey the mortgage loans to
the trust after acquiring them from Mortgage Lenders Network USA, Inc.
The Note Insurer
Financial Security Assurance Inc. is a New York financial guaranty insurance
company.
The Indenture Trustee
Norwest Bank Minnesota, National Association is a national banking association.
If Mortgage Lenders Network USA, Inc. is terminated as servicer, Norwest Bank
Minnesota, National Association will take over the servicer's obligations or
appoint a successor servicer.
The Owner Trustee
Wilmington Trust Company, a Delaware banking corporation, will act as owner
trustee.
DESCRIPTION OF THE NOTES
The Notes
The trust will issue its asset-backed notes, designated as the "Mortgage Lenders
Network Home Equity Loan Trust 1999-2 Asset-Backed Notes, Series 1999-2, Class
A." There will be only one class of notes.
The initial principal amount of the notes is indicated on the front cover of
this prospectus supplement.
The Assets of the Trust
The notes will be backed solely by a pledge of the assets of the trust. The
assets of the trust will consist of (i) a pool of primarily fixed rate and
adjustable rate, residential one- to four-family, first and second lien mortgage
loans; (ii) principal and interest payments on the mortgage loans (including
prepayment premiums); (iii) the trust's rights under a mortgage loan sale
agreement and a servicing agreement; and (iv) certain other property.
The Stated Maturity of the Notes
The stated maturity date for the notes, on which the final payment of principal
must ultimately be made, is December 25, 2030, which is the payment date that
S-5
occurs in the thirteenth month following the month in which the last maturity
date of any mortgage loan conveyed to the trust is scheduled to occur. The
depositor anticipates, however, that actual final payment of principal on the
notes will occur significantly earlier.
Book-Entry Format
The notes will initially be issued in book-entry form only, through the
facilities of The Depository Trust Company. The notes will be issued in minimum
denominations of $1,000 and multiples of $1,000 in excess thereof.
PAYMENTS ON THE NOTES
Payment Dates
Principal and interest is scheduled to be paid to the noteholders on the 25th
day of each month, or, if such day is not a business day, on the following
business day, commencing on December 27, 1999.
Record Dates
The indenture trustee will make payments to the noteholders of record determined
as of the last day of the calendar month immediately prior to the payment date.
Due Periods and Collection Periods
Generally, payments made to noteholders on each payment date will relate to the
collections of principal and interest on the mortgage loans in the due period,
with respect to all scheduled collections of principal and interest, or the
collection period, with respect to all unscheduled collections. The due period
commences on the second day of the calendar month immediately before the month
in which the related payment date occurs and ends on the first day of the
calendar month in which the related payment date occurs. The collection period
is the calendar month before the calendar month in which the related payment
date occurs.
Funds Available for Payment of Interest and Principal
The following funds will generally be available for the payment of interest and
principal on the notes:
. collections on the mortgage loans, net of fees and expenses but including all
prepayment premiums collected;
. any advances made by the servicer in respect of delinquent payments of
principal and interest on mortgage loans;
. proceeds from any insurance policy covering a mortgaged property;
. any other proceeds, net of expenses, the servicer receives from the sale,
foreclosure, condemnation or other disposition of a mortgaged property;
. interest payments made by the servicer to compensate in part for any
shortfall in interest payments on the notes caused by a mortgagor prepaying
all or part of a mortgage loan;
. any amounts resulting from the repurchase, release, removal or substitution
of a mortgage loan; and
. in the event the notes are redeemed in the manner described herein, amounts
deposited in connection with such redemption.
Interest
Interest on the notes will accrue at the note interest rate during each interest
period. The note interest rate will initially be 7.583% per annum and will
increase to 8.083% per annum after the first payment date upon which the
aggregate principal balance of the mortgage loans is less than 10% of the
aggregate principal balance of the mortgage loans as of November 1, 1999.
Generally, the interest period will be the calendar month preceding a payment
date. In the case of the December 1999 payment date, interest begins to accrue
on November 1, 1999.
Interest on the notes will be calculated on the basis of a year of 360 days and
twelve 30 day months.
Principal
On each payment date, the noteholders are scheduled to receive an amount of
principal generally equal to the sum of all scheduled payments of principal made
or advanced on the mortgage loans and all other amounts collected or received or
otherwise recovered in respect of principal on the mortgage loans.
Servicer Advances
The servicer will make advances to pay all reasonable out-of-pocket costs, such
as the cost of pursuing judicial proceedings relating to the mortgages and the
costs of managing and liquidating mortgaged properties. The servicer is also
required to make advances with respect to delinquent payments of principal and
interest on the mortgage loans. The servicer, however, is only required to
S-6
make such advances if it believes that it can recover the advance from later
proceeds or collections on the related mortgage loan. The servicer may recover
servicing advances out of other amounts the servicer may collect with respect to
the mortgage loans.
Compensating Interest Payments
The servicer will also make interest payments to compensate in part for any
shortfall in interest payments on the notes which result from a mortgagor
prepaying all or part of a mortgage loan. The amount of such payments will not
exceed the servicing fee payable for the related period. The insurance policy
does not cover shortfalls in interest arising from prepayments. The servicer is
not entitled to recover compensating interest payments from the trust.
Application of Excess Cash
Generally, because the payments of interest and principal on the mortgage loans
exceed the sum of the amounts payable to the note insurer, the payment of
indenture trustee and servicing fees and payments of monthly interest and
principal to the noteholders, in the absence of delinquencies and losses on the
mortgage loans there will be excess cash each month above that required to pay
principal and interest on the notes. Excess cash will be used to pay down the
note balance in order to reach the required level of overcollateralization.
After reaching the required level of overcollateralization, any excess cash
remaining after payments on the notes and payments to the note insurer in
respect of the notes will be released to the holder of the residual interest and
will not be available for any subsequent payments to the noteholders or the note
insurer.
TRUST CERTIFICATES
The trust will also issue a trust certificate or residual interest which
represents the ownership interest in the mortgage loans and is subordinate in
priority of payment to the notes. MLN Depository Corp., a Delaware corporation
and a wholly-owned subsidiary of the seller, will hold the trust certificate.
The trust certificate is not offered by this prospectus supplement and the
accompanying prospectus.
CREDIT ENHANCEMENT
Credit enhancement reduces the harm caused to noteholders by shortfalls in
collections received and losses incurred on the mortgage loans. The credit
enhancement available to the noteholders will consist of the insurance policy
issued by Financial Security Assurance Inc., the note insurer, and the
overcollateralization provisions of the trust.
Insurance Policy
Financial Security Assurance Inc. will issue its financial guaranty insurance
policy to the indenture trustee for the benefit of the noteholders. The effect
of the insurance policy is to guaranty the timely payment of interest on, and
the ultimate payment of the principal amount of, the notes. If the note insurer
were unable to pay under the financial guaranty insurance policy, the notes
could be subject to losses.
We refer you to "The Note Insurance" in this prospectus supplement for
additional information.
Overcollateralization
The cash flow provisions of the trust may result in a limited acceleration of
the notes relative to the amortization of the mortgage loans. This acceleration
feature creates overcollateralization which equals the excess of the total
principal balance of the trust's assets over the total principal balance of the
notes. The purpose of overcollateralization is to ensure that there are excess
funds available to pay interest and principal on the notes so that the
noteholders will have some protection against payment shortfalls and so that the
note balances will be reduced to zero no later than the date the notes are
scheduled to mature.
As of the closing date, the level of overcollateralization will be zero; on each
payment date, the indenture trustee will apply excess cash to pay down the note
balance until the required level of overcollateralization is reached.
The required level of overcollateralization may increase or decrease over time.
Any increase may result in an accelerated amortization of the notes until the
required level is reached. Any decrease will result in slower amortization of
the notes until the required level is reached.
MORTGAGE LOAN POOL
Statistical Information
The statistical information on the mortgage loans presented in this prospectus
supplement is based on the pool of mortgage loans as of November 1, 1999.
S-7
Mortgage Loan Data
As of November 1, 1999, there were 2,224 mortgage loans secured by mortgages on
residential properties, exclusively, and having the following characteristics:
Number of Mortgage
Loans........................ 2,224
Principal Balance:
Aggregate Principal Balance.. $144,953,790
Average Principal Balance.... $ 65,177
Range of Principal Balances.. $9,600 to $275,902
Remaining Term to Maturity:
Weighted Average Remaining 251 months
Term to Maturity............
Range of Remaining Term to 56 to 360 months
Maturity....................
Original Combined
Loan-to-Value Ratio:
Weighted Average Combined 77.60%
Loan-to-Value Ratio.........
Range of Combined 12.67% to 100.00%
Loan-to-Value Ratios........
Interest Rate (per annum):
Weighted Average Interest 10.82%
Rate........................
Range of Interest Rates...... 7.45% to 15.75%
Percentage of Fixed Rate 93.54%
Loans.......................
Percentage of Adjustable 6.46%
Rate Loans..................
Percentage of Balloon 45.10%
Mortgage Loans..............
OPTIONAL REDEMPTION
The majority holders of the trust certificate and the servicer have the option
to redeem the notes, in full but not in part, on or after any payment date on
which the aggregate principal balance of the mortgage loans has declined to less
than 10% of the aggregate principal balance of the mortgage loans as of November
1, 1999.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Cadwalader, Wickersham & Taft, the notes will be characterized
as debt for federal income tax purposes and the trust will not be characterized
as an association (or a publicly traded partnership) taxable as a corporation or
as a taxable mortgage pool. The issuer and the depositor agree and each
noteholder, by the acceptance of a note, will agree to treat the notes as
indebtedness for federal income tax purposes.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations" herein, the
notes may be acquired and held by employee benefit plans and other retirement
plans and arrangements subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, or Section 4975 of the Internal Revenue
Code of 1986, as amended.
LEGAL INVESTMENT CONSIDERATIONS
The notes will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended.
Rating of the Notes
Before the trust can issue the notes, the notes must receive a rating of "AAA"
from Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and a
rating of "Aaa" from Moody's Investors Service, Inc. in order to be issued.
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. A security rating does not address the frequency of principal
prepayments or the corresponding effect on yield to investors.
S-8
Risk Factors
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the notes.
You should also carefully consider the information set forth under "Risk
Factors" in the prospectus. Any statistical information presented below is
based upon the characteristics of the mortgage loans as of November 1, 1999.
Risks of the Mortgage Loans
As a Result of the Underwriting Standards, the Mortgage Loans are Likely to
Experience Higher Rates of Delinquency, Foreclosure and Bankruptcy than those
Underwritten in a More Traditional Manner. The mortgage loans have been
originated using underwriting standards that are significantly less stringent
than the underwriting standards applied by other mortgage loan purchase programs
such as those run by Fannie Mae or by Freddie Mac. For example, the mortgage
loans may have been made to mortgagors having imperfect credit histories,
ranging from minor delinquencies to bankruptcies, or mortgagors with higher
ratios of monthly mortgage payments to income or higher ratios of total monthly
credit payments to income. As a result of the underwriting standards, the
mortgage loans are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Delinquent Mortgage Loans May Result in Higher Losses. Approximately 1.04%
of the mortgage loans by principal balance as of October 29, 1999 were more than
30 days, but less than 60 days, past due. In addition, because approximately
24.66% of the mortgage loans by principal balance as of November 1, 1999 have a
first scheduled monthly payment due date occurring after November 1, 1999, it is
not possible for such mortgage loans to have had a scheduled monthly payment
past due as of November 1, 1999. Substantially all of the Mortgage Loans were
originated or acquired within the last three months and are not very seasoned.
Accordingly, there can be no assurance as to the likelihood of default by the
mortgagors or as to the likelihood of delinquency. The Mortgage Loans with
higher loan-to-value ratios or combined loan-to-value ratios may also present a
greater risk of loss. Approximately 24.64% of the mortgage loans by principal
balance as of November 1, 1999, have combined loan-to-value ratios at
origination in excess of 80%. Approximately 91.10% of the mortgage loans by
principal balance as of November 1, 1999 will not be insured by a primary
mortgage insurance policy.
No assurance can be given that the values of the mortgaged properties will
not decline from those on the dates the related mortgage loans were originated
and any such decline could render the information set forth herein with respect
to the combined loan-to-value ratios of such mortgage loans an unreliable
measure of security for the related debt. If the residential real estate market
should experience an overall decline in property values such that the
outstanding principal balances of the mortgage loans become equal to or greater
than the values of such mortgaged properties, the actual rate of delinquencies,
foreclosures and losses on the related mortgage loans could be higher than those
now generally experienced in the mortgage lending industry. Even assuming that
the mortgaged properties provide adequate security for the mortgage loans,
substantial delays could be encountered in connection with the foreclosure and
liquidation of defaulted mortgage loans and corresponding delays in the receipt
of related proceeds by noteholders could occur. In the event that any mortgaged
properties fail to provide adequate security for the related mortgage loans, any
resulting losses will be covered by funds made available through operation of
the overcollateralization feature described herein, or, if necessary, by amounts
paid under the insurance policy to the extent of interest due to the noteholders
on the related payment date and the amount of any overcollateralization deficit
with respect to such payment date.
Nature of Collateral May Lead to Delays or Shortfalls in Distributions to
Noteholders. Because the mortgage loans are secured in certain cases by second
liens that are subordinate to the rights of the mortgagee or beneficiary under
the related first mortgage or deed of trust, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such a second mortgage loan only to the extent that the
claims of such senior mortgagee or beneficiary have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may
not foreclose on the property securing a second mortgage unless it forecloses
subject to the senior mortgage, in which case it must either pay the entire
amount due on the senior mortgage to the senior mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgage in the event the mortgagor is in default thereunder. In servicing
second mortgages
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in its portfolio, it is generally the servicer's practice to satisfy the senior
mortgage at or prior to the foreclosure sale. The issuer will have no source of
funds to satisfy the senior mortgage or make payments due to the senior
mortgagee.
Even assuming that a mortgaged property provides adequate security for the
related mortgage loan, substantial delays could be encountered in connection
with the liquidation of a mortgage loan that is delinquent, and resulting
shortfalls in distributions to noteholders could occur. Liquidation expenses
(such as legal fees, real estate taxes, and maintenance and preservation
expenses) will reduce the proceeds payable to noteholders and thereby reduce the
security for the mortgage loans. The combined loan-to-value ratio for the
mortgage loans ranged from 12.67% to 100.00% as of November 1, 1999, with a
weighted average of 77.60% (based on November 1, 1999 principal balances).
Approximately 2.97% of the mortgage loans by principal balance as of
November 1, 1999 are secured by second mortgages or deeds of trust. Mortgage
loans secured by second mortgages are entitled to proceeds that remain from the
sale of the related mortgaged property after any related senior mortgage loan
and prior statutory liens have been satisfied. In the event that such proceeds
are insufficient to satisfy such loans and prior liens in the aggregate, the
issuer and, accordingly, the noteholders, will bear (i) the risk of delay in
distributions while a deficiency judgment against the borrower is sought and
(ii) the risk of loss if the deficiency judgment cannot be obtained or is not
realized upon.
Higher Default Rates May Occur for Mortgage Loans with Balloon Payments.
Approximately 45.10% of the mortgage loans by principal balance as of November
1, 1999 are "balloon" loans that provide for the payment of the outstanding
principal balance of such mortgage loan in a single payment at maturity. Such
balloon loans provide for equal monthly payments, consisting of principal and
interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the balloon loan 15 years after origination.
Amortization of a balloon loan based on a scheduled period that is longer than
the term of the loan results in a remaining principal balance at maturity that
is substantially larger than the regular scheduled payments. Mortgage Lenders
Network USA, Inc. does not have any information regarding the default history or
prepayment history of payments on balloon loans. Because borrowers of balloon
loans are required to make substantial single payments upon maturity, it is
possible that the default risk associated with the balloon loans is greater than
that associated with fully-amortizing mortgage loans. In addition, the ability
of a borrower to repay a balloon loan at maturity frequently will depend on such
borrower's ability to refinance the related mortgage loan. The ability of a
borrower to refinance such a mortgage loan will be affected by a variety of
factors, including the level of available mortgage rates at the time, the value
of the related mortgaged property, the borrower's equity in the related
mortgaged property, the financial condition of the borrower and general economic
conditions at the time. The inability of a borrower to refinance a balloon loan
may result in delinquencies or defaults.
Geographic Concentration of Mortgaged Properties May Result in Higher
Losses of Particular Regions Experiencing Downturns. Approximately 8.64%, and
8.39% of the mortgage loans by principal balance as of November 1, 1999 are
secured by Mortgaged Properties located in Ohio and South Carolina,
respectively. In general, declines in the residential real estate markets in
such states may adversely affect the values of the mortgaged properties securing
such mortgage loans such that the aggregate principal balance of such mortgage
loans will equal or exceed the value of such mortgaged properties. In addition,
adverse economic conditions in such states (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on such mortgage loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on such mortgage loans
could be higher than those currently experienced in the mortgage lending
industry in general.
Origination Risks; Seller's Reliance on Brokers and Correspondents
Mortgage Lenders Network USA, Inc. depends largely on independent mortgage
brokers and, to a lesser extent, on correspondent lenders, for its originations
and purchases of mortgage loans, including the mortgage loans. All brokers and
correspondents in the Seller's network must undergo an approval process and
enter into an agreement with Mortgage Lenders Network USA, Inc. pursuant to
which the broker or correspondent agrees to comply with Mortgage Lenders Network
USA, Inc.'s eligibility and origination requirements. Mortgage Lenders Network
USA, Inc. underwrites all loans it funds through brokers and re-underwrites all
loans it purchases through
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correspondents, and regularly reviews the performance of loans originated or
purchased through its brokers and correspondents. Mortgage Lenders Network USA,
Inc. undertakes pre-closing and post-closing quality control procedures
involving random samples of loans to confirm that the loans are being originated
and underwritten in accordance with Mortgage Lenders Network USA, Inc.'s
guidelines (subject to exceptions approved by Mortgage Lenders Network USA, Inc.
prior to loan funding).
Mortgage Lenders Network USA, Inc. has no reason to believe that any of the
files for the mortgage loans included in the trust include defective appraisals
or falsified credit documents although no assurance can be given that a
mortgagor, broker, correspondent or appraiser has not submitted defective or
falsified documents.
Given its Limited Operating History for the Type of Mortgage Loans in the Trust,
Mortgage Lenders Network USA, Inc. Does Not Have Any Significant Historical Loss
and Delinquency Data
The servicer, Mortgage Lenders Network USA, Inc., commenced its servicing
activities for mortgage loans in April 1997. As a result, Mortgage Lenders
Network USA, Inc. has limited historical data available regarding loan
performance. Consequently, the servicer has been unable to develop meaningful
statistics relating to the historical performance of the mortgage loans in its
servicing portfolio. As a result, it is unknown how Mortgage Lenders Network
USA, Inc.'s mortgage loan portfolio will perform relative to the portfolios of
other mortgage lenders and servicers. Therefore, no assurance can be given as
to the level of losses and delinquencies that the mortgage loans will experience
Prepayment of the Mortgage Loans May Adversely Affect the Yield to Maturity of
the Notes
The mortgage loans may be prepaid by the related mortgagors in whole or in
part, at any time. However, approximately 63.42% of the mortgage loans by
principal balance as of November 1, 1999 require the payment of a fee in
connection with certain prepayments, which may discourage prepayments. The rate
of prepayments of the mortgage loans cannot be predicted and may be affected by
a wide variety of general economic, social, competitive and other factors,
including state and federal income tax policies, interest rates, the
availability of alternative financing and homeowner mobility. Therefore, no
assurance can be given as to the level of prepayments that the mortgage loans
will experience.
The average life of the notes, and, if purchased at other than par, the
yields realized by noteholders will be sensitive to levels of payment, including
prepayments, on the mortgage loans. In general, the yield on notes purchased at
a premium from the outstanding principal amount thereof will be adversely
affected by a higher than anticipated level of prepayments and enhanced by a
lower than anticipated level. Conversely, the yield on notes purchased at a
discount from the outstanding principal amount thereof will be enhanced by a
higher than anticipated level of prepayments and adversely affected by a lower
than anticipated level.
Assignment of Mortgages Will Only Be Recorded under Limited Circumstances.
Under the terms of the mortgage loan sale agreement between Mortgage
Lenders Network USA, Inc. and the depositor, during the period that the notes
are outstanding, assignments of the mortgages in favor of the Indenture Trustee
will be delivered in recordable form but will not be recorded, except in certain
limited instances. The failure to record assignments of the mortgages in favor
of the Indenture Trustee in many states in which the mortgaged properties are
located will have the result of making the sale of the mortgage loans
potentially ineffective against:
. any creditors of Mortgage Lenders Network USA, Inc. who may have been
fraudulently or inadvertently induced to rely on the mortgage loans as assets
of Mortgage Lenders Network USA, Inc., or
. any purchaser (in the event Mortgage Lenders Network USA, Inc. fraudulently
or inadvertently sells a mortgage loan to a purchaser) who had no notice of
the prior sale to the depositor and such purchaser takes possession of the
mortgage.
S-11
Insurance Policy Does Not Cover Certain Risks
In general, the protection afforded by the insurance policy is protection
for credit risk and not for prepayment risk. A claim cannot be made under the
insurance policy in an attempt to guarantee or insure that any particular rate
of prepayment is experienced by the assets in the trust. In addition, the
insurance policy does not cover any shortfall in interest due to the timing of
receipt of principal prepayments or the application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"). See "Certain
Legal Aspects of Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of
1940" in the accompanying prospectus.
Credit Enhancement May Be Inadequate for the Notes
The credit enhancement features are intended to enhance the likelihood that
holders of the Notes will receive regular payments of interest and principal.
However, we cannot assure you that the applicable credit enhancement will
adequately cover any shortfalls in cash available to pay your certificates as a
result of delinquencies or defaults on the mortgage loans. If substantial
losses were to occur as a result of defaults and delinquent payments on the
mortgage loans, and the Note Insurer is unable to pay under the financial
guaranty insurance policy, you may suffer losses.
Payments of Excess Cash May Affect the Yield to Maturity on the Notes
Excess cash will be paid to reduce the outstanding principal balance of the
notes on any payment date if the level of overcollateralization required at the
time in question exceeds the actual level of overcollateralization on such
payment date. The rate at which excess cash is paid to noteholders will affect
the yield to maturity on a note, if purchased at a premium or a discount. If
the actual rate of such excess cash payments is slower than the rate anticipated
by an investor who purchases a note at a discount, the actual yield to such
investor will be lower than the investor's anticipated yield. If the actual
rate of excess cash payments is faster than the rate anticipated by an investor
who purchases a note at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield.
The amount of excess cash on any payment date depends on the actual amount
of interest collected on the mortgage loans during the related collection
period. Collections of interest on the mortgage loans will be influenced by
changes in the weighted average of the interest rates on the mortgage loans
resulting from prepayments and liquidations of such mortgage loans as well as
from adjustments of interest rates on the adjustable rate loans included in the
trust. The amount of excess cash payments paid to reduce the note balance on
each payment date will be based on the level of overcollateralization required
at the time in question. The required level of overcollateralization may
increase or decrease over time. Any increase may result in an accelerated
amortization of the notes until the required level is reached. Any decrease
will result in slower amortization of the notes until the required level is
reached.
Notes are Non-Recourse Obligations
The notes will be non-recourse obligations solely of the issuer and will
not represent an obligation of or interest in Financial Security Assurance Inc.,
Mortgage Lenders Network USA, Inc., Norwest Bank Minnesota, National
Association, Wilmington Trust Company, ACE Securities Corp., MLN Depository
Corp. or any of their respective affiliates, except as described herein. The
assets included in the trust and payments under the insurance policy will be the
sole source of payments on the notes, and there will be no recourse to Financial
Security Assurance Inc., Mortgage Lenders Network USA, Inc., Norwest Bank
Minnesota, National Association, Wilmington Trust Company, ACE Securities Corp.,
MLN Depository Corp. or any of their respective affiliates, or any other entity,
in the event that such assets or payments are insufficient or otherwise
unavailable to make all payments provided for under the notes.
Book-Entry Registration
Issuance of the notes in book-entry form may reduce the liquidity of the
notes in the secondary trading market because investors may be unwilling to
purchase notes for which they cannot obtain physical certificates.
S-12
Because transactions in the Notes can be effected only through the
Depository Trust Company ("DTC" ), Cedelbank, the Euroclear system,
participating organizations, indirect participants and certain banks, the
ability of a beneficial owner to pledge a note to persons or entities that do
not participate in the DTC, Cedelbank or Euroclear system, or otherwise to take
actions in respect of such note, may be limited due to lack of a physical
certificate representing such note.
Beneficial owners may experience some delay in their receipt of payments of
interest of and principal on the notes because such payments will be forwarded
by the indenture trustee to DTC and DTC will credit such payments to the
accounts of its participants, which will thereafter credit them to the accounts
of beneficial owners either directly or indirectly through indirect
participants.
Year 2000 Readiness Disclosure
General. The servicer, the indenture trustee and the note insurer, like
all financial institutions, are faced with the challenge of correctly stating
and processing data containing dates from the year 2000 and beyond, i.e.,
becoming year 2000-ready. Computers programmed with a two-digit field for
identifying the year interpret "99" and "1999", but may interpret "00" as "1900"
rather than "2000." If not remedied, this problem could create system errors
and failures resulting in the disruption of normal business operations.
Servicer. Mortgage Lenders Network USA, Inc. has advised the depositor
that it believes that its material computer systems are year 2000 compliant and
that it has been advised by its material suppliers and vendors that each has
become or taken meaningful steps to become year 2000 compliant.
Indenture Trustee. In order to assure that its information systems are
able to properly process data on and after December 31, 1999, Norwest Bank
Minnesota, National Association has been conducting a detailed inventory and
assessment of all of its computer hardware and software systems and imbedded
chip technology ("Information Systems") and of its business and operations that
could be adversely affected by its failure to be so compliant on a timely basis.
In that regard, Norwest Bank Minnesota, National Association has implemented a
project plan to make its Information Systems year 2000 compliant. Norwest Bank
Minnesota, National Association has also undertaken to determine whether its
material suppliers, vendors, and customers have taken meaningful steps to become
year 2000 compliant on a timely basis, and has developed a feasible contingency
plan to ensure the uninterrupted and unimpaired operation of its business in the
event of the failure of the systems of such third parties or of its own
Information Systems.
The Depository Trust Company. With respect to year 2000 issues, DTC has
informed members of the financial community that it has developed and is
implementing a program so that its systems, as the same relate to the timely
payment of distributions (including principal and interest payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately on and after January 1, 2000. This program
includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, its participating
organizations (through which certificateholders will hold their offered
certificates), as well as the computer systems of third party service providers.
DTC has informed the financial community that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to:
(i) impress upon them the importance of such services being year 2000 compliant
and (ii) determine the extent of their efforts for year 2000 remediation (and,
as appropriate, testing) of their services. In addition, DTC has stated that it
is in the process of developing such contingency plans as it deems appropriate.
If problems associated with the year 2000 issue were to occur with respect
to DTC and the services described above, distributions to certificateholders
could be delayed or otherwise adversely affected.
Risks. If the servicer, the indenture trustee, the note insurer or DTC is
unable to complete its year 2000 compliance by January 1, 2000, any resulting
disruptions in the collection and distribution of receipts on the mortgage loans
or amounts under the financial guaranty insurance policy could negatively affect
the Notes.
S-13
Year 2000 Legislation May Affect Timely Exercise of Remedies
In July 1999, Congress approved, and the President signed into law,
legislation that limits legal liability for losses due to year 2000 computer-
related errors. This legislation, among other things, protects borrowers from
foreclosure if their residential mortgage loans become delinquent because an
actual year 2000 failure results in the inability to accurately or timely
process their mortgage payments.
This legislation is not intended to extinguish or otherwise affect a
borrower's payment obligations but instead delays the enforcement of obligations
on an otherwise defaulted mortgage loan. Borrowers seeking foreclosure
protection under this legislation must provide timely written notice and
documentation to the service of the failure of the mortgage payments to be
accurately or timely applied. Absent an extension from the servicer, borrowers
will then have four weeks to make up late payments on their loans. This
legislation does not apply to mortgage loans for which a default occurs before
December 15, 1999, or for which an imminent default is foreseeable before that
date. Moreover, this legislation does not protect borrowers who deliver notice
of a year 2000 failure after March 15, 2000. Mortgage loans that remain in
default after the applicable grace period will be subject to foreclosure or
other enforcement.
This legislation could delay the servicer's ability to foreclose on some
mortgage loans during the first quarter of the year 2000. These delays could
consequently affect the timing of distributions on the Notes.
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DESCRIPTION OF THE NOTES
Mortgage Lenders Network Home Equity Loan Trust 1999-2 (the "Trust" or the
"Issuer") will be formed pursuant to a deposit trust agreement, dated as of
November 1, 1999 (the "Trust Agreement"), among ACE Securities Corp. (the
"Depositor"), Wilmington Trust Company (the "Owner Trustee"), Norwest Bank
Minnesota, National Association, as trust paying agent, and Mortgage Lenders
Network USA, Inc., as servicer (in its capacity as servicer, the "Servicer" and
otherwise, the "Seller"). The Issuer will issue its Asset-Backed Notes, Series
1999-2 (the "Notes") pursuant to an indenture, dated as of November 1, 1999 (the
"Indenture"), between the Issuer and Norwest Bank Minnesota, National
Association, as the indenture trustee (the "Indenture Trustee"). The summaries
of certain provisions of the Indenture set forth below and under the caption
"Description of the Agreements - Material Terms of the Indenture" in the
Prospectus, while complete in material respects, do not purport to be
exhaustive. For more details regarding the terms of the Indenture, prospective
investors in the Notes are advised to review the Indenture, a copy of which the
Seller will provide (without exhibits) without charge upon written request
addressed to the Seller at Middlesex Corporate Center, 11th Floor, 213 Court
Street, Middletown, Connecticut 06457.
General
The Notes will be secured by the Trust Fund (as defined below) created by
the Indenture. The Notes represent non-recourse obligations of the Issuer, and
proceeds of the assets in the Trust Fund and payments under the financial
guaranty insurance policy (the "Insurance Policy") issued by Financial Security
Assurance Inc. (the "Note Insurer"), if any, will be the only sources of
payments on the Notes. The Notes will not represent an interest in or
obligation of ACE Securities Corp., Mortgage Lenders Network USA, Inc., MLN
Depository Corp. ("MLN Depository"), the Indenture Trustee, the Owner Trustee,
the Depositor, the Underwriters (as defined herein), the Note Insurer, any of
their respective affiliates or any other entity, and will not represent an
interest in or recourse obligation of the Issuer.
The assets of the trust (the "Trust Fund") will consist of (i) a pool (the
"Mortgage Pool") of primarily fixed rate and adjustable rate mortgage loans (the
"Mortgage Loans") secured by first and second lien mortgages or deeds of trust,
on the related mortgaged properties ("Mortgaged Properties"), and including the
related promissory notes (the "Mortgage Notes"); (ii) all payments in respect of
principal and interest on the Mortgage Loans, including prepayment premiums
(other than any principal or interest payments due thereon on or prior to
November 1, 1999 (the "Cut-off Date"); (iii) security interests in the Mortgaged
Properties; (iv) the Issuer's rights under the Sale Agreement (as defined below)
and the servicing agreement among the Issuer, the Servicer and the Indenture
Trustee (the "Servicing Agreement"); and (v) certain other property.
Payments on the Notes will be made on the 25th day of each month, or if
such day is not a business day, on the following business day (each, a "Payment
Date"), commencing December 27, 1999. All payments on the Notes will be made by
or on behalf of the Indenture Trustee to each holder of a Note (a "Noteholder" )
of record on the business day immediately preceding the related Payment Date
(or, with respect to Notes in definitive form, the last day of the month
immediately preceding the month in which such Payment Date occurs) (the "Record
Date"). Payments on Notes issued in book-entry form will be made by or on
behalf of the Indenture Trustee to DTC. Payments on notes issued in definitive
form ("Definitive Notes") generally will be made either (i) by check mailed to
the address of each Noteholder as it appears in the register maintained by the
Indenture Trustee or (ii) by wire transfer of immediately available funds to the
account of a Noteholder, if such Noteholder (a) is the registered holder of
Definitive Notes having an initial principal amount of at least $1,000,000 and
(b) has provided the Indenture Trustee with wiring instructions in writing five
days prior to the related Record Date or has provided the Indenture Trustee with
such instructions for any previous Payment Date. A fee may be charged by the
Indenture Trustee to a Noteholder of Definitive Notes for any payment made by
wire transfer. Notwithstanding the above, the final payment in redemption of
any Definitive Note will be made only upon presentation and surrender of such
Definitive Note at the office or agency designated by the Indenture Trustee for
that purpose.
The Notes will be issued in denominations of not less than $1,000 principal
amount and multiples of $1,000 in excess thereof, with the exception of one Note
which may be issued in a lesser amount.
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The Trust will also issue a trust certificate (the "Residual Interest")
which represents the ownership interest in the Mortgage Loans and is subordinate
in priority of payment to the Notes. MLN Depository, a Delaware corporation and
a wholly-owned subsidiary of the Seller will hold the trust certificate.
Book-Entry Registration and Definitive Notes
The Notes initially will be book-entry notes (the "Book-Entry Notes").
Beneficial Owners will hold the Notes through DTC, in the United States, or
Cedelbank, S.A. ("Cedel") or the Euroclear System ("Euroclear") in Europe, if
they are participants of such systems, or indirectly through organizations that
are participants in such systems. The Book-Entry Notes initially will be
registered in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear
will hold omnibus positions on behalf of Cedel Participants and Euroclear
Participants, respectively, 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. ("Citibank") will act as
depositary for Cedel, and Morgan Guaranty Trust Company of New York ("Morgan")
will act as depositary for Euroclear (Citibank and Morgan, in such capacities,
individually the "Relevant Depositary" and collectively, the "European
Depositaries"). Except as described below, no person acquiring a Book-Entry
Note will be entitled to receive a Definitive Note. Unless and until Definitive
Notes are issued, it is anticipated that the only "Noteholder" will be Cede &
Co., as nominee of DTC or Citibank or Morgan, as nominees of Cedel and
Euroclear, respectively. Persons acquiring a beneficial ownership interest in a
Note (each, a "Beneficial Owner") will not be Noteholders as that term is used
in the Indenture. Beneficial Owners are permitted to exercise their rights only
indirectly through DTC and its Participants (including Cedel and Euroclear).
The beneficial ownership of a Book-Entry Note will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Note will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a Participant and on the records of Cedel
or Euroclear, as appropriate).
Beneficial Owners will receive all payments of principal of, and interest
on, the Notes from the Indenture Trustee through DTC and its Participants
(including Cedel and Euroclear). While the Notes 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 Notes and is required to receive and transmit payments of
principal of, and interest on, the Notes. Participants and indirect
participants with whom Beneficial Owners have accounts with respect to Book-
Entry Notes are similarly required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess certificates, the Rules
provide a mechanism by which Beneficial Owners will receive payments and will be
able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Beneficial Owners who are not Participants may transfer ownership of Notes only
through Participants and indirect participants by instructing such Participants
and indirect participants to transfer Notes, by book-entry transfer, through DTC
for the account of the purchasers of the Notes, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Notes 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 Beneficial 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
Participants 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 or Euroclear Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedel or
S-16
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Notes, see "Material Federal Income Tax Considerations--Taxation of Certain
Foreign Investors" in the Prospectus and in "ANNEX A: Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" hereto.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by the Relevant 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.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants ("Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each Participant in the Book-Entry
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States Dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depositary, 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 through Euroclear in any of 32 currencies,
including United States Dollars. Euroclear provides various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that 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
(the "Federal Reserve Board") and the New York State Banking Department, as well
as the Belgian Banking Commission.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution 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.
Payments on the Book-Entry Notes will be made on each Payment Date by the
Indenture Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable Participants in accordance with
DTC's normal procedures. Each Participant will be responsible for disbursing
such payments to the Beneficial Owners that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Beneficial Owners that it represents.
Under a book-entry format, Beneficial Owners may experience some delay in
their receipt of payments because such payments will be forwarded by the
Indenture Trustee to Cede & Co. Payments with respect to Notes 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 payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Material Federal Income Tax Considerations--Taxation
of Certain Foreign Investors" in the Prospectus and in "ANNEX A: Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" hereto. Because DTC has indicated that
it will act only on behalf of Financial Intermediaries, the ability of
Beneficial Owners to pledge Book-Entry Notes to persons or entities that do not
participate in the depository system or otherwise take actions in respect of
such Book-Entry Notes may be limited due to the lack of physical certificates
representing such Book-Entry Notes. In addition, issuance of the Book-Entry
Notes in book-entry form may reduce the liquidity of the Notes in the secondary
market because certain potential investors may be unwilling to purchase Notes
for which they cannot obtain physical certificates.
The monthly and annual statements with respect to the Mortgage Loans and
the Notes as described under "--Reports to Noteholders" herein will be provided
by the Indenture Trustee to Cede & Co., as nominee of DTC and a Noteholder, and
may be made available by such entity to Beneficial Owners upon request, in
accordance with the Rules, and to the Financial Intermediaries to whose DTC
accounts the related Book-Entry Notes are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by a Noteholder
under the Indenture only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Notes are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Notes. Cedel or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Noteholder
under the Indenture 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 Notes that conflict with actions taken with respect to other
Notes.
Definitive Notes will be issued in registered form to Beneficial Owners, or
their nominees, rather than to DTC, only if (i) DTC or the Issuer advises the
Indenture Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as nominee and depositary with respect to the
Notes and the Issuer or the Indenture Trustee is unable to locate a qualified
successor, (ii) the Issuer, at its option, advises the Indenture Trustee that it
elects to terminate the book-entry system through DTC, or (iii) after a Note
Event of Default under the Indenture, the Beneficial Owners representing not
less than 51% of the Note Balance of the Book-Entry Notes advise the Indenture
Trustee and DTC that the book-entry system is no longer in the best interests of
such Beneficial Owners. Upon issuance of Definitive Notes to Beneficial Owners,
the Notes will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Indenture Trustee with
respect to transfers, notices and payments. See "Description of the Securities-
- -Book Entry Registration and Definitive Securities" in the Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to use its best
efforts to notify all Beneficial Owners of the occurrence of such event and the
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availability through DTC of Definitive Notes. Upon surrender by DTC of the
global certificates representing the Book-Entry Notes and instructions for re-
registration, the Indenture Trustee will issue Definitive Notes and thereafter
the Indenture Trustee will recognize the holders of such Definitive Notes as
Noteholders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfer of Notes 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.
Assignment of Mortgage Loans
The Mortgage Loans were originated by the Seller or acquired by the Seller,
through its network of brokers and correspondents and retail origination
offices. On or prior to the date the Notes are issued, the Seller will convey
each Mortgage Loan to the Depositor pursuant to a mortgage loan sale agreement
between the Seller and the Depositor (the "Sale Agreement") and the Depositor in
turn will convey each such Mortgage Loan to the Issuer.
At the time of issuance of the Notes, the Issuer will pledge all of its
right, title and interest in and to the Mortgage Loans, including all principal
and interest due on each such Mortgage Loan after the Cut-off Date, without
recourse, to the Indenture Trustee pursuant to the Indenture as collateral for
the Notes; provided, however, that the Seller will reserve and retain all its
right, title and interest in and to principal and interest due on such Mortgage
Loan on or prior to the Cut-off Date (whether or not received on or prior to
such Cut-off Date), and to prepayments received on or prior to the Cut-off Date.
The Indenture Trustee, concurrently with such assignment, will authenticate and
deliver the Notes at the direction of the Issuer in exchange for, among other
things, the Mortgage Loans.
The Indenture will require the Issuer to deliver the Mortgage Loans to the
Indenture Trustee or to a permitted custodian designated by the Indenture
Trustee, the related Mortgage Notes endorsed without recourse to the Indenture
Trustee, the related mortgages or deeds of trust with evidence of recording
thereon, the title policies with respect to the related Mortgaged Properties,
all intervening mortgage assignments, if applicable, and certain other documents
relating to the Mortgage Loans (the "Mortgage Files"). The Seller will be
required to cause to be prepared and, upon the occurrence of certain events,
recorded, at the expense of the Seller and within the time period specified in
the Indenture (or, if original recording information is unavailable, within such
later period as is permitted by the Indenture), assignments of the mortgages
from the Seller to the Indenture Trustee.
The Indenture Trustee or a custodian on behalf of the Indenture Trustee
will review the Mortgage Files delivered to it and if any document required to
be included in any Mortgage File is found to be missing or to be defective in
any material respect and such defect is not cured within 60 days following
notification thereof to the Servicer, the Issuer, the Depositor, the Note
Insurer and the Seller by the Indenture Trustee, the Indenture Trustee will
require either that the related Mortgage Loan be removed from the Mortgage Pool
or that a Mortgage Loan conforming to the requirements of the Indenture (a
"Qualified Replacement Mortgage") be substituted for the related Mortgage Loan
in the manner described below.
In connection with the transfer of the Mortgage Loans to the Depositor, the
Seller will make certain representations and warranties as to the accuracy in
all material respects of the information set forth on a schedule identifying and
describing each Mortgage Loan. In addition, the Seller will make certain other
representations and warranties regarding the Mortgage Loans, including, for
instance, that each Mortgage Loan, at its origination, complied in all material
respects with applicable state and federal laws, that each first mortgage is a
valid first priority lien and that each second mortgage is a valid lien, that,
as of the Cut-off Date, no Mortgage Loan will be more than two payments past
due, that each Mortgaged Property consists of a one- to four-family residential
property, mixed-use property or unit in a condominium or planned unit
development, that the Seller had good title to each Mortgage Loan prior to such
transfer and that the originator was authorized to originate each Mortgage Loan.
The rights of the Depositor to enforce remedies for breaches of such
representations and warranties in the Sale Agreement against the Seller will be
assigned to the Indenture Trustee pursuant to the Indenture.
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured within the
period specified above and materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interest of the
Indenture Trustee, the Noteholders or
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the Note Insurer therein or (2) a breach of any representation or warranty made
by the Seller relating to such Mortgage Loan occurs and such breach materially
and adversely affects the value of any such Mortgage Loan or materially and
adversely affects the interests of the Indenture Trustee, the Noteholders or the
Note Insurer therein, the Indenture Trustee will enforce the remedies for such
defects or breaches against the Seller by requiring the Seller to remove the
related Mortgage Loan (any such Mortgage Loan, a "Defective Mortgage Loan") from
the Trust Fund by remitting to the Indenture Trustee an amount equal to the
Principal Balance (as defined herein) of such Defective Mortgage Loan together
with interest accruing at the Mortgage Rate (net, if the Seller is then the
Servicer, of the applicable Servicing Fee Rate) on such Defective Mortgage Loan
from the date interest was last paid by the related mortgagor to the end of the
Collection Period immediately preceding the related Deposit Date, less any
payments received during the related Collection Period in respect of such
Defective Mortgage Loan plus any unreimbursed Monthly Advances in respect of
principal and Servicing Advances (the "Release Price"). The Seller will also
have the option, but not the obligation, to substitute for such Defective
Mortgage Loan a Qualified Replacement Mortgage. Upon delivery of a Qualified
Replacement Mortgage and deposit of certain amounts in the Note Account as set
forth in the Indenture, or deposit of the Release Price in the Note Account (as
hereinafter defined) and receipt by the Indenture Trustee and the Note Insurer
of written notification of any such substitution or removal, as the case may be,
the Indenture Trustee shall execute and deliver an instrument of transfer or
assignment necessary to vest legal and beneficial ownership of such Defective
Mortgage Loan (including any property acquired in respect thereof or proceeds of
any insurance policy with respect thereto) to the Seller and release such
Defective Mortgage Loan from the Trust Fund.
The "Collection Period" with respect to a Payment Date will be the period
beginning on the first day of the calendar month immediately preceding the month
in which such Payment Date occurs (or, in the case of the first Payment Date,
the period beginning on the Cut-Off Date) and ending on the last day of such
calendar month. The "Deposit Date" will be the 18th day of the month, or if
such day is not a business day, the next succeeding business day). The "Due
Period" with respect to any Payment Date will be the period commencing on the
second day of the calendar month immediately preceding the calendar month in
which such Payment Date occurs (or, with respect to the first Payment Date,
commencing on the day following the Cut-off Date for each Mortgage Loan) and
ending on the first day of the calendar month in which such Payment Date occurs.
The obligation of the Seller to cure, remove or substitute any Mortgage
Loan as described above will constitute the sole remedy available to
Noteholders, the Depositor, the Issuer, the Note Insurer (with certain
exceptions) or the Indenture Trustee for a Defective Mortgage Loan.
Payments on the Notes
Payments on the Notes will be made by the Indenture Trustee (in such
capacity, the "Paying Agent") on each Payment Date, commencing with the Payment
Date in December 1999, to Noteholders as of the Record Date in an amount equal
to the product of such Noteholders' Percentage Interest and the amount paid in
respect of the Notes. Payments on the Notes will be made solely from Available
Funds. The "Percentage Interest" represented by any Note will be equal to the
percentage obtained by dividing the aggregate principal balance of such Note by
the Note Balance.
On each Payment Date, the Paying Agent will be required to pay the
following amounts with respect to the Notes, in the following order of priority,
out of Available Funds:
first, to the PMI Insurer, the amount owing to the PMI Insurer for the
premium payable in respect of the PMI Mortgage Loans;
second, to the Note Insurer, the amount owing to the Note Insurer for
the premium payable in respect of the Notes;
third, to the Noteholders, the Note Interest with respect to such
Payment Date;
fourth, to the Noteholders, the amount of Monthly Principal for the
Notes with respect to such Payment Date, in reduction of the Note Balance
until the Note Balance is reduced to zero;
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fifth, to the Note Insurer, the amount owing to the Note Insurer under
the Insurance Agreement for reimbursement for prior draws made on the
Insurance Policy in respect of the Notes and any other amounts owing to the
Note Insurer under the Insurance Agreement (including any unpaid premiums
in respect of the Notes);
sixth, to the Noteholders, the Overcollateralization Deficiency
Amount, if any, on such Payment Date (after giving effect to application of
Monthly Principal for such Payment Date), in reduction of the Note Balance
until the Note Balance is reduced to zero; and
seventh, to the Indenture Trustee, certain costs and expenses,
including costs and expenses incurred by the Indenture Trustee in
connection with the appointment of a successor servicer, to the extent such
costs and expenses have not previously been reimbursed.
Any Available Funds remaining after application in the manner specified
above will be released to the holder(s) of the Residual Interest on such Payment
Date, free from the lien of the Indenture, and such amounts will not be
available to make payments on the Notes or payments to the Note Insurer on any
subsequent Payment Date.
In the event that, with respect to a particular Payment Date, Available
Funds on such date are not sufficient to pay any portion of Note Interest for
the Notes, the Indenture Trustee will file a claim on the Insurance Policy in an
amount equal to such deficiency and apply the Insured Payment in respect of such
claim to the payment of the deficiency in Note Interest. In addition, the
Indenture Trustee will file a claim on the Insurance Policy in an amount equal
to any Overcollateralization Deficit on a Payment Date (after taking into
account payments in respect of Monthly Principal and Excess Cash on such Payment
Date) and apply the portion of the Insured Payment related to such
Overcollateralization Deficit to reduce the Note Balance on such Payment Date by
the amount of such Overcollateralization Deficit. Any Insured Payment paid to
make up any Overcollateralization Deficit will be paid to the Noteholders, in
reduction of the Note Balance, until the Note Balance is reduced to zero.
The Insurance Policy will not cover any interest shortfall resulting from
the timing of principal prepayments (a "Prepayment Interest Shortfall") or the
application of the Relief Act (a "Relief Act Shortfall").
In no event will the aggregate payments of principal to Noteholders exceed
$144,953,790 (the "Original Note Balance").
The Note Insurer will be entitled to receive a monthly premium (the "Note
Insurer Premium") on each Payment Date payable from Available Funds.
"Insurance Agreement" means the insurance agreement dated as of November 1,
1999 among the Note Insurer, the Seller, the Depositor and the Issuer.
"Note Interest" for any Payment Date will be an amount equal to interest
accrued during the related Interest Period at the Note Interest Rate on the Note
Balance as of the preceding Payment Date (after giving effect to the payment, if
any, in reduction of principal made on the Notes on such preceding Payment
Date).
"Interest Period" means, with respect to any Payment Date, the immediately
preceding calendar month.
All calculations of interest on the Notes will be computed on the basis of
a year of 360 days and of twelve 30 day months.
The "Note Interest Rate" for each Interest Period on or prior to the
Initial Redemption Date (as defined herein) will be a per annum rate equal to
7.583%, and for each Interest Period thereafter, a per annum rate equal to
8.083%.
The "Note Balance" will equal, as of any Payment Date, the Original Note
Balance less all amounts paid to the Noteholders on previous Payment Dates in
reduction of the Note Balance (exclusive, for the sole purpose of effecting the
Note Insurer's subrogation rights, of payments made by the Note Insurer in
respect of any Overcollateralization Deficit under the Insurance Policy, except
to the extent reimbursed to the Note Insurer pursuant to the Indenture).
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"Monthly Principal" for any Payment Date will be an amount equal to (A) the
aggregate of (i) all scheduled payments of principal received or advanced with
respect to the Mortgage Loans due during the related Due Period and all other
amounts collected, received or otherwise recovered in respect of principal on
such Mortgage Loans (including partial and full Principal Prepayments, but not
including Payments Ahead that are not allocable to principal for the related Due
Period) during or in respect of the related Collection Period, (ii) the
aggregate of the amounts allocable to principal deposited in the Note Account on
the related Deposit Date by the Issuer, the Seller or the Note Insurer in
connection with a repurchase, release, removal or substitution of any such
Mortgage Loans pursuant to the Indenture, and (iii) in connection with the
redemption of the Notes, that portion of the redemption price in respect of
principal, reduced by (B) the amount of any Overcollateralization Surplus with
respect to such Payment Date.
The "Principal Balance" of a Mortgage Loan with respect to any
Determination Date is the actual outstanding principal balance thereof as of the
close of business on the Determination Date in the preceding month (or, in the
case of the first Payment Date, as of the Cut-off Date), less (i) all scheduled
payments of principal received or advanced with respect to the Mortgage Loans
and due during the related Due Period and all other amounts collected, received
or otherwise recovered in respect of principal on the Mortgage Loans (including
Principal Prepayments, but not including Payments Ahead that are not allocable
to principal for the related Due Period) during or in respect of the related
Collection Period, Net Liquidation Proceeds and Insurance Proceeds allocable to
principal recovered or collected in respect of such Mortgage Loan during the
related Collection Period, (ii) the portion of the Release Price allocable to
principal remitted by the Issuer, the Servicer or the Note Insurer to the
Indenture Trustee on or prior to the next succeeding Deposit Date in connection
with a release and removal of such Mortgage Loan pursuant to the Indenture, to
the extent such amount is actually remitted on or prior to such Deposit Date,
and (iii) the amount to be remitted by the Seller to the Indenture Trustee on
the next succeeding Deposit Date in connection with a substitution of a
Qualified Replacement Mortgage for such Mortgage Loan pursuant to the Indenture,
to the extent such amount is actually remitted on or prior to such Deposit Date;
provided, however, that Mortgage Loans that have become Liquidated Mortgage
Loans since the preceding Determination Date (or, in the case of the first
Determination Date, since the Cut-off Date) will be deemed to have a Principal
Balance of zero on the current Determination Date.
"Determination Date" means, as to any Payment Date, the last day of the Due
Period relating to such Payment Date.
"Payments Ahead" means any payment of one or more scheduled monthly
payments remitted by a mortgagor with respect to a Mortgage Note in excess of
the scheduled monthly payment due during the related Due Period with respect to
such Mortgage Note, which sums the related mortgagor has instructed the Servicer
to apply to scheduled monthly payments due in one or more subsequent Due
Periods. Payments Ahead will be deemed received in the Due Period in which they
would have become due had they not been paid in advance.
"Principal Prepayment" means any mortgagor payment or other recovery in
respect of principal on a Mortgage Loan (including Net Liquidation Proceeds and
Insurance Proceeds allocable to principal) which, in the case of a mortgagor
payment, is received in advance of its scheduled due date and is not accompanied
by an amount as to interest representing scheduled interest for any month
subsequent to the month of such payment, or that is accompanied by instructions
from the related mortgagor directing the Servicer to apply such payment to the
Principal Balance of such Mortgage Loan currently.
"Liquidated Mortgage Loan" means, as to any Payment Date, any Mortgage Loan
as to which the Servicer has determined during the related Collection Period, in
accordance with its customary servicing procedures, that all Liquidation
Proceeds which it expects to recover from or on account of such Mortgage Loan
have been recovered.
"Available Funds" with respect to any Payment Date will consist of the sum
of the amounts described in clauses (a) through (g) below, less (i) the
Administrative Fee Amount in respect of such Payment Date, (ii) Monthly Advances
and Servicing Advances (each as defined herein) previously made that are
reimbursable to the Servicer (other than those included in liquidation expenses
for any Liquidated Mortgage Loan and already reimbursed from the related
Liquidation Proceeds) in such Collection Period to the extent permitted by the
Servicing Agreement and (iii) the aggregate amounts (A) deposited into the
Collection Account or Note Account that may not be withdrawn therefrom pursuant
to a final and nonappealable order of a United States bankruptcy court of
competent jurisdiction
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imposing a stay pursuant to Section 362 of the United States Bankruptcy Code and
that would otherwise have been included in Available Funds on such Payment Date
and (B) received by the Indenture Trustee that are recoverable and sought to be
recovered from the Issuer as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code in accordance with a final
nonappealable order of a court of competent jurisdiction:
(a) all scheduled payments of interest received with respect to the
Mortgage Loans due during the related Due Period and all other interest
payments on or in respect of such Mortgage Loans received by or on behalf
of the Servicer during the related Collection Period, net of amounts
representing interest accrued on such Mortgage Loans in respect of any
period prior to the Cut-off Date, plus any Compensating Interest Payments
made by the Servicer in respect of the Mortgage Loans and any net income
from related REO Properties for such Collection Period;
(b) all scheduled payments of principal received with respect to the
Mortgage Loans and due during the related Due Period and all other
principal payments (including Principal Prepayments and prepayment
premiums, but excluding amounts described elsewhere in this definition)
received or deemed to be received during the related Collection Period in
respect of such Mortgage Loans;
(c) the aggregate of any proceeds from or in respect of any policy of
insurance covering a Mortgaged Property that are received during the
related Collection Period and applied by the Servicer to reduce the
Principal Balance of the related Mortgage Loan ("Insurance Proceeds")
(which proceeds will not include any amounts applied to the restoration or
repair of the related Mortgaged Property or released to the related
mortgagor in accordance with applicable law, the Servicer's customary
servicing procedures or the terms of the related Mortgage Loan);
(d) the aggregate of any other proceeds received by the Servicer during
the related Collection Period in connection with the liquidation of any
Mortgaged Property securing a Mortgage Loan, whether through trustee's
sale, foreclosure, condemnation, taking by eminent domain or otherwise
(including any Insurance Proceeds to the extent not duplicative of amounts
in clause (c) above) ("Liquidation Proceeds"), net of expenses incurred by
the Servicer in connection with the liquidation of such Mortgage Loan (such
net amount, "Net Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Mortgage
Loans that are required or permitted to be repurchased, released, removed
or substituted by the Seller during the related Collection Period as
described in "--Assignment of Mortgage Loans" and "Servicing of the
Mortgage Loans" herein, to the extent such amounts are received by the
Indenture Trustee on or before the related Deposit Date;
(f) the amount of any Monthly Advances made for such Payment Date; and
(g) the aggregate of amounts deposited in the Note Account by the
Indenture Trustee, the Issuer or the Note Insurer, as the case may be,
during such Collection Period in connection with redemption of the Notes as
described under "--Redemption of the Notes" herein.
The "Administrative Fee Amount" for any Payment Date is equal to the sum of
the Servicing Fee and the Indenture Trustee Fee relating to such Payment Date.
Note Account
Pursuant to the Indenture, the Indenture Trustee is required to establish
and maintain an account with respect to the Notes (a "Note Account") from which
all payments with respect to the Notes will be made. As described below, not
later than the Deposit Date, the Servicer will be required pursuant to the
Servicing Agreement to wire transfer to the Indenture Trustee for deposit in the
Note Account the sum (without duplication) of all amounts on deposit in the
Collection Account that constitute any portion of Available Funds for the
related Payment Date. See "Description of the Trust Funds--Accounts" in the
Prospectus.
Investment of Note Account. All or a portion of the Note Account may be
invested and reinvested by the Indenture Trustee in one or more Permitted
Investments bearing interest or sold at a discount. The Indenture Trustee or
any affiliate thereof may be the obligor on any investment in the Note Account
which otherwise qualifies as a
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Permitted Investment. No investment in the Note Account may mature later than
the Business Day preceding the Payment Date.
The Indenture Trustee will not in any way be held liable by reason of any
insufficiency in the Note Account resulting from any loss on any Permitted
Investment included therein (except to the extent the Indenture Trustee is the
obligor thereon or manages or advises such Permitted Investment).
All income or other gain from investments in the Note Account will not be
available to Noteholders or otherwise subject to any claims or rights of the
Noteholders and will be held in the Note Account for the benefit of the
Servicer, subject to withdrawal from time to time as permitted by the Indenture.
Any loss resulting from such investments will be for the account of the
Servicer. The Servicer will be required to deposit the amount of any such loss
immediately upon the realization of such loss to the extent such loss will not
be offset by other income or gain from investments in the Note Account and then
available for such application.
Permitted Investments. The Indenture will define "Permitted Investments"
generally as follows:
(a) direct obligations of, and obligations fully guaranteed by, the
United States of America, the Federal Home Loan Mortgage Corporation,
Fannie Mae, the Federal Home Loan Banks or any agency or instrumentality of
the United States of America, the obligations of which are backed by the
full faith and credit of the United States of America;
(b) (i) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by or federal funds sold by any depository
institution or trust company (including the Indenture Trustee or its agent
acting in their respective commercial capacities) incorporated under the
laws of the United States of America or any state thereof and subject to
supervision and examination by federal and/or state authorities, so long
as, at the time of such investment or contractual commitment providing for
such investment, such depository institution or trust company or its
ultimate parent has a short-term unsecured debt rating in one of the two
highest available rating categories of S&P and the highest available rating
category of Moody's and provided that each such investment has an original
maturity of no more than 365 days, and (ii) any other demand or time
deposit or deposit which is fully insured by the Federal Deposit Insurance
Corporation;
(c) repurchase obligations with a term not to exceed 30 days with
respect to any security described in clause (a) above and entered into with
a depository institution or trust company (acting as a principal) rated "A"
or higher by "S&P" and rated "A2" or higher by Moody's; provided, however,
that collateral transferred pursuant to such repurchase obligation must be
of the type described in clause (a) above and must (i) be valued daily at
current market price plus accrued interest, (ii) pursuant to such
valuation, be equal, at all times, to 105% of the cash transferred by the
Indenture Trustee in exchange for such collateral and (iii) be delivered to
the Indenture Trustee or, if the Indenture Trustee is supplying the
collateral, an agent for the Indenture Trustee, in such a manner as to
accomplish perfection of a security interest in the collateral by
possession of certified securities;
(d) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or
any state thereof which has a long-term unsecured debt rating in the
highest available rating category of each of the Rating Agencies at the
time of such investment;
(e) commercial paper having an original maturity of less than 365 days
and issued by an institution having a short-term unsecured debt rating in
the highest available rating category of each of the Rating Agencies at the
time of such investment;
(f) a guaranteed investment contract approved by each of the Rating
Agencies and the Note Insurer and issued by an insurance company or other
corporation having a long-term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at the time of
such investment;
(g) money market funds having ratings in one of the two highest
available rating categories of S&P and Moody's at the time of such
investment which invest only in other Permitted Investments (any such money
market funds which provide for demand withdrawals being conclusively deemed
to satisfy any maturity requirements for Permitted Investments set forth
herein), including money market funds of the Indenture
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Trustee and any such funds that are managed by the Indenture Trustee or its
affiliates or for which the Indenture Trustee or any affiliate acts as
advisor as long as such money market funds satisfy the criteria of this
subparagraph (g); and
(h) any investment approved in writing by the Note Insurer and as to
which the Indenture Trustee receives written evidence that any such
investment will not result in a downgrading or withdrawal of the rating by
each Rating Agency on the Notes.
The Indenture Trustee may purchase from or sell to itself or an affiliate,
as principal or agent, the Permitted Investments listed above. All Permitted
Investments in a trust account under the Indenture shall be made in the name of
the Indenture Trustee for the benefit of the Noteholders and the Note Insurer.
Overcollateralization Feature
Credit enhancement with respect to the Notes will be provided in part by
overcollateralization resulting from the aggregate Principal Balances of the
Mortgage Loans as of the end of each Due Period exceeding the Note Balance for
the related Payment Date (after taking into account the Monthly Principal and
Excess Cash to be paid on such Payment Date in reduction of the Note Balance).
The Indenture requires that the Overcollateralization Amount be increased to,
and thereafter maintained at, the Required Overcollateralization Amount. This
increase and subsequent maintenance is intended to be accomplished by the
application of monthly Excess Cash to accelerate the pay-down of the Note
Balance until the Overcollateralization Amount reaches the Required
Overcollateralization Amount. Such applications of Excess Cash, because they
consist of interest collections on the Mortgage Loans, but are distributed as
principal on the Notes, will increase the Overcollateralization Amount. Such
overcollateralization is intended to result in amounts received on the Mortgage
Loans in excess of the amount necessary to pay the Note Interest and Monthly
Principal required to be paid on the Notes on any Payment Date being applied to
reduce the Note Balance to zero no later than the Stated Maturity of the Notes.
The "Excess Cash" with respect to any Payment Date will be equal to
Available Funds for such Payment Date, reduced by the sum of (i) the amount
owing to the PMI Insurer and Note Insurer for the premium payable in respect of
the Notes, (ii) the Note Interest for the related Payment Date, (iii) the
Monthly Principal for the related Payment Date and (iv) the amount owing to the
Note Insurer under the Insurance Agreement for reimbursement for prior draws
made on the Insurance Policy in respect of the Notes and any other amounts owing
to the Note Insurer under the Insurance Agreement (including any unpaid premiums
in respect of the Notes).
The "Overcollateralization Amount" with respect to any Payment Date is the
amount, if any, by which (x) the aggregate Principal Balance of the Mortgage
Loans as of the end of the related Due Period exceeds (y) the Note Balance of
the Notes as of such Payment Date after taking into account payments of Monthly
Principal (disregarding any permitted reduction in Monthly Principal due to an
Overcollateralization Surplus) made on such Payment Date. The required level of
the Overcollateralization Amount with respect to any Payment Date (the "Required
Overcollateralization Amount") will be equal to the amount specified as such in
the Indenture. The Indenture generally provides that the Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the Required
Overcollateralization Amount to decrease or "step down" based on the performance
on the Mortgage Loans with respect to certain delinquency rate and loss tests
specified in the Indenture. In addition, Excess Cash will be applied to the
payment in reduction of principal of the Notes during the period that the
Mortgage Loans are unable to meet certain tests specified in the Indenture based
on delinquency rates. Any increase in the Required Overcollateralization Amount
may result in an accelerated amortization of the Notes until such Required
Overcollateralization Amount is reached. Conversely, any decrease in the
Required Overcollateralization Amount will result in a decelerated amortization
of the Notes until such Required Overcollateralization Amount is reached.
The "Overcollateralization Deficiency Amount" with respect to any Payment
Date is the amount, if any, by which the Required Overcollateralization Amount
exceeds the Overcollateralization Amount.
The application of Excess Cash to reduce the Note Balance on any Payment
Date will have the effect of accelerating the amortization of the Notes relative
to the amortization of the Mortgage Loans.
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In the event that the Required Overcollateralization Amount is permitted to
decrease or "step down" on any Payment Date in the future, the Indenture will
provide that all of the Excess Cash that would otherwise be paid to the Notes on
any such Payment Date in reduction of the Note Balance will be released to the
holder(s) of the Residual Interest.
With respect to any Payment Date, an "Overcollateralization Surplus" means,
the amount, if any, by which (x) the Overcollateralization Amount for such
Payment Date exceeds (y) the then applicable Required Overcollateralization
Amount for such Payment Date. As a technical matter, an Overcollateralization
Surplus may result even prior to the occurrence of any decrease or "step down"
in the Required Overcollateralization Amount because the Notes will be entitled
to receive 100% of collected principal on the Mortgage Loans, even though the
Note Balance will, as a result of the accelerated amortization caused by the
application of the Excess Cash, be less than the aggregate Principal Balance of
the Mortgage Loans, in the absence of any Realized Losses on the Mortgage Loans.
The Indenture will provide that, on any Payment Date, all amounts collected
on the Mortgage Loans in respect of principal to be applied on such Payment Date
will be paid to Noteholders in reduction of the Note Balance on such Payment
Date, except as provided above with respect to any Payment Date for which there
exists an Overcollateralization Surplus. If any Mortgage Loan became a
Liquidated Mortgage Loan during such prior Collection Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less than
the Principal Balance of the related Mortgage Loan; the amount of any such
deficiency is a "Realized Loss." In addition, the Indenture will provide that
the Principal Balance of any Mortgage Loan that becomes a Liquidated Mortgage
Loan shall equal zero. The Indenture will not require that the amount of any
Realized Loss be paid to Noteholders on the Payment Date following the event of
loss. However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount for the Notes, and will result in more Excess Cash,
if any, being paid on the Notes in reduction of the Note Balance on subsequent
Payment Dates than would be the case in the absence of such Realized Loss.
Overcollateralization and the Insurance Policy. The Indenture will require
the Indenture Trustee to file a claim for an Insured Payment under the Insurance
Policy not later than 12:00 noon (New York City time) on the third Business Day
prior to any Payment Date as to which the Indenture Trustee has determined that
an Overcollateralization Deficit with respect to the Notes will occur for the
purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Noteholders on such Payment Date. With respect to any Payment
Date, an "Overcollateralization Deficit" will mean the amount, if any, by which
(x) the Note Balance, after taking into account all payments to be made on such
Payment Date in reduction thereof, including any Excess Cash payments, exceeds
(y) the sum of aggregate Principal Balance of the Mortgage Loans as of the end
of the applicable Due Period. Accordingly, the Insurance Policy is similar to
the provisions described above with respect to the overcollateralization
provisions insofar as the Insurance Policy guarantees ultimate collection of the
full amount of the Note Balance, rather than current payments of the amounts of
any Realized Losses to the Noteholders. Investors in the Notes should realize
that, under certain loss or delinquency scenarios, they may temporarily receive
no payments in reduction of the Note Balance.
Reports to Noteholders
Concurrently with each payment to Noteholders, the Indenture Trustee will
make available a statement to each Noteholder, the Note Insurer and the
Underwriters in the form required by the Indenture and setting forth the
following information (to the extent the Servicer makes such information (other
than the information described in clause (b) below) available to the Indenture
Trustee):
(a) the amount of such payment to the Noteholders on the related
Payment Date allocable to (i) Monthly Principal (separately setting forth
Principal Prepayments) and (ii) any Excess Cash payment;
(b) the amount of such payment to the Noteholders on such Payment Date
allocable to Note Interest;
(c) the Note Balance after giving effect to the payment of Monthly
Principal and any Excess Cash applied to reduce the Note Balance on such
Payment Date;
(d) the aggregate Principal Balance of the Mortgage Loans as of the end
of the related Due Period;
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(e) the amount of Monthly Advances made with respect to such Payment
Date and the aggregate amount of unreimbursed Monthly Advances and
Servicing Advances, if any;
(f) the number and the aggregate of the Principal Balances of the
Mortgage Loans delinquent (i) one month, (ii) two months and (iii) three or
more months as of the end of the related Collection Period;
(g) the aggregate of the Principal Balances of the Mortgage Loans in
foreclosure or other similar proceedings or in which the borrower is in
bankruptcy and the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure during the related
Collection Period;
(h) the aggregate of the Principal Balances of the Mortgage Loans
repurchased by the Seller or the Servicer, separately setting forth the
aggregate of the Principal Balances of Mortgage Loans delinquent for three
consecutive monthly installments purchased by the Servicer at its option
pursuant to the Servicing Agreement;
(i) the Insured Payment, if any, for such Payment Date;
(j) the amount of the Servicing Fee paid to or retained by the Servicer
with respect to such Payment Date;
(k) the Overcollateralization Amount, the then applicable Required
Overcollateralization Amount, the Overcollateralization Surplus, if any,
and the Overcollateralization Deficit, if any, with respect to such Payment
Date; and
(l) the aggregate outstanding principal balance of the three largest
outstanding Mortgage Loans.
In the case of information furnished pursuant to clauses (a) and (b) above,
the amounts shall be expressed as a dollar amount per Note with a $1,000
principal denomination.
The Indenture Trustee will make the reports to Noteholders (and, at its
option, any additional files containing the same information in an alternative
format) available each month to noteholders, and other parties to the Indenture
via the Indenture Trustee's internet website and its fax-on-demand service. The
Indenture Trustee's fax-on-demand service may be accessed by calling (301) 815-
6610. The Indenture Trustee's internet website shall initially be located at
www.ctslink.com. Assistance in using the website or the fax-on-demand service
can be obtained by calling the Indenture Trustee's customer service desk at
(301) 815-6600. Parties that are unable to use the above distribution options
are entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such. The Indenture Trustee will have
the right to change the way the reports to Noteholders are distributed in order
to make such distribution more convenient and/or more accessible and the
Indenture Trustee will provide timely and adequate notification to all above
parties regarding any such changes.
Within 90 days after the end of each calendar year, the Indenture Trustee
will mail to each person who at any time during such calendar year was a
Noteholder and to the Underwriters, if requested in writing by any such person,
a statement containing the information set forth in clauses (a) and (b) above,
aggregated for such calendar year or, in the case of each person who was a
Noteholder for a portion of such calendar year, setting forth such information
for each month thereof. Such obligation of the Indenture Trustee shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be prepared and furnished by the Indenture Trustee to
Noteholders pursuant to any requirements of the Code as are in force from time
to time.
Redemption of the Notes
The Notes will be subject to redemption, in whole but not in part, at the
option of the holders of a majority of the Residual Interest or, if not
exercised, at the option of the Servicer, on or after the first Payment Date
(such date, the "Initial Redemption Date") on which the aggregate Principal
Balance of the Mortgage Loans has declined to less than 10% of the aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date (the date on
which the Notes are to be redeemed, the "Redemption Date").
The Notes will be redeemed at a redemption price of 100% of the then
outstanding Note Balance, plus accrued but unpaid interest thereon through the
end of the Interest Period immediately preceding the related
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Payment Date; provided, however, that no redemption may take place unless, in
connection with such redemption, any amounts due and owing to the Note Insurer
under the Insurance Agreement are paid in full to the Note Insurer. There will
be no prepayment premium in connection with such a redemption. Notice of an
optional redemption of the Notes must be mailed by the Indenture Trustee to the
Noteholders and the Note Insurer at least ten days prior to the Payment Date set
for such redemption.
Payments to the Holder(s) of the Residual Interest
On each Payment Date, any portion of Available Funds remaining after making
payments of interest and principal due on the Notes and other distributions
required on such Payment Date will be released to the holder(s) of the Residual
Interest, free of the lien of the Indenture. Any such remaining amounts will
not be available to make payments on the Notes or payments to the Note Insurer
on any subsequent Payment Date.
The Indenture Trustee
Norwest Bank Minnesota, National Association, a national banking
association, will be the Indenture Trustee under the Indenture. The Indenture
will provide that the Indenture Trustee is entitled to a fee (the "Indenture
Trustee Fee"), payable monthly on each Payment Date at one-twelfth of 0.02% of
the aggregate Principal Balance of the Mortgage Loans as of the first day of the
related Due Period, and reimbursement of certain expenses. Norwest Bank
Minnesota, National Association, will also perform certain monitoring functions
and act as successor servicer under the Servicing Agreement and, upon a
termination of the Servicer, shall be obligated to succeed to the obligations of
the Servicer or to appoint an eligible successor servicer.
The Indenture also will provide that the Indenture Trustee may resign at
any time, upon notice to the Issuer, the Servicer, the Note Insurer and any
Rating Agency, in which event the Issuer will, with the consent of the Note
Insurer (and if the Issuer fails to do so within 30 days, the Note Insurer may),
appoint a successor Indenture Trustee. The Issuer, with the prior consent of
the Note Insurer, will remove the Indenture Trustee if the Indenture Trustee
ceases to be eligible to continue as such under the Indenture or if the
Indenture Trustee becomes insolvent. Any resignation or removal of the
Indenture Trustee and appointment of a successor Indenture Trustee will not
become effective until acceptance of the appointment by the successor Indenture
Trustee. The Indenture will provide that the Indenture Trustee is under no
obligation to exercise any of the rights or powers vested in it by the Indenture
at the request or direction of any of the Noteholders, unless such Noteholders
shall have offered to the Indenture Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction. The Indenture Trustee may execute
any of the rights or powers granted by the Indenture or perform any duties
thereunder either directly or by or through its agents or attorneys; provided,
however, the Indenture Trustee will remain liable for the performance of all of
its duties. Pursuant to the Indenture, the Indenture Trustee is not liable for
any action it takes or omits to take in good faith which it reasonably believes
to be authorized by an authorized officer of any person or within its rights or
powers under the Indenture. The Indenture Trustee and any director, officer,
employee or agent of the Indenture Trustee may rely and will be protected in
acting or refraining from acting in good faith in reliance on any certificate,
notice or other document of any kind prima facie properly executed and submitted
by the authorized officer of any person respecting any matters arising under the
Indenture. The Indenture Trustee will be indemnified by the Servicer for
certain losses and other events to the extent described in the Servicing
Agreement.
Voting
Unless otherwise specified in the Indenture, with respect to any provisions
of the Indenture providing for the action, consent or approval of the
Noteholders evidencing specified "Voting Interests," each Noteholder will have a
Voting Interest equal to the Percentage Interest represented by such
Noteholder's Note. Unless the Note Insurer fails to make a payment under the
Insurance Policy or if certain events of bankruptcy or insolvency occur with
respect to the Note Insurer and such event is continuing, the Voting Interests
of the Noteholders will be exercised solely by or with the consent of the Note
Insurer.
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Note Events of Default
An "Event of Default" with respect to the Notes will occur if either (i) an
event of default under the Insurance Agreement occurs or (ii) on any Payment
Date, after taking into account all payments made in respect of the Notes on
such Payment Date, the Note Interest for such Payment Date remains unpaid or an
Overcollateralization Deficit still exists with respect to the Notes. See
"Description of the Agreements--Material Terms of the Indenture--Events of
Default" in the Prospectus for a description of the circumstances under which a
default on the Notes, other than a payment default, may occur. For a
description of the rights of Noteholders in connection with any Event of Default
with respect to the Notes, see "Description of the Agreements--Material Terms of
the Indenture--Events of Default" in the Prospectus. In the absence of a
failure by the Note Insurer to pay Insured Payments, no acceleration of the
maturity of the Notes shall be permitted without the consent of the Note
Insurer.
The PMI Policy
161 Mortgage Loans (the "PMI Mortgage Loans") with original Loan-to-Value
Ratios in excess of 80% are insured by Mortgage Guaranty Insurance Corporation
(the "PMI Insurer") pursuant to the primary mortgage insurance policy (the "PMI
Policy"). The amount of coverage provided by the PMI Policy (which is also
referred to below as the "insured percentage of the claim") varies on a loan-by-
loan basis between 18% and 27% based upon the original Loan-to-Value Ratio of
the PMI Mortgage Loan.
The PMI Policy is required to remain in force with respect to each PMI
Mortgage Loan until: (1) the Principal Balance of such PMI Mortgage Loan is paid
in full, (2) the Principal Balance of such PMI Mortgage Loan has amortized down
to a level that results in a Loan-to-Value Ratio for such Mortgage Loan of 68%
or less; provided, however, that no coverage of any PMI Mortgage Loan under the
PMI Policy is required where prohibited by applicable law or (3) any other event
specified in the PMI Policy occurs that allows for termination of the PMI
Policy. The PMI Policy may not be assigned or transferred without the prior
written consent of the PMI Insurer, provided, however that the PMI Insurer has
previously provided written consent to the assignment of the PMI Policy from the
Indenture Trustee to the Seller in connection with any Mortgage Loan repurchased
or substituted for by the Seller.
The PMI Policy generally requires that delinquencies on any PMI Mortgage
Loan must be reported to the PMI Insurer within four months of default, and
appropriate proceedings to obtain title to the property securing the PMI
Mortgage Loan must be commenced within six months of default. The PMI Policy
under which the PMI Mortgage Loans are insured contains provisions substantially
as follows: (a) for the insured to present a claim, the insured must have
acquired, and tendered to the PMI Insurer, good and merchantable title to the
property securing the PMI Mortgage Loan, free and clear of all liens and
encumbrances, including, but not limited to, any right of redemption by the
mortgagor unless such acquisition of good and merchantable title is excused
under the terms of the PMI Policy; (b) a claim generally includes unpaid
principal, accrued interest to the date of such tender to the PMI Insurer by the
insured, and certain expenses; (c) when a claim is presented the PMI Insurer
will have the option of either (i) paying the claim in full, taking title to the
property securing the PMI Mortgage Loan, and arranging for its sale, or (ii)
paying the insured percentage of the claim and with the insured retaining title
to the property securing the PMI Mortgage Loan; (d) claims generally must be
filed within 60 days after the insured has acquired good and merchantable title
to the property securing the PMI Mortgage Loan; and (e) a claim generally must
be paid within 60 days after the claim is filed by the insured. No payment for
a loss will be made under the PMI Policy unless the property securing the PMI
Mortgage Loan is in the same physical condition as when the PMI Mortgage Loan
was originally insured, except for reasonable wear and tear and unless premiums
on the standard homeowner's insurance policy, real estate taxes and foreclosure
protection and preservation expenses have been advanced by or on behalf of the
insured. The responsibilities of the insured prescribed by the PMI Policy are
required to be performed by the Servicer.
In issuing the PMI Policy, the PMI Insurer has relied upon certain
information and data regarding the PMI Mortgage Loans furnished to the PMI
Insurer by the Seller. The PMI Policy will not insure against 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 PMI Mortgage Loans,
including, but not limited to, misrepresentation by the lender or certain other
persons involved in the origination of the PMI Mortgage Loan or the application
for insurance; (ii) failure to
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construct a property securing a PMI Mortgage Loan in accordance with specified
plans; or (iii) physical damage to a property securing a PMI Mortgage Loan.
For a more complete description of these provisions, terms and conditions,
reference is made to the PMI Policy, a copy of which is available upon request
from the Indenture Trustee.
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement. After the Closing Date, the Residual Interest
representing all of the beneficial ownership interest in the Issuer will be held
by MLN Depository, a limited purpose, wholly-owned subsidiary of the Seller.
The principal office of the Issuer is located in Wilmington, Delaware, c/o the
Owner Trustee, Rodney Square North, 1100 North Market Street, Wilmington,
Delaware 19890-0001, Attention: Corporate Trust Administration. The Issuer
does not have, nor is it expected in the future to have, any significant assets,
other than the assets included in the Trust Fund.
Mortgage Lenders Network USA, Inc.
Mortgage Lenders Network USA, Inc., the Seller under the Sale Agreement and
the Servicer under the Servicing Agreement, is a Delaware corporation and a full
service mortgage banker engaged in the business of originating, purchasing,
selling and servicing mortgage loans on one- to four-family residential
properties. The Seller's mortgage loans are primarily made to borrowers whose
borrowing needs are generally not being served by traditional financial
institutions because of impaired or limited credit profiles. The Seller was
formed in November 1996. The Seller currently originates its mortgage loans
primarily through independent licensed brokers and its retail origination
offices, and purchases mortgage loans from approved correspondents. Each
Mortgage Loan is underwritten by the Seller. See "Description of the Mortgage
Pool--Underwriting Standards" and "Servicing of the Mortgage Loans--Historical
Servicing Experience of the Servicer" herein.
The Seller has its principal offices at Middlesex Corporate Center, 213
Court Street, Middletown, Connecticut 06457 (telephone number: (860) 344-5700).
DESCRIPTION OF THE MORTGAGE POOL
General
The following is a brief description of certain terms of the Mortgage Loans
as of the Cut-off Date. The information presented herein does not take into
account any Mortgage Loans which may prepay in full or be removed, prior to the
Closing Date, from the Mortgage Pool and that other Mortgage Loans may be
substituted therefor. As a result, the information regarding the Mortgage Loans
set forth herein may vary from comparable information based in the actual
composition of the Mortgage Pool at the Closing Date, although such variance
will not be material.
The Mortgage Pool will consist of primarily fixed rate and adjustable rate
mortgage loans secured by first and second liens, on one- to four-family
residential properties located in 44 states and the District of Columbia. No
Mortgage Loan will have an original term to stated maturity in excess of 30
years or a scheduled maturity date later than November 1, 2029. All of the
Mortgage Loans will be originated or acquired by the Seller through its network
of brokers and correspondents and through its retail origination offices.
The Mortgage Loans have been originated using underwriting standards that
are significantly less stringent than the underwriting standards applied by
other mortgage loan purchase programs such as those administered by Fannie Mae
or by Freddie Mac. See "--Underwriting Standards" and "Risk Factors" herein.
The Mortgage Loans are generally not assumable pursuant to the terms of the
related Mortgage Note. See "Certain Prepayment and Yield Considerations"
herein.
None of the Mortgage Loans are or will be insured or guaranteed by the
Issuer, the Seller, MLN Depository, the Depositor, the Servicer, the Indenture
Trustee, the Note Insurer, any originator or any of their
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respective affiliates, or by any governmental agency or other person, except as
described herein. None of the Mortgage Loans will be insured by mortgage pool
insurance policies.
Approximately 63.42% of the Mortgage Loans by Principal Balance as of the
Cut-off Date will provide for the payment of a prepayment charge.
Mortgage Loan Characteristics
Set forth below is certain summary statistical information regarding the
Mortgage Loans as of the Cut-off Date. As of the Cut-off Date, the Mortgage
Loans consisted of 2,224 Mortgage Loans with an aggregate Principal Balance
totaling $144,953,789.59 (the "Initial Pool Balance").
As of the Cut-off Date, the average Principal Balance of the Mortgage Loans
was $65,177.06; the minimum and maximum Principal Balances of the Mortgage Loans
were $9,600.27 and $275,901.58, respectively; 97.03% of the Mortgage Loans by
Principal Balance as of the Cut-off Date are secured by first lien mortgages on
the related Mortgaged Properties and 2.97% of the Mortgage Loans by Principal
Balance as of the Cut-off Date are secured by second lien mortgages on the
related Mortgaged Properties; 45.10% of the Mortgage Loans by Principal Balance
as of the Cut-off Date are loans that provide for the payment of a substantial
portion of the original Principal Balance in a single payment at maturity
("Balloon Loans"); the weighted average interest rate (the "Mortgage Rate") of
the Mortgage Loans was 10.82% per annum; the Mortgage Rates of the Mortgage
Loans ranged from 7.45% to 15.75% per annum; the weighted average Combined Loan-
to-Value Ratio of the Mortgage Loans was 77.60% and these Combined Loan-to-Value
Ratios ranged from 12.67% to 100.00%. The weighted average remaining term to
maturity of the Mortgage Loans was 251 months and the remaining terms to
maturity of the Mortgage Loans ranged from 56 months to 360 months. As of the
Cut-off Date, 124 Mortgage Loans were adjustable rate Mortgage Loans,
representing 6.46% of the Mortgage Loans by Principal Balance.
Approximately 1.04% of the Mortgage Loans were more than 30 days, but less
than 60 days, past due as of October 29, 1999. As of October 29, 1999, none of
the Mortgage Loans were 60 days or more delinquent in payment of principal and
interest. Approximately 8.90% of the Mortgage Loans, all with Combined Loan-to-
Value Ratios at origination in excess of 80%, will be covered by a primary
mortgage insurance policy issued by the PMI Insurer. Approximately 24.64% of
the Mortgage Loans by Principal Balance as of the Cut-off Date are Mortgage
Loans with Combined Loan-to-Value Ratios at origination in excess of 80%.
Approximately 63.42% of the Mortgage Loans by Principal Balance as of the Cut-
off Date require the payment of a fee in connection with certain prepayments.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan shall generally mean
that ratio, expressed as a percentage, borne by (a) the sum of the principal
amount of the Mortgage Loan at origination plus the then-current principal
balance of all mortgage loans (each a "Senior Loan" ) secured by liens on the
related Mortgaged Property having priorities senior to that of the lien which
secures such Mortgage Loan over (b) the minimum of the purchase price or the
appraised value of the related Mortgaged Property at origination.
Each adjustable rate Mortgage Loan has an interest rate equal to the sum of
a specified index and a gross margin, subject to periodic caps and lifetime
minimum and maximum rates. The index used with respect to each adjustable rate
Mortgage Loan is the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market ("Six-Month LIBOR").
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-off Date (except as otherwise indicated). The
information expressed below as a percentage of the Initial Pool Balance may not
total 100% due to rounding.
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Principal Balance of the Mortgage Loans
Number of Aggregate Unpaid Principal Percentage of Aggregate
Range of Principal Balances Mortgage Loans Balance Unpaid Principal Balance
- ------------------------------- -------------------------- ---------------------------- ---------------------------
$ 0.01 - 25,000.00 133 $ 2,642,600 1.82%
25,000.01 - 50,000.00 683 26,897,044 18.56
50,000.01 - 75,000.00 794 48,642,093 33.56
75,000.01 - 100,000.00 343 29,365,738 20.26
100,000.01 - 125,000.00 138 15,340,572 10.58
125,000.01 - 150,000.00 62 8,500,551 5.86
150,000.01 - 175,000.00 30 4,922,683 3.40
175,000.01 - 200,000.00 20 3,748,280 2.59
200,000.01 - 225,000.00 9 1,929,289 1.33
225,000.01 - 250,000.00 9 2,150,259 1.48
250,000.01 - 275,000.00 2 538,780 0.37
275,000.01 - 300,000.00 1 275,902 0.19
-------------------------- ---------------------------- ---------------------------
Total 2,224 $144,953,790 100.00%
As of the Cut-off Date, the average Principal Balance of the Mortgage Loans
was approximately $65,177.06.
Mortgage Interest Rates of the Mortgage Loans
Range of Mortgage Number of Aggregate Unpaid Principal Percentage of Aggregate
Interest Rates Mortgage Loans Balance Unpaid Principal Balance
- ------------------------------- -------------------------- ---------------------------- ---------------------------
7.001 - 7.500% 1 $ 234,287 0.16%
7.501 - 8.000 12 1,019,659 0.70
8.001 - 8.500 42 3,002,114 2.07
8.501 - 9.000 147 10,176,044 7.02
9.001 - 9.500 121 8,089,711 5.58
9.501 - 10.000 257 16,895,022 11.66
10.001 - 10.500 275 19,702,071 13.59
10.501 - 11.000 400 28,112,403 19.39
11.001 - 11.500 273 17,122,887 11.81
11.501 - 12.000 288 16,707,854 11.53
12.001 - 12.500 193 11,778,677 8.13
12.501 - 13.000 115 6,375,190 4.40
13.001 - 13.500 43 2,664,316 1.84
13.501 - 14.000 34 2,043,380 1.41
14.001 - 14.500 11 391,965 0.27
14.501 - 15.000 10 403,399 0.28
15.001 - 15.500 1 33,136 0.02
15.501 - 16.000 1 201,676 0.14
-------------------------- ---------------------------- ---------------------------
Total 2,224 $144,953,790 100.00%
S-32
Original Combined Loan-to-Value Ratios of the Mortgage Loans
Range of Original Combined Number of Aggregate Unpaid Principal Percentage of Aggregate
Loan-to-Value Ratios Mortgage Loans Balance Unpaid Principal Balance
- ------------------------------- -------------------------- ---------------------------- ---------------------------
10.001 - 20.000% 3 $ 52,932 0.04%
20.001 - 30.000 13 434,131 0.30
30.001 - 40.000 33 1,190,627 0.82
40.001 - 50.000 52 2,087,689 1.44
50.001 - 60.000 82 4,054,038 2.80
60.001 - 70.000 315 17,297,694 11.93
70.001 - 80.000 1,274 84,120,197 58.03
80.001 - 90.000 443 35,176,403 24.27
90.001 - 100.000 9 540,079 0.37
--------------------------- ---------------------------- ---------------------------
Total 2,224 $144,953,790 100.00%
The weighted average Combined Loan-to-Value Ratio at origination of the
Mortgage Loans was approximately 77.60%.
Risk Classification of the Mortgage Loans
Number of Aggregate Unpaid Principal Percentage of Aggregate
Risk Classification Mortgage Loans Balance Unpaid Principal Balance
- ------------------------------- -------------------------- ---------------------------- ---------------------------
A+ 346 $ 23,652,236 16.32%
A 510 34,848,609 24.04
AA 5 563,245 0.39
B+ 299 20,567,120 14.19
B 328 21,076,508 14.54
C+ 134 8,902,950 6.14
C 413 24,069,449 16.60
C- 137 8,281,005 5.71
D 52 2,992,668 2.06
-------------------------- ---------------------------- ---------------------------
Total 2,224 $144,953,790 100.00%
S-33
Geographic Distribution of Mortgaged Properties of the Mortgage Loans
Number of Aggregate Unpaid Principal Percentage of Aggregate
Location Mortgage Loans Balance Unpaid Principal Balance
- ------------------------------- -------------------------- ---------------------------- --------------------------
Alabama 66 $ 3,478,438 2.40%
Arizona 34 2,332,634 1.61
Arkansas 20 1,255,922 0.87
California 2 177,046 0.12
Colorado 24 2,602,203 1.80
Connecticut 57 4,729,206 3.26
District of Columbia 4 198,644 0.14
Delaware 2 167,963 0.12
Florida 129 7,594,096 5.24
Georgia 96 6,762,552 4.67
Indiana 2 164,759 0.11
Illinois 133 9,070,326 6.26
Indiana 68 3,646,895 2.52
Iowa 15 913,076 0.63
Kansas 13 741,568 0.51
Kentucky 72 4,373,032 3.02
Louisiana 15 767,937 0.53
Maine 2 168,257 0.12
Maryland 125 8,139,612 5.62
Massachusetts 57 4,347,289 3.00
Michigan 27 1,650,526 1.14
Minnesota 7 326,381 0.23
Mississippi 24 1,085,043 0.75
Missouri 80 4,884,210 3.37
Montana 1 41,749 0.03
Nebraska 2 99,217 0.07
New Hampshire 15 1,234,910 0.85
New Jersey 14 995,907 0.69
New Mexico 36 2,478,990 1.71
New York 90 8,212,871 5.67
North Carolina 119 7,813,931 5.39
Ohio 204 12,526,813 8.64
Oklahoma 54 3,120,057 2.15
Oregon 8 839,705 0.58
Pennsylvania 135 8,386,486 5.79
Rhode Island 14 953,752 0.66
South Carolina 196 12,166,712 8.39
Tennessee 161 9,153,339 6.31
Texas 10 948,029 0.65
Utah 2 222,331 0.15
Vermont 4 209,005 0.14
Virginia 56 3,859,516 2.66
Washington 11 1,036,312 0.71
West Virginia 9 534,424 0.37
Wisconsin 9 542,117 0.37
-------------------------- ---------------------------- --------------------------
Total 2,224 $144,953,790 100.00%
No more than 0.54% of the Mortgage Loans by Principal Balance as of the
Cut-off Date will be secured by Mortgaged Properties located in any one five
digit zip code area.
S-34
Mortgage Loan Purpose of the Mortgage Loans
Percentage of
Number of Aggregate Unpaid Principal Aggregate Unpaid Principal
Purpose Mortgage Loans Balance Balance
- ------------------------- ---------------------------- ----------------------------- ------------------------------
Purchase 387 $ 28,752,918 19.84%
Refinance Rate/Term 38 2,726,909 1.88
Refinance Cash Out 1,799 113,473,963 78.28
---------------------------- ----------------------------- ------------------------------
Total 2,224 $144,953,790 100.00%
Mortgage Loan Documentation Types of the Mortgage Loans
Percentage of
Number of Aggregate Unpaid Principal Aggregate Unpaid Principal
Documentation Mortgage Loans Balance Balance
- -------------------------- ----------------------------- ----------------------------- ----------------------------
Full Documentation 1,869 $119,793,113 82.64%
Limited 113 9,166,020 6.32
Stated 242 15,994,657 11.03
----------------------------- ----------------------------- ----------------------------
Total 2,224 $144,953,790 100.00%
Occupancy Status of the Mortgage Loans
Percentage of
Number of Aggregate Unpaid Principal Aggregate Unpaid Principal
Occupancy Mortgage Loans Balance Balance
- -------------------------- ----------------------------- ----------------------------- -----------------------------
Primary 1,993 $132,222,809 91.22%
Secondary 5 354,016 0.24
Investor 226 12,376,965 8.54
----------------------------- ----------------------------- -----------------------------
Total 2,224 $144,953,790 100.00%
Mortgaged Property Type of the Mortgage Loans
Percentage of
Number of Aggregate Unpaid Principal Aggregate Unpaid Principal
Property Type Mortgage Loans Balance Balance
- -------------------------- ----------------------------- ----------------------------- -----------------------------
Single Family 1,625 $105,524,011 72.80%
2-4 Family 152 11,486,323 7.92
Planned Unit Development 12 1,046,854 0.72
Condominium 46 2,685,735 1.85
Manufactured Housing 389 24,210,866 16.70
----------------------------- ----------------------------- -----------------------------
Total 2,224 $144,953,790 100.00%
S-35
Seasoning of the Mortgage Loans
Percentage of
Number of Aggregate Unpaid Principal Aggregate Unpaid Principal
Months of Seasoning Mortgage Loans Balance Balance
- -------------------------- ---------------------------- ----------------------------- ---------------------------
0 580 $ 35,746,443 24.66%
1 - 12 1,643 109,135,690 75.29
13 - 24 1 71,657 0.05
---------------------------- ----------------------------- ---------------------------
Total 2,224 $144,953,790 100.00%
As of the Cut-off Date, the weighted average seasoning of the Mortgage
Loans was approximately 2.2 months.
Original Term to Maturity of the Mortgage Loans
Percentage of
Original Term to Maturity Number of Aggregate Unpaid Principal Aggregate Unpaid Principal
(in months) Mortgage Loans Balance Balance
- -------------------------- ---------------------------- ----------------------------- ---------------------------
Less than or equal to 60 3 $ 57,100 0.04%
76 - 85 2 103,500 0.07
86 - 100 1 22,081 0.02
101 - 120 35 1,005,593 0.69
146 - 180 1,208 76,463,263 52.75
181 - 240 194 10,793,070 7.45
241 - 300 48 3,087,676 2.13
301 - 360 733 53,421,507 36.85
---------------------------- ----------------------------- ---------------------------
Total 2,224 $144,953,790 100.00%
Remaining Terms to Maturity of the Mortgage Loans
Months Remaining to Number of Aggregate Unpaid Principal Percentage of Aggregate
Maturity Mortgage Loans Balance Unpaid Principal Balance
- ------------------------ ----------------------------- ---------------------------- -----------------------------
Less than or equal to 60 3 $ 57,100 0.04%
76 - 85 2 103,500 0.07
86 - 95 1 22,081 0.02
111 - 115 6 136,905 0.09
116 - 120 29 868,689 0.60
146 - 165 1 30,453 0.02
171 - 175 140 9,093,858 6.27
176 - 180 1,067 67,338,951 46.46
231 - 235 39 1,995,261 1.38
236 - 240 155 8,797,809 6.07
291 - 295 12 726,106 0.50
296 - 300 36 2,361,570 1.63
346 - 350 2 163,807 0.11
351 - 355 100 7,051,609 4.86
356 - 356 58 4,163,821 2.87
357 - 357 107 8,158,017 5.63
358 - 358 199 15,256,770 10.53
359 - 359 104 7,337,286 5.06
360 - 360 163 11,290,198 7.79
----------------------------- ---------------------------- -----------------------------
Total 2,224 $144,953,790 100.00%
S-36
As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans was approximately 251 months.
Maximum Interest Rates of the Adjustable Rate Mortgage Loans
Percentage of Aggregate
Aggregate Unpaid Principal Unpaid Principal Balance of
Range of Maximum Interest Number of Adjustable Rate Balance of the Adjustable the Adjustable Rate Mortgage
Rates Mortgage Loans Rate Mortgage Loans Loans
- -------------------------- -------------------------- ----------------------------- -----------------------------
14.501 - 15.000% 1 $ 57,561 0.61%
15.001 - 15.500 1 77,974 0.83
15.501 - 16.000 5 488,559 5.21
16.001 - 16.500 2 275,022 2.94
16.501 - 17.000 16 1,109,538 11.84
17.001 - 17.500 20 1,648,083 17.59
17.501 - 18.000 24 2,007,122 21.42
18.001 - 18.500 11 822,927 8.78
18.501 - 19.000 19 1,366,578 14.59
19.001 - 19.500 15 907,349 9.68
19.501 - 20.000 6 412,216 4.40
20.001 and greater 4 195,705 2.09
-------------------------- ----------------------------- -----------------------------
Total 124 $9,368,633 100.00%
Minimum Interest Rates of the Adjustable Rate Mortgage Loans
Percentage of Aggregate
Aggregate Unpaid Principal Unpaid Principal Balance of
Range of Minimum Interest Number of Adjustable Rate Balance of the Adjustable the Adjustable Rate Mortgage
Rates Mortgage Loans Rate Mortgage Loans Loans
- -------------------------- -------------------------- ----------------------------- -----------------------------
7.501 - 8.000% 1 $ 57,561 0.61%
8.001 - 8.500 1 77,974 0.83
8.501 - 9.000 5 488,559 5.21
9.001 - 9.500 2 275,022 2.94
9.501 - 10.000 16 1,109,538 11.84
10.001 - 10.500 20 1,648,083 17.59
10.501 - 11.000 24 2,007,122 21.42
11.001 - 11.500 11 822,927 8.78
11.501 - 12.000 19 1,366,578 14.59
12.001 - 12.500 15 907,349 9.68
12.501 - 13.000 6 412,216 4.40
13.001 - 13.500 1 40,591 0.43
13.501 - 14.000 1 82,785 0.88
14.501 - 15.000 1 39,194 0.42
15.001 - 15.500 1 33,136 0.35
-------------------------- ----------------------------- -----------------------------
Total 124 $9,368,633 100.00%
S-37
Next Interest Rate Adjustment Date of the Adjustable Rate Mortgage Loans
Percentage of Aggregate
Aggregate Unpaid Principal Unpaid Principal Balance of
Month and Year of Next Number of Adjustable Rate Balance of the Adjustable the Adjustable Rate Mortgage
Interest Rate Adjustment Mortgage Loans Rate Mortgage Loans Loans
- -------------------------- ---------------------------- ---------------------------- -----------------------------
October 2000 1 $ 71,657 0.76%
March 2001 1 77,974 0.83
April 2001 3 183,808 1.96
May 2001 4 357,159 3.81
June 2001 4 268,746 2.87
July 2001 11 824,741 8.80
August 2001 15 1,098,077 11.72
September 2001 48 3,872,268 41.33
October 2001 37 2,614,205 27.90
---------------------------- ---------------------------- ----------------------------
Total 124 $9,368,633 100.00%
Underwriting Standards
The Mortgage Loans will be sold by the Seller to the Depositor, sold by the
Depositor to the Issuer and then pledged by the Issuer to the Indenture Trustee.
All of the Mortgage Loans were or will be originated by the Seller or acquired
by the Seller from mortgage bankers or brokers generally in accordance with the
underwriting criteria described herein.
The Seller's underwriting standards are primarily intended to assess the
ability and willingness of the borrower to repay the debt and to evaluate the
adequacy of the mortgaged property as collateral for the mortgage loan. All of
the Mortgage Loans were underwritten with a view toward the resale thereof in
the secondary mortgage market. The Seller considers, among other things, a
mortgagor's credit history, repayment ability and debt service to income ratio
("debt-to-income ratio"), as well as the value, type and use of the mortgaged
property. The Mortgage Loans generally bear higher rates of interest than
mortgage loans that are originated in accordance with Fannie Mae and Freddie Mac
standards, and may experience rates of delinquency and foreclosure that are
higher, and that may be substantially higher, than those experienced by
portfolios of mortgage loans underwritten in accordance with such Fannie Mae or
Freddie Mac standards.
Approximately 85.60% of the Mortgage Loans originated by the Seller are
based on loan application packages submitted through mortgage brokerage
companies with whom the Seller has a relationship (such mortgage loans,
"Indirect Retail Mortgage Loans"). The brokers and/or companies must meet
minimum standards based on an analysis of information submitted with an
application for approval, including resumes of the principals, valid broker's
license(s), and a satisfactory credit report. Once approved, mortgage brokerage
companies are eligible to submit loan application packages in compliance with
the terms of a signed broker agreement. All Indirect Retail Mortgage Loans are
originated in the Seller's regional offices located in Horsham, Pennsylvania,
Oak Brook, Illinois, Atlanta, Georgia, Phoenix, Arizona and Seattle, Washington.
All Indirect Retail Mortgage Loans are underwritten according to the Seller's
underwriting guidelines by the Seller in both the regional offices and the
corporate office located in Middletown, Connecticut (the "Corporate Office").
All Indirect Retail Mortgage Loans are initially reviewed by a loan officer for
pre-approval. The credit file is processed and reviewed by an underwriter for
final approval.
Approximately 14.40% of the Mortgage Loans were originated by the Seller
either directly through its retail operation under the name "Family Credit
Connection" or purchased under the Seller's bank referral program (such mortgage
loans, "Retail Mortgage Loans"). Retail Mortgage Loans are underwritten based
on the Seller's underwriting guidelines by the Seller in the Corporate Office.
All Retail Mortgage Loans are originated at the Illinois, Florida, Maryland or
Connecticut retail office or the referral department in Middletown, Connecticut.
Retail Mortgage Loans are initially reviewed by a loan officer to determine
whether the loan application meets the Seller's underwriting guidelines. The
credit file is processed and reviewed by an underwriter for final approval.
S-38
On a case-by-case basis, the Seller may determine that, based upon
compensating factors, a prospective mortgagor not strictly qualifying under the
underwriting risk category guidelines described below warrants an underwriting
exception. Compensating factors may include, but are not limited to, low Loan-
to-Value Ratio and/or large down payment, proven ability to handle high debt-to-
income levels, low debt-to-income ratio, large cash flow, significant verified
savings, good credit history, stable employment, excellent mortgage history, a
large reduction in monthly cash outflows and time in residence at the
applicant's current address. It is expected that a number of the Mortgage Loans
to be included in the Mortgage Pool will contain one or more loans which have
been underwritten according to such practice.
On "full-documentation" loans, the Seller's underwriters generally verify
the income of each applicant from various sources in the following manner:
salaried and hourly borrowers and those borrowers on commissions, whether at a
full time or part time job, are required to submit W-2 forms for the past one or
two years of employment and pay stubs from within the past 45-60 days; rental
income must be shown from the latest year's tax returns, or from leases; pension
income must be verified from a check, direct deposit slip, a bank statement
disclosing funds directly deposited, a W-2 form or a letter from the pension
administrator; bonus income must be demonstrated over eighteen months via W-2
forms; alimony and child support must be documented by a court order and proof
of receipt of payment; and self-employed individuals must submit two years of
tax returns with all schedules attached.
The applicant must have a sufficiently established credit history to
qualify for the appropriate credit grade (as described below). This credit
history is substantiated by a report prepared by an independent merged credit
report agency. The report typically considers the applicant's entire credit
history and contains information relating to such matters as credit history with
local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcy, repossession, suits or judgments.
The Seller originates loans secured by single-family residences (which may
be detached, attached, part of a two-to-four unit dwelling, a condominium unit,
townhouse or unit in a planned unit development) and manufactured housing. The
Seller's guidelines are applied in accordance with a procedure which complies
with applicable federal and state laws and regulations and require an appraisal
of the mortgaged property which conforms to FNMA and the Financial Institutions
Reform and Recovery Act ("FIRREA") standards. Appraisals may only be provided
by independent appraisers who satisfy the necessary licensing standards.
Each appraisal includes a market data analysis based on recent sales of
comparable homes in the area and, where deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. Full
appraisals are required for all loans that are submitted. If additional
collateral information is required, the Seller may require a desk, field, or
drive-by review of the mortgaged property.
The Seller requires title insurance on all mortgage loans. The Seller also
requires that fire and extended coverage casualty insurance be maintained on the
mortgaged property in an amount at least equal to the lesser of the principal
balance of the related residential loan or the appraised value less the value of
the land (replacement coverage will be required, if applicable). A quality
control department performs a monthly quality control audit of a sample of all
loans. The monthly underwriting analysis consists of a review of a random
sample of at least 10% of all closed loans.
In addition to the quality control audit, each underwriter will have
approximately 10% of its loans audited by the chief underwriter or his designee
each month. The loan review confirms the existence and accuracy of legal
documents, credit documentation, income computation, appraisal analysis, and
underwriting decisions. The review function allows the Seller to assess
programs for potential guideline changes, program enhancements, appraisal
policies, areas of risk to be reduced or eliminated, and need for additional
underwriter training.
Under the Seller's mortgage loan programs, various risk categories are used
to grade the likelihood that the applicant will satisfy the repayment conditions
of the loan. These risk categories establish the maximum permitted Loan-to-
Value Ratio and loan amount, given the occupancy status of the mortgaged
property and the applicant's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which reflect higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, as compensating factors,
these loan programs establish lower maximum Loan-to-Value Ratios and maximum
loan amounts for loans graded in such categories.
S-39
The Seller's guidelines have the following categories and criteria for
grading the potential likelihood that the applicant will satisfy the repayment
obligations of a mortgage loan, however, on a case-by-case basis, the Seller may
determine that, based on compensating factors, a prospective mortgagor not
strictly qualifying under such underwriting risk category guidelines warrants an
underwriting exception:
The "Loan-to-Value Ratio" of a Mortgage Loan shall generally mean the
ratio, expressed as a percentage of (a) the principal amount of the Mortgage
Loan at origination over (b) the lesser of the purchase price or the appraised
value of the related Mortgaged Property at origination.
"A+": Under the A+ risk category, the applicant generally must have repaid
installment and revolving debt according to its terms with a maximum of three
isolated 30 day delinquencies in the past 12 months. The history over the prior
13-24 months must not exhibit 90+ day delinquency on more than 50% of the total
consumer balances. One 30-day late payment within the last 12 months is
permitted on an existing mortgage loan. Judgments or liens must have been paid
off within two years prior to the funding of the loan. In the case of a prior
bankruptcy, the bankruptcy must have been filed a minimum of five years prior to
the application date. No foreclosures may be in the borrower's credit file.
Generally, the mortgaged property must be in at least average condition.
Generally, a maximum Loan-to-Value Ratio of 90% is permitted for owner occupied
one- to four-unit and townhouse properties secured by first mortgages. The
maximum Loan-to-Value Ratio generally is reduced by 10% on a mortgaged property
consisting of a second home with proof of owner occupancy for part of the year
and rental properties. Generally, properties with rural characteristics are
limited to an 80% Loan-to-Value Ratio. The debt-to-income ratio may not exceed
45%. On those second lien mortgage loans for which the Combined Loan-to-Value
Ratio ("CLTV") exceeds 90%, the CLTV may be as high as 100%.
"A": Under the A risk category, the applicant's credit report may exhibit
30 day delinquency on all credit and a maximum of 60 day delinquency on no more
than 25% of total consumer balances over the last 12 months. A maximum of two
30-day late payments within the past 12 months is permitted on an existing
mortgage loan. Generally, a Loan-to-Value Ratio for the applied-for mortgage of
90% or less is required on all owner occupied one-to-four unit properties
secured by a first mortgage. For purposes of determining whether a prospective
mortgagor has been 30 days late, the Seller uses a "rolling 30-day period,"
i.e., a continuous sequence of 30-day late payments will be considered as a
single 30-day late payment. Judgments or liens must have been paid off within
two years prior to the funding of the loan. No collection accounts or charge-
off may remain open after the funding of the loan except that those under $500
are treated on a case-by-case basis. No bankruptcy, dismissal or notice of
default filings may have occurred during the preceding three years and no
foreclosures may be in the applicant's file. Generally, the mortgaged property
must be in at least average condition. The maximum Loan-to-Value Ratio
generally is limited to 80% on properties with rural characteristics. Loan-to-
Value Ratios for non-owner-occupied properties and second homes are limited to
80%. The debt-to-income ratio generally may not exceed 50%.
"AA": Under the AA risk category, the applicant generally must have repaid
installment and revolving debt according to its terms with a maximum of three
isolated 30 day delinquencies in the past 12 months. The history over the prior
13-24 months must not exhibit 60+ day delinquency on any consumer balances. One
30-day late payment within the last 12 months or up to two 30-day late payments
within the last 24 months are permitted on an existing mortgage loan. Judgments
or liens must have been paid off within two years prior to the funding of the
loan. In the case of a prior bankruptcy, the bankruptcy must have been
discharged a minimum of five years prior to the application date with a minimum
of two years of reestablished credit with no mortgage lates. No foreclosures
may be in the borrower's credit file. Generally, the mortgaged property must be
in at least average condition. Generally, a maximum Loan-to-Value Ratio of 95%
is permitted for owner occupied one- to four-unit and townhouse properties
secured by first mortgages. Generally the debt-to-income ratio must be 45% or
less.
"B+": Under the B+ risk category, the applicant must have generally repaid
installment and revolving debt according to its terms with a maximum of 60-day
delinquency for minor and major creditors. A maximum of three 30-day late
payments within the last 12 months are permitted on an existing mortgage loan.
No bankruptcy, dismissal or notice of default filings may have occurred during
the preceding two years and no foreclosures may be in the applicant's file
within the previous five years. Non-medical charge-off accounts, judgments,
collection accounts and liens exceeding $500 should be more than six months old.
Generally, the mortgaged property must be in at least average condition.
Generally, a maximum Loan-to-Value Ratio of 85% is permitted for an owner-
occupied one-to-four-unit condominium or townhouse property with a first
mortgage. The maximum Loan-to-Value
S-40
Ratio is generally limited to 80% on properties with rural characteristics.
Loan-to-Value Ratios for non-owner-occupied properties and second homes are
limited to 75%. The debt-to-income ratio generally may not exceed 50%.
"B": Under the B risk category, consumer credit may exhibit 60 day
delinquency on all credit with a maximum of 90 day delinquency on no more than
25% of the total consumer balances. A maximum of 30-day late payments within
the last 12 months are permitted on an existing mortgage loan. No bankruptcy,
dismissal or notice of default filings may have occurred during the preceding
two years and no foreclosures within the past five years may be in the
applicant's file. Non-medical charge-off accounts, judgments, collection
accounts and liens exceeding $500 should be more than six months old.
Generally, the mortgaged property must be in at least average condition.
Generally, a maximum Loan-to-Value Ratio of 85% is permitted for an owner-
occupied one- to four- unit or townhouse property with a first mortgage. Loan-
to-Value Ratios for non-owner-occupied properties generally are limited to 75%.
Generally, the debt-to-income ratio must be 50% or less.
"C+": Under the C+ risk category, the applicant may have experienced
significant credit problems in the past. A maximum of one 60-day late payments
within the last 12 months are permitted on an existing mortgage loan. An
existing mortgage loan is not required to be current at the time the application
is submitted. No notice of foreclosure filing may have occurred during the
preceding four years. No bankruptcy filing or dismissal may have occurred
during the preceding 24 months. Generally, the mortgaged property must be in at
least average condition. Generally a maximum Loan-to-Value Ratio of 80% is
permitted for an owner-occupied properties or townhouse property secured by a
first mortgage, while 70% is permitted for non-owner-occupied properties or
second homes with proof of owner occupancy for part of the year. Generally, the
debt-to-income ratio must be 50% or less.
"C": Under the C risk category, the applicant may have experienced
significant credit problems in the past. A maximum of one 60-day late payments
within the last 12 months are permitted on an existing mortgage loan. An
existing mortgage loan is not required to be current at the time the application
is submitted. No notice of foreclosure filing may have occurred during the
preceding 3 years. No bankruptcy filing or dismissal may have occurred during
the preceding 12 months. Generally, the mortgaged property must be in at least
average condition. Generally, a maximum Loan-to-Value Ratio of 80% is permitted
for an owner-occupied one-to-four unit or townhouse property secured by a first
mortgage, while 65% is permitted for non-owner-occupied properties or second
homes with proof of owner occupancy for part of the year. Generally, the debt-
to-income ratio must be 50% or less.
"C-": Under the C- risk category, the applicant may have experienced
significant credit problems in the past. A maximum of two 90-day late payments
within the past 12 months is permitted on an existing mortgage loan for full
documentation loans. A maximum of one 90-day delinquency within the past 12
months is permitted on an existing mortgage loan for limited and stated
documentation loans. An existing mortgage loan is not required to be current at
the time the application is submitted. A notice of foreclosure filing may have
occurred in the past. Bankruptcy must be dismissed. Generally, the mortgaged
property must be in at least average condition. Generally, a maximum Loan-to-
Value Ratio of 75% is permitted for an owner-occupied one-to-four unit or
townhouse property secured by a first mortgage, while 65% is permitted for non-
owner-occupied properties or second homes with proof of owner occupancy for part
of the year. Generally, the debt-to-income ratio must be 55% or less.
"D": Under the D risk category, the applicant may have experienced
significant credit problems in the past. An existing mortgage loan is not
required to be current at the time the application is submitted. Generally, the
mortgaged property must be in at least average condition. Generally, a maximum
Loan-to-Value Ratio of 70% is permitted for an owner-occupied one-to-four unit
or townhouse property secured by a first mortgage. The maximum Loan-to-Value
Ratio is generally reduced by 10% on non-owner-occupied properties. Generally,
the debt-to-income ratio may not exceed 55%.
The Seller's standards applicable to the Mortgage Loans include the
foregoing categories and characteristics as guidelines only. The foregoing risk
grade classifications are based on factors that are exclusive of the additional
protection against loss that primary mortgage insurance customarily provides on
loans which have Loan-to-Value Ratios or Combined Loan-to-Value Ratios in excess
of 80%. Approximately 24.64% of the Mortgage Loans by Principal Balance as of
the Cut-off Date, have Combined Loan-to-Value Ratios in excess of 80%.
S-41
Based on the indicated underwriting standards applicable for mortgage loans
with risk features originated thereunder, and in particular Mortgage Loans in
loan classes C and D as described herein, such Mortgage Loans are likely to
experience greater rates of delinquency, foreclosure and loss, and may
experience substantially greater rates of delinquency, foreclosure and loss,
than mortgage loans underwritten under more stringent underwriting standards.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
General
The effective yield of the Notes will be affected by the rate and timing of
payments of principal on the Mortgage Loans securing the Notes (including, for
this purpose, prepayments and amounts received by virtue of refinancings,
liquidations of Mortgage Loans due to defaults, casualties, condemnations, and
repurchases, whether optional or required, by the Seller or the Note Insurer),
the amount and timing of mortgagor delinquencies and defaults resulting in
realized losses, and the application of Excess Cash on the Notes. Such yield
may be adversely affected by a higher or lower than anticipated rate of
principal payments (including principal prepayments) on the Mortgage Loans. The
rate of principal payments on such Mortgage Loans will in turn be affected by
the amortization schedules of such Mortgage Loans, the rate and timing of
principal prepayments thereon by the mortgagors, liquidations of defaulted
Mortgage Loans and optional or required repurchases of Mortgage Loans as
described herein. The timing of changes in the rate of prepayments,
liquidations and repurchases of the Mortgage Loans may, and the timing of
Realized Losses could, significantly affect the yield to an investor, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. Since the rate and timing of principal payments on
the Mortgage Loans will depend on future events and on a variety of factors (as
described more fully herein), no assurance can be given as to such rate or the
timing of principal prepayments on the Notes.
Because all amounts available for payment on the Notes after payments in
respect of interest on the Notes, including all or a portion of the Excess Cash,
are applied as reductions of the Note Balance, the weighted average life of the
Notes will also be influenced by the amount of Excess Cash so applied. Because
Excess Cash attributable to the overcollateralization feature is derived from
interest collections on the Mortgage Loans and will be applied to reduce the
Note Balance, the aggregate payments in reduction of the Note Balance on a
Payment Date will usually be greater than the aggregate amount of principal
payments (including Principal Prepayments) on the Mortgage Loans payable on such
Payment Date until the Required Overcollateralization Amount is reached and
assuming an Overcollateralization Deficit does not occur. As a consequence,
Excess Cash available for payment in reduction of the Note Balance for the Notes
will increase in proportion to the outstanding Note Balance over time in the
absence of offsetting Realized Losses for the Mortgage Loans.
Excess Cash will be paid on the Notes in reduction of the Note Balance on
each Payment Date to the extent the then applicable Required
Overcollateralization Amount exceeds the related Overcollateralization Amount on
such Payment Date. Any remaining Excess Cash will be released to the holder(s)
of the Residual Interest. If a Note is purchased at other than par, its yield
to maturity will be affected by the rate at which the Excess Cash is paid to the
Noteholders. If the actual rate of Excess Cash payments on the Notes applied in
reduction of the Note Balance is slower than the rate anticipated by an investor
who purchases a Note at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of Excess Cash
payments applied in reduction of the Note Balance is faster than the rate
anticipated by an investor who purchases a Note at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of Excess Cash on any Payment Date will be affected by, among other
things, the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Collection Period and such
amount will be influenced by changes in the weighted average of the Mortgage
Rates resulting from prepayment and liquidations of the Mortgage Loans. The
amount of Excess Cash paid to the Noteholders applied to the Note Balance on
each Payment Date will be based on the Required Overcollateralization Amount.
The Indenture generally provides that the Required Overcollateralization Amount
may, over time, decrease, or increase, subject to certain floors, caps and
triggers, including triggers that allow the Required Overcollateralization
Amount to decrease or "step down" based on the performance on the Mortgage Loans
with respect to certain tests specified in the Indenture based on delinquency
rates. Any increase in the Required Overcollateralization Amount may result in
an accelerated amortization until such Required Overcollateralization Amount is
reached. Conversely, any decrease in the Required Overcollateralization Amount
will result in a decelerated amortization of the Notes.
S-42
The Mortgage Loans generally may be prepaid in full or in part at any time,
although a substantial portion of the Mortgage Loans provide for payment of a
prepayment charge. The Mortgage Loans generally are not assumable and the
related Mortgaged property will be due on sale, in which case the Servicer shall
enforce any due-on-sale clause contained in any Mortgage Note or Mortgage, to
the extent permitted under applicable law and governmental regulations;
provided, however, if the Servicer determines that it is reasonably likely that
the mortgagor will bring, or if any mortgagor does bring legal action to declare
invalid or otherwise avoid enforcement of a due-on-sale clause contained in any
Mortgage Note or Mortgage, the Servicer will not be required to enforce the due-
on-sale clause or to contest such action.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. See "Risk Factors" herein
and in the Prospectus. The rate of default on Mortgage Loans that are refinance
or limited documentation mortgage loans, and on Mortgage Loans with high Loan-
to-Value Ratios, may be higher than for other types of Mortgage Loans. As a
result of the underwriting standards applicable to the Mortgage Loans, the
Mortgage Loans are likely to experience rates of delinquency, foreclosure,
bankruptcy and loss that are higher, and that may be substantially higher, than
those experienced by mortgage loans underwritten in accordance with the
standards applied by Fannie Mae and Freddie Mac mortgage loan purchase programs.
See "Description of the Mortgage Pool--Underwriting Standards" herein. In
addition, because of such underwriting criteria and their likely effect on the
delinquency, foreclosure, bankruptcy and loss experience of the Mortgage Loans,
the Mortgage Loans will generally be serviced in a manner intended to result in
a faster exercise of remedies, which may include foreclosure, in the event
Mortgage Loan delinquencies and defaults occur, than would be the case of the
Mortgage Loans were serviced in accordance with such other programs.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic condition of the
region of the country in which the related Mortgaged Properties are located.
The risk of delinquencies and loss is greater and 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. To the
extent that the locations of the Mortgaged Properties are concentrated in a
given region, the risk of delinquencies, loss and involuntary prepayments
resulting from adverse economic conditions in such region or from other factors,
such as fires, storms, landslides and mudflows and earthquakes, is increased.
Certain information regarding the location of the Mortgaged Properties is set
forth under "Description of the Mortgage Pool--Mortgage Loan Characteristics"
herein. See "Risk Factors--Risks Associated with Geographic Concentration of
the Mortgage Properties" herein.
Certain of the Mortgage Loans are Balloon Loans. Balloon Loans involve a
greater degree of risk than fully amortizing loans because the ability of the
borrower to make a Balloon Payment typically will depend upon its ability either
to refinance the loan or to sell the related Mortgaged 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 the
attempted sale or refinancing, the borrower's equity in the related Mortgaged
Property, the financial condition of the borrower and operating history of the
related Mortgaged Property, tax laws, prevailing economic conditions and the
availability of credit for commercial real estate projects generally.
Other factors affecting prepayment of Mortgage Loans include changes in
mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
the Notes will depend on the rate of payment (including prepayments) of the
principal of the Mortgage Loans, the actual maturity of the Notes could occur
significantly earlier than the Stated Maturity. See "--Weighted Average Life"
herein.
In addition, the yield to maturity of the Notes will depend on the price
paid by the holders of the Notes and the Note Interest Rate. The extent to
which the yield to maturity of a Note is sensitive to prepayments will depend
upon the degree to which it is purchased at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be passed
through to the Indenture Trustee and included in the Available Funds in the
month following the month of receipt thereof by the Servicer. Any prepayment of
a Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure proceedings or
by virtue of the repurchase of a Mortgage Loan) will have the effect of
resulting in payments on the Notes of amounts that otherwise would be paid in
amortized increments over the remaining term of such Mortgage Loan.
S-43
To the extent that principal prepayments with respect to the Mortgage Loans
result in prepayments on the Notes during periods of generally lower interest
rates, Noteholders may be unable to reinvest such principal prepayments in
securities having a yield and rating comparable to the Notes.
The yield on the Notes may be affected by any delays in receipt of payments
thereon as described under "Description of the Notes--Book-Entry Registration
and Definitive Notes" herein and "Risk Factors--Owners of Book Entry Securities
Not Entitled To Exercise Rights of Holders of Securities" and "Description of
the Securities--Book Entry Registration and Definitive Securities" in the
Prospectus.
The yield on the Notes may also be affected by a redemption of the Notes as
described under " Description of the Notes--Redemption of the Notes" herein.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of the Notes. An investor is
urged to make an investment decision with respect to the Notes based on the
anticipated yield to maturity of the Notes resulting from its price and such
investor's own determination as to anticipated Mortgage Loan prepayment rates.
Prospective investors are urged to analyze fully the effect of Mortgage Loan
principal prepayments and market conditions on the yield and value of the Notes,
before acquiring any Notes. In particular, investors that are required to
perform periodic valuations on their investment portfolios should consider the
effect of such fluctuations in value. In addition, investors should carefully
consider the factors discussed under "Risk Factors--Prepayment of the Mortgage
Loans May Adversely Affect the Yield to Maturity of the Notes" herein.
Weighted Average Life
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the
Notes will be influenced by the rate at which principal on the Mortgage Loans is
paid, which may be in the form of scheduled payments or prepayments (including
prepayments of principal by the borrower as well as amounts received by virtue
of repurchases, condemnation, insurance or foreclosure with respect to the
Mortgage Loans), and the timing thereof.
The weighted average life of the Notes also will be influenced by the
overcollateralization of the Notes because interest collections are applied as
principal payments to the Notes until the outstanding Note Balance is less than
the aggregate Principal Balance of the Mortgage Loans by an amount equal to the
Required Overcollateralization Amount. These payments have the effect of
accelerating the amortization of the Notes, thereby shortening their weighted
average life.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. A common model ("Constant Prepayment Rate" or
"CPR") represents an assumed constant rate of prepayment each month, expressed
as an annual rate, relative to the then outstanding principal balance on a pool
of mortgage loans for the life of such loans. The model used in the Prospectus
Supplement with respect to the Notes is the Home Equity Prepayment assumption
("HEP"). HEP assumes that a pool of loans prepays in the first month of the
life of such loans at a CPR that corresponds to one tenth the given HEP
percentage and increases by an additional one-tenth each month thereafter until
the tenth month, where it remains at a CPR equal to the given HEP percentage.
For example, with respect to a pool of mortgage loans, a 25% HEP assumes a CPR
of 2.5% in the first month of the life of such loans and an increase of 2.5% CPR
each month thereafter until the tenth month. Beginning in the tenth month and
in each month thereafter during the life of such mortgage loans, 25% HEP assumes
a CPR of 25% each month. Neither the prepayment model used herein nor any other
prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the
Mortgage Pool.
Each of the following tables is based on the following assumptions (the
"Modeling Assumptions"): (i) the Mortgage Pool consists of Mortgage Loans with
the characteristics set forth in the table below, (ii) distributions on the
Notes are received, in cash, on the 25th day of each month, commencing in
December 1999, (iii) the Mortgage Loans prepay at the percentage of HEP
indicated, (iv) the Notes are not redeemed on the Initial Redemption Date (other
than as set forth in the Weighted Average Life to 10% Call), (v) no defaults or
delinquencies occur in the payment by mortgagors of principal and interest on
the Mortgage Loans and no shortfalls due to the application of
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the Relief Act, are incurred, (vi) none of the Seller, the Servicer or any other
person purchases from the Trust any Mortgage Loan pursuant to any obligation or
option under the Sale Agreement, the Servicing Agreement or others, (vii)
scheduled monthly payments of principal and interest on the Mortgage Loans are
received on the first day of each month commencing in December 1999, and are
computed prior to giving effect to any prepayments received in the prior month,
(viii) prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month commencing in November 1999, and include
30 days' interest thereon, (ix) the scheduled monthly payment for each Mortgage
Loan is calculated based on its Principal Balance, gross coupon rate and
remaining amortization term, such that the Mortgage Loan will amortize in
amounts sufficient to repay the remaining principal balance of such Mortgage
Loan by its remaining amortization term, (x) the coupon on the Notes is as set
forth herein, (xi) the Notes are purchased on November 18, 1999, (xii) no
investment earnings on the Note Account or the Collection Account is available
for payment to the Noteholders, (xiii) the Servicing Fee is equal to 0.50% per
annum of the aggregate Principal Balance of the Mortgage Loans, (xiv) the
Indenture Trustee Fee is equal to 0.01% per annum of the aggregate Principal
Balance of the Mortgage Loans and the Note Insurer Premium is equal to the
amount set forth in the Insurance Agreement, (xv) the Required
Overcollateralization Amount is as set forth in the Indenture and all collateral
performance tests have been satisfied, (xvi) the level of Six-Month LIBOR
remains constant at 6.00125%, (xvii) no prepayment premium is received during
the related Collection Period, (xviii) the PMI Insurer premium is equal to 0.07%
per annum of the aggregate Principal Balance of the Mortgage Loans, and (xix)
the gross coupon rate for each adjustable rate Mortgage Loan is adjusted on its
next rate adjustment date (and every six months thereafter) to equal the sum of
(a) the level of Six-Month LIBOR and (b) the respective gross margin (subject to
applicable interest rate caps and floors).
S-45
Mortgage Loan Pool Characteristics
Original Remaining Remaining Term
Pool Principal Gross Coupon Amortization Amortization To Maturity
Number Balance( $ ) Rate (%) Term (months) Term (months) (months) Gross Margin (%)
- ---------- ------------- ------------ ------------- ------------ -------------- ----------------
1 58,011,190.47 10.626 334 332 332 N/A
2 12,205,174.61 10.536 174 172 172 N/A
3 65,368,791.24 11.033 360 358 178 N/A
4 9,368,633.27 10.911 358 356 356 7.568
Number of Months
Pool Initial Periodic Ongoing Periodic Lifetime Cap Lifetime until next rate
Number Cap (%) Cap (%) (%) Floor (%) adjustment date
- ---------- ---------------- ---------------- ------------ --------- ----------------
1 N/A N/A N/A N/A N/A
2 N/A N/A N/A N/A N/A
3 N/A N/A N/A N/A N/A
4 3.000 1.000 17.911 10.911 22
S-46
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table. Any such
discrepancy may have an effect upon the percentages of the initial Note Balance
outstanding (and the weighted average life) of the Notes set forth in the table.
In addition, since the actual Mortgage Loans will have characteristics that
differ from those assumed in preparing the table set forth below the Notes may
mature earlier or later than indicated by the table. Based on the foregoing
assumptions, the table indicates the weighted average life of the Notes and sets
forth the percentages of the initial Note Balance that would be outstanding
after each of the Payment Dates shown, at various percentages of HEP.
Variations in the prepayment experience and the balance of the Mortgage Loans
that prepay may increase or decrease the percentages of initial Note Balances
(and weighted average lives) shown in the following table. Such variations may
occur even if the average prepayment experience of all such Mortgage Loans
equals any of the specified percentages of HEP. The following table indicates
the percentage of the initial Note Balance that would be outstanding after each
of the dates shown at various percentages of HEP and the corresponding weighted
average lives of the Notes.
S-47
Percent of Original Principal Balance Outstanding of the Notes at the
Following HEP Percentages
Payment Date 0% 15% 25% 27% 30% 35%
-------- ---- ---- ---- ---- ----
Initial Percentage 100% 100% 100% 100% 100% 100%
November 25, 2000 97 85 78 76 74 70
November 25, 2001 94 70 55 53 49 43
November 25, 2002 93 58 41 38 34 28
November 25, 2003 92 48 30 27 23 18
November 25, 2004 91 40 22 20 16 11
November 25, 2005 90 34 17 14 11 7
November 25, 2006 89 28 12 10 8 5
November 25, 2007 87 24 9 7 5 3
November 25, 2008 85 20 7 5 3 2
November 25, 2009 83 16 5 4 2 1
November 25, 2010 81 14 3 2 1 0
November 25, 2011 79 11 2 2 1 0
November 25, 2012 76 9 2 1 0 0
November 25, 2013 73 8 1 1 0 0
November 25, 2014 33 3 0 0 0 0
November 25, 2015 33 2 0 0 0 0
November 25, 2016 31 2 0 0 0 0
November 25, 2017 30 1 0 0 0 0
November 25, 2018 28 1 0 0 0 0
November 25, 2019 26 1 0 0 0 0
November 25, 2020 24 0 0 0 0 0
November 25, 2021 21 0 0 0 0 0
November 25, 2022 19 0 0 0 0 0
November 25, 2023 16 0 0 0 0 0
November 25, 2024 12 0 0 0 0 0
November 25, 2025 9 0 0 0 0 0
November 25, 2026 4 0 0 0 0 0
November 25, 2027 1 0 0 0 0 0
November 25, 2028 0 0 0 0 0 0
November 25, 2029 0 0 0 0 0 0
Weighted Average 15.7 5.3 3.4 3.1 2.8 2.4
Life to Maturity (in Years)(1)
Weighted Average 15.6 5.1 3.1 2.9 2.6 2.2
Life to 10% Call (in Years)(1)
(1) The weighted average life of the Notes is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the original Note Balance.
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the table above,
or to any other level, or that the actual weighted average life of the Notes
will conform to any of the weighted average lives set forth in the table above.
Furthermore, the information contained in the table with respect to the weighted
average life of the Notes is not necessarily indicative of the weighted average
life that might be calculated or projected under different or varying HEP.
The characteristics of the Mortgage Loans will differ from those assumed in
preparing the table above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity or that all of the
Mortgage Loans will prepay at the same rate. The timing of changes in the rate
of prepayments may significantly
S-48
affect the actual yield to maturity to investors, even if the average rate of
principal prepayments is consistent with the expectations of investors.
SERVICING OF THE MORTGAGE LOANS
General
The Mortgage Loans will be serviced by Mortgage Lenders Network USA, Inc.,
as Servicer (the "Servicer"). The information set forth in the following
paragraphs has been provided by the Servicer.
The Servicer was incorporated in November 1996, commenced closing mortgage
loans in April 1997, and began servicing such mortgages loans in the same month.
The principal business of the Servicer historically has been the origination and
sale of non-conforming mortgage loans on both a servicing released and a
servicing retained basis. The Servicer does not have a significant history of
servicing mortgage loans. The loans serviced by the Servicer's mortgage
servicing department were loans made to residents throughout the United States.
The Servicer will service and administer the Mortgage Loans in accordance
with the policies, procedures and practices customarily employed by the Servicer
in servicing other comparable mortgage loans and pursuant to the provisions of
the Servicing Agreement. The Servicer will not amend or modify in any material
respect its policies, procedures and practices with respect to the Mortgage
Loans (other than as required by applicable laws and regulations) without the
prior consent of the Note Insurer.
The Servicer's mortgage servicing department maintains a centralized
portfolio management department which services the mortgage loans that are not
sold, are sold servicing retained, are sub-serviced, as well as those mortgage
loans that are securitized. Servicing includes collecting payments from
borrowers, accounting for principal and interest, contacting delinquent
borrowers, ensuring that insurance is in place, monitoring payment of real
estate property taxes, and supervising foreclosures and bankruptcies in the
event of unremedied defaults. The Servicer has increased its servicing
capabilities and staffing significantly since 1997 in light of its origination
growth.
Consistent with the servicing standard described above, the Servicer, in
its discretion, may (a) waive any late payment charges, charges for checks
returned for insufficient funds or other fees that may be collected in the
ordinary course of servicing a Mortgage Loan, (b) arrange a schedule for the
payment of delinquent payments on the Mortgage Loan, subject to conditions set
forth in the Servicing Agreement, if a mortgagor is in default or about to be in
default because of such mortgagor's financial condition or (c) modify monthly
payments on Mortgage Loans in accordance with the Servicer's general policy on
Mortgage Loans subject to the Relief Act; provided, however, the Servicer may
not, without the prior consent of the Note Insurer, permit any waiver,
modification or variance of a Mortgage Loan which would (i) change the Mortgage
Rate, (ii) forgive the payment of any principal or interest, (iii) lessen the
lien priority, (iv) the Servicer will not, without the Note Insurer's consent,
(A) extend any Mortgage Loan more than once in a calendar year or (B) grant more
than three extensions with respect to any Mortgage Loan or (v) extend the final
maturity date on a Mortgage Loan past twelve months prior to the maturity date
of the Notes, in any case except to the extent required under the Relief Act.
The Servicer, acting as agent for the Indenture Trustee, will not consent to the
subsequent placement of a deed of trust or mortgage, as applicable, on any
Mortgaged Property that is of equal or higher priority to that of the lien
securing the related Mortgage Loan unless such Mortgage Loan is prepaid in full
and thereby removed from the Mortgage Pool.
Customary Servicing Procedures
The procedures of the Servicer with respect to day to day servicing of the
Mortgage Loans may vary considerably depending on the particular Mortgage Loan,
the Mortgaged Property, the mortgagor and the laws of the jurisdiction in which
the Mortgaged Property is located. Generally, it is the current practice of the
Servicer to send borrowers coupon books periodically reflecting their Monthly
Payments and the due dates therefor. Although borrowers generally make loan
payments within ten to fifteen days after the due date, if a borrower fails to
pay the monthly payment within such time period, the Servicer will commence
collection efforts by notifying the borrower of the delinquency. Under the
terms of each Mortgage Loan, the mortgagor agrees to pay a late charge (which
the Servicer is entitled to retain as additional servicing compensation under
the Servicing Agreement) if a monthly
S-49
payment on a Mortgage Loan is not received within the number of days specified
in the Mortgage Note after its due date. If the Mortgage Loan remains
delinquent, the Servicer will attempt to contact the mortgagor to determine the
cause of the delinquency and to obtain a commitment to cure the delinquency at
the earliest possible time.
Collection efforts generally begin when an account is over five days past
due. At the time, the Servicer's loan counseling department attempts to contact
the borrower to determine the reason for the delinquency and cause the account
to become current. After an account becomes 8 days past due, letters are sent
to the borrower. In general, at 30 days past due, a right to cure letter is
sent; at 61 days a demand letter is sent and the account is reviewed for
foreclosure action. In addition to written notices, the Servicer attempts to
maintain telephone contact with the borrower throughout the period of
delinquency. If the status of the account continues to deteriorate, the loan
counseling department undertakes an analysis to determine the appropriate
action. In limited circumstances, when a borrower is experiencing difficulty in
making timely payments, the loan counseling department may temporarily adjust
the borrower's payment schedule without changing the loan's delinquency status.
The determination of how to work out a delinquent loan is based upon a number of
factors, including the borrower's payment history and the reason for the current
inability to make timely payments.
When a loan is 90 days past due in accordance with its original terms, it
is placed on non-accrual status, is forwarded to the Servicer's default
servicing center and foreclosure proceedings are generally initiated. In
connection with such foreclosure, the loan and the facts surrounding its
delinquency are reviewed, and the underlying property may be appraised.
Regulations and practices regarding foreclosures and the rights of the mortgagor
in default vary greatly from state to state. See "Certain Legal Aspects of the
Mortgage Loans--Foreclosure" and "--Security Interests in the Manufactured
Homes" in the Prospectus.
The Servicing Agreement
The summaries of certain provisions of the Servicing Agreement set forth
below and in other places in this Prospectus Supplement, while complete in
material respects, do not purport to be exhaustive. For more details regarding
the terms of the Servicing Agreement, prospective investors in the Notes are
advised to review the Servicing Agreement, a copy of which the Seller will
provide (without exhibits) without charge upon written request addressed to the
Seller.
Generally, the Servicer will be authorized and empowered pursuant to the
Servicing Agreement (i) to execute and deliver (or procure the execution and
delivery by the Indenture Trustee of) any and all instruments of satisfaction or
cancellation or of partial or full release or discharge and all other comparable
instruments with respect to the Mortgage Loans and with respect to the Mortgaged
Properties and (ii) to institute foreclosure proceedings or obtain deeds in lieu
of foreclosure so as to convert title to of any Mortgaged Property in the name
of the Indenture Trustee on behalf of the Noteholders and the Note Insurer.
Payments on Mortgage Loans and Establishment of Collection Account. The
Servicer shall establish and maintain in the name of the Indenture Trustee for
the benefit of Noteholders and the Note Insurer one or more accounts
(collectively, the "Collection Account") at one or more institutions meeting the
requirements set forth in the Servicing Agreement. The Collection Account, and
all amounts deposited therein from time to time, shall be part of the Trust
Fund. The Servicer will deposit into the Collection Account not later than two
Business Days after receipt, all payments on or in respect of the Mortgage Loans
received from or on behalf of mortgagors and all proceeds of the Mortgage Loans,
net of servicing fees, all other items of servicing compensation, and
reimbursable outstanding Servicing Advances and Monthly Advances, to the extent
the Servicer's automated system deducts such amounts prior to deposit to the
Collection Account. On or prior to 12:00 noon Eastern Standard Time on each
Deposit Date, funds to be remitted to the Note Account will be remitted from the
Collection Account to the Indenture Trustee for deposit into the Note Account.
Notwithstanding the foregoing, payments and collections that do not constitute
Available Funds (e.g., amounts representing interest accrued on Mortgage Loans
in respect of any period prior to the Cut-off Date, fees, late payment charges,
charges for checks returned for insufficient funds, extension or other
administrative charges or other amounts received for application towards the
payment of taxes, insurance premiums, assessments and similar items) will not be
required to be deposited into the Collection Account. The Servicer may make
withdrawals from the Collection Account only for the following purposes: (a) to
make deposits into the Note Account as described above; (b) to pay itself any
monthly Servicing Fees and other items of servicing compensation and investment
income on Permitted Investments to the extent permitted by the Servicing
Agreement; (c) to make any Servicing Advance to the extent permitted by the
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Servicing Agreement or to reimburse itself for any Servicing Advance or Monthly
Advance previously made to the extent permitted by the Servicing Agreement; (d)
to withdraw amounts that have been deposited to the Collection Account in error;
and (e) to clear and terminate the Collection Account.
Investment of Collection Account. All or a portion of the Collection
Account may be invested and reinvested in one or more Permitted Investments
bearing interest or sold at a discount, at the Servicer's written direction.
The Indenture Trustee or any affiliate thereof may be the obligor on, or manager
or advisor of, any investment in any Collection Account which otherwise
qualifies as a Permitted Investment. No investment in the Collection Account
may mature later than the Deposit Date next succeeding the date of investment.
The Indenture Trustee will not in any way be held liable by reason of any
insufficiency in the Collection Account resulting from any loss on any Permitted
Investment included therein (except to the extent the Indenture Trustee is the
obligor thereon).
All income or other gain from investments in the Collection Account will be
held in the Collection Account for the benefit of the Servicer as additional
servicing compensation and will be subject to withdrawal from time to time as
permitted by the Servicing Agreement. Any loss resulting from such investments
will be for the account of the Servicer. The Servicer will be required to
deposit the amount of any such loss immediately upon the realization of such
loss to the extent such loss will not be offset by other income or gain from
investments in the Collection Account and then available for such application.
Monthly Advances. In order to maintain a regular flow of scheduled
interest to Noteholders (rather than to guarantee or insure against losses), the
Servicing Agreement will require that, not later than the close of business on
the Deposit Date prior to each Payment Date, the Servicer will remit or cause to
be remitted a Monthly Advance, if necessary, to the Indenture Trustee for
deposit in the Note Account to be paid on the related Payment Date. A "Monthly
Advance" will be equal to the sum of (i) the interest and principal portions of
the aggregate amount of monthly payments (net of the related Servicing Fee) due
on the Mortgage Loans during the related Due Period but delinquent so as not to
have been deposited into the Collection Account as of the close of business on
the last day before the related Deposit Date and (ii) with respect to each
Mortgaged Property that was acquired in foreclosure or similar action (each, an
"REO Property") during or prior to the related Collection Period and as to which
final sale did not occur during the related Collection Period, an amount equal
to the excess, if any, of interest on the Principal Balance of the Mortgage
Loan, but not of any portion that represents late payment charges, extension
fees or collections allocable to payments to be made by mortgagors for payment
of insurance premiums or similar items, relating to such REO Property for the
related Collection Period at the related Mortgage Rate (net of the Servicing
Fee) over the net income from the REO Property transferred to the Note Account
for such Payment Date; provided, however, that in no case will the Servicer be
required to make advances with respect to any period following the final due
date with respect to any Mortgage Loan.
The Servicing Agreement provides that the Servicer may pay all or a portion
of any Monthly Advance out of amounts on deposit in the Collection Account which
are being held for payment on a subsequent Payment Date; any such amounts so
used are required to be replaced by the Servicer by deposit to the Collection
Account on or before the Deposit Date relating to such subsequent Payment Date.
The Servicer may recover Monthly Advances, if not theretofore recovered
from the mortgagor on whose behalf such Monthly Advance was made, from
subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds (but only to the extent of such Insurance Proceeds
or Liquidation Proceeds) and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Monthly Advance will not be ultimately recoverable from subsequent collections,
Insurance Proceeds, Liquidation Proceeds on the related Mortgage Loans or
otherwise ("Nonrecoverable Advances"), the Servicer may reimburse itself on the
first Deposit Date thereafter out of collections received on other Mortgage
Loans.
The Servicer will not be required to make any Monthly Advance that it
determines would be a Nonrecoverable Advance.
S-51
Compensating Interest Payments. With respect to each Mortgage Loan as to
which a prepayment in whole or in part was received, the Servicer will be
required with respect to such Payment Date to remit to the Indenture Trustee no
later than the related Deposit Date, from amounts otherwise payable to the
Servicer as the Servicing Fee for the related Payment Date, an amount equal to
the lesser of (a) the monthly Servicing Fee for such Collection Period and (b)
the excess, if any, of (i) 30 days' interest on the Principal Balance of each
such Mortgage Loan (immediately prior to such prepayment) at the related
Mortgage Rate, less (ii) the amount of interest actually received by the
Servicer on such Mortgage Loan during the related Due Period (each such amount,
a "Compensating Interest Payment") for payment on the Notes on such Payment
Date. The Servicer will not be entitled to be reimbursed from collections on
the Mortgage Loans or any assets of the Trust Fund for any Compensating Interest
Payments made.
Realization upon Defaulted Mortgage Loans. The Servicing Agreement will
require the Servicer, acting as the agent of the Indenture Trustee, to foreclose
upon or otherwise comparably convert to ownership in the name of the Indenture
Trustee, on behalf of the Noteholders and the Note Insurer, Mortgaged Properties
securing such of the Mortgage Loans as come into default, as to which no
satisfactory arrangements can be made for the collection of delinquent payments
and which the Servicer has not reacquired pursuant to the option described
below; provided, however, that if the Servicer has actual knowledge or
reasonably believes that any Mortgaged Property is contaminated by hazardous or
toxic wastes or substances, the Servicer will cause an environmental inspection
(in no event at the Indenture Trustee's expense) of the Mortgaged Property that
complies with Fannie Mae's selling and servicing guide applicable to single
family homes and its servicing procedures to be conducted. If the environmental
inspection reveals any potentially hazardous substances, the Servicer will
notify the Indenture Trustee and the Note Insurer, and the Servicer will not
foreclose or accept a deed in lieu of foreclosure on the Mortgaged Property
without the consent of the Indenture Trustee and the Note Insurer. In
connection with such foreclosure or other conversion, the Servicer will follow
such practices as it deems necessary or advisable and as are in keeping with its
general mortgage loan servicing activities; provided, however, that the Servicer
will not be required to expend its own funds in connection with foreclosure or
other conversion, correction of a default on a senior deed of trust or
restoration of any Mortgaged Property unless the Servicer determines that such
foreclosure, correction or restoration will increase Net Liquidation Proceeds.
In servicing the Mortgage Loans, the Servicer will be required to
determine, with respect to each defaulted Mortgage Loan, when it has recovered,
whether through trustee's sale, foreclosure sale or otherwise, all amounts, if
any, it expects to recover from or on account of such defaulted Mortgage Loan,
whereupon such Mortgage Loan will be charged off and will become a Liquidated
Mortgage Loan.
The Servicer may have the right and the option under the Servicing
Agreement, but not the obligation, to reacquire for its own account any Mortgage
Loan which becomes delinquent, in whole or in part, as to three consecutive
monthly installments or any Mortgage Loan as to which enforcement proceedings
have been brought by the Servicer; provided however, repurchases in excess of 3%
of the Principal Balance of the Mortgage Loans as of the Cut-off Date will
require the consent of the Note Insurer. Any such Mortgage Loan so reacquired
will be withdrawn from the Mortgage Pool on a Deposit Date at the Release Price
therefor. The Servicer may only repurchase Mortgage Loans in the order of
delinquency, from most delinquent to least or from highest projected loss (as
shown on the Servicer's monthly report) to lowest projected loss.
Evidence as to Compliance. The Servicing Agreement provides that on or
before a specified date in each year, a firm of nationally recognized
independent public accountants will furnish a report to the Issuer, Indenture
Trustee, the Rating Agencies and the Note Insurer to the effect that on the
basis of certain procedures substantially in conformance with the Uniform Single
Attestation Program for Mortgage Bankers ("USAP") (to the extent the procedures
are applicable to the servicing obligations set forth in the Servicing
Agreement), the servicing by or on behalf of the Servicer of mortgage loans, and
such procedures have disclosed no exceptions or errors in records relating to
the mortgage loans serviced by the Servicer for others which, in the opinion of
such firm, such firm's required to report under USAP, except for such exceptions
as will be referred to in the report. The Servicing Agreement will provide that
the Servicer will be required to deliver to the Issuer, the Indenture Trustee,
the Rating Agencies and the Note Insurer, on or before a specified date in each
year, an officer's certificate of the Servicer to the effect that the Servicer
has fulfilled its material obligations under the Servicing Agreement throughout
the preceding year.
S-52
Removal of Servicer; Certain Matters Regarding Servicer's Servicing
Obligations. The Servicing Agreement provides that the Servicer shall be hired
for a term of no longer than three calendar months and may be re-hired for
additional terms of no longer than three calendar months each by the Note
Insurer, in its sole and absolute discretion. The Servicing Agreement will
provide that the Servicer may not resign from, or not agree to be re-hired with
respect to, its obligations and duties as the Servicer thereunder, except upon
the delivery, at the Servicer's expense, of an opinion of counsel addressed to
the Issuer, the Indenture Trustee and the Note Insurer and in form and substance
acceptable to the Indenture Trustee and the Note Insurer to the effect that its
duties thereunder are no longer permissible under applicable law or regulation
or are in material conflict by reason of applicable law or regulation with any
other of its activities carried on as of the date of the Servicing Agreement.
No such resignation will become effective until the Indenture Trustee or a
successor servicer approved by the Note Insurer has assumed the servicing
obligations and duties of the Servicer under the Servicing Agreement.
The Servicing Agreement will also provide that neither the Servicer, nor
any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust or the Noteholders for any action taken or for
refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of duties of the Servicer, or by reason of
reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Servicing Agreement will provide that the Servicer will
not be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its duties to service the Mortgage Loans under the
Servicing Agreement and which in its opinion may involve it in any expense or
liability.
The Servicing Agreement will provide that any corporation or other entity
(a) into which the Servicer may be merged or consolidated, (b) that may result
from any merger, conversion or consolidation to which the Servicer shall be a
party or (c) that may succeed to all or substantially all of the business of the
Servicer, will, in any case where an assumption is not effected by operation of
law, execute an agreement of assumption to perform every obligation of the
Servicer under the Servicing Agreement, and will be the successor to the
Servicer thereunder without the execution or filing of any document or any
further act by any of the parties to the Servicing Agreement; provided, however,
that if the Servicer in any of the foregoing cases is not the surviving entity,
the surviving entity shall execute and deliver to the Issuer and the Indenture
Trustee an agreement of assumption to perform every obligation of the Servicer
thereunder and provided further that if the surviving entity is not the
Servicer, the surviving entity must (A) be acceptable to the Note Insurer and
(B) each Rating Agency must have issued written confirmation that the succession
of such successor will not result in a downgrading of the implied rating then
assigned by such Rating Agency to the Notes (without taking into account the
Insurance Policy).
Servicer Events of Default. Events of default (each, a "Servicer Event of
Default") under the Servicing Agreement will generally include (a) any failure
by the Servicer to make a required Monthly Advance on the related Deposit Date
as required or any failure by the Servicer to deposit in the Collection Account
or Note Account any other amount required to be so deposited under the Servicing
Agreement; (b) any failure by the Servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the Servicing
Agreement or the Sale Agreement which materially and adversely affects the
rights of Noteholders or the Note Insurer and continues unremedied for the
applicable cure period, if any, after the giving of written notice of such
failure to the Servicer by the Indenture Trustee, at the direction of the Note
Insurer, or by the Note Insurer or, with the consent of the Note Insurer, the
Noteholders evidencing Voting Interests represented by all Notes aggregating not
less than 51%; (c) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings regarding the
Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations; (d) any representation or warranty made by the
Servicer in the Servicing Agreement or the Sale Agreement or certificate
delivered by the Servicer pursuant thereto having been incorrect in any material
respect as of the time made and the circumstance in respect of which such
representation and warranty is incorrect, if capable of being cured, not having
been cured within any applicable cure period after notice is given to the
Servicer by the Indenture Trustee, at the direction of the Note Insurer, or the
Note Insurer, or, with the consent of the Note Insurer, the Noteholders
evidencing Voting Interests represented by all Notes aggregating not less than
51%; (e) the failure by the Servicer to satisfy certain net worth and other
financial requirements of the Note Insurer; (f) the occurrence of delinquencies
and/or losses in respect of the Mortgage Loans in excess of a level, and for a
period of time, as specified in the Servicing Agreement; and (g) the occurrence
of an event of default under the Insurance Agreement.
S-53
Rights Upon Servicer Events of Default. Upon the occurrence of a Servicer
Event of Default, the Note Insurer or, with the written consent of the Note
Insurer, Noteholders evidencing Voting Interests represented by all Notes
aggregating not less than 51% or the Indenture Trustee, at the direction of the
Note Insurer, may terminate all of the rights and obligations of the Servicer
under the Servicing Agreement, whereupon the Note Insurer may (and if the Note
Insurer fails to do so, the Indenture Trustee will be obligated to) appoint a
successor Servicer or, if neither the Note Insurer nor the Indenture Trustee
appoints a successor Servicer, the Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to such compensation as the Servicer would have
been entitled to under the Servicing Agreement. In the event neither the Note
Insurer nor the Indenture Trustee appoints a successor Servicer and the
Indenture Trustee is unwilling or legally unable to act as Servicer, the
Indenture Trustee may petition a court of competent jurisdiction for the
appointment of a successor Servicer. Any such successor Servicer must be an
established housing and home finance institution or any institution that
regularly services nonconforming residential mortgage loans, that is currently
servicing a nonconforming residential mortgage loan portfolio, that has all
licenses, permits and approvals required by applicable law and a net worth of at
least $10,000,000. The appointment of any such successor Servicer (other than
the Indenture Trustee) shall be acceptable to the Note Insurer, which acceptance
shall not be unreasonably withheld, and shall not result in the qualification,
reduction or withdrawal of the implied rating assigned to the Notes by the
Rating Agencies (without taking into account the Insurance Policy). Pending
appointment of a successor Servicer, unless the Indenture Trustee is prohibited
by law from so acting, the Indenture Trustee will be obligated to act as
Servicer. The Note Insurer and such successor Servicer may agree upon the
servicing compensation to be paid, which may be greater than the compensation
described above.
No Noteholder, solely by virtue of its status as a Noteholder, will have
any right under the Servicing Agreement to institute any action, suit or
proceeding with respect to the Servicing Agreement unless the Note Insurer shall
have consented thereto, and such Noteholder previously has given to the
Indenture Trustee written notice of default and unless Noteholders evidencing
Voting Interests represented by all Notes aggregating not less than 51% have
made written request upon the Indenture Trustee to institute such action, suit
or proceeding in its own name as Indenture Trustee thereunder and have offered
to the Indenture Trustee reasonable indemnity for costs, expenses and
liabilities to be incurred, and the Indenture Trustee for 60 days has neglected
or refused to institute any such action, suit or proceeding. However, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Servicing Agreement 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 which may be incurred therein or thereby.
Amendments. Subject to the prior written consent of the Note Insurer, at
any time and from time to time, without the consent of the Noteholders, the
Indenture Trustee, the Issuer and the Servicer may amend the Servicing Agreement
for the purposes of (a) curing any ambiguity or mistake or correcting or
supplementing any provision of such agreement that may be inconsistent with any
other provision of such agreement or (b) complying with the requirements of the
Code; provided, however, that such action shall not materially and adversely
affect the interests of any Noteholder, as evidenced by an opinion of counsel
delivered to the Indenture Trustee to such effect (which opinion shall not be at
the expense of the Indenture Trustee) and written confirmation from each of the
Rating Agencies that such action will not result in a qualification, reduction
or withdrawal of the implied ratings on the Notes (without taking into account
the Insurance Policy).
The Servicing Agreement may also be amended by the Indenture Trustee, the
Issuer and the Servicer, at any time and from time to time, with the prior
written approval of the Rating Agencies, the Note Insurer and not less than a
majority of the Voting Interests represented by the Notes then outstanding, for
the purpose of adding any provisions or changing in any manner or eliminating
any of the provisions thereof or of modifying in any manner the rights of the
Noteholders thereunder; provided, however, that no such amendment shall (a)
reduce in any manner the amount of, or delay the timing of, payments which are
required to be paid to the Note Account without the consent of all Noteholders
or (b) reduce the aforesaid percentages of Voting Interests which are required
to consent to any such amendments, without the consent of all Noteholders.
S-54
Servicing and Other Compensation; Payment of Expenses
The Servicing Fee will be the primary compensation to be paid to or
retained by the Servicer in respect of its servicing activities under the
Servicing Agreement and will be paid to the Servicer on each Deposit Date out of
collections of interest received on or in respect of the Mortgage Loans for the
related Collection Period. The servicing fee (the "Servicing Fee") will equal
one-twelfth (1/12) of the product of (a) 0.50% (the "Servicing Fee Rate") and
(b) the aggregate scheduled principal balance of the Mortgage Loans as of the
close of business on the first day of the related Due Period. The Servicer
shall be entitled to retain the Servicing Fee from amounts to be deposited in
the Collection Account. In addition, the Servicer will retain the benefit, if
any, from any deposit, maintenance or investment of funds in the Collection
Account. Assumption fees, late payment charges, charges for checks returned for
insufficient funds, and extension and other administrative charges, to the
extent collected from mortgagors, will be retained by the Servicer as additional
servicing compensation.
Subject to its right to refuse to make Nonrecoverable Advances as described
below, the Servicer will be required to pay all reasonable and customary "out-
of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the payment of fees for any sub-
servicer and the cost of (i) any enforcement or judicial proceedings relating to
the mortgagors, including foreclosures, and (ii) the management and liquidation
of Mortgaged Properties acquired in satisfaction of the related Mortgage Loans.
Such expenditures (each, a "Servicing Advance") may include costs of collection
efforts, reappraisals, forced placement of hazard insurance if a borrower allows
his hazard policy to lapse, legal fees in connection with foreclosure actions,
advancing delinquent property taxes and upkeep and maintenance of the Mortgaged
Property if it is acquired through foreclosure and similar types of expenses.
The Servicing Agreement provides that the Servicer may pay all or a portion
of any Servicing Advance out of amounts on deposit in the Collection Account
which are being held for payment on a subsequent Payment Date relating to such
Collection Period; any such amounts so used are required to be replaced by the
Servicer by deposit to the Collection Account on or before the Deposit Date
relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore recovered
from the mortgagor on whose behalf such Servicing Advance was made, from
subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Servicing Advance will be or has become a Nonrecoverable Advance, the Servicer
may reimburse itself for such advance from the Collection Account.
The Servicer will not be required to make any Servicing Advance that it
determines would be a Nonrecoverable Advance if made.
Historical Servicing Experience of the Servicer
The Servicer has provided MLN Depository with the following information
regarding the servicing of mortgage loans which it considers non-conforming
credits and none of MLN Depository, the Depositor, the Issuer, the Note Insurer
or the Underwriters make any representations or warranties as to the accuracy or
completeness of such information. The table below sets forth the overall
delinquency experience on residential one-to-four-family mortgage loans for
nonconforming credits which are currently serviced by the Servicer. No mortgage
loan is considered delinquent for purposes of the table until a payment is 30
days past due on a contractual basis. It should be noted that the Servicer
commenced its servicing activities in April 1997. Accordingly, the Servicer
does not have significant historical delinquency, bankruptcy foreclosure or
default experience that may be referred to for estimating the future delinquency
and loss experience of the Mortgage Loans. The information in the table below
is not intended to indicate or predict the expected delinquency experience on
past current or future pools of mortgage loans for which the Servicer is the
primary servicer.
S-55
Mortgage Lenders Network USA, Inc.
Non-Conforming Mortgage Loan Portfolio Experience
As of
September December September December March June September
30, 31, 30, 31, 31, 30, 30,
1997 1997 1998 1998 1999 1999 1999
----------- --------- ---------- ---------- ---------- ---------- -----------
(000s omitted)
Total principal balance (at period end)... $690,256 $790,410 $1,426,203 $1,632,326 $1,749,068 $1,824,365 $1,830,305
Average portfolio principal balance(1).... $670,399 754,273 $1,384,187 $1,556,162 $1,714,553 $1,780,816 $1,824,433
DELINQUENCIES (at period end)
30-59 Days:
Principal balance(2)..................... $ 10,349 $ 8,608 $ 31,040 $ 37,853 $ 23,901 $ 32,858 $ 56,458
Percent(3)............................... 1.50% 1.09% 2.18% 2.32% 1.37% 1.80% 3.08%
60-89 Days:
Principal balance(2)..................... $ 1,942 $ 2,105 $ 4,922 $ 9,359 $ 8,515 $ 11,809 $ 14,567
Percent(3)............................... 0.28% 0.27% 0.35% 0.57% 0.49% 0.65% 0.80%
90 Days or More:
Principal balance........................ $ 1,077 $ 1,314 $ 17,128 $ 23,608 $ 29,623 $ 34,807 $ 44,709
Percent(3)............................... 0.16% 0.17% 1.20% 1.45% 1.69% 1.91% 2.44%
Total Delinquencies:
Principal balance(4)..................... $ 13,368 $ 12,027 $ 53,090 $ 70,819 $ 62,039 $ 79,474 $ 115,734
Percent(3)............................... 1.94% 1.52% 3.72% 4.34% 3.55% 4.36% 6.32%
REO (at period end)....................... 0 0 $ 1,391 $ 1,661 $ 1,720 $ 3,380 $ 4,184
Net gains/(losses) on liquidated loans.... 0 0 ($230) ($1,130) ($241) ($694) ($595)
Percentage of net gains/(losses) on
liquidated loans (based on average
portfolio principal balance)............. 0.00% 0.00% 0.02% 0.07% 0.01% 0.04% 0.03%
__________________________________________
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Delinquency information includes loans in foreclosure.
(3) Percentages are expressed based upon the total outstanding principal balance
at the end of the indicated period.
(4) Delinquency information does not include loans in foreclosure or REO.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the mortgage portfolios set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the indicated mortgage servicing
portfolios only for the periods presented, whereas the aggregate delinquency
experience on the Mortgage Loans comprising the Mortgage Pool will depend on the
results obtained over the life of the Mortgage Pool. The mortgage servicing
portfolios set forth above include mortgage loans that were originated using a
variety of different underwriting procedures and standards which may have been
more selective. They include mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans
comprising the Mortgage Pool. In addition, a substantial number of the mortgage
loans in the servicing portfolio were not originated by the Seller and were
originated on the basis of underwriting standards that are more stringent than
those applicable to the Mortgage Loans. As a result, there can be no assurance
that the Mortgage Loans comprising the Mortgage Pool will perform consistently
with the delinquency or foreclosure experience described herein. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and foreclosures
could be higher than those previously experienced by the Servicer. In addition,
adverse economic conditions may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies and foreclosures with respect to
the Mortgage Pool.
S-56
THE NOTE INSURANCE
The Insurance Policy
Simultaneously with the issuance of the Notes, the Note Insurer will
deliver the Insurance Policy to the Indenture Trustee for the benefit of the
holders of the Notes. Under the Insurance Policy, the Note Insurer will
irrevocably and unconditionally guarantee payment to the Indenture Trustee on
behalf of the holders of the Notes on each Payment Date for the benefit of the
holders of the Notes, the full and complete payment of Insured Payments with
respect to the Notes calculated in accordance with the original terms of the
Notes when issued and without regard to any amendment or modification of the
Notes or the Indenture except amendments or modifications to which the Note
Insurer has given its prior written consent. "Insured Payments" shall mean with
respect to the Notes as of any Payment Date, the sum of (i) any shortfall in
amounts available to pay the Note Interest on such Notes for the related
Interest Period, (ii) the excess, if any, of (a) the Note Balance of the Notes
then outstanding, after giving effect to payments on such Payment Date, over (b)
the aggregate principal balances of the Mortgage Loans then outstanding and
(iii) without duplication of the amount specified in clause (ii), the Note
Balance of the Notes to the extent unpaid on the stated maturity date, after
giving effect to payments on such Payment Date, or the earlier redemption of the
Notes pursuant to the terms of the Indenture. Notwithstanding the foregoing,
the Note Insurer has the right to pay a Realized Loss. The Insurance Policy
does not cover any Prepayment Interest Shortfalls or Relief Act Shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Note Insurer will pay
such amount out of funds of the Note Insurer on the later of (a) the date when
due to be paid pursuant to the Order referred to below or (b) the first to occur
of (i) the fourth Business Day following Receipt by the Note Insurer from the
Indenture Trustee of (A) a certified copy of the order of the court or other
governmental body which exercised jurisdiction to the effect that a holder of
Notes is required to return principal or interest distributed with respect to a
Note during the Term of the Insurance Policy because such payments were voidable
preferences under applicable bankruptcy law (the "Order"), (B) a certificate of
such holder of Notes that the Order has been entered and is not subject to any
stay, and (C) an assignment duly executed and delivered by such holder of Notes,
in such form as is reasonably required by the Note Insurer and provided to such
holder of Notes by the Note Insurer, irrevocably assigning to the Note Insurer
all rights and claims of such holder of Notes relating to or arising under the
Notes against the debtor which made such preference payment or otherwise with
respect to such preference payment, or (ii) the date of Receipt by the Note
Insurer from the Indenture Trustee of the items referred to in clauses (A), (B)
and (C) above if, at least four Business Days prior to such date of Receipt, the
Note Insurer shall have Received written notice from the Indenture Trustee that
such items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator, debtor-
in-possession or Indenture Trustee in bankruptcy named in the Order and not to
the Indenture Trustee or holder of Notes directly, unless a holder of Notes has
previously paid such amount to the receiver, conservator, debtor-in-possession
or Indenture Trustee in bankruptcy named in the Order, in which case such
payment shall be disbursed to the Indenture Trustee for payment to such holder
of the Notes upon proof of such payment reasonably satisfactory to the Note
Insurer. In connection with the foregoing, the Note Insurer shall have the
rights provided pursuant to the Indenture.
Payment of claims under the Insurance Policy made in respect of Insured
Payments will be made by the Note Insurer following Receipt by the Note Insurer
of the appropriate notice for payment on the later to occur of (a) 12:00 noon,
New York City time, on the third Business Day following Receipt of such notice
for payment, and (b) 12:00 noon, New York City time, on the relevant Payment
Date.
The terms "Receipt" and "Received", with respect to the Insurance Policy,
means actual delivery to the Note Insurer and to its fiscal agent appointed by
the Note Insurer at its option, if any, prior to 12:00 p.m., New York City time,
on a Business Day; delivery either on a day that is not a Business Day or after
12:00 p.m., New York City time, shall be deemed to be Receipt on the next
succeeding Business Day. If any notice or certificate given under the Insurance
Policy by the Indenture Trustee is not in proper form or is not properly
completed, executed or delivered, it shall be deemed not to have been Received,
and the Note Insurer or the fiscal agent shall promptly so advise the Indenture
Trustee and the Indenture Trustee may submit an amended notice.
S-57
Under the Insurance Policy, "Business Day" means any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York, New York, the State of New York or in the city in which the corporate
Trust office of the Indenture Trustee is located, are authorized or obligated by
law or executive order to be closed. The Note Insurer's obligations under the
Insurance Policy to make Insured Payments shall be discharged to the extent
funds are transferred to the Indenture Trustee as provided in the Insurance
Policy, whether or not such funds are properly applied by the Indenture Trustee.
Insured Payments shall be made only at the time set forth in the Insurance
Policy and no accelerated Insured Payments shall be made regardless of any
acceleration of the Notes, unless such acceleration is at the sole option of the
Note Insurer.
"Term of the Insurance Policy" means the period from and including the date
of issuance of the Insurance Policy to and including the date on which the Note
Balance of the Notes are reduced to zero, plus such additional period, to the
extent specified in the Insurance Policy, during which any payment on the Notes
could be avoided in whole or in part as a preference payment.
The Note Insurer shall be subrogated to the rights of the holders of the
Notes to receive payments on principal and interest, as applicable, with respect
to payments on such Notes to the extent of any payment by the Note Insurer under
the Insurance Policy. To the extent the Note Insurer makes Insured Payments,
either directly or indirectly (as by paying through the Indenture Trustee), to
the holders of the Notes, the Note Insurer will be subrogated to the rights of
the holders of the Notes with respect to such Insured Payment and shall be
deemed to the extent of the payments so made to be a registered holder of the
Notes for purposes of payment.
Claims under the Insurance Policy constitute direct unsecured and
unsubordinated obligations of the Note Insurer, and will rank not less than pari
passu with any other unsecured and unsubordinated indebtedness of the Note
Insurer except for certain obligations in respect to tax and other payments to
which preference is or may become afforded by statute. The terms of the
Insurance Policy cannot be modified, altered or affected by any other agreement
or instrument, or by the merger, consolidation or dissolution of the Issuer.
The Insurance Policy by its terms may not be canceled or revoked prior to
distribution in full of all Scheduled Payments (as defined therein). The
Insurance Policy is governed by the laws of the State of New York. The
Insurance Policy is not covered by the property/casualty insurance security fund
specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Note Insurer agrees
under the Insurance Policy not to assert, and waives, for the benefit of each
holder of the Notes, all its rights (whether by counterclaim, setoff or
otherwise) and defenses (including, without limitation, the defense of fraud),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the Note Insurer to avoid payment
of its obligations under the Insurance Policy in accordance with the express
provisions of the Insurance Policy.
The Depositor, the Issuer, the Seller and Servicer and the Note Insurer
will enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Depositor, the Issuer and the Seller will agree to
reimburse, with interest, the Note Insurer for amounts paid pursuant to claims
under the Insurance Policy. The Depositor, the Issuer and the Seller will
further agree to pay the Note Insurer all reasonable charges and expenses which
the Note Insurer may pay or incur relative to any amounts paid under the
Insurance Policy or otherwise in connection with the transaction and to
indemnify the Note Insurer against certain liabilities. Except to the extent
provided therein, amounts owing under the Insurance Agreement will be payable
solely from the Trust Fund. An event of default by the Seller under the
Insurance Agreement will constitute an Event of Default by the Servicer under
the Servicing Agreement and allow the Note Insurer, among other things, to
direct the Indenture Trustee to terminate the Servicer. An "event of default"
by the Seller under the Insurance Agreement includes (i) the Seller's failure to
pay when due any amount owed under the Insurance Agreement or certain other
documents, (ii) the Seller's untruth or incorrectness in any material respect of
any representation or warranty of the Seller in the Insurance Agreement, the
Servicing Agreement (in its capacity as Servicer) or certain other documents,
(iii) the Seller's failure to perform or to observe any covenant or agreement in
the Insurance Agreement, the Servicing Agreement (in its capacity as Servicer)
and certain other documents, (iv) the Seller's failure to pay its debts in
general or the occurrence of certain events of insolvency or bankruptcy with
respect to the Seller, (v) the occurrence of an Event of Default relating to the
Servicer under the Servicing Agreement or certain other documents, and (vi) a
claim for payment is made on the Insurance Policy.
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For a more complete description of these provisions, terms and conditions,
reference is made to the Insurance Policy, a copy of which is available upon
request from the Indenture Trustee.
The Note Insurer
The information set forth in this section has been provided by the Note
Insurer. No representation is made by the Underwriters, the Issuer, the
Depositor, the Seller, the Servicer, MLN Depository or any of their affiliates
as to the accuracy or completeness of such information or any information
related to the Note Insurer incorporated by reference herein.
General. The Note Insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The Note Insurer is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia and Puerto Rico.
The Note Insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities - thereby enhancing the credit rating of those securities--
in consideration for the payment of a premium to the insurer. The Note Insurer
and its subsidiaries principally insure asset-backed, collateralized and
municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. The Note Insurer insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy the Note Insurer's underwriting criteria.
The Note Insurer is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include White Mountains Insurance Group, Inc.,
MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co., Ltd. and
XL Capital Ltd. No shareholder of Holdings is obligated to pay any debt of the
Note Insurer or any claim under any insurance policy issued by the Note Insurer
or to make any additional contribution to the capital of the Note Insurer.
The principal executive offices of the Note Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by the Note
Insurer or its domestic or Bermuda operating insurance company subsidiaries are
generally reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the Note Insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the Note
Insurer as a risk management device and to comply with statutory and rating
agency requirements; it does not alter or limit the Note Insurer's obligations
under any financial guaranty insurance policy.
Ratings. The Note Insurer's insurance financial strength is rated "Aaa" by
Moody's. The Note Insurer's insurer financial strength is rated "AAA" by S&P
and Standard & Poor's (Australia) Pty. Ltd. The Note Insurer's claims-paying
ability is rated "AAA" by Fitch IBCA, Inc. and Japan Rating and Investment
Information, Inc. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies.
Capitalization. The following table sets forth the capitalization of the
Note Insurer and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of June 30, 1999:
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June 30, 1999
------------------
Unaudited
(In thousands)
Deferred Premium Revenue (net of $ 520,986
prepaid reinsurance premiums)..................... ----------
Surplus Notes..................................... 120,000
----------
Minority Interest................................. 21,429
----------
Shareholder's Equity:
Common Stock..................................... 15,000
Additional Paid-In Capital....................... 706,117
Accumulated Other Comprehensive
Loss (net of deferred income taxes).............. (1,937)
Accumulated Earnings............................. 418,772
----------
Total Shareholder's Equity........................ 1,137,952
----------
Total Deferred Premium Revenue, Surplus Notes, $1,800,367
Minority Interest and Shareholder's Equity....... ==========
- --------------------
For further information concerning the Note Insurer, see the Consolidated
Financial Statements of Financial Security Assurance Inc. and Subsidiaries, and
the notes thereto incorporated herein by reference. The Note Insurer's
financial statements are included as exhibits in the Annual Reports on Form 10-K
and the Quarterly Reports on Form 10-Q filed with the Securities and Exchange
Commission (the "Commission") by Holdings and may be reviewed at the EDGAR
website maintained by the Commission and at Holding's website,
http://www.FSA.com. Copies of the statutory quarterly and annual statements
filed with the State of New York Insurance Department by the Note Insurer are
available upon request to the State of New York Insurance Department.
Incorporation of Certain Documents by Reference. The consolidated
financial statements of the Note Insurer included in, or as exhibits to, the
following documents, which have been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this Prospectus
Supplement: (a) the Annual Report on Form 10-K, as amended, for the year ended
December 31, 1998, and (b) the Quarterly Report on Form 10-Q for the period
ended June 30, 1999.
All financial statements of the Note Insurer included in documents filed by
Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to the date of
this Prospectus Supplement and prior to the termination of the offering of the
Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The Seller will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated herein
by reference. Requests for such copies should be directed to the Seller at
Mortgage Lenders Network USA, Inc., Middlesex Corporate Center, 213 Court
Street, Middletown, CT 06457.
The Seller on behalf of the Trust hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the Trust's
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act and
each filing of the financial statements of the Note Insurer included in or as an
exhibit to the annual report of Holdings filed pursuant to Section 13(a) or
Section 15(d) of the Exchange Act that is incorporated by reference in the
Registration Statement (as defined in the Prospectus) shall be deemed to be a
new registration statement relating to the Notes offered hereby, and the
offering of such Notes at that time shall be deemed to be the initial bona fide
offering thereof.
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Insurance Regulation. The Note Insurer is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, the Note Insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, the Note Insurer is subject to Article 69 of the New York Insurance
Law which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such insurer
maintain a minimum surplus to policyholders, establishes contingency, loss and
unearned premium reserve requirements for each such insurer, and limits the size
of individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as the Note Insurer, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
ERISA CONSIDERATIONS
Section 406 of 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"), prohibit a pension, profit sharing or other employee
benefit plan, as well as individual retirement accounts and annuities and
certain Keogh Plans, and entities deemed to hold assets of such plans (each, a
"Plan") from engaging in certain transactions involving "plan assets" with
persons that are "parties in interest" under ERISA or "disqualified persons"
under the Code with respect to such Plan. A violation of these "prohibited
transaction rules" may generate excise tax and other penalties and liabilities
under ERISA and the Code for such persons. Title I of ERISA also requires that
fiduciaries of, a Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Under regulations of the Department of Labor set forth in 29 C.F.R. (S)
2510.3-101 (the "Plan Asset Regulations"), the assets of a Plan generally
include not only securities held by a Plan but also the underlying assets of the
issuer of any equity securities (the "Look-Through Rule"-) unless one or more
exceptions specified in the Plan Asset Regulations are satisfied. For purposes
of those Regulations, an equity security is a security other than a security
that is treated as debt under applicable local law and that has no substantial
equity features. The Issuer believes that the Notes will be treated as debt
obligations without significant equity features for purposes of the Plan Asset
Regulations. Accordingly, a Plan that acquires a Note should not be treated as
having acquired a direct interest in the assets of the Issuer. However, there
can be no complete assurance that the Notes will be treated as debt obligations
without significant equity features for purposes of the Plan Asset Regulations.
If the Notes are treated as having substantial equity features, the purchaser of
a Note could be treated as having acquired a direct interest in the Mortgage
Loans securing the Notes. In that event, the purchase, holding, or resale of
the Notes could result in a transaction that is prohibited under ERISA or the
Code.
However, even if the Notes are treated as debt for such purposes, the
acquisition or holding of Notes by or on behalf of a Plan could be considered to
give rise to a prohibited transaction if the Issuer or any of its affiliates is
or becomes a "party in interest" under ERISA or a "disqualified person" under
the Code with respect to such Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire Notes.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 96-23, regarding transactions effected by "in-house asset managers";
PTCE 90-1, regarding investments by insurance company pooled separate accounts;
PTCE 95-60, regarding investments by insurance company general accounts; PTCE
91-38, regarding investments by bank collective investment funds; and PTCE 84-
14, regarding transactions effected by "qualified professional asset managers".
A purchaser of a Note should be aware, however, that even if the conditions
specified in one or more exemptions are met, the scope of the relief provided by
an exemption might not cover all acts that might be construed as prohibited
transactions. The purchase of a Note will be deemed a representation by the
acquirer that either (i) it is not, and is not purchasing a Note on behalf of or
with the assets of a Plan, or (ii) the acquisition and holding of a Note by the
acquirer qualifies for exemptive relief under PTCE 95-60, PTCE 96-23, PTCE 91-
38, PTCE 90-1, PTCE 84-14 or another Department of Labor Class Exemption.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
Title I of ERISA or Section 4975 of the Code. However, such a governmental plan
may be subject to a federal, state, or local law which is, to a
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material extent, similar to the foregoing provisions of ERISA or the Code
("Similar Law"). A fiduciary of a governmental plan should make its own
determination as to the need for and the availability of any exemptive relief
under Similar Law.
A Plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding the applicability of the fiduciary
responsibility provisions of ERISA to such investment, whether the assets of the
Issuer would be considered plan assets, the possibility of exemptive relief from
the prohibited transaction rules, and other related issues and their potential
consequences. The sale of Notes to a Plan is in no respect a representation by
the Issuer or the Underwriters that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan. See "ERISA Considerations" in the Prospectus.
USE OF PROCEEDS
The Issuer intends to use the net proceeds to be received from the sale of
the Notes to acquire the Mortgage Loans from the Depositor and the Seller and to
pay other expenses associated with the pooling of the Mortgage Loans and the
issuance of the Notes.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Institutions
whose activities are subject to review by federal or state regulatory
authorities may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the investment by such
institutions in certain forms of mortgage related securities. See "Legal
Investment Considerations" in the Prospectus.
UNDERWRITING
Under the terms set forth in the underwriting agreement and a terms
agreement, each dated the date hereof (collectively, the "Underwriting
Agreement"), the Depositor has agreed to cause the Issuer to sell, and Deutsche
Bank Securities Inc. and First Union Securities, Inc. (together, the
"Underwriters") have agreed, subject to the terms and conditions set forth
therein, to purchase the entire principal amount of the Notes as follows:
Deutsche Bank Securities Inc. will acquire approximately 50% of the Notes and
First Union Securities, Inc. will acquire approximately 50% of the Notes by
Original Note Balance.
Each of the Underwriters has informed the Depositor that it proposes to
offer the Notes for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriters may effect such transactions by
selling the Notes to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter. In connection with the sale of the Notes, the
Underwriters may be deemed to have received compensation from the Depositor in
the form of underwriting compensation. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Notes may be deemed
to be underwriters and any commissions received by them and any profit on the
resale of the Notes by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Securities Act").
The Depositor and the Seller have agreed to indemnify the Underwriters
against certain liabilities including liabilities under the Securities Act.
The Depositor has been advised by the Underwriters that the Underwriters
intend to make a market in the Notes, as permitted by applicable laws and
regulations and subject to the provisions of Rule 104 of Regulation M. The
Underwriters are not obligated, however, to make a market in the Notes and such
market-making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Notes.
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First Union Securities, Inc. ("First Union"), or affiliates of First Union
(collectively referred to as First Union for the purposes of this paragraph)
provide warehouse financing facilities to the Seller.
All of the Mortgage Loans included in the Trust Fund will have been
acquired in a privately negotiated transaction with the Seller.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1998
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated federal
income tax considerations to investors of the purchase, ownership and
disposition of the Notes offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Notes.
Treatment of the Notes as Indebtedness. The Seller agrees, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for all federal, state and local income tax purposes. There are no regulations,
published rulings or judicial decisions involving the characterization for
federal income tax purposes of securities with terms substantially the same as
the Notes. In general, whether instruments such as the Notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the instruments
are labeled. The Internal Revenue Service (the "IRS") and the courts have set
forth various factors to be taken into account in determining, for federal
income tax purposes, whether or not an instrument constitutes indebtedness and
whether a transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Cadwalader, Wickersham & Taft, tax counsel to the
Depositor ("Tax Counsel") is of the opinion that, while no transaction closely
comparable to that contemplated has been subject to any Treasury regulation,
revenue ruling or judicial decision, and therefore the matter is subject to
interpretation, for federal income tax purposes, the Notes will be treated as
indebtedness of the Trust, and not as an ownership interest in the Mortgage
Loans, or an equity interest in the Trust or in a separate association taxable
as a corporation or other taxable entity. Further, Tax Counsel is of the
opinion that neither the Issuer nor the Mortgage Pool will be characterized as
an association (or as a publicly traded partnership) taxable as a corporation or
as a taxable mortgage pool.
If the Notes are characterized as indebtedness, interest paid or accrued on
a Note will be treated as ordinary income to the Noteholders and principal
payments on a Note will be treated as a return of capital to the extent of the
Noteholder's basis in the Note allocable thereto. An accrual method taxpayer
will be required to include in income interest on the Notes when earned, even if
not paid, unless it is determined to be uncollectible. The Trust will report to
Noteholders of record and the IRS in respect of the interest paid and original
issue discount, if any, accrued on the Notes to the extent required by law.
Although, as described above, it is the opinion of Tax Counsel that, for
federal income tax purposes, the Notes will be characterized as debt, such
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that the Notes
did not represent debt for federal income tax purposes, holders of the Notes
would likely be treated as owning an interest in a partnership and not an
interest in an association (or publicly traded partnership) taxable as a
corporation. If the Noteholders were treated as owning an equitable interest in
a partnership, the partnership itself would not be subject to federal income
tax; rather
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each partner would be taxed individually on their respective distributive share
of the partnership's income, gain, loss, deductions and credits. The amount,
timing and characterization of items of income and deductions for a Noteholder
would differ if the Notes were held to constitute partnership interests, rather
than indebtedness. Since the parties will treat the Notes as indebtedness for
federal income tax purposes, none of the Servicer, the Indenture Trustee or the
Owner Trustee will attempt to satisfy the tax reporting requirements that would
apply under this alternative characterization of the Notes. Investors that are
foreign persons are strongly advised to consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of the
purchase, ownership and disposition of the Notes.
Original Issue Discount. It is anticipated that the Notes will not have
any original issue discount ("OID") other than possibly OID within a de minimis
exception and that accordingly the provisions of sections 1271 through 1273 and
1275 of the Code generally will not apply to the Notes. OID will be considered
de minimis if it is less than 0.25% of the principal amount of a Note multiplied
by its expected weighted average life. The prepayment assumption that will be
used for purpose of computing original issue discount, if any, for federal
income tax purposes is 27% HEP.
Market Discount. A subsequent purchaser who buys a Note for less than its
principal amount may be subject to the "market discount" rules of Section 1276
through 1278 of the Code. If a subsequent purchaser of a Note disposes of the
Note (including certain nontaxable dispositions such as a gift), or receives a
principal payment, any gain upon such sale or other disposition will be
recognized, or the amount of such principal payment will be treated, as ordinary
income to the extent of any "market discount" accrued for the period that such
purchaser holds the Note. Such holder may instead elect to include market
discount in income as it accrues with respect to all debt instruments acquired
in the year of acquisition of the Notes and thereafter. Market discount
generally will equal the excess, if any, of the then current unpaid principal
balance of the Note over the purchaser's basis in the Note immediately after
such purchaser acquired the Note. In general, market discount on a Note will be
treated as accruing over the term of such Note in the ratio of interest for the
current period over the sum of such current interest and the expected amount of
all remaining interest payments, or at the election of the holder, under a
constant yield method (taking into account the Prepayment Assumption). At the
request of a holder of a Note, information will be made available that will
allow the holder to compute the accrual of market discount under the first
method described in the preceding sentence.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if it is less than a de minimis amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is de minimis, the actual
amount of discount must be allocated to the remaining principal distributions on
the Notes and, when each such distribution is received, capital gain equal to
the discount allocated to such distribution will be recognized.
Market Premium. A subsequent purchaser who buys a Note for more than its
principal amount generally will be considered to have purchased the Note at a
premium. Such holder may amortize such premium, using a constant yield method,
over the remaining term of the Note and, except as future regulations may
otherwise provide, may apply such amortized amounts to reduce the amount of
interest reportable with respect to such note over the period from the purchase
date to the date of maturity of the Note. The amortization of such premium on
an obligation that provides for partial principal payments prior to maturity
should be governed by the methods for accrual of market discount on such an
obligation (described above). A holder that elects to amortize premium must
reduce the tax basis in the related obligation by the amount of the aggregate
deductions (or interest offsets) allowable for amortizable premium. If a debt
instrument purchased at a premium is redeemed in full prior to its maturity, a
purchaser who has elected to amortize premium should be entitled to a deduction
for any remaining unamortized premium in the taxable year of redemption.
Sale or Redemption of Notes. If a Note is sold or retired, the seller will
recognize gain or loss equal to the difference between the amount realized on
the sale and such holder's adjusted basis in the Note. Such adjusted basis
generally will equal the cost of the Note to the seller, increased by any
original issue discount included in the seller's gross income in respect of the
Note (and by any market discount which the taxpayer elected to include in income
or
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was required to include in income), and reduced by payments other than payments
of qualified stated interest in respect of the Note received by the seller and
by any amortized premium. Similarly, a holder who receives a payment other than
a payment of qualified stated interest in respect of a Note, either on the date
on which such payment is scheduled to be made or as a prepayment, will recognize
gain equal to the excess, if any, of the amount of the payment over his adjusted
basis in the Note allocable thereto. A Noteholder who receives a final payment
which is less than his adjusted basis in the Note will generally recognize a
loss in the amount of the shortfall on the last day of his taxable year.
Generally, any such gain or loss realized by an investor who holds a Note as a
"capital asset" within the meaning of Code Section 1221 should be capital gain
or loss, except as described above in respect of market discount and except that
a loss attributable to accrued but unpaid interest may be an ordinary loss.
Taxation of Certain Foreign Investors. Interest payments (including OID)
on the Notes made to a Noteholder who is a nonresident alien individual, foreign
corporation or other non-United States person (a "foreign person") generally
will be "portfolio interest" which is not subject to United States tax if such
payments are not effectively connected with the conduct of a trade or business
in the United States by such foreign person, provided the foreign person is not
a "10-percent shareholder" or a "controlled foreign corporation", within the
meaning of the Code, with respect to the Trust, the Depositor or the Seller, and
if the Trust (or other person who would otherwise be required to withhold tax
from such payments) is provided with an appropriate statement that the
beneficial owner of the Note identified on the statement is a foreign person.
Backup Withholding. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Notes, may be subject to the
"backup withholding tax" under Section 3406 of the Code at rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed
by the IRS on a recipient of distributions that is required to supply
information but does not do so in the proper manner.
STATE TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential Noteholders should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Notes will be
passed upon by Cadwalader, Wickersham & Taft, New York, New York, as counsel for
the Depositor and the Underwriters. Certain legal matters will be passed upon
for the Seller and the Servicer by Brown & Wood LLP, Washington, D.C.
Certain federal income tax consequences with respect to the Certificates
will be passed upon for the Issuer by Cadwalader, Wickersham & Taft, New York,
New York.
RATING OF THE NOTES
It is a condition to the issuance of the Notes that each shall be rated
"Aaa" by Moody's Investors Service, Inc ("Moody's"') and "AAA" by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P" and, together with
Moody's, the "Rating Agencies").
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, and S&P, 55 Water Street,
New York, New York 10041. Each rating will be the view only of the assigning
Rating Agency.
S-65
The ratings on the Notes are based in substantial part on the claims-paying
ability of the Note Insurer. Any changes in the ratings of the Note Insurer by
the Rating Agencies may result in a change in the ratings of the Notes.
The ratings assigned to the Notes do not represent any assessment of the
likelihood or rate of principal prepayments and do not address the possibility
that Noteholders might suffer a lower than anticipated yield.
There is no assurance that any rating assigned to the Notes will continue
for any period of time or that such ratings will not be revised or withdrawn.
Any such revision or withdrawal of such ratings may have an adverse effect on
the market price or liquidity of the Notes.
The ratings of the Notes should be evaluated independently form similar
ratings on other types of securities. A security rating is not a recommendation
to buy, sell or hold securities.
There can be no assurances as to whether any other rating agency will rate
the Notes, or, if one does, what rating will be assigned by such other rating
agency. A rating on the Notes by another rating agency, if assigned at all, may
be lower than the ratings assigned to the Notes by Moody's or S&P.
S-66
INDEX OF PRINCIPAL TERMS
A
Administrative Fee Amount....................................................23
aggregate risks..............................................................61
Available Funds..............................................................22
B
Balloon Loans................................................................31
Beneficial Owner.............................................................16
Book-Entry Notes.............................................................16
Business Day.................................................................58
C
Cedel........................................................................16
Cedel Participants...........................................................17
Citibank.....................................................................16
CLTV.........................................................................40
Code.........................................................................61
Collection Account...........................................................50
Collection Period............................................................20
Combined Loan-to-Value Ratio.................................................31
Commission...................................................................60
Compensating Interest Payment................................................52
Constant Prepayment Rate.....................................................44
Cooperative..................................................................17
Corporate Office.............................................................38
CPR..........................................................................44
Cut-off Date.................................................................15
D
debt-to-income ratio.........................................................38
Defective Mortgage Loan......................................................20
Definitive Notes.............................................................15
Deposit Date.................................................................20
Depositor....................................................................15
Determination Date...........................................................22
DTC..........................................................................13
Due Period...................................................................20
E
ERISA........................................................................61
Euroclear....................................................................16
Euroclear Operator...........................................................17
Euroclear Participants.......................................................17
European Depositaries........................................................16
Event of Default.............................................................29
Excess Cash..................................................................25
Exchange Act.................................................................60
F
Federal Reserve Board........................................................17
Financial Intermediary.......................................................16
FIRREA.......................................................................39
S-67
First Union..................................................................63
foreign person...............................................................65
H
HEP..........................................................................44
Holdings.....................................................................59
I
Indenture....................................................................15
Indenture Trustee............................................................15
Indenture Trustee Fee........................................................28
Indirect Retail Mortgage Loans...............................................38
Information Systems..........................................................13
Initial Pool Balance.........................................................31
Initial Redemption Date......................................................27
Insurance Agreement..........................................................21
Insurance Policy.............................................................15
Insurance Proceeds...........................................................23
Insured Payments.............................................................57
Interest Period..............................................................21
IRS..........................................................................63
Issuer.......................................................................15
L
Liquidated Mortgage Loan.....................................................22
Liquidation Proceeds.........................................................23
Loan-to-Value Ratio..........................................................40
Look-Through Rule............................................................61
M
MLN Depository...............................................................15
Modeling Assumptions.........................................................44
Monthly Advance..............................................................51
Monthly Principal............................................................22
Moody's......................................................................65
Morgan.......................................................................16
Mortgage Files...............................................................19
Mortgage Loans...............................................................15
Mortgage Notes...............................................................15
Mortgage Pool................................................................15
Mortgage Rate................................................................31
Mortgaged Properties.........................................................15
N
Net Liquidation Proceeds.....................................................23
Nonrecoverable Advances......................................................51
Note Account.................................................................23
Note Balance.................................................................21
Note Insurer.................................................................15
Note Insurer Premium.........................................................21
Note Interest................................................................21
Note Interest Rate...........................................................21
Noteholder...................................................................15
Notes........................................................................15
S-68
O
OID..........................................................................64
Order........................................................................57
Original Note Balance........................................................21
Overcollateralization Amount.................................................25
Overcollateralization Deficiency Amount......................................25
Overcollateralization Deficit................................................26
Overcollateralization Surplus................................................26
Owner Trustee................................................................15
P
Participants.................................................................17
Paying Agent.................................................................20
Payment Date.................................................................15
Payments Ahead...............................................................22
Percentage Interest..........................................................20
Permitted Investments........................................................24
Plan.........................................................................61
Plan Asset Regulations.......................................................61
PMI Insurer..................................................................29
PMI Mortgage Loans...........................................................29
PMI Policy...................................................................29
Prepayment Interest Shortfall................................................21
Principal Balance............................................................22
Principal Prepayment.........................................................22
PTCE.........................................................................61
Q
Qualified Replacement Mortgage...............................................19
R
Rating Agencies..............................................................65
Realized Loss................................................................26
Receipt......................................................................57
Received.....................................................................57
Record Date..................................................................15
Redemption Date..............................................................27
Release Price................................................................20
Relevant Depositary..........................................................16
Relief Act...................................................................12
Relief Act Shortfall.........................................................21
REO Property.................................................................51
Required Overcollateralization Amount........................................25
Residual Interest............................................................16
Retail Mortgage Loans........................................................38
Rules........................................................................16
S
S&P..........................................................................65
Sale Agreement...............................................................19
Securities Act...............................................................62
Seller.......................................................................15
Senior Loan..................................................................31
Servicer.....................................................................15
Servicer Event of Default....................................................53
S-69
Servicing Advance............................................................55
Servicing Agreement..........................................................15
Servicing Fee................................................................55
Servicing Fee Rate...........................................................55
Similar Law..................................................................62
single risks.................................................................61
Six-Month LIBOR..............................................................31
SMMEA........................................................................62
T
Tax Counsel..................................................................63
Term of the Insurance Policy.................................................58
Terms and Conditions.........................................................18
Trust........................................................................15
Trust Agreement..............................................................15
Trust Fund...................................................................15
U
Underwriters.................................................................62
Underwriting Agreement.......................................................62
USAP.........................................................................52
V
Voting Interests.............................................................28
S-70
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Asset Backed
Notes, Series 1999-2 (the "Global Securities"), will be available only in book-
entry form. Investors in the Global Securities may hold such Global Securities
through DTC, Cedel or Euroclear. The Global Securities will be traceable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between participants of Cedel or Euroclear
and Participants holding Notes will be effected on a delivery-against-payment
basis through the Relevant Depositaries of Cedel and Euroclear (in such
capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede, as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositaries,
which in turn will hold such positions in accounts as Participants.
Investors selecting to hold their Global Securities through DTC will follow
DTC settlement practice. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between Participants. Secondary market trading between
Participants will be settled using the procedures applicable to prior asset-
backed Note issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least
A-1
one Business Day prior to settlement. Cedel or Euroclear will instruct the
respective Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the respective Depositary
to the Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they clear the
overdraft when the Global Securities are credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the Participants a cross-market transaction
will settle no differently than a trade between two Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a Participant. The seller will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one Business Day prior to settlement. In these cases, Cedel or Euroclear will
instruct the Relevant Depositary, as appropriate, to deliver the Global
Securities to the Participant's account against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment to and excluding the settlement date on the basis of the actual number
of days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
A-2
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a Participant no later
than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the Participant is at least one day
prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade of Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8.
Form 1001 may be filed by the beneficial owners or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years, and Form 4224 is effective for one calendar year.
Final withholding regulations (the "New Regulations") effective January 1,
2001 affect the documentation required from non-U.S. Persons having validly
existing IRS Forms, such as IRS Forms W-8, 1001 or 4224. The New Regulations
replace a number of current tax certification forms (including IRS Forms W-8,
1001 and 4224, as discussed above) with a new series of IRS Forms W-8 and
generally standardize the period of time for which withholding agents can rely
on such forms (although certain of the new forms may remain valid indefinitely
if the beneficial owner provides a United States taxpayer identification number
and the information on the form does not change). Existing forms and statements
will remain valid until the earlier of their expiration or December 31, 2000.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership (unless, in the case of a partnership,
Treasury regulations are adopted that provide otherwise) created or organized in
or under the laws of the United States, any state thereof or the District of
Columbia, including an entity treated as a
A-3
corporation or partnership for federal income tax purposes, (iii) an estate the
income of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of such trust and
one or more such U.S. Persons have the authority to control all substantial
decisions of such trust (or, to the extent provided in applicable Treasury
regulations, certain trusts in existence on August 20, 1996 which are eligible
to be treated as U.S. Persons). This summary does not deal with all aspects of
U.S. federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
A-4
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$144,953,790 Asset-Backed Notes, Series 1999-2
Mortgage Lenders Network Home Equity Loan Trust 1999-2
Issuer
[LOGO]
Mortgage Lenders Network USA, Inc.
Seller and Servicer
ACE Securities Corp.
Depositor
----------------------------
Prospectus Supplement
----------------------------
Deutsche Banc Alex. Brown
First Union Securities, Inc.
November 10, 1999
You should rely only on the information incorporated by reference or provided in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone else to provide you with different information.
We are not offering the notes offered hereby in any state where such offer is
not permitted.
We represent the accuracy of the information in this prospectus supplement and
the accompanying prospectus only as of the dates on their respective covers.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the notes offered hereby and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the notes,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus for ninety days following the date of this
Prospectus Supplement.
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