1
As filed with the Securities and Exchange Commission on August 14, 1996
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM S-3
Registration Statement
Under the
Securities Act of 1933
-------------------
AAMES CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA 95-444916
---------------------- ---------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
3731 WILSHIRE BLVD.
LOS ANGELES, CALIFORNIA 90010
(213) 351-6100
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
GARY K. JUDIS
AAMES CAPITAL CORPORATION
3731 WILSHIRE BLVD.
LOS ANGELES, CALIFORNIA 90010
(213) 351-6100
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
-------------------
COPIES TO:
JAMES A. BLALOCK III, ESQ. BARBARA POLSKY, ESQ.
ANDREWS & KURTH L.L.P. AAMES CAPITAL CORPORATION
1701 PENNSYLVANIA AVE., N.W. -- SUITE 200 3731 WILSHIRE BLVD.
WASHINGTON, DC 20006 LOS ANGELES, CALIFORNIA 90010
(202) 662-2730 (213) 351-6196
-------------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
-------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /x/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _____________________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ___________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Amount to be Proposed Maximum Proposed Maximum Amount of
Title of Securities to be Registered Registered(1) Offering Price Per Unit(2) Aggregate Offering Price(2) Registration Fee(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage Pass-Through Certificates
(Issuable in Series) $1,500,000,000.00 100% $1,500,000,000.00 $365,555.81
====================================================================================================================================
(1) Includes $439,888,164 principal amount of the Registrant's Mortgage
Pass-Through Certificates previously registered under its Registration
Statement on Form S-3 (Registration No. 33-99458) that remain unsold as
of the date hereof. As permitted by Rule 429 under the Securities Act
of 1933, as amended, the Prospectus filed as part of this Registration
Statement on Form S-3 will be used in connection with the offering of
such previously registered and unsold Mortgage Pass-Through
Certificates and the Mortgage Pass-Through Certificates covered hereby.
(2) Estimated solely for purposes of calculating the registration fee.
(3) The registration fee specified in the table has been computed on the
basis of the $1,060,111,836 principal amount of Mortgage Pass-Through
Certificates covered hereby, prior to including the previously
registered and unsold Mortgage Pass-Through Certificates referred to in
footnote (1).
-----------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
2
[Exhibit 99.1. Form of Prospectus Supplement. This form of Prospectus
Supplement is for illustrative purposes only. A Prospectus Supplement in
definitive form reflecting the terms of each Series of Certificates will be
filed with the Commission under the Securities Act of 1933, as amended,
pursuant to Rule 424(b)(2) promulgated thereunder.]
PROSPECTUS SUPPLEMENT
(To Prospectus dated August 14, 1996)
AAMES MORTGAGE TRUST 1996-[ ]
$[ ]
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1996-[ ]
$[ ] [ ]% Class A-1A Certificates
$[ ] [ ]% Class A-1B Certificates
$[ ] [ ]% Class A-1C Certificates
$[ ] Class A-2 Adjustable Rate Certificates
AAMES CAPITAL CORPORATION
Sponsor and Servicer
-----------------------
The Mortgage Pass-Through Certificates, Series 1996-[ ], will consist of
the Class A-1A Certificates, the Class A-1B Certificates and the Class A-1C
Certificates (collectively, the "Class A-1 Certificates"), the Class A-2
Certificates (the "Class A-2 Certificates," together with the Class A-1
Certificates, the "Class A Certificates") and the Class R Certificate (the
"Class R Certificate," together with the Class A Certificates, the
"Certificates"). Only the Class A Certificates are offered hereby. The
Certificates will represent undivided beneficial ownership interests in Aames
Mortgage Trust 1996-[ ] (the "Trust") established by Aames Capital Corporation
(the "Sponsor").
(continued on next page)
SEE "RISK FACTORS" STARTING ON PAGE S-20 HEREOF AND ON PAGE 16 OF THE
PROSPECTUS FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN THE CLASS A CERTIFICATES OFFERED HEREBY.
-----------------------
THE CLASS A CERTIFICATES WILL REPRESENT BENEFICIAL OWNERSHIP INTERESTS ONLY IN
THE TRUST AND WILL NOT REPRESENT ANY INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE
UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Class A Certificates will be offered by the Underwriters named below (the
"Underwriters") from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of the related sale.
Proceeds to the Sponsor from the sale of the Class A Certificates are
anticipated to be approximately $[ ] plus, with respect to the
Class A-1 Certificates, accrued interest from [ ], before deducting
expenses payable by the Sponsor, estimated to be $[ ]. The Class A
Certificates are offered by the Underwriters subject to prior sale, when, as
and if issued to and accepted by them and subject to approval of certain legal
matters by counsel for the Underwriters. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the Class A Certificates will be made in
book-entry form only through the Same-Day Funds Settlement System of The
Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear System
on or about [ ]. The Class A Certificates will be
offered in Europe and the United States of America.
[UNDERWRITERS]
3
(continued from cover)
Initially, the assets of the Trust will consist primarily of a pool (the
"Mortgage Pool") of mortgage loans (the "Mortgage Loans") secured by first and
junior liens on one- to four-family residential properties or condominiums and
monies on deposit in the Purchase Account and Capitalized Interest Account as
described herein. The Mortgage Pool will be divided into two groups (each, a
"Mortgage Loan Group"). Distributions on the Class A-1 Certificates will be
derived primarily from amounts received, collected or recovered in respect of
the Mortgage Loan Group comprised entirely of Mortgage Loans bearing fixed
rates of interest (the "Fixed Rate Group"). Distributions on the Class A-2
Certificates will be derived primarily from amounts received, collected or
recovered in respect of the Mortgage Loan Group comprised entirely of Mortgage
Loans bearing interest at rates that are subject to periodic adjustment (the
"Adjustable Rate Group").
The Class A Certificates will be unconditionally and irrevocably guaranteed as
to payment of interest due to Class A Certificateholders on each Distribution
Date and as to ultimate collection of the Class A Certificate Principal
Balances of the related Class A Certificates, in each case pursuant to the
terms of the Certificate Insurance Policy (as defined herein) issued by [name
of Certificate Insurer]. See "Description of the Certificates -- The
Certificate Insurance Policy" herein.
As described herein, the yield on the Class A Certificates will be affected by
the rate of prepayments of the Mortgage Loans in the related Mortgage Loan
Group and the timing of receipt of such payments. Because a substantial
portion of the Mortgage Loans in the Fixed Rate Group are secured by junior
liens, the rate of prepayments experienced on the related Mortgage Loans may be
higher than would be the case if such Mortgage Loan Group consisted only of
first lien Mortgage Loans. The yield on the Class A Certificates will also be
affected by Excess Cash (as defined herein) that is applied in reduction of the
Class A Certificate Principal Balance on any Distribution Date, as described
herein. See "Risk Factors" herein.
As described herein, an election will be made to treat the Trust (other than
the Purchase Account and the Capitalized Interest Account) as a "real estate
mortgage investment conduit" ("REMIC") pursuant to the Internal Revenue Code of
1986, as amended (the "Code"). The Class A Certificates will be "regular
interests" in such REMIC. See "Certain Federal Income Tax Consequences" herein
and in the Prospectus.
There is currently no secondary market for the Class A Certificates. The
Underwriters intend to make a secondary market for the Class A Certificates,
but have no obligation to do so. There can be no assurance that a secondary
market for any of the Class A Certificates will develop or, if one does
develop, that it will continue.
The Trust is subject to optional termination under the limited circumstances
described herein. Any such optional termination may result in an early
retirement of the Class A Certificates offered hereby. See "The Pooling and
Servicing Agreement -- Termination; Optional Termination" in the Prospectus.
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE SPONSOR PURSUANT TO ITS
PROSPECTUS DATED AUGUST 14, 1996, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART
AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF CLASS A CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PROSPECTIVE INVESTOR HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE RELATED PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS ACTING AS UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE CLASS A CERTIFICATES OFFERED HEREBY NOR AN OFFER OF THE CLASS A
CERTIFICATES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH
OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT AT ANY TIME DOES NOT IMPLY THAT INFORMATION THEREIN OR HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF; HOWEVER, IF ANY MATERIAL
CHANGE OCCURS WHILE THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS IS REQUIRED BY LAW
TO BE DELIVERED, THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED
OR SUPPLEMENTED ACCORDINGLY.
S-2
4
FOR UNITED KINGDOM PURCHASERS: THE CLASS A CERTIFICATES MAY NOT BE OFFERED OR
SOLD IN THE UNITED KINGDOM OTHER THAN TO PERSONS WHOSE ORDINARY BUSINESS IS TO
BUY OR SELL SECURITIES, WHETHER AS PRINCIPAL OR AGENT (EXCEPT IN CIRCUMSTANCES
THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING OF THE PUBLIC
OFFERS OF SECURITIES REGULATION 1995), AND THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS MAY ONLY BE ISSUED OR PASSED ON TO ANY PERSON IN THE UNITED KINGDOM
IF THAT PERSON IS OF THE KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL
SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1996.
REPORTS TO CERTIFICATEHOLDERS
Monthly and annual reports concerning the Class A Certificates and the
Trust will be sent by the Trustee to all Certificateholders. So long as any
Class A Certificate is in book-entry form, such reports will be sent to Cede &
Co., as the nominee of The Depository Trust Company ("DTC") and as the
Certificateholder of such Class A Certificates pursuant to the Pooling and
Servicing Agreement described herein. DTC will supply such reports to all
persons acquiring beneficial ownership interests in the Class A Certificates.
See "Description of the Certificates -- Book-Entry Registration of Class A
Certificates" herein.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act
of 1933, as amended, with the Securities and Exchange Commission (the
"Commission") with respect to the Class A Certificates. The Registration
Statement and amendments thereof and the exhibits thereto may be inspected at
the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronic filings made through the Electronic Data Gathering, Analysis and
Retrieval System are publicly available through the Commission's Web Site
(http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Certain documents filed with the Commission by or on behalf of the Trust
are incorporated by reference herein. See "Incorporation of Certain Documents
by Reference" in the Prospectus. [Identify any other documents incorporated by
reference that relate to a specific Series of Certificates.]
S-3
5
TABLE OF CONTENTS
CAPTION PAGE
- ------- ----
REPORTS TO CERTIFICATEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . S-3
SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Risk of Limitations on Adjustments of Class A-2 Pass-Through Rate . . . . . . . . S-20
Risks Associated with Underwriting Standards . . . . . . . . . . . . . . . . . . S-20
Risks Associated with Geographic Concentration of Mortgaged Properties . . . . . S-21
Risks Associated with Damaged Mortgaged Properties . . . . . . . . . . . . . . . S-21
Risks Associated with Junior Loans . . . . . . . . . . . . . . . . . . . . . . . S-22
Concentration of Balloon Loans . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Risks Associated with Prepayment of the Mortgage Loans . . . . . . . . . . S-23
The Subsequent Mortgage Loans and the Purchase Account . . . . . . . . . . . . . S-24
Yield Considerations Relating to Excess Cash . . . . . . . . . . . . . . . . . . S-24
Environmental Statutes Affecting Security Interests . . . . . . . . . . . . . . . S-25
Risks Associated with Certain Origination Fees . . . . . . . . . . . . . . . . . S-25
Book-Entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
Book-Entry Registration of Class A Certificates . . . . . . . . . . . . . . . . . S-27
Assignment of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
Payments on Mortgage Loans and Deposits to the Collection Account . . . . . . . . S-32
Distributions on the Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-33
Purchase Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Capitalized Interest Account . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Overcollateralization Feature . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
The Certificate Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . S-45
The Certificate Insurer Premium . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Monthly Advances; Servicing Advances; Compensating Interest and
Interest Shortfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Reports to Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Termination; Retirement of the Certificates . . . . . . . . . . . . . . . . . . . S-48
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
THE MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Fixed Rate Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
Adjustable Rate Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
Conveyance of Subsequent Mortgage Loans . . . . . . . . . . . . . . . . . . . . . S-52
PREPAYMENT AND YIELD CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . S-53
Projected Prepayments and Yields for the Class A Certificates . . . . . . . . . . S-54
ORIGINATION AND SERVICING OF THE MORTGAGE LOANS . . . . . . . . . . . . . . . . . . S-59
The Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
Underwriting of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . S-59
Mortgage Loan Delinquency and Foreclosure Experience . . . . . . . . . . . . . . S-59
Servicing of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
Sub-Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Realization upon Defaulted Mortgage Loans . . . . . . . . . . . . . . . . . . . . S-62
Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
Servicing and Other Compensation; Payment of Expenses . . . . . . . . . . . . . . S-64
Certain Matters Regarding Servicer's Servicing Obligations . . . . . . . . . . . S-64
THE CERTIFICATE INSURANCE POLICYAND THE CERTIFICATE INSURER . . . . . . . . . . . . S-65
The Certificate Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
The Certificate Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . S-67
Credit Enhancement Does Not Apply to Prepayment Risk . . . . . . . . . . . . . . S-69
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . S-69
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-69
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-71
LEGAL INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . S-71
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-71
REPORT OF EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
RATING OF THE CLASS A CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . S-73
ANNEX A
DESCRIPTION OF THE MORTGAGE POOL . . . . . . . . . . . . . . . . . . . . . . . . A-1
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT ANDTAX DOCUMENTATION PROCEDURES . . . . . . . . . . B-1
S-4
6
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Capitalized terms not otherwise defined herein have
the meanings assigned to such terms in the Prospectus. See the "Index of
Principal Terms" in the Prospectus.
Issuer . . . . . . . . . . . . . . . . . . Aames Mortgage Trust 1996-[ ] (the "Trust").
Certificates Offered . . . . . . . . . . . . . Mortgage Pass-Through Certificates, Series 1996-[ ], Class A-1A Certificates
(the "Class A-1A Certificates"), Class A-1B Certificates (the "Class A-1B
Certificates"), Class A-1C Certificates (the "Class A-1C Certificates" and
together with the Class A-1A Certificates and the Class A-1B Certificates, the
"Class A-1 Certificates") and Class A-2 Certificates (the "Class A-2
Certificates" and together with the Class A-1 Certificates, the "Class A
Certificates"). The Class A Certificates will be offered in book-entry form
only. See "Description of Certificates -- Book-Entry Registration of Class A
Certificates" herein.
The Sponsor . . . . . . . . . . . . . . . . . . Aames Capital Corporation, a California corporation (the "Sponsor"). The
principal office of the Sponsor is located in Los Angeles, California. The
Sponsor is a wholly owned subsidiary of Aames Financial Corporation, a Delaware
corporation. See "The Sponsor" in the Prospectus.
The Servicer . . . . . . . . . . . . . . . . . Aames Capital Corporation will act as servicer of the Mortgage Loans (in such
capacity, the "Servicer"). The Servicer intends to appoint one or more mortgage
servicing institutions (each, a "Sub-Servicer"), which may be affiliates of the
Sponsor, to service and administer certain Mortgage Loans on behalf of the
Servicer. See "Origination and Servicing of the Mortgage Loans -- Sub-
Servicers" herein and "The Pooling and Servicing Agreement -- Sub-Servicers"
in the Prospectus.
The Trustee . . . . . . . . . . . . . . . . . . [Name of Trustee] (the "Trustee").
Cut-off Date . . . . . . . . . . . . . . . . . [ ].
Closing Date . . . . . . . . . . . . . . . . . On or about [ ].
Description of the
Certificates . . . . . . . . . . . . . . . . The Mortgage Pass-Through Certificates, Series 1996-[ ] (the "Certificates"),
will consist of two Classes of Class A Certificates, the Class A-1 Certificates
(consisting of three subclasses, the Class A-1A Certificates, the Class A-1B
Certificates and the Class A-1C Certificates) and the Class A-2 Certificates,
and a Class of Certificates evidencing the residual interest in the Trust (the
"Class R Certificate"). The Certificates will represent undivided beneficial
ownership interests in the Trust to be created pursuant to a Pooling and
Servicing Agreement to be dated as of [ ] (the "Pooling and
Servicing Agreement") between the Sponsor, in its capacity as Sponsor and
Servicer, and the Trustee. Only the Class A Certificates are being offered
hereby.
S-5
7
Initially, the assets of the Trust will consist of (i) a pool (the "Mortgage
Pool") of two groups (each, a "Mortgage Loan Group") of home equity mortgage
loans described herein (the "Initial Mortgage Loans") secured by first and
junior lien mortgages or deeds of trust on one- to four-family residential
properties or condominiums (the "Mortgaged Properties"); (ii) all payments
received under the respective Mortgage Loans on and after the Cut-off Date;
(iii) security interests in the Mortgaged Properties; (iv) amounts to be
deposited in the Purchase Account (as defined herein) that will be available
for the purchase of Subsequent Mortgage Loans (as defined herein) during the
Commitment Period; (v) amounts to be deposited in the Capitalized Interest
Account (as defined herein); (vi) the insurance policy (the "Certificate
Insurance Policy") to be issued by [name of Certificate Insurer] (the
"Certificate Insurer"); and (vii) certain other property. Distributions on the
Class A-1 Certificates will be derived primarily from amounts received,
collected or recovered in respect of the Mortgage Loan Group comprised entirely
of Mortgage Loans bearing fixed rates of interest (the "Fixed Rate Group").
Distributions on the Class A-2 Certificates will be derived primarily from
amounts received, collected or recovered in respect of the Mortgage Loan Group
comprised entirely of Mortgage Loans bearing interest at rates that are subject
to periodic adjustment (the "Adjustable Rate Group").
As of the Cut-off Date, the Initial Mortgage Loans in the Fixed Rate Group had
an Aggregate Principal Balance of $[ ] and the Initial Mortgage
Loans in the Adjustable Rate Group had an Aggregate Principal Balance of
$[ ] (in each case subject to reduction in the event mortgage loans
are removed from the Mortgage Pool prior to the Closing Date). See "The
Mortgage Loans -- General" herein.
Original Class A-1A Certificate
Principal Balance . . . . . . . . . . . . . . $[ ].
Original Class A-1B Certificate
Principal Balance . . . . . . . . . . . . . . $[ ].
Original Class A-1C Certificate
Principal Balance . . . . . . . . . . . . . . $[ ].
Original Class A-2 Certificate
Principal Balance . . . . . . . . . . . . . . $[ ].
Class A-1A Pass-Through
Rate . . . . . . . . . . . . . . . . . . The Class A-1A Pass-Through Rate will be [ ]% per annum.
Class A-1B Pass-Through
Rate . . . . . . . . . . . . . . . . . . The Class A-1B Pass-Through Rate will be [ ]% per annum.
Class A-1C Pass-Through
Rate . . . . . . . . . . . . . . . . . . The Class A-1C Pass-Through Rate will be [ ]% per annum.
S-6
8
Class A-2 Pass-Through
Rate . . . . . . . . . . . . . . . . . . The Class A-2 Pass-Through Rate for each Interest Period will be a per annum
rate equal to the lesser of (i) for each Interest Period on or prior to the
Distribution Date in [ ], LIBOR plus [ ]%, and, for each Interest
Period thereafter, LIBOR plus [ ]% and (ii) the Adjustable Rate Cap (as
defined herein). LIBOR for the initial Interest Period will be determined on
[ ]. The "Adjustable Rate Cap" will be, with respect to any Distribution
Date and the Class A-2 Certificates, the per annum rate equal to the percentage
obtained by (I) dividing (x) the amount of interest that accrued on the Mortgage
Loans in the Adjustable Rate Group in respect of the related Interest Period at
the weighted average of the related Mortgage Interest Rates applicable to
Monthly Payments due on such Mortgage Loans during such Interest Period, reduced
by the sum of (i) the Servicing Fee with respect to the Mortgage Loans in the
Adjustable Rate Group for such Interest Period, (ii) the applicable Certificate
Insurer Premium attributable to the Adjustable Rate Group for the related
Distribution Date, and (iii) in the case of each Distribution Date occurring
after the Distribution Date in [ ], an amount equal to one-twelfth
(1/12) of [ ] basis points multiplied by the aggregate principal balance of
the Mortgage Loans in the Adjustable Rate Group as of the first day of such
Interest Period, by (y) the product of (i) the Class A-2 Certificate Principal
Balance as of the first day of such Interest Period and (ii) the actual number
of days elapsed during such Interest Period divided by 360 and (II) multiplying
the result by 100. See "Description of the Certificates -- Distributions on the
Certificates" herein.
Record Date . . . . . . . . . . . . . . . . . Distributions will be made on each Distribution Date to Class A
Certificateholders of record on the last Business Day (as defined herein) of the
immediately preceding calendar month (each, a "Record Date"), except that the
final distribution in respect of the Class A Certificates will be made only upon
presentation and surrender of such Certificates at the office or agency
designated by the Trustee for that purpose. See "Description of the
Certificates -- Distributions on the Certificates" herein.
Distributions on the
Class A Certificates
A. General . . . . . . . . . . . . . . . . . Distributions on the Class A Certificates will be made on the 15th day of each
month or, if such day is not a Business Day, on the next succeeding Business Day
(each, a "Distribution Date"), commencing in [ ], to each Class A
Certificateholder of record on the related Record Date. On each Distribution
Date, distributions will be made on each Class of Class A Certificates from
Available Funds (as defined herein) for the related Mortgage Loan Group for such
Distribution Date.
1. Class A Interest
Distributions . . . . . . . . . . . . . On each Distribution Date, the Class A Certificates will be entitled to
distributions in respect of Class A Monthly Interest.
S-7
9
As of any Distribution Date, "Class A Monthly Interest" for the Class A-1
Certificates will consist of Class A-1A Monthly Interest, Class A-1B Monthly
Interest and Class A-1C Monthly Interest for such Distribution Date. "Class
A-1A Monthly Interest" will be, with respect to the first Distribution Date, an
amount equal to 30 days of interest at the Class A-1A Pass-Through Rate on the
Original Class A-1A Certificate Principal Balance and, with respect to any
subsequent Distribution Date, an amount equal to 30 days of interest at the
Class A-1A Pass-Through Rate on the Class A-1A Certificate Principal Balance (as
defined herein) as of the preceding Distribution Date (after giving effect to
the distribution, if any, in reduction of principal made on the Class A-1A
Certificates on such preceding Distribution Date), in either case net of any
applicable Interest Shortfalls. "Class A-1B Monthly Interest" will be, with
respect to the first Distribution Date, an amount equal to 30 days of interest
at the Class A-1B Pass-Through Rate on the Original Class A-1B Certificate
Principal Balance and, with respect to any subsequent Distribution Date, an
amount equal to 30 days of interest at the Class A-1B Pass-Through Rate on the
Class A-1B Certificate Principal Balance (as defined herein) as of the preceding
Distribution Date (after giving effect to the distribution, if any, in reduction
of principal made on the Class A-1B Certificates on such preceding Distribution
Date), in either case net of any applicable Interest Shortfalls. "Class A-1C
Monthly Interest" will be, with respect to the first Distribution Date, an
amount equal to 30 days of interest at the Class A-1C Pass-Through Rate on the
Original Class A-1C Certificate Principal Balance and, with respect to any
subsequent Distribution Date, an amount equal to 30 days of interest at the
Class A-1C Pass-Through Rate on the Class A-1C Certificate Principal Balance (as
defined herein) as of the preceding Distribution Date (after giving effect to
the distribution, if any, in reduction of principal made on the Class A-1C
Certificates on such preceding Distribution Date), in either case net of any
applicable Interest Shortfalls.
As of any Distribution Date, "Class A Monthly Interest" for the Class A-2
Certificates will be an amount equal to (a) with respect to the [ ]
Distribution Date, interest for the number of days in the period commencing on
the Closing Date and ending on the day prior to such Distribution Date at the
initial Class A-2 Pass-Through Rate on the Original Class A-2 Certificate
Principal Balance, and (b) with respect to each subsequent Distribution Date,
interest for the number of days in the related Interest Period at the Class A-2
Pass-Through Rate in effect for such Distribution Date on the Class A-2
Certificate Principal Balance (as defined herein) as of the preceding
Distribution Date (after giving effect to the distribution, if any, in reduction
of principal made on the Class A-2 Certificates on such preceding Distribution
Date), in either case net of any applicable Interest Shortfalls.
If, with respect to either Class of Class A Certificates and any Distribution
Date, funds are not available from Available Funds for the related Mortgage Loan
Group and any available Excess Cash (as defined herein) from the other Mortgage
Loan Group to distribute the full amount of the Class A Monthly Interest to the
related Class of Class A
S-8
10
Certificates, the deficiency will be covered by payments made pursuant to the
Certificate Insurance Policy in respect of such Class for such Distribution
Date. See "Description of the Certificates -- The Certificate Insurance
Policy" herein.
The "Interest Period" in respect of any Distribution Date will be (i) for the
Class A-1 Certificates, the calendar month preceding the month in which such
Distribution Date occurs, and (ii) for the Class A-2 Certificates, the period
from and including the Closing Date, in the case of the first Distribution Date,
or the immediately preceding Distribution Date, as applicable, to but excluding
the related Distribution Date. All calculations of interest on the Class A-1
Certificates will be computed on the basis of a 360-day year of twelve 30-day
months. All calculations of interest on the Class A-2 Certificates will be
computed on the basis of the actual number of days elapsed in the related
Interest Period and in a year of 360 days.
2. Class A Principal
Distributions . . . . . . . . . . . . On each Distribution Date, Monthly Principal will be distributed on the Class
A-1 Certificates in reduction of the Class A-1 Certificate Principal Balance (as
defined herein) and on the Class A-2 Certificates in reduction of the Class A-2
Certificate Principal Balance. "Monthly Principal" with respect to each Class
of Class A Certificates and any Distribution Date will be equal to the
aggregate of amounts collected, received or otherwise recovered in respect of
principal on the Mortgage Loans in the related Mortgage Loan Group during the
related Collection Period, subject to reduction for any Coverage Surplus (as
defined herein) with respect to such Class and the related Distribution Date as
described herein. Distributions in respect of Monthly Principal on the Class A-1
Certificates will be distributed first to Class A-1A Certificateholders, in
reduction of the Class A-1A Certificate Principal Balance, until such Class A-1A
Certificate Principal Balance is reduced to zero, then to Class A-1B
Certificateholders, in reduction of the Class A-1B Certificate Principal
Balance, until such Class A-1B Certificate Principal Balance is reduced to zero
and then to Class A-1C Certificateholders, in reduction of the Class A-1C
Certificate Principal Balance, until such Class A-1C Certificate Principal
Balance is reduced to zero. See "Description of the Certificates --
Distributions on the Certificates" herein.
3. Distributions of Excess
Cash . . . . . . . . . . . . . . . . . On each Distribution Date with respect to which the Coverage Amount (as defined
herein) for a Class of Class A Certificates is less than the Required Coverage
Amount (as defined herein) for such Class and such Distribution Date, Excess
Cash derived from Available Funds for the related Mortgage Loan Group, if
any, will be distributed on the related Class of Class A Certificates, in
reduction of the Class A Certificate Principal Balance of such Class, up to the
amount necessary for the related Coverage Amount to equal the applicable
Required Coverage Amount. Excess Cash with respect to each Class of Class A
Certificates on any Distribution Date will be equal to Available Funds for the
related Mortgage Loan Group on such Distribution Date, reduced by the sum of
S-9
11
(i) the Class A Monthly Interest for the related Class and Distribution
Date, (ii) the Monthly Principal for the related Class and Distribution Date,
(iii) the Certificate Insurer Premium attributable to the related Mortgage Loan
Group and Distribution Date and (iv) any amounts payable to the Certificate
Insurer for Insured Amounts (as defined herein) paid on prior Distribution Dates
and not yet reimbursed and any unpaid Certificate Insurer Premium from prior
Distribution Dates, with respect to the related Class. Any distributions in
respect of Excess Cash on the Class A-1 Certificates will be distributed first
to the Class A-1A Certificates, then to the Class A-1B Certificates and then to
the Class A-1C Certificates as described under the caption "-- Application of
Distributions on the Class A-1 Certificates" herein.
Any Excess Cash with respect to a Class of Class A Certificates not required to
be distributed on the related Class of Class A Certificates on any Distribution
Date will be distributed on the other Class of Class A Certificates first, to
cover any shortfall in the Class A Monthly Interest for such Class and
Distribution Date, and then to the extent necessary to reduce the Class A
Certificate Principal Balance of such other Class up to the amount necessary for
the related Coverage Amount to equal the then applicable Required Coverage
Amount for such Class on the related Distribution Date. Any Excess Cash not
required to be distributed on either Class of Class A Certificates on any
Distribution Date shall be applied first, to reimburse the Certificate Insurer
for amounts to which it then may be entitled in respect of Insured Amounts for
the other Class and to pay amounts of any unpaid Certificate Insurer Premium on
prior Distribution Dates; second, to reimburse the Servicer for any amounts to
which it may then be entitled; and, thereafter, any remaining amount shall be
distributed to the holder of the Class R Certificate. Amounts so distributed to
the Class R Certificateholder on a Distribution Date will not be available to
pay amounts due to Class A Certificateholders on subsequent Distribution Dates.
See "Description of the Certificates -- Distributions on the Certificates"
herein.
4. Application of Distributions
on the Class A-1 Certificates . . . . . Distributions on the Class A-1 Certificates will be allocated among the Class
A-1A Certificateholders, Class A-1B Certificateholders and Class A-1C
Certificateholders in the following manner. All distributions in respect of
interest on the Class A-1 Certificates will be distributed pro rata to Class
A-1A Certificateholders, Class A-1B Certificateholders and Class A-1C
Certificateholders in proportion to the Class A-1A Monthly Interest, Class A-1B
Monthly Interest and Class A-1C Monthly Interest for the related Distribution
Date. All distributions in respect of principal on the Class A-1 Certificates
(including any Excess Cash distributable in respect of the Class A-1
Certificates) for any Distribution Date will be distributed to holders of Class
A-1 Certificates sequentially in an amount not to exceed the amount required to
reduce the Certificate Principal Balance of the related subclass to zero, but
not prior to the Distribution Date on which the Certificate Principal Balance
of each subclass of Class A-1 Certificates that is sequentially prior to such
subclass has been
S-10
12
reduced to zero. See "Description of the Certificates -- Distributions on the
Certificates" herein.
B. Available Funds . . . . . . . . . . . . . "Available Funds" for each Mortgage Loan Group and any Distribution Date will
generally be the sum of amounts collected, received or otherwise recovered by or
on behalf of the Servicer on or with respect to the Mortgage Loans in the
related Mortgage Loan Group during the calendar month immediately preceding
the month in which such Distribution Date occurs (each, a "Collection Period"),
net of the related Servicing Fee and any additional servicing compensation paid
to the Servicer, Payments Ahead (as defined herein) and reimbursements for
certain Advances (as defined herein) (other than those included in Liquidation
Expenses reimbursed from related Liquidation Proceeds), plus the amount of any
Monthly Advances and Compensating Interest Payments made by the Servicer with
respect to such Mortgage Loan Group for such Distribution Date, any amounts
deposited in the Certificate Account by the Sponsor or the Servicer in respect
of the purchase, repurchase or substitution of Mortgage Loans in such Mortgage
Loan Group during the related Collection Period and any amounts deposited in the
Certificate Account during such Collection Period from the Purchase Account and
the Capitalized Interest Account or in connection with the termination of the
Trust that are attributable to the related Mortgage Loan Group, all as more
fully described under "Description of the Certificates -- Distributions on the
Certificates" herein.
C. Overcollateralization
Feature . . . . . . . . . . . . . . . . . Credit enhancement with respect to the Class A-1 Certificates is expected to
result from the application of Excess Cash on each Distribution Date to the
reduction of the Certificate Principal Balance of the Class A-1 Certificates so
that over time the Aggregate Principal Balance of the Mortgage Loans in the
Fixed Rate Group will exceed the aggregate Certificate Principal Balance of
the Class A-1 Certificates. Credit enhancement with respect to the Class A-2
Certificates initially will be provided in part by overcollateralization
resulting from the Aggregate Principal Balance of the Initial Mortgage Loans in
the Adjustable Rate Group and the Purchase Account Deposit attributable to such
Adjustable Rate Group exceeding the Original Class A-2 Certificate Principal
Balance which is expected to be supplemented by the application of Excess Cash
on each Distribution Date so that over time such overcollateralization will
increase. In either case, such overcollateralization is intended to result in
receipts, collections and recoveries on the Mortgage Loans in the related
Mortgage Loan Group in excess of the amount necessary to pay the related Class A
Monthly Interest and Class A Monthly Principal required to be distributed on the
Class A Certificates on any Distribution Date and to reduce the Certificate
Principal Balances of each Class or subclass, as applicable, of the Class A
Certificates to zero prior to the applicable Final Scheduled Payment Date (as
defined herein). Excess Cash attributable to a Mortgage Loan Group will be
distributed on the related Class of Class A Certificates on each Distribution
Date to the extent necessary to reduce
S-11
13
the Certificate Principal Balance of such Class up to the amount necessary for
the related Coverage Amount to equal the Required Coverage Amount for such Class
and for such Distribution Date. Any Excess Cash that is not distributed on the
related Class of Class A Certificates on a given Distribution Date will be
distributed on the other Class of Class A Certificates, first to cover any
shortfall in the Class A Monthly Interest for such Class and such Distribution
Date and then to the extent necessary to reduce the Class A Certificate
Principal Balance of such Class up to the amount necessary for the related
Coverage Amount to equal the applicable Required Coverage Amount.
The "Coverage Amount" for each Class of Class A Certificates on any Distribution
Date will be equal to the amount by which the Aggregate Principal Balance of the
Mortgage Loans in the related Mortgage Loan Group as of the end of the related
Collection Period exceeds the Class A Certificate Principal Balance of the
related Class for such Distribution Date after taking into account distributions
of Monthly Principal (disregarding any permitted reduction in Monthly Principal
due to a Coverage Surplus in respect of such Class of Class A Certificates) made
on such Distribution Date. The "Required Coverage Amount" for each Class of
Class A Certificates on any Distribution Date will be equal to the amount
specified as such in the Pooling and Servicing Agreement. The "Coverage Surplus"
for each Class of Class A Certificates on any Distribution Date will be the
amount, if any, by which the Coverage Amount for such Class on such Distribution
Date exceeds the then applicable Required Coverage Amount for such Class. The
"Coverage Deficit" for each Class of Class A Certificates on any Distribution
Date will be the amount, if any, by which the Class A Certificate Principal
Balance of such Class on such Distribution Date (after taking into account the
Monthly Principal and Excess Cash to be distributed on such Distribution Date in
reduction of the Class A Certificate Principal Balance of such Class) exceeds
the Aggregate Principal Balance of the Mortgage Loans in the related Mortgage
Loan Group at the end of the related Collection Period.
On the Closing Date, the initial Coverage Amount for the Class A-1 Certificates
(the amount by which the sum of the Aggregate Principal Balance of the Initial
Mortgage Loans in the Fixed Rate Group and the portion of the Purchase Account
Deposit attributable to the Fixed Rate Group exceeds the sum of the Original
Class A-1A Certificate Principal Balance, the Original Class A-1B Certificate
Principal Balance and the Original Class A-1C Certificate Principal Balance) is
expected to be zero. On the Closing Date, the initial Coverage Amount for the
Class A-2 Certificates will be approximately [ ]% of the sum of the
Aggregate Principal Balance of the Initial Mortgage Loans in the Adjustable Rate
Group and the portion of the Purchase Account Deposit attributable to the
Adjustable Rate Group. The initial Coverage Amount for either the Class A-1
Certificates or the Class A-2 Certificates is not indicative of the quality of
the related Mortgage Loan Group nor is it intended to reflect the loss, default
or delinquency experience anticipated on the Mortgage Loans in such Mortgage
Loan Group.
S-12
14
The Pooling and Servicing Agreement may provide that the Required Coverage
Amount for a Class of Class A Certificates may increase or decrease during the
period such Class remains outstanding. With respect to the Class A-2
Certificates, if on any Distribution Date occurring after [ ], the
amount of Excess Cash distributable on the Class A-2 Certificates is less than
an amount specified in the Pooling and Servicing Agreement, the Required
Coverage Amount for the Class A-2 Certificates will be increased (any such
Distribution Date, a "Class A-2 Trigger Event Date"); provided, however, that
upon the satisfaction of certain cash flow requirements in respect of the Class
A-2 Certificates for the period specified in the Pooling and Servicing
Agreement, such Required Coverage Amount will return to its original level. Any
increase in the Required Coverage Amount for a Class of Class A Certificates may
result in an accelerated amortization of such Class until such Required Coverage
Amount for such Class is reached, and any decrease in the Required Coverage
Amount for a Class of Class A Certificates will result in a decelerated
amortization of such Class until such Required Coverage Amount for such Class is
reached. See "Description of the Certificates -- Overcollateralization Feature"
herein.
D. Certificate Insurance
Policy . . . . . . . . . . . . . . . . . The Certificate Insurance Policy will be issued on the Closing Date by the
Certificate Insurer in favor of the Trustee for the benefit of the Class A
Certificateholders. If, with respect to either Class of Class A
Certificates and any Distribution Date, sufficient funds are not available from
Available Funds for the related Mortgage Loan Group and any available Excess
Cash from the other Mortgage Loan Group to distribute the Class A Monthly
Interest to the related Class of Class A Certificates, or if a Coverage Deficit
exists with respect to such Class on such Distribution Date (after taking into
account any distributions in reduction of the Class A Certificate Principal
Balance of such Class on such Distribution Date), the Trustee will make a draw
on the Certificate Insurance Policy in an amount equal to the amount necessary
to pay the full amount of the related Class A Monthly Interest on such
Distribution Date and the amount of any Coverage Deficit with respect to such
Class of Class A Certificates on such Distribution Date, as more fully described
under "Description of the Certificates -- The Certificate Insurance Policy"
herein. See also "The Certificate Insurance Policy and the Certificate Insurer"
herein.
S-13
15
E. Final Scheduled Payment Date . . . . . . . The "Final Scheduled Payment Dates" for the Class A Certificates are set forth
below, although it is anticipated that the actual final payment date for each
Class or subclass, as applicable, of Class A Certificates will occur
significantly earlier than such Final Scheduled Payment Date. See "Prepayment
and Yield Considerations" herein.
Class Final Scheduled Payment Date
----- ----------------------------
Class A-1A Certificates [ ]
Class A-1B Certificates [ ]
Class A-1C Certificates [ ]
Class A-2 Certificates [ ]
Forward Purchase Commitment;
Purchase Account . . . . . . . . . . . . . . On the Closing Date, a deposit (the "Purchase Account Deposit") in the amount of
approximately $[ ] will be made by the Sponsor to a Purchase Account
in the name of the Trustee. Approximately $[ ] of the Purchase Account
Deposit shall be allocated for the purchase of Subsequent Mortgage Loans for
inclusion in the Fixed Rate Group, and approximately $[ ] of the
Purchase Account Deposit shall be allocated for the purchase of Subsequent
Mortgage Loans for inclusion in the Adjustable Rate Group. The Purchase Account
Deposit may be increased by an amount equal to the aggregate of the principal
balances of any mortgage loans removed from the Mortgage Pool prior to the
Closing Date as described herein, provided that any such increase shall not
exceed $[ ]. See "The Mortgage Loans -- General" herein. During the
period (the "Commitment Period") from the Closing Date until the earlier of (i)
the date on which the Purchase Account Deposit is reduced to zero and (ii)
[ ], the Purchase Account Deposit will be reduced by the amount thereof used
to purchase Subsequent Mortgage Loans from the Sponsor in accordance with the
applicable provisions of the Pooling and Servicing Agreement. Subsequent
Mortgage Loans purchased by and added to the Trust on any Subsequent Transfer
Date (as defined herein) must satisfy the criteria set forth in the Pooling and
Servicing Agreement and must be approved by the Certificate Insurer. Any
date on which such Subsequent Mortgage Loans will be conveyed by the Sponsor to
the Trust is a "Subsequent Transfer Date." On the Distribution Date in [ ],
the portion of the Purchase Account Deposit allocated to the Fixed Rate Group
that is remaining at the end of the Commitment Period (net of reinvestment
income payable to the Sponsor) will be distributed in reduction of the Class A-1
Certificate Principal Balance and the portion of the Purchase Account Deposit
allocated to the Adjustable Rate Group that is remaining at the end of the
Commitment Period (net of reinvestment income payable to the Sponsor) will be
distributed in reduction of the Class A-2 Certificate Principal Balance.
Although it is intended that the principal amount of Subsequent Mortgage Loans
sold to the Trust will require application of substantially all of the Purchase
Account Deposit and it is not currently anticipated that there will be any
material amount of principal distributions from amounts remaining on deposit in
the Purchase Account in reduction of the Class A Certificate Principal Balances
of either Class, no assurance
S-14
16
can be given that such a distribution with respect to either Class or both
Classes of Class A Certificates will not occur on the Distribution Date in
[ ]. In any event, it is unlikely that the Sponsor will be able to
deliver Subsequent Mortgage Loans with aggregate principal balances that exactly
equal the Purchase Account Deposit, and any portion of the Purchase Account
Deposit allocated to each Mortgage Loan Group remaining at the end of the
Commitment Period will be distributed on the [ ] Distribution Date in
reduction of the Class A Certificate Principal Balances of the related Classes.
The Purchase Account will not be part of the REMIC Pool. See "Description of
the Certificates -- Purchase Account" herein.
Capitalized Interest Account . . . . . . . . . On the Closing Date, cash will be deposited in the name of the Trustee in the
Capitalized Interest Account. The Capitalized Interest Account will be
maintained with the Trustee in its corporate trust department. The amount on
deposit in the Capitalized Interest Account will be specifically allocated to
cover shortfalls in interest on each Class of Class A Certificates that may
arise as a result of the utilization of the Purchase Account for the purchase by
the Trust of Subsequent Mortgage Loans after the Cut-off Date and will be so
applied by the Trustee on the [ ] Distribution Date. The Capitalized
Interest Account will not be part of the REMIC Pool. See "Description of the
Certificates -- Capitalized Interest Account" herein.
Monthly Advances . . . . . . . . . . . . . . . The Servicer is required to make advances ("Monthly Advances") on each
Distribution Date in respect of delinquent payments of interest on the Mortgage
Loans in the related Mortgage Loan Group for the related Collection Period,
subject to certain limitations described herein. See "Description of the
Certificates -- Monthly Advances; Servicing Advances; Compensating Interest and
Interest Shortfalls" herein.
Compensating Interest and
Interest Shortfalls . . . . . . . . . . . . . With respect to any Mortgage Loan as to which a prepayment was received, that
became a Liquidated Mortgage Loan (as defined herein) or was otherwise charged
off during a Collection Period, the Servicer will be required to remit to the
Trustee, from amounts otherwise payable to the Servicer as the Servicing Fee for
the related Mortgage Loan Group and Collection Period, an amount generally
calculated to ensure that a full month's interest on each such Mortgage Loan
(less the applicable Servicing Fee attributable to such Mortgage Loan) is
available for distribution to the holders of the related Class of Class A
Certificates on the applicable Distribution Date (each such amount, a
"Compensating Interest Payment"). If the Servicing Fee for the related Mortgage
Loan Group and Collection Period is insufficient to make any portion of such
Compensating Interest Payments, the resulting shortfall (a "Prepayment Interest
Shortfall") will reduce the amount of interest distributable in respect of the
related Class of Class A Certificates on the related Distribution Date and such
reduction will not be recoverable thereafter.
In addition, the application to any Mortgage Loan of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act"), or
S-15
17
similar legislation may adversely affect, for an indeterminate period of time,
the ability of the Servicer to collect full amounts of interest on such Mortgage
Loan ("Relief Act Shortfalls"; Relief Act Shortfalls and Prepayment Interest
Shortfalls are collectively, "Interest Shortfalls"). Interest Shortfalls will
not be covered by the Certificate Insurance Policy. See "Risk Factors --
Limitations on Interest Payments and Foreclosures" in the Prospectus.
Certificate Insurer
Premium . . . . . . . . . . . . . . . . . . The Certificate Insurer will be entitled to receive from the Trust a monthly
premium (the "Certificate Insurer Premium") payable out of Available Funds on
each Distribution Date in respect of the related Class of Class A Certificates
from amounts on deposit in the Certificate Account after reimbursement to the
Certificate Insurer of certain Insured Amounts. The Certificate Insurer Premium
as of any Distribution Date will equal one-twelfth (1/12) of the product of the
applicable Insurer Premium Rate and the Class A Certificate Principal Balance of
the related Class of Class A Certificates for such Distribution Date. The
"Insurer Premium Rate" will be [ ]%; provided, however, that with respect to
the Class A-2 Certificates and each Distribution Date commencing with the
Distribution Date immediately after [ ], if the Coverage Amount for
the Class A-2 Certificates is less than the then applicable Required
Coverage Amount for such Class as of the immediately preceding Distribution
Date, the Insurer Premium Rate with respect to the Class A-2 Certificates and
such Distribution Date will be [ ]%. See "Description of the Certificates
-- The Certificate Insurer Premium" herein.
Servicing Fee . . . . . . . . . . . . . . . . The primary compensation payable to the Servicer on each Distribution Date in
respect of the related Collection Period and the related Mortgage Loan Group
(the "Servicing Fee") will equal one-twelfth (1/12) of the product of (a)
the applicable Servicing Fee Rate and (b) the Aggregate Principal Balance of the
Mortgage Loans in the related Mortgage Loan Group at the beginning of such
Collection Period. The "Servicing Fee Rate" for each Mortgage Loan Group will be
[ ]% for each Collection Period. The Servicer will also be entitled to
retain late fees, prepayment charges and certain other amounts and charges as
additional servicing compensation. See "Origination and Servicing of the
Mortgage Loans -- Servicing and Other Compensation; Payment of Expenses" herein.
The Mortgage Loans . . . . . . . . . . . . . . The statistical information presented in this Prospectus Supplement regarding
the Mortgage Pool is based on the Initial Mortgage Loans as of the date of
this Prospectus Supplement. The statistical information does not take into
account any Subsequent Mortgage Loans that may be added to the Mortgage Pool
during the Commitment Period through application of amounts on deposit in the
Purchase Account. Certain mortgage loans may be removed, prior to the Closing
Date, from the Mortgage Pool as described herein. In such event, an amount equal
to the aggregate principal balances of such mortgage loans, but in no event more
than $[ ], would be added to the Purchase Account Deposit on the Closing Date.
As a result, the statistical information presented
S-16
18
herein regarding the Initial Mortgage Loans and each Mortgage Loan Group as of
the date of this Prospectus Supplement may vary in certain limited respects from
comparable information based on the actual composition of the Mortgage Pool and
each Mortgage Loan Group on the Closing Date.
As of the Cut-off Date, the Mortgage Pool consisted of a total of [ ]
Mortgage Loans of which [ ] are fixed rate Mortgage Loans and [ ] are
adjustable rate Mortgage Loans. The Mortgage Loans will be conventional,
closed-end, home equity mortgage loans acquired by the Sponsor from certain
affiliates of the Sponsor (the "Affiliated Originators") and institutions not
affiliated with the Sponsor (the "Unaffiliated Originators" and, together with
the Affiliated Originators, the "Originators"). See "Origination and Servicing
of the Mortgage Loans -- The Originators" and "-- Underwriting of Mortgage
Loans" herein. Approximately [ ]% of the Initial Mortgage Loans in the Fixed
Rate Group and approximately [ ]% of the Initial Mortgage Loans in the
Adjustable Rate Group (by principal balance as of the Cut-off Date) are secured
by Mortgaged Properties located in California. As of the Cut-off Date, the
Initial Mortgage Loans in the Mortgage Pool had an Aggregate Principal Balance
of $[ ]. The Initial Mortgage Loans in the Fixed Rate Group had an
Aggregate Principal Balance of $[ ] and the Initial Mortgage Loans
in the Adjustable Rate Group had an Aggregate Principal Balance of $[ ].
See "The Mortgage Loans -- General," "-- Fixed Rate Group" and "--
Adjustable Rate Group" and "ANNEX A: Description of the Mortgage Pool" herein
for detailed information about the Initial Mortgage Loans in each Mortgage Loan
Group.
Optional Termination . . . . . . . . . . . . . On any Distribution Date when the Aggregate Principal Balance of the Mortgage
Loans in the Mortgage Pool (the "Pool Balance") as of such Distribution Date is
less than 10% of the sum of the Pool Balance as of the Cut-off Date and the
original Purchase Account Deposit, the Servicer may purchase from the Trust all
remaining Mortgage Loans and all property acquired in respect of any Mortgage
Loan held by the Trust and thereby effect an early retirement of the Class A
Certificates. The purchase price will generally be equal to the Principal
Balance of each Mortgage Loan in the Mortgage Pool at such time plus the fair
market value of each Mortgaged Property then held by the Trust, together with
any unpaid accrued interest on such Mortgage Loan.
If, on any Distribution Date, Mortgage Loans with original Cut-off Date
aggregate Principal Balances equal to or in excess of 25% of the sum of the
Pool Balance as of the Cut-off Date and the Purchase Account Deposit have become
Liquidated Mortgage Loans, the Certificate Insurer will have the option to
purchase all remaining Mortgage Loans and all property acquired in respect of
any Mortgage Loan held by the Trust, and thereby effect an early retirement of
the Certificates. The purchase price for such Mortgage Loans will be the price
set forth in the immediately preceding paragraph plus any outstanding unpaid
fees and expenses of
S-17
19
the Trustee and Servicer. See "Description of Certificates -- Termination;
Retirement of the Certificates" herein.
Rating . . . . . . . . . . . . . . . . . . It is a condition to the issuance of the Class A Certificates that each of the
Class A-1A Certificates, the Class A-1B Certificates, the Class A-1C
Certificates and the Class A-2 Certificates be rated ["AAA"]["AA"] by [ ]
(the "Rating Agencies"). A security rating is not a recommendation to buy,
sell or hold the securities and may be subject to revision or withdrawal at any
time by the assigning Rating Agency. See "Rating of the Class A Certificates"
herein.
Certain Federal Income Tax Consequences . . . . An election will be made to treat the Trust (other than the Purchase Account and
the Capitalized Interest Account) as a real estate mortgage investment conduit
(the "REMIC") for federal income tax purposes. The Class A-1A Certificates,
Class A-1B Certificates, Class A-1C Certificates and Class A-2 Certificates will
be designated as the regular interests in the REMIC and generally will be
treated as newly originated debt instruments for federal income tax
purposes. The Class R Certificate will be designated as the residual interest
in the REMIC. Beneficial owners of the Class A Certificates will be required to
report income on such Certificates in accordance with the accrual method of
accounting. [It is anticipated that the Class A Certificates will be issued
without original issue discount for federal income tax purposes. However, it is
possible that the Internal Revenue Service could treat a portion of the
additional interest which would become payable on the Class A-2 Certificates
after the Distribution Date in [ ] as original issue discount.]
Certificateholders are urged to consult their tax advisors with respect to the
tax consequences of holding the Class A Certificates. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus.
ERISA Considerations . . . . . . . . . . . . . Subject to the satisfaction of certain conditions set forth herein, the Class A
Certificates may be acquired and held by a pension or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and/or Section 4975 of the Internal Revenue Code of 1986, as
amended. See "ERISA Considerations" herein and in the Prospectus.
Legal Investment
Considerations . . . . . . . . . . . . . . . The Class A Certificates will NOT constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
See "Legal Investment Considerations" herein and in the Prospectus.
Risk Factors . . . . . . . . . . . . . . . . . For a discussion of certain factors that should be considered by prospective
investors in the Class A Certificates, including certain yield and prepayment
risks, see "Risk Factors" herein and in the Prospectus.
S-18
20
Registration and Denominations;
Form of the Class A Certificates . . . . . . The Class A Certificates will be issued in minimum denominations of $1,000 and
integral multiples of $1 in excess thereof. Persons acquiring beneficial
ownership interests in the Class A Certificates ("Certificate Owners") will hold
their Certificates through The Depository Trust Company ("DTC"), in the United
States, or Cedel Bank, societe anonyme ("Cedel") or the Euroclear System
("Euroclear") in Europe. Transfers within DTC, Cedel or Euroclear, as the case
may be, will be in accordance with the usual rules and operating procedures of
the relevant system. So long as the Class A Certificates are book-entry
Certificates, such Certificates will be evidenced by one or more Certificates
registered in the name of Cede & Co., as the nominee of DTC, or Citibank N.A. or
Morgan Guaranty Trust Company of New York, the relevant depositaries of Cedel
and Euroclear, respectively, and each a participating member of DTC. No
Certificate Owner will be entitled to receive a definitive certificate
representing such person's interest, except in the event that Definitive
Certificates are issued under the limited circumstances described herein. See
"Risk Factors -- Book-Entry Registration", "Description of the Certificates --
Book-Entry Registration of Class A Certificates" herein, "ANNEX B: Global
Clearance, Settlement and Tax Documentation Procedures" hereto and "Description
of the Certificates -- Form of Certificates -- Book-Entry Registration" in the
Prospectus.
S-19
21
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the factors set forth under "Risk Factors"
in the Prospectus) in connection with the purchase of the Class A Certificates.
Any statistical information presented below is based upon the characteristics
of the Initial Mortgage Loans as of the date of this Prospectus Supplement.
Such information may vary as a result of the possibility that certain mortgage
loans may be removed from the Mortgage Pool prior to the Closing Date.
RISK OF LIMITATIONS ON ADJUSTMENTS OF CLASS A-2 PASS-THROUGH RATE.
The Adjustable Rate Group contains Mortgage Loans that, after a period of
approximately [six months, two years, three years or five years] following the
date of origination, adjust [either] [semi-annually based upon a six-month
LIBOR index] [or] [annually based on the weekly average yield on United States
Treasury securities adjusted to a constant maturity of one year, as made
available by the Federal Reserve Board (the "one-year CMT index")], in each
case subject to periodic caps on such adjustment, whereas the Class A-2
Pass-Through Rate adjusts monthly based upon a one-month LIBOR index, subject
to the Adjustable Rate Cap. Consequently, the interest due on such Mortgage
Loans (reduced by the sum of (i) the Servicing Fee, (ii) the Certificate
Insurer Premium, and (iii) after the Distribution Date in [ ], an
amount equal to one-twelfth (1/12) of [ ] basis points multiplied by the
Aggregate Principal Balance of the Mortgage Loans in the Adjustable Rate Group
for the related Distribution Date) during any Collection Period may not equal
the amount of interest that would accrue at one-month LIBOR plus the applicable
margin on the Class A-2 Certificates during the related Interest Period. In
particular, because the interest rates of the Mortgage Loans in the Adjustable
Rate Group adjust less frequently than the Class A-2 Pass-Through Rate, the
amount of Class A Monthly Interest distributed on the Class A-2 Certificates on
any Distribution Date may be limited (as a result of being determined on the
basis of the Adjustable Rate Cap) to an amount that is less than the amount of
interest that would be due on the then Class A-2 Certificate Principal Balance
for such Distribution Date at a rate equal to LIBOR plus [ ]% or LIBOR plus
[ ]%, as applicable, for extended periods in a rising interest rate
environment.
[A significant percentage of the Initial Mortgage Loans included in the
Adjustable Rate Group have Mortgage Interest Rates that remain fixed for
approximately two years, three years or five years from the date of origination
and thereafter are adjustable semi-annually on the basis of the six-month LIBOR
index (as defined herein). It is expected that, in the aggregate, such
Mortgage Loans will represent not more than [ ]% of the Mortgage Loans (by
Aggregate Principal Balance) included in the Adjustable Rate Group as of the
Closing Date. The inclusion of such Mortgage Loans in the Adjustable Rate Group
may increase the likelihood that the Class A-2 Pass-Through Rate will be
determined based on the Adjustable Rate Cap rather than on the basis of LIBOR
plus [ ]% if LIBOR increases appreciably prior to the time that such
Mortgage Loans have reached their respective dates of first adjustment.]
If the Class A-2 Pass-Through Rate is determined on the basis of the
Adjustable Rate Cap, the value of the Class A-2 Certificates may be temporarily
or permanently reduced.
RISKS ASSOCIATED WITH UNDERWRITING STANDARDS. All of the Mortgage
Loans will have been underwritten and originated or, in the case of Mortgage
Loans acquired by the Sponsor from Unaffiliated Originators, re-underwritten by
the Sponsor, in either case pursuant to the Sponsor's Guidelines (as described
in the Prospectus under the caption "The Originators -- Underwriting
Guidelines") which, in most cases, rely on the value and adequacy of the
related Mortgaged Property as collateral and, to a lesser extent, on the
creditworthiness of the Mortgagor. 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 Loan-to-Value or 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 (including any senior liens on the related
Mortgage Properties) become equal to or greater than the values of such
Mortgaged Properties, the
S-20
22
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 Class A
Certificateholders 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 Certificate Insurance Policy to the extent of the Class A
Monthly Interest due to the holders of the related Class of Class A
Certificates on the related Distribution Date and the amount of any Coverage
Deficit with respect to such Class and Distribution Date. See "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Foreclosure/Repossession,"
"-- Rights of Redemption" and "The Pooling and Servicing Agreement --
Realization upon Defaulted Mortgage Loans" in the Prospectus.
In general, a prospective borrower applying for a Mortgage Loan is
required to fill out a detailed application designed to provide the related
Originator pertinent information. As part of the description of the borrower's
financial condition, the borrower generally is required to provide a current
list of assets and liabilities and a statement of income and expenses, as well
as an authorization to apply for a credit report that summarizes the borrower's
credit history. The Originator obtains a credit report from credit reporting
agencies. In many cases, the borrower's credit history will include major
derogatory credit items such as credit write-offs, outstanding judgments and
prior bankruptcies. In most cases, the Originator verifies the borrower's
employment and income. Because certain Mortgage Loans may have been
underwritten pursuant to standards that rely to a greater extent on the value
of the related Mortgaged Properties than on the creditworthiness of the related
Mortgagor, the actual rates of delinquencies, foreclosures and losses on such
Mortgage Loans could be higher than those historically experienced in the
mortgage lending industry in general, particularly in periods during which the
values of the related Mortgaged Properties decline. See "The Originators --
Underwriting Guidelines" in the Prospectus.
RISKS ASSOCIATED WITH GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES.
Approximately [ ]% of the Initial Mortgage Loans (by Cut-off Date Principal
Balance) are secured by Mortgaged Properties located in California. The
California residential real estate market has experienced a sustained decline
over the last several years. In general, declines in the California
residential real estate market may adversely affect the values of the Mortgaged
Properties securing such Mortgage Loans such that the Principal Balances of
such Mortgage Loans, together with any primary financing on such Mortgaged
Properties, will equal or exceed the value of such Mortgaged Properties. In
addition, adverse economic conditions in California (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.
RISKS ASSOCIATED WITH DAMAGED MORTGAGED PROPERTIES. Generally, the
standard form of hazard insurance policy required to be maintained under the
terms of each Mortgage Loan does not cover physical damage resulting from
floods and other water-related causes or from earth movement (including
earthquakes, landslides and mudflows). See "Origination and Servicing of the
Mortgage Loans -- Hazard Insurance" herein. Accordingly, to the extent a
Mortgaged Property has been materially damaged since the Cut-off Date due to
flooding or other water-related causes or due to an earthquake or other earth
movement and such damage results in losses on the related Mortgage Loan, such
losses will be covered by funds made available through operation of the
overcollateralization feature described herein, or, if necessary, by amounts
paid under the Certificate Insurance Policy to the extent of the Class A
Monthly Interest due to the holders of the related Class of Class A
Certificates on the related Distribution Date and the amount of any Coverage
Deficit with respect to such Class and Distribution Date. See "Description of
the Certificates -- Overcollateralization Feature -- Overcollateralization and
the Certificate Insurance Policy" and "-- The Certificate Insurance Policy"
herein.
S-21
23
Certain Initial Mortgage Loans are secured, and certain Subsequent
Mortgage Loans may be secured, by Mortgaged Properties located in areas that
have been affected by natural disasters not covered by standard hazard
insurance policies. However, under the Pooling and Servicing Agreement, the
Sponsor will represent that, as of the Cut-off Date, each Mortgaged Property is
free of substantial damage and is in good repair. In the event that any
uncured breach of such representation materially and adversely affects the
interest of Certificateholders in the related Mortgage Loan, the Sponsor will
be required to repurchase the Mortgage Loan or deliver a substitute Mortgage
Loan therefor. To the extent the Sponsor repurchases such Mortgage Loan, such
repurchase will accelerate the timing of principal distributions with respect
to the related Mortgage Loan Group and may thereby affect the yields and
weighted average lives of the related Class or Classes of Certificates.
RISKS ASSOCIATED WITH JUNIOR LOANS. Because a substantial portion of
the Mortgage Loans in the Fixed Rate Group are secured by junior liens ("Junior
Loans") subordinate to the rights of the beneficiary under each related senior
lien, the proceeds from any liquidation, insurance or condemnation proceedings
will be available to satisfy the principal balance of a Mortgage Loan only to
the extent that the claims, if any, of each such senior beneficiary are
satisfied in full, including any related foreclosure costs. In addition, a
beneficiary of a junior lien may not foreclose on the Mortgaged Property
securing such lien unless it forecloses subject to the related senior lien(s),
in which case it must either make payments on each senior lien in the event of
default thereunder or pay the entire amount of each senior lien to the
applicable beneficiary prior to the foreclosure sale. In servicing home equity
mortgage loans in its portfolio, it is the practice of the Servicer to satisfy
each such senior lien at or prior to the foreclosure sale only to the extent
that it determines any amounts so paid will be recoverable from future payments
and collections on the related home equity mortgage loan or otherwise. The
Trust will have no source of funds to satisfy any such senior lien or make
payments due to each related senior beneficiary. See "Risk Factors -- Nature
of the Security for Mortgage Loans -- Risks Associated with Junior Liens" and
"Certain Legal Aspects of the Mortgage Loans and Related Matters --
Foreclosure/Repossession" in the Prospectus.
Even assuming that the Mortgaged Properties provide adequate security
for the related 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 Class A
Certificateholders could occur. An action to foreclose on a Mortgaged Property
securing a Mortgage Loan is regulated by state statutes and rules and is
subject to many of the same delays and expenses as other lawsuits if defenses
or counter claims are interposed, sometimes requiring several years to
complete. Furthermore, an action to obtain a deficiency judgment is generally
not permitted following a non-judicial foreclosure of a Mortgaged Property. In
the event of a default by a Mortgagor, these restrictions, among other things,
may impede the ability of the Servicer to foreclose on and sell the Mortgaged
Property or to obtain Net Liquidation Proceeds (as defined herein) sufficient
to repay all amounts due on the related Mortgage Loan. 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 Certificate Insurance Policy to the extent
of the Class A Monthly Interest due on the related Class of Class A
Certificates on the related Distribution Date and the amount of any Coverage
Deficit with respect to such Class and Distribution Date. See "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Foreclosure/Repossession,"
"-- Certain Provisions of California Deeds of Trust," "-- Anti-deficiency
Legislation and other Limitations on Lenders" and "The Pooling and Servicing
Agreement --Realization upon Defaulted Mortgage Loans" in the Prospectus.
In addition, other factors may affect the prepayment rate of Junior
Loans such as the amounts of, and interest rates on, the underlying senior
mortgage loans, if any, and the use of first lien mortgage loans as long-term
financing for home purchase and Junior Loans as shorter-term financing for a
variety of purposes, including home improvement, education expenses and
purchases of consumer durables such as automobiles. Accordingly, Junior Loans
may experience a higher rate of prepayments than traditional first lien
mortgage loans. In addition, any future limitations on the right of borrowers
to deduct interest payments on Junior Loans for federal income tax purposes may
further increase the rate of prepayments of such Junior Loans. See "Maturity,
Prepayment and Yield Considerations" in the Prospectus.
S-22
24
CONCENTRATION OF BALLOON LOANS. Approximately [ ]% of the Aggregate
Principal Balance of the Initial Mortgage Loans in the Fixed Rate Group (by
Cut-off Date Principal Balance) are Balloon Loans. Approximately [ ]% of
the Initial Mortgage Loans in the Adjustable Rate Group (by Cut-off Date
Principal Balance) are Balloon Loans. See "Risk Factors -- Nature of the
Security for Mortgage Loans -- Risks Associated with Balloon Loans" in the
Prospectus.
RISKS ASSOCIATED WITH PREPAYMENT OF THE MORTGAGE LOANS. All of the
Mortgage Loans may be prepaid in full or in part at any time, generally upon
the payment to the Servicer of a prepayment charge. The rate of prepayments of
the Mortgage Loans cannot be predicted and may be affected by a wide variety of
economic, social 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 Trust will experience. A number of factors suggest that
the prepayment behavior of the Mortgage Pool may be significantly different
from that of a pool of conventional first lien residential mortgage loans with
equivalent interest rates and maturities. One such factor is that the
principal balance of the average Mortgage Loan is smaller than that of the
average conventional first lien mortgage loan. A smaller principal balance
may be easier for a borrower to prepay than a larger balance and, therefore, a
higher prepayment rate may result for the Mortgage Pool than for a pool of
conventional first lien mortgage loans, irrespective of the relative average
interest rates and the general interest rate environment. In addition, in
order to refinance a first lien mortgage loan, the borrower must generally
repay any junior mortgage loans. However, a small principal balance may make
refinancing a Mortgage Loan at a lower interest rate less attractive to the
borrower as the perceived impact to the borrower of lower interest rates on the
size of the monthly payment may not be significant. Other factors that might
be expected to affect the prepayment rate of the Mortgage Pool include general
economic conditions, possible future changes affecting the deductibility for
federal income tax purposes of interest payments on mortgage loans, the amounts
of and interest rates on the underlying senior mortgage loans and the tendency
of borrowers to use first lien mortgage loans as long-term financing for home
purchase and junior mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses, debt consolidation
and purchases of consumer durables such as automobiles. Accordingly, the
Mortgage Loans may experience higher rates of prepayment than traditional first
lien mortgage loans. See "Maturity, Prepayment and Yield Considerations" in
the Prospectus.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancing of any related senior
mortgage loans), sales of Mortgaged Properties subject to "due-on-sale" clauses
as to which the Servicer exercises its rights thereunder and liquidations due
to default, as well as the receipt of proceeds from hazard, credit life and
disability insurance policies. In addition, repurchases or purchases from the
Trust of Mortgage Loans in a Mortgage Loan Group required or permitted to be
made by the Sponsor, the Servicer and, under certain limited circumstances, the
Certificate Insurer under the Pooling and Servicing Agreement will have the
same effect on the holders of the related Class of Class A Certificates as a
prepayment of the related Mortgage Loans. Prepayments and such repurchases and
purchases will accelerate the receipt of distributions of Monthly Principal on
the Class A Certificates. See "The Pooling and Servicing Agreement --
Assignment of Mortgage Loans" and "-- Termination; Optional Termination" and
"Certain Legal Aspects of the Mortgage Loans and Related Matters --
Enforceability of Due-on-Sale Clauses" in the Prospectus. The Servicer's
practice of soliciting refinancings from existing borrowers under loans
originated by Affiliated Originators may have the effect of increasing the rate
of prepayment, due to refinancings, on the Mortgage Loans. See "Origination
and Servicing of the Mortgage Loans -- Servicing of the Mortgage Loans" herein.
Prepayments, liquidations, repurchases and purchases of the Mortgage
Loans will result in distributions to Class A Certificateholders of principal
amounts which would otherwise be distributed over the remaining terms of the
Mortgage Loans. The extent to which the yield to maturity of a Class A
Certificate may vary from the anticipated yield will depend upon the degree to
which it is purchased at a premium or discount and the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations,
repurchases and purchases of Mortgage Loans. In the case of any Class A
Certificate purchased at a discount, an investor should consider the risk that
a slower than anticipated rate of principal payments on the Mortgage Loans
could result in an actual yield
S-23
25
to such investor that is lower than the anticipated yield and, in the case of
any Class A Certificate purchased at a premium, the risk that a faster than
anticipated rate of prepayments, liquidations, repurchases and purchases could
result in an actual yield to such investor that is lower than the anticipated
yield. Further, there can be no assurance that Class A Certificateholders will
be able to reinvest distributions in respect of prepayments, liquidations,
repurchases and purchases of the Mortgage Loans in securities or other
instruments that have a yield comparable to that of the related Class of Class
A Certificates.
THE SUBSEQUENT MORTGAGE LOANS AND THE PURCHASE ACCOUNT. Any conveyance
of Subsequent Mortgage Loans is subject to the following conditions, among
others: (i) each Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the Subsequent Transfer Agreement and the Pooling and
Servicing Agreement; (ii) the Sponsor will not select such Subsequent Mortgage
Loans in a manner that it believes is adverse to the interests of either Class
of Class A Certificateholders; (iii) as of the Subsequent Cut-off Date, the
Mortgage Loans in the Mortgage Pool at that time, including the Subsequent
Mortgage Loans to be conveyed by the Sponsor as of such Subsequent Cut-off
Date, will satisfy the criteria set forth in the Pooling and Servicing
Agreement; and (iv) the Subsequent Mortgage Loans will have been approved by
the Certificate Insurer. Following the transfer of Subsequent Mortgage Loans
to the Mortgage Pool, the aggregate characteristics of the Mortgage Loans then
held in the Mortgage Pool may vary from those of the Initial Mortgage Loans
included in the Mortgage Pool. A Current Report on Form 8-K containing a
description of the Mortgage Loans included in the final Mortgage Pool as of the
end of the Commitment Period in a form comparable to the description of the
Initial Mortgage Loans contained in "ANNEX A: Description of the Mortgage
Pool" will be filed with the Securities and Exchange Commission within 15 days
after expiration of the Commitment Period. See "The Mortgage Loans --
Conveyance of Subsequent Mortgage Loans" herein.
If, by the end of the Commitment Period, amounts on deposit in the
Purchase Account are not fully applied to the purchase of Subsequent Mortgage
Loans, the portion of the Purchase Account Deposit allocated to the Fixed Rate
Group that is not so applied will be distributed in reduction of the Class A-1
Certificate Principal Balance and the portion of the Purchase Account Deposit
allocated to the Adjustable Rate Group that is not so applied will be
distributed in reduction of the Class A-2 Certificate Principal Balance.
Although it is intended that the principal amount of Subsequent Mortgage Loans
sold to the Trust will require application of substantially all of the Purchase
Account Deposit and it is not currently anticipated that there will be any
material amount of principal distributions from amounts remaining on deposit in
the Purchase Account in reduction of the Class A Certificate Principal Balance
of either Class, no assurance can be given that such a distribution with
respect to either Class or both Classes of Class A Certificates will not occur
on the Distribution Date in [ ]. In any event, it is unlikely
that the Sponsor will be able to deliver Subsequent Mortgage Loans with an
aggregate principal balance that exactly matches the Purchase Account Deposit.
YIELD CONSIDERATIONS RELATING TO EXCESS CASH. Excess Cash attributable
to any Mortgage Loan Group will be distributed in reduction of the Class A
Certificate Principal Balance of the related Class of Class A Certificates on
each Distribution Date to the extent the then applicable Required Coverage
Amount exceeds the Coverage Amount for such Class on such Distribution Date
and, after such Required Coverage Amount equals the Coverage Amount for such
Class, any remaining Excess Cash attributable to such Mortgage Loan Group will
be distributed on the other Class of Class A Certificates first to cover any
shortfall in the Class A Monthly Interest for such Class, then to reduce the
Class A Certificate Principal Balance of such Class until the Coverage Amount
for that Class equals the then applicable Required Coverage Amount for such
Class. If purchased at a premium or a discount, the yield to maturity on a
Class A Certificate will be affected by the rate at which Excess Cash is
distributed to Class A Certificateholders in reduction of the Class A
Certificate Principal Balance of such Class. If the actual rate of such Excess
Cash distributions on the Class A Certificates is slower than the rate
anticipated by an investor who purchases a Class A Certificate at a discount,
the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of such Excess Cash distributions is
faster than the rate anticipated by an investor who purchases a Class A
Certificate 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
Distribution Date will be
S-24
26
affected by 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
Interest Rates resulting from prepayments and liquidations of Mortgage Loans as
well as from, in the case of the Adjustable Rate Group, adjustments of
adjustable Mortgage Interest Rates. The amount of Excess Cash distributions to
the Class A Certificateholders applied in reduction of the related Class A
Certificate Principal Balance on each Distribution Date will be based on the
then applicable Required Coverage Amount applicable to the related Class of
Class A Certificates, which may increase or decrease during the period such
Class remains outstanding. With respect to the Class A-2 Certificates, if on
any Distribution Date occurring after [ ], the amount of Excess Cash
distributable on the Class A-2 Certificates is less than an amount specified in
the Pooling and Servicing Agreement, the Required Coverage Amount for the Class
A-2 Certificates will be increased (any such Distribution Date, a "Class A-2
Trigger Event Date"); provided, however, that upon the satisfaction of certain
cash flow requirements in respect of the Class A-2 Certificates for the period
specified in the Pooling and Servicing Agreement, such Required Coverage Amount
will return to its original level. Any increase in a Required Coverage Amount
(including, in the case of the Class A-2 Certificates, an increase required on
a Class A-2 Trigger Event Date) may result in an accelerated rate of
amortization of the related Class of Class A Certificates until the Coverage
Amount for such Class equals such Required Coverage Amount and any decrease in
a Required Coverage Amount will result in a decelerated rate of amortization of
the Class A Certificates until the Coverage Amount for such Class equals such
Required Coverage Amount.
ENVIRONMENTAL STATUTES AFFECTING SECURITY INTERESTS. A substantial
percentage of the Initial Mortgage Loans (by Cut-off Date Principal Balance)
are secured by Mortgaged Properties located in states that may impose a
statutory lien for associated costs on property that is the subject of a
clean-up action by the state on account of hazardous wastes or hazardous
substances released or disposed of on the property. Such a lien generally will
have priority over all subsequent liens on the property, although in some
states, including California, it will not have priority over prior recorded
liens, including the lien of a mortgage. In addition, under federal
environmental statutes and under the laws of many states, including California,
a secured party that takes a deed in lieu of foreclosure, acquires a mortgaged
property at a foreclosure sale or, prior to foreclosure, has been involved in
decisions or actions that may lead to contamination of a property, may be
liable for the costs of cleaning up a contaminated site. See "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Environmental
Considerations" in the Prospectus. Any such liens or costs imposed in
connection with a clean-up action by the state may impede the ability of the
Servicer to foreclose on or sell the related Mortgaged Property or to obtain
Net Liquidation Proceeds sufficient to repay all amounts due on the related
Mortgage Loan. 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 Certificate Insurance Policy to the extent
of the Class A Monthly Interest due on the related Class of Class A
Certificates on the related Distribution Date and the amount of any Coverage
Deficit with respect to such Class and Distribution Date.
RISKS ASSOCIATED WITH CERTAIN ORIGINATION FEES. Fees earned on the
origination of loans and placement of related insurance by the Sponsor and
Affiliated Originators are often paid by the borrower out of related loan
proceeds. From time to time, in the ordinary course of their businesses,
originators of home equity loans have been named in legal actions brought by
mortgagors challenging the amount or method of imposing or disclosing such
fees. To date, no such action has been decided against the Sponsor or any
Affiliated Originator. If such an action against any Originator with respect
to any Mortgage Loan were successful, a court might require that the principal
balances of the related Mortgage Loans be reduced by the amount of contested
fees or charges. Any such reductions could result in substantial Realized
Losses during one or more Collection Periods, potentially leading to Coverage
Deficits. Under such circumstances, payments by the Certificate Insurer would
result in accelerated distributions in reduction of the Class A Certificate
Principal Balance.
BOOK-ENTRY REGISTRATION. Issuance of the Class A Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
trading market because investors may be unwilling to purchase Class A
Certificates for which they cannot obtain physical certificates.
S-25
27
Because transactions in the Class A Certificates can be effected only
through DTC, Cedel, Euroclear (each as defined herein), participating
organizations, indirect participants and certain banks, the ability of a
Certificate Owner to pledge a Class A Certificate to persons or entities that
do not participate in the DTC, Cedel or Euroclear system, or otherwise to take
actions in respect of such Certificate, may be limited due to lack of a
physical certificate representing such Class A Certificate.
Certificate Owners may experience some delay in their receipt of
distributions of interest of and principal on the Class A Certificates because
such distributions will be forwarded by the Trustee to DTC and DTC will credit
such distributions to the accounts of its Participants (as defined herein)
which will thereafter credit them to the accounts of Certificate Owners either
directly or indirectly through indirect participants. See "Description of the
Certificates -- Book-Entry Registration of Class A Certificates" herein, "ANNEX
B: Global Clearance, Settlement and Tax Documentation Procedures" hereto and
"Description of the Certificates -- Form of Certificates -- Book-Entry
Registration" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The Class A Certificates will be issued pursuant to a Pooling and
Servicing Agreement, to be dated as of [ ] (the "Pooling and
Servicing Agreement"), between the Sponsor, in its capacities as Sponsor and
Servicer, and the Trustee. The following summaries describe the material
provisions of the Pooling and Servicing Agreement but do not purport to be
complete. The Sponsor will provide a copy of the Pooling and Servicing
Agreement (without exhibits) without charge upon the written request of a
Certificate Owner addressed to: Aames Capital Corporation, 3731 Wilshire
Blvd., 10th Floor, Los Angeles, California 90010, Attention: Corporate
Secretary.
GENERAL
The Certificates will evidence undivided beneficial ownership interests
in the Trust created pursuant to the Pooling and Servicing Agreement. The
Class A-1A Certificates, the Class A-1B Certificates and the Class A-1C
Certificates will respectively evidence the right to receive from the Trust (i)
the Class A-1A Certificate Principal Balance, plus interest at the Class A-1A
Pass-Through Rate, (ii) the Class A-1B Certificate Principal Balance, plus
interest at the Class A-1B Pass-Through Rate and (iii) the Class A-1C
Certificate Principal Balance, plus interest at the Class A-1C Pass-Through
Rate, as described herein. The Class A-2 Certificates will evidence the right
to receive from the Trust an aggregate amount equal to the Class A-2
Certificate Principal Balance, plus interest at the Class A-2 Pass-Through
Rate, as described herein. The holder of the Class R Certificate (which has no
stated principal balance) is not entitled to any distributions with respect to
any Distribution Date until such time as the Coverage Amount for each Class of
Class A Certificates equals or exceeds the then applicable Required Coverage
Amount for the related Class of Class A Certificates and the Certificate
Insurer and the Servicer, in that order, have been reimbursed amounts to which
they may be entitled. The holder of the Class R Certificate will thereafter be
entitled to certain amounts as described herein under "-- Distributions on the
Certificates."
The assets of the Trust will consist of (a) the Mortgage Loans that from
time to time are subject to the Pooling and Servicing Agreement; (b) the assets
that from time to time are required by the Pooling and Servicing Agreement to
be deposited in the Collection Account and the Certificate Account, held in the
Purchase Account and the Capitalized Interest Account or invested in Permitted
Investments (see "-- Payments on Mortgage Loans and Deposits to the Collection
Account" herein); (c) all rights of the mortgagee under any insurance policy
covering a Mortgage Loan or the related Mortgaged Property; (d) property and
any proceeds thereof acquired by foreclosure of the Mortgage Loans, deed in
lieu of foreclosure or a comparable conversion; and (e) the Certificate
Insurance Policy.
The Sponsor will designate in the Pooling and Servicing Agreement, for
purposes of the Internal Revenue Code of 1986, as amended (the "Code"), the
Class A Certificates as "regular interests," and the Class R Certificate as the
sole class of "residual interests," in a REMIC generally comprised of the
Mortgage Pool, the Collection
S-26
28
Account, the Certificate Account and the Certificate Insurance Policy (the
"REMIC Pool"). The Purchase Account and the Capitalized Interest Account will
not be part of the REMIC Pool. The Closing Date will be designated as the
"Startup Day" (within the meaning of the Code) of the REMIC. See "Certain
Federal Income Tax Consequences" in the Prospectus.
The Class A Certificates will be issued in minimum denominations of
$1,000 and integral dollar multiples of $1 in excess thereof.
BOOK-ENTRY REGISTRATION OF CLASS A CERTIFICATES
The Class A Certificates initially will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Class A Certificates ("Certificate Owners") will hold such Certificates
through the Depository Trust Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear"), in
Europe, if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates per Class, representing
the aggregate principal balance of each such Class of Class A Certificates, and
will initially be registered in the name of Cede & Co. ("Cede"), the nominee of
DTC. Cedel and Euroclear will hold omnibus positions on behalf of Cedel
Participants and Euroclear Participants (each as defined herein), 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"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
integral multiples of $1 in excess thereof. Except as described below, no
person acquiring a Book-Entry Certificate will be entitled to receive a
physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Class A Certificates will
be Cede, as nominee of DTC. Certificate Owners will not be Certificateholders
as that term is used in the Pooling and Servicing Agreement. Certificate 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 Certificate will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Certificate
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Certificate 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).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and its
Participants (including Cedel and Euroclear). While the Class A Certificates
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 Certificates and is required to
receive and transmit distributions of principal of, and interest on, such
Certificates. Participants and indirect participants with whom Certificate
Owners have accounts with respect to Book-Entry Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interests.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless
and until Definitive
S-27
29
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Class A Certificates only through Participants and
indirect participants by instructing such Participants and indirect
participants to transfer Class A Certificates, by book-entry transfer, through
DTC for the account of the purchasers of such Class A Certificates, which
account is maintained with their respective Participants. Under the Rules and
in accordance with DTC's normal procedures, transfers of ownership of Class A
Certificates 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 Certificate Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
or Euroclear Participant to a Participant will be received with value on the
DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Certificates, see "Certain Federal Income Tax Consequences -- Non-U.S. Persons
- -- Senior Certificates" and "-- Information Reporting and Backup Withholding"
in the Prospectus and in "ANNEX B: 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
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates 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 depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
S-28
30
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 which is a member bank of the Federal Reserve System. As such it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear and receipts of payments with
respect to securities in Euroclear. All securities in Euroclear are held on a
fungible basis without attribution to specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the 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 Certificate 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 Certificate Owners
that it represents.
Under a book-entry format, Certificate Owners may experience some delay
in their receipt of payments because such payments will be forwarded by the
Trustee to Cede. Distributions with respect to Certificates held through Cedel
or Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Certain Federal Income Tax
Consequences -- Non-U.S. Persons -- Senior Certificates" in the Prospectus and
"-- Information Reporting and Backup Withholding" in "ANNEX B: Global
Clearance, Settlement and Tax Documentation Procedures" hereto. Because DTC has
indicated that it will act only on behalf of Financial Intermediaries, the
ability of Certificate Owners to pledge Book-Entry Certificates to persons or
entities that do not participate in the depository system or otherwise take
actions in respect of such Book-Entry Certificates may be limited due to the
lack of physical certificates representing such Book-Entry Certificates. In
addition, issuance of the Book-Entry Certificates in book-entry form may reduce
the liquidity of such Certificates in the secondary
S-29
31
market because certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to Certificate Owners upon
request, in accordance with the Rules, and to the Financial Intermediaries to
whose DTC accounts the related Book-Entry Certificates are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Certificateholder under the Pooling
and Servicing Agreement on behalf of a Cedel Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Class A Certificates which conflict with
actions taken with respect to other Class A Certificates.
Definitive Class A Certificates will be issued in registered form to
Certificate Owners, or their nominees, rather than to DTC, only if (i) DTC or
the Sponsor advises the Trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as nominee and depository with
respect to the Class A Certificates and the Sponsor or the Trustee is unable to
locate a qualified successor, (ii) the Sponsor, at its option, advises the
Trustee that it elects to terminate the book-entry system through DTC, or (iii)
after an Event of Default under the Pooling and Servicing Agreement, the
Certificate Owners representing not less than 51% of the Class A Certificate
Principal Balance of the book-entry certificates advise the Trustee and DTC
that the book-entry system is no longer in the best interests of such
Certificate Owners. Upon issuance of Definitive Class A Certificates to
Certificate Owners, such Class A Certificates will be transferable directly
(and not exclusively on a book-entry basis) and registered holders will deal
directly with the Trustee with respect to transfers, notices and distributions.
See "Description of the Certificates -- Form of Certificates -- General" in the
Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificates
representing the Book-Entry Certificates and instructions for re-registration,
the Trustee will issue Definitive Certificates and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfer of Class A Certificates 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
At the time of issuance of the Certificates, the Sponsor will assign to
the Trustee all of its right, title and interest in and to the Initial Mortgage
Loans, including all principal and interest on or in respect of the Initial
Mortgage Loans received on or after the Cut-off Date, together with its right,
title and interest in and to the proceeds of any related insurance policies
received on and after the Cut-off Date. The Trustee, concurrently with such
assignment, will deliver the Certificates at the direction of the Sponsor in
exchange for, among other things, the Initial Mortgage Loans. Each Initial
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Pooling and Servicing Agreement (the "Mortgage Loan Schedule") that will
provide information about each Mortgage Loan, including, among other things,
its identifying number and the name of the related Mortgagor, the
S-30
32
street address of the related Mortgaged Property, its date of origination, the
original number of months to stated maturity, the original stated maturity, its
original Principal Balance, its Principal Balance as of the Cut-off Date (the
"Cut-off Date Principal Balance"), its interest rate as of the Cut-off Date and
its monthly payment as of the Cut-off Date.
Following the Closing Date, the Trustee on behalf of the Trust will be
obligated to purchase from the Sponsor, from time to time on or before
[ ], subject to the availability thereof, Subsequent Mortgage Loans
consisting of closed-end fixed and adjustable rate home equity mortgage loans.
In connection with each purchase of Subsequent Mortgage Loans, the Trustee on
behalf of the Trust will pay to the Sponsor from amounts comprising the
Purchase Account Deposit a cash purchase price of not more than 100% of the
principal balance thereof; the Trust may pay a cash purchase price of less than
100% for the purpose of increasing the Coverage Amount, but in no event less
than the fair market value of the Subsequent Mortgage Loans. In connection
with any purchase of Subsequent Mortgage Loans, pursuant to the Pooling and
Servicing Agreement, the Sponsor will assign to the Trustee all of its right,
title and interest in and to such Subsequent Mortgage Loans as provided above
with respect to the Initial Mortgage Loans.
The Pooling and Servicing Agreement will require the Sponsor to deliver
to the Trustee the Mortgage Loans, the related Mortgage Notes endorsed without
recourse to the Trustee, the related mortgages or deeds of trust with evidence
of recording thereon, assignments of the Mortgages in recordable form, 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"). Assignments of the
Mortgage Loans to the Trustee (or its nominee) will be recorded in the
appropriate public office for real property records in the states where such
recording is required to protect the Trustee's interest in the Mortgage Loans
against the claims of any subsequent transferee or any successor to or creditor
of the Sponsor. The Trustee will hold such documents in trust for the benefit
of the Certificateholders and the Certificate Insurer.
The Trustee will review the Mortgage Files delivered to it within 45
days following such delivery, 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 Sponsor by the Trustee, the Sponsor will be obligated to
repurchase the related Mortgage Loan from the Trust or substitute a Qualified
Replacement Mortgage (as defined below), in the manner described below.
Because certain of the assignments by the Sponsor to the Trustee of
Mortgage Loans will not be recorded, it may be possible for the Sponsor to
transfer such Mortgage Loans to bona fide purchasers for value without notice,
notwithstanding the rights of the Trustee. However, in most instances, the
Sponsor would not be able to deliver the original documents evidencing the
Mortgage Notes or the mortgages because, under the terms of the Pooling and
Servicing Agreement, such documents will be retained in the possession of the
Trustee, except when released to the Servicer in connection with its servicing
activities. Moreover, a subsequent transferee who failed to obtain delivery of
the original evidence of indebtedness generally would not, in the absence of
special facts, be able to defeat the interests of the Trustee in a Mortgage
Loan so long as such evidence of indebtedness remained in the possession of the
Trustee.
The Sponsor will make certain representations and warranties as to the
accuracy in all material respects of the information set forth on the Mortgage
Loan Schedule. In addition, the Sponsor 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 mortgage is a valid
lien of the applicable priority, no Mortgage Loan had [ ] or more monthly
payments past due, that each Mortgaged Property consists of a one- to
four-family residential property or condominium, that the Sponsor had good
title to each Mortgage Loan prior to the sale and assignment by the Sponsor and
that the Originator was authorized to originate each Mortgage Loan. See "The
Pooling and Servicing Agreement -- Assignment of Mortgage Loans" in the
Prospectus.
S-31
33
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured and materially
and adversely affects the interests of the Certificateholders or the
Certificate Insurer in such Mortgage Loan or (2) a breach of any representation
or warranty made by the Sponsor in the Pooling and Servicing Agreement relating
to such Mortgage Loan occurs and such breach materially and adversely affects
the interests of the Certificateholders or the Certificate Insurer in such
Mortgage Loan, the Sponsor will be required to repurchase the related Mortgage
Loan (any such Mortgage Loan, a "Defective Mortgage Loan") from the Trust at a
price equal to its Principal Balance together with one month's interest at the
Mortgage Interest Rate (net of the applicable Servicing Fee Rate) on such
Defective Mortgage Loan, less any payments received during the related
Collection Period in respect of such Defective Mortgage Loan (the "Purchase
Price"). The Sponsor will also have the option, but not the obligation, during
the two years (or such longer period as permitted by the applicable REMIC
Regulations) immediately following the Closing Date, to substitute for such
Defective Mortgage Loan a Mortgage Loan conforming to the requirements of the
Pooling and Servicing Agreement (a "Qualified Replacement Mortgage"). Upon
delivery of a Qualified Replacement Mortgage and deposit of certain amounts in
the Collection Account as set forth in the Pooling and Servicing Agreement, or
deposit of the Purchase Price in the Collection Account and receipt by the
Trustee of written notification of any such substitution or repurchase, as the
case may be, the Trustee shall execute and deliver an instrument of transfer or
assignment necessary to vest in the Sponsor 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).
The obligation of the Sponsor to cure, repurchase or substitute any
Mortgage Loan as described above will constitute the sole remedy available to
Certificateholders or the Trustee for a Defective Mortgage Loan.
The Pooling and Servicing Agreement additionally provides that the
Servicer will have the option, but not the obligation, to purchase from the
Trust at the Purchase Price (i) any Mortgage Loan as to which the related
Mortgagor has failed to make scheduled payments thereon for three consecutive
months at any time following the Cut-off Date and (ii) during the 90-day period
following the Closing Date, any Mortgage Loan as to which a scheduled payment
thereon becomes 60 or more days contractually delinquent; provided, however,
that the aggregate of the Principal Balances of the Mortgage Loans so purchased
by the Servicer may not exceed 5% of the sum of the Cut-off Date Pool Balance
and the Purchase Account Deposit. See "The Pooling and Servicing Agreement --
Realization upon Defaulted Mortgage Loans" in the Prospectus.
PAYMENTS ON MORTGAGE LOANS AND DEPOSITS TO THE COLLECTION ACCOUNT
The Servicer shall establish and maintain an account or, with respect to
certain Mortgage Loans serviced by a Sub-Servicer (as defined herein), shall
cause the related Sub-Servicer to establish and maintain an account
(collectively, the "Collection Account") into which all collections on or with
respect to the Mortgage Loans in each Mortgage Loan Group will be deposited and
the Trustee shall establish and maintain an account (the "Certificate Account"
and, together with the Collection Account, the "Accounts") from which all
distributions with respect to the Certificates will be made. All amounts held
in the Accounts shall be invested in Permitted Investments (as defined herein)
that mature not later than the date which is one Business Day prior to the
Deposit Date (as defined herein) for the related Distribution Date next
succeeding the date of investment. A "Business Day" will be any day other than
a Saturday or Sunday or a day on which banking institutions in the State of
California or the State of New York are required or authorized by law,
executive order or governmental decree to be closed. "Permitted Investments"
will be specified in the Pooling and Servicing Agreement and will be limited to
investments which are approved by the Certificate Insurer and meet the criteria
of the Rating Agencies (as defined herein) from time to time as being
consistent with their then current ratings of the Class A Certificates. See
"The Pooling and Servicing Agreement -- Permitted Investments" in the
Prospectus. No Permitted Investment shall be sold or disposed of at a gain
prior to maturity unless the Servicer has obtained a satisfactory opinion of
counsel that such sale or disposition will not cause the REMIC Pool to be
subject to the tax on income from prohibited transactions imposed by Code
Section 860F(a)(1), otherwise subject the REMIC Pool to tax or cause the REMIC
Pool to fail to qualify as a REMIC. Investment income on monies on deposit in
the Certificate Account and the Collection
S-32
34
Account will not be available for distribution to Certificateholders or
otherwise subject to any claims or rights of the Certificateholders and will
be paid to Servicer as additional servicing compensation. The Servicer will be
liable for any losses resulting from such investments.
The Servicer will deposit, or cause the related Sub-Servicer to 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 Mortgage Loans. On the date in each month
specified in the Pooling and Servicing Agreement, which date shall be no later
than three Business Days prior to the related Distribution Date (the "Deposit
Date"), funds to be distributed in respect of the Class A Monthly Interest,
Monthly Principal and any Excess Cash in respect of each Class of Class A
Certificates will be transferred from the Collection Account to the Certificate
Account. Notwithstanding the foregoing, payments and collections that do not
constitute Available Funds (e.g., fees, late payment charges, prepayment
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 to make
the deposits to the Certificate Account, to pay the monthly Servicing Fee for
each Mortgage Loan Group to itself, to reimburse itself for certain Advances
(as defined herein) that it has made and for which it may be entitled to
reimbursement under the Pooling and Servicing Agreement and for any other
expenses incurred by it for which it may be entitled to reimbursement under the
Pooling and Servicing Agreement.
DISTRIBUTIONS ON THE CERTIFICATES
Distributions of principal and interest on the Class A Certificates will
be made by the Trustee (in such capacity, the "Paying Agent") on the fifteenth
day of each month or, if such day is not a Business Day, on the next succeeding
Business Day (each, a "Distribution Date") commencing in [ ] to
holders of record of the related Class of Class A Certificates as of the close
of business on the last Business Day of the calendar month immediately
preceding such Distribution Date (each, a "Record Date") in an amount equal to
the product of such Certificateholders' Percentage Interest and the amount
distributed in respect of the related Class of Class A Certificates. The
"Percentage Interest" represented by any Class A-1A Certificate, Class A-1B
Certificate, Class A-1C Certificate or Class A-2 Certificate will be equal to
the percentage obtained by dividing the Certificate Principal Balance of such
Class A-1A Certificate, Class A-1B Certificate, Class A-1C Certificate or Class
A-2 Certificate, respectively, by the aggregate of the principal balances of
all Certificates of the same Class or subclass, as applicable.
On each Distribution Date, the Paying Agent will distribute the
following amounts in the following order of priority, to the extent of
Available Funds for the Fixed Rate Group and any available Excess Cash from the
Adjustable Rate Group:
(a) to the Certificate Insurer, the aggregate amount necessary to
reimburse the Certificate Insurer for any unreimbursed payments of
Insured Amounts in respect of the Class A-1 Certificates on prior
Distribution Dates and the amount of any unpaid Certificate Insurer
Premium in respect of the Class A-1 Certificates on prior Distribution
Dates; provided, however, that the Certificate Insurer's right to such
reimbursement is subject to the right of Class A-1A Certificateholders,
Class A-1B Certificateholders and Class A-1C Certificateholders to
receive Class A-1A Monthly Interest, Class A-1B Monthly Interest and
Class A-1C Monthly Interest, respectively, and any Coverage Deficit for
the Class A-1 Certificates with respect to such Distribution Date;
(b) to the Certificate Insurer, an amount equal to the Certificate
Insurer Premium (as defined herein) attributable to the Fixed Rate
Group;
S-33
35
(c) concurrently to the Class A-1A Certificateholders, Class A-1B
Certificateholders and Class A-1C Certificateholders, Class A-1A Monthly
Interest, Class A-1B Monthly Interest and Class A-1C Monthly Interest,
respectively;
(d) to the Class A-1A Certificateholders, the amount of Monthly
Principal for the Class A-1 Certificates, in reduction of the Class A-1A
Certificate Principal Balance until such Class A-1A Certificate
Principal Balance is reduced to zero, then to Class A-1B
Certificateholders, the amount of any remaining Monthly Principal for
the Class A-1 Certificates, in reduction of the Class A-1B Certificate
Principal Balance, until such Class A-1B Certificate Principal Balance
is reduced to zero, and then to Class A-1C Certificateholders, the
amount of any remaining Monthly Principal for the Class A-1
Certificates, in reduction of the Class A-1C Certificate Principal
Balance, until such Class A-1C Certificate Principal Balance is reduced
to zero;
(e) to the Class A-1A Certificateholders, the amount, if any, of
Excess Cash for the Fixed Rate Group in reduction of the Class A-1A
Certificate Principal Balance, up to an amount equal to the lesser of
(1) the amount necessary for the Coverage Amount of the Class A-1
Certificates to equal the Required Coverage Amount for such Class A-1
Certificates on such Distribution Date and (2) the amount necessary to
reduce the Class A-1A Certificate Principal Balance to zero;
(f) to the Class A-1B Certificateholders, the amount, if any, of
Excess Cash for the Fixed Rate Group remaining after distribution
pursuant to clause (e) above in reduction of the Class A-1B Certificate
Principal Balance, up to an amount equal to the lesser of (1) the amount
necessary for the Coverage Amount of the Class A-1 Certificates to equal
the Required Coverage Amount for such Class A-1 Certificates on such
Distribution Date and (2) the amount necessary to reduce the Class A-1B
Certificate Principal Balance to zero;
(g) to the Class A-1C Certificateholders, the amount, if any, of
Excess Cash for the Fixed Rate Group remaining after distribution
pursuant to clauses (e) and (f) above in reduction of the Class A-1C
Certificate Principal Balance, up to an amount equal to the lesser of
(1) the amount necessary for the Coverage Amount of the Class A-1
Certificates to equal the Required Coverage Amount for such Class A-1
Certificates on such Distribution Date and (2) the amount necessary to
reduce the Class A-1C Certificate Principal Balance to zero;
(h) to the Class A-2 Certificateholders, the amount, if any, of
Excess Cash for the Fixed Rate Group, remaining after the distributions
pursuant to clauses (e), (f) and (g) above, to be applied first to cover
any shortfalls in the Class A Monthly Interest of the Class A-2
Certificates, and second to reduce the Class A-2 Certificate Principal
Balance, up to an amount equal to the lesser of (1) the amount
necessary for the Coverage Amount of Class A-2 Certificates to equal the
Required Coverage Amount for such Class A-2 Certificates on such
Distribution Date and (2) the amount necessary to reduce the Class A-2
Certificate Principal Balance to zero (after taking into account the
Monthly Principal and Excess Cash distributed on such date in reduction
of the Class A-2 Certificate Principal Balance);
(i) to the Certificate Insurer, the amount of any Available Funds
for the Fixed Rate Group remaining in the Certificate Account, to the
extent necessary to reimburse the Certificate Insurer for any Insured
Amounts paid on prior Distribution Dates in respect of the Class A-2
Certificates and not previously reimbursed; and
(j) to the Class R Certificateholder, subject to the right of the
Servicer to be reimbursed for any prior unreimbursed Advances, any
Available Funds for the Fixed Rate Group remaining in the Certificate
Account.
S-34
36
On each Distribution Date, the Paying Agent will distribute the
following amounts in the following order of priority, to the extent of
Available Funds for the Adjustable Rate Group and any available Excess Cash
from the Fixed Rate Group:
(a) to the Certificate Insurer, the aggregate amount necessary to
reimburse the Certificate Insurer for any unreimbursed payments of
Insured Amounts in respect of the Class A-2 Certificates on prior
Distribution Dates and the amount of any unpaid Certificate Insurer
Premium in respect of the Class A-2 Certificates on prior Distribution
Dates; provided, however, that the Certificate Insurer's right to such
reimbursement is subject to the right of such Class A-2
Certificateholders to receive Class A Monthly Interest and any Coverage
Deficit for the Class A-2 Certificates with respect to such Distribution
Date;
(b) to the Certificate Insurer, an amount equal to the Certificate
Insurer Premium (as defined herein) attributable to the Adjustable Rate
Group;
(c) to the Class A-2 Certificateholders, the Class A Monthly
Interest for the Class A-2 Certificates;
(d) to the Class A-2 Certificateholders, Monthly Principal for the
Class A-2 Certificates in reduction of the Class A-2 Certificate
Principal Balance;
(e) to the Class A-2 Certificateholders, the amount of Excess Cash
for the Adjustable Rate Group in reduction of the Class A-2 Certificate
Principal Balance up to an amount equal to the lesser of (1) the amount
necessary for the Coverage Amount of the Class A-2 Certificates to equal
the Required Coverage Amount for such Class A-2 Certificates on such
Distribution Date and (2) the amount necessary to reduce the Class A-2
Certificate Principal Balance to zero;
(f) concurrently, to the Class A-1A Certificateholders, the Class
A-1B Certificateholders and the Class A-1C Certificateholders, the
amount, if any, of such Excess Cash for the Adjustable Rate Group
remaining after distribution pursuant to clause (e) above, to be applied
pro rata to cover any shortfalls in Class A-1A Monthly Interest, Class
A-1B Monthly Interest and Class A-1C Monthly Interest;
(g) to the Class A-1A Certificateholders, the amount, if any, of
Excess Cash for the Adjustable Rate Group remaining after the
distributions pursuant to clauses (e) and (f) above, to reduce the Class
A-1A Certificate Principal Balance, up to an amount equal to the lesser
of (1) the amount necessary for the Coverage Amount of the Class A-1
Certificates to equal the Required Coverage Amount for such Class A-1
Certificates on such Distribution Date and (2) the amount necessary to
reduce the Class A-1A Certificate Principal Balance to zero (after
taking into account the Monthly Principal and Excess Cash distributed on
such date in reduction of the Class A-1 Certificate Principal Balance);
(h) to the Class A-1B Certificateholders, the amount, if any, of
Excess Cash for the Adjustable Rate Group remaining after the
distributions pursuant to clauses (e), (f) and (g) above, to reduce the
Class A-1B Certificate Principal Balance, up to an amount equal to the
lesser of (1) the amount necessary for the Coverage Amount of the Class
A-1 Certificates to equal the Required Coverage Amount for such Class
A-1 Certificates on such Distribution Date and (2) the amount necessary
to reduce the Class A-1B Certificate Principal Balance to zero (after
taking into account the Monthly Principal and Excess Cash distributed on
such date in reduction of the Class A-1 Certificate Principal Balance);
(i) to the Class A-1C Certificate holders, the amount, if any, of
Excess Cash for the Adjustable Rate Group remaining after the
distributions pursuant to clauses (e), (f), (g) and (h) above, to reduce
the Class A-1C Certificate Principal Balance, up to an amount equal to
the lesser of (1) the amount necessary for the Coverage Amount of the
Class A-1 Certificates to equal the Required Coverage Amount for such
Class A-1 Certificates on such Distribution Date and (2) the amount
necessary to reduce the Class A-1C Certificate
S-35
37
Principal Balance to zero (after taking into account the Monthly
Principal and Excess Cash distributed on such date in reduction of the
Class A-1 Certificate Principal Balance);
(j) to the Certificate Insurer, the amount of any Available Funds
for the Adjustable Rate Group remaining in the Certificate Account to
the extent necessary to reimburse the Certificate Insurer for any
unreimbursed Insured Amounts paid on prior Distribution Dates in respect
of the Class A-1 Certificates; and
(k) to the Class R Certificateholder, subject to the right of the
Servicer to be reimbursed for any prior unreimbursed Advances, any
Available Funds remaining in the Certificate Account.
In the event that, on a particular Distribution Date, the Available
Funds with respect to the related Mortgage Loan Group and any available Excess
Cash with respect to the other Mortgage Loan Group on such date are not
sufficient to pay any portion of the Class A Monthly Interest for the related
Class of Class A Certificates, the Trustee will make a claim on the Certificate
Insurance Policy in an amount equal to such deficiency and apply the Insured
Amount received in respect of such claim to the payment of the deficiency in
such Class A Monthly Interest. In addition, the Trustee will make a claim on
the Certificate Insurance Policy in an amount equal to any Coverage Deficit
with respect to the related Class of Class A Certificates on a Distribution
Date (after taking into account distributions in respect of Monthly Principal
and Excess Cash from the related Mortgage Loan Group and, if applicable, from
the other Mortgage Loan Group) and apply the portion of the Insured Amount
related to such Coverage Deficit to reduce the Class A Certificate Principal
Balance of such Class on such Distribution Date by the amount of such Coverage
Deficit. Any Insured Amount distributed in respect of the Class A-1
Certificates to make up any Coverage Deficit shall be distributed first to
Class A-1A Certificateholders, in reduction of the Class A-1A Certificate
Principal Balance, until such Class A-1A Certificate Principal Balance is
reduced to zero and then to Class A-1B Certificateholders, in reduction of the
Class A-1B Certificate Principal Balance, until such Class A-1B Certificate
Principal Balance is reduced to zero and thereafter to the Class A-1C
Certificateholders, in reduction of the Class A-1C Certificate Principal
Balance until such Class A-1C Certificate Principal Balance is reduced to zero.
In no event will the aggregate distributions of principal to holders of
the Class A-1A Certificates, Class A-1B Certificates, Class A-1C Certificates
or Class A-2 Certificates exceed the Original Class A-1A Certificate Principal
Balance, the Original Class A-1B Certificate Principal Balance, the Original
Class A-1C Certificate Principal Balance or the Original Class A-2 Certificate
Principal Balance, respectively.
As of any Distribution Date, "Class A Monthly Interest" for the Class
A-1 Certificates will consist of Class A-1A Monthly Interest, Class A-1B
Monthly Interest and Class A-1C Monthly Interest. "Class A-1A Monthly
Interest" will be distributed to Class A-1A Certificateholders on each
Distribution Date in an amount equal to, with respect to the [ ]
Distribution Date, 30 days of interest at the Class A-1A Pass-Through Rate on
the Original Class A-1A Certificate Principal Balance and, with respect to any
subsequent Distribution Date, 30 days of interest at the Class A-1A
Pass-Through Rate on the Class A-1A Certificate Principal Balance as of the
preceding Distribution Date (after giving effect to the distribution, if any,
in reduction of principal made on the Class A-1A Certificates on such preceding
Distribution Date), in either case net of any applicable Interest Shortfalls
(as defined herein). "Class A-1B Monthly Interest" will be distributed to
Class A-1B Certificateholders on each Distribution Date in an amount equal to,
with respect to the [ ] Distribution Date, 30 days of
interest at the Class A-1B Pass-Through Rate on the Original Class A-1B
Certificate Principal Balance and, with respect to any subsequent Distribution
Date, 30 days of interest at the Class A-1B Pass-Through Rate on the Class A-1B
Certificate Principal Balance as of the preceding Distribution Date (after
giving effect to the distribution, if any, in reduction of principal made on
the Class A-1B Certificates on such preceding Distribution Date), in either
case net of any applicable Interest Shortfalls. "Class A-1C Monthly Interest"
will be distributed to the Class A-1C Certificateholders on each Distribution
Date in an amount equal to, with respect to the [ ]
Distribution Date, 30 days of interest at the Class A-1C Pass-Through Rate on
the Original Class A-1C Certificate Principal
S-36
38
Balance and, with respect to any subsequent Distribution Date, 30 days of
interest at the Class A-1C Pass-Through Rate on the Class A-1C Certificate
Principal Balance as of the preceding Distribution Date (after giving effect to
the distribution, if any, in reduction of principal made on the Class A-1C
Certificates on such preceding Distribution Date), in either case net of any
applicable Interest Shortfalls.
As of any Distribution Date, "Class A Monthly Interest" for the Class
A-2 Certificates will be an amount equal to (a) with respect to the [ ]
Distribution Date, interest for the number of days in the period commencing
on the Closing Date and ending on the day prior to such Distribution Date at
the initial Class A-2 Pass-Through Rate on the Original Class A-2 Certificate
Principal Balance, and (b) with respect to each subsequent Distribution Date,
interest for the number of days in the related Interest Period at the Class A-2
Pass-Through Rate in effect for such Distribution Date on the Class A-2
Certificate Principal Balance as of the preceding Distribution Date (after
giving effect to the distribution, if any, in reduction of principal made on
the Class A-2 Certificates on such preceding Distribution Date), in either case
net of any applicable Interest Shortfalls.
All calculations of interest on the Class A-1 Certificates will be
computed on the basis of a 360-day year of twelve 30-day months. All
calculations of interest of the Class A-2 Certificates will be computed on the
basis of the actual number of days elapsed in the related Interest Period and
in a year of 360 days.
The "Class A-1A Pass-Through Rate" will be a fixed rate of [ ]% per
annum.
The "Class A-1B Pass-Through Rate" will be a fixed rate of [ ]% per
annum.
The "Class A-1C Pass-Through Rate" will be a fixed rate of [ ]% per
annum.
The Class A-2 Pass-Through Rate for each Interest Period will be a per
annum rate equal to the lesser of (i) for each Interest Period on or prior to
the Distribution Date in [ ], LIBOR plus [ ]%, and, for each
Interest Period thereafter, LIBOR plus [ ]% and (ii) the Adjustable Rate Cap.
LIBOR for the initial Interest Period will be determined on [ ].
The "Adjustable Rate Cap" will be, with respect to any Distribution
Date and the Class A-2 Certificates, the per annum rate equal to the percentage
obtained by (I) dividing (x) the amount of interest that accrued on the
Mortgage Loans in the Adjustable Rate Group in respect of the related Interest
Period at the weighted average of the related Mortgage Interest Rates
applicable to Monthly Payments due on such Mortgage Loans during the related
Collection Period, reduced by the sum of (i) the Servicing Fee with respect to
the Mortgage Loans in the Adjustable Rate Group for such Collection Period,
(ii) the applicable Certificate Insurer Premium attributable to the Adjustable
Rate Group for the related Distribution Date, and (iii) in the case of each
Distribution Date occurring after the Distribution Date in [ ], an
amount equal to one-twelfth (1/12) of [ ] basis points multiplied by the
aggregate principal balance of the Mortgage Loans in the Adjustable Rate Group
as of the first day of such Interest Period, by (y) the product of (i) the
Class A-2 Certificate Principal Balance as of the first day of such Interest
Period and (ii) the actual number of days elapsed during such Interest Period
divided by 360 and (II) multiplying the result by 100.
"LIBOR" shall mean the London interbank offered rate for one-month U.S.
dollar deposits. LIBOR for each Interest Period shall be determined on the
second business day preceding the first day of any Interest Period (each, a
"LIBOR Determination Date"), on the basis of the offered rates of the Reference
Banks for one-month U.S. dollar deposits, as such rates appear on the Reuters
Screen LIBO Page, as of 11:00 a.m. (London time) on such LIBOR Determination
Date. As used in this section, "business day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York City;
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on the
Reuters Monitor Money Rates Service (or such other page as may replace the LIBO
page on that service for the purpose of displaying London interbank offered
rates of major banks); and "Reference Banks" means leading banks selected by
the Trustee and engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (i) with an established place of business in
London, (ii) whose quotations appear on the Reuters Screen LIBO Page on the
LIBOR Determination Date in question, (iii) which have been
S-37
39
designated as such by the Trustee and (iv) not controlling, controlled by or
under common control with the Sponsor or any Originator.
On each LIBOR Determination Date, LIBOR will be established by the
Trustee as follows:
(a) If on such LIBOR Determination Date two or more Reference
Banks provide such offered quotations, LIBOR shall be the arithmetic
mean (rounded upwards if necessary to the nearest whole multiple of
0.0625%) of such offered quotations.
(b) If on such LIBOR Determination Date fewer than two Reference
Banks provide such offered quotations, LIBOR shall be the greater of
(x) LIBOR as determined on the previous LIBOR Determination Date and
(y) the Reserve Interest Rate. The "Reserve Interest Rate" shall be
the rate per annum that the Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 0.0625%) of the one-month U.S. dollar lending rates which
New York City banks selected by the Trustee are quoting on the
relevant LIBOR Determination Date to the principal London offices of
leading banks in the London interbank market or, in the event that
the Trustee can determine no such arithmetic mean, (ii) the lowest
one-month U.S. dollar lending rate which New York City banks selected
by the Trustee are quoting on such LIBOR Determination Date to
leading European banks.
The establishment of LIBOR on each LIBOR Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class A-2 Certificates for the related Interest Period shall (in the absence of
manifest error) be final and binding. Each such rate of interest may be
obtained by telephoning the Trustee at [ ].
The "Class A-1 Certificate Principal Balance" will equal, as of any
Distribution Date, the sum of the Class A-1A Certificate Principal Balance for
such Distribution Date, Class A-1B Certificate Principal Balance for such
Distribution Date and Class A-1C Certificate Principal Balance for such
Distribution Date. The "Class A-1A Certificate Principal Balance" will equal,
as of any Distribution Date, the Original Class A-1A Certificate Principal
Balance less all Monthly Principal and Excess Cash from either Mortgage Loan
Group distributed to holders of Class A-1A Certificates on previous
Distribution Dates (exclusive, for the sole purpose of effecting the
Certificate Insurer's subrogation rights, of payments made by the Certificate
Insurer in respect of any Coverage Deficit for the Class A-1 Certificates and
paid to the Class A-1A Certificates under the Certificate Insurance Policy,
except to the extent reimbursed to the Certificate Insurer pursuant to the
Pooling and Servicing Agreement). The "Class A-1B Certificate Principal
Balance" will equal, as of any Distribution Date, the Original Class A-1B
Certificate Principal Balance less all Monthly Principal and Excess Cash from
either Mortgage Loan Group distributed to holders of Class A-1B Certificates on
previous Distribution Dates (exclusive, for the sole purpose of effecting the
Certificate Insurer's subrogation rights, of payments made by the Certificate
Insurer in respect of any Coverage Deficit for the Class A-1 Certificates and
paid to the Class A-1B Certificates under the Certificate Insurance Policy,
except to the extent reimbursed to the Certificate Insurer pursuant to the
Pooling and Servicing Agreement). The "Class A-1C Certificate Principal
Balance" will equal, as of any Distribution Date, the Original Class A-1C
Certificate Principal Balance less all Monthly Principal and Excess Cash from
either Mortgage Loan Group distributed to holders of Class A-1C Certificates on
previous Distribution Dates (exclusive, for the sole purpose of effecting the
Certificate Insurer's subrogation rights, of payments made by the Certificate
Insurer in respect of any Coverage Deficit for the Class A-1 Certificates and
paid to the Class A-1C Certificates under the Certificate Insurance Policy,
except to the extent reimbursed to the Certificate Insurer pursuant to the
Pooling and Servicing Agreement).
The "Class A-2 Certificate Principal Balance" will equal, as of any
Distribution Date, the Original Class A-2 Certificate Principal Balance less
all Monthly Principal and Excess Cash from either Mortgage Loan Group
distributed to holders of Class A-2 Certificates on previous Distribution Dates
in reduction of the Class A-2 Certificate Principal Balance (exclusive, for the
sole purpose of effecting the Certificate Insurer's subrogation rights, of
payments made by the Certificate Insurer in respect of any Coverage Deficit for
such Class under the
S-38
40
Certificate Insurance Policy, except to the extent reimbursed to the
Certificate Insurer pursuant to the Pooling and Servicing Agreement).
The "Class A Certificate Principal Balance," as of any Distribution
Date, refers to either the Class A-1 Certificate Principal Balance for such
Distribution Date or the Class A-2 Certificate Principal Balance for such
Distribution Date, as applicable.
"Monthly Principal" with respect to each Class of Class A Certificates
for any Distribution Date will be an amount equal to (A) the aggregate of (i)
any Principal Payments received in respect of the Mortgage Loans in the related
Mortgage Loan Group during the related Collection Period, (ii) Net Liquidation
Proceeds (as defined herein) and Trust Insurance Proceeds (as defined herein)
allocable to principal recovered or collected in respect of the Mortgage Loans
in the related Mortgage Loan Group during the related Collection Period, (iii)
the aggregate of the amounts allocable to principal deposited in the
Certificate Account on the related Deposit Date by the Sponsor or the Servicer
in connection with a purchase, repurchase or substitution of any Mortgage Loans
in the related Mortgage Loan Group pursuant to the Pooling and Servicing
Agreement, (iv) the aggregate of amounts remitted by the Sponsor to the Trustee
in connection with the termination of the Trust upon liquidation of the
remaining Mortgage Loans in the related Mortgage Loan Group pursuant to the
Pooling and Servicing Agreement, and (v) with respect to the first Distribution
Date, the amount, if any, of the Purchase Account Deposit allocated to the
related Mortgage Loan Group to be deposited in the Collection Account upon
expiration of the Commitment Period, reduced by (B) the amount of any Coverage
Surplus for such Mortgage Loan Group with respect to such Distribution Date.
The "Principal Balance" of a Mortgage Loan with respect to any Determination
Date (as defined below) 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 Distribution Date, as of the Cut-off Date), less (i)
any Principal Payments received in respect of such Mortgage Loan during the
related Collection Period, (ii) Net Liquidation Proceeds and Trust Insurance
Proceeds allocable to principal recovered or collected in respect of such
Mortgage Loan during the related Collection Period, (iii) the portion of the
Purchase Price allocable to principal remitted by the Sponsor or the Servicer
to the Trustee on the next succeeding Deposit Date in connection with a
purchase, repurchase or substitution of such Mortgage Loan pursuant to the
Pooling and Servicing Agreement, to the extent such amount is actually remitted
on such Deposit Date, (iv) the amount to be remitted by the Sponsor to the
Trustee on the next succeeding Deposit Date in connection with a substitution
of a Qualified Replacement Mortgage for such Mortgage Loan pursuant to the
Pooling and Servicing Agreement, to the extent such amount is actually remitted
on such Deposit Date and (v) the amount to be remitted by the Certificate
Insurer to the Trustee on the next succeeding Deposit Date in connection with a
purchase of such Mortgage Loan pursuant to the Pooling and Servicing Agreement;
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 Distribution Date, the last day of the calendar month immediately
preceding the calendar month in which such Distribution Date occurs.
"Principal Payment" means, as to any Mortgage Loan and Collection Period, all
amounts received or, in the case of the principal portion of any Payment Ahead,
deemed to have been received by the Servicer from or on behalf of the related
Mortgagor during such Collection Period which, at the time of receipt or, in
the case of any Payment Ahead, at the time such Payment Ahead is deemed to have
been received, were applied or were required to be applied by the Servicer in
reduction of the Principal Balance of such Mortgage Loan. "Payment 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 such Collection 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 Collection Periods.
"Principal Prepayment" means any Mortgagor payment or other recovery in respect
of principal on a Mortgage Loan (including Net Liquidation Proceeds) 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 was
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"
S-39
41
means, as to any Distribution 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 Mortgage Loan Group and any
Distribution Date will consist of the sum of the amounts described in clauses
(a) through (j) below in respect of the related Mortgage Loan Group, less (i)
the Servicing Fee in respect of such Mortgage Loan Group and the related
Collection Period, (ii) Advances previously made in respect of the related
Mortgage Loan Group that are reimbursable to the Servicer (other than those
included in Liquidation Expenses for any Liquidated Mortgage Loan and
reimbursed from the related Liquidation Proceeds) in such Collection Period to
the extent permitted by the Pooling and Servicing Agreement and (iii) the
aggregate amounts (A) deposited into the Collection Account or Certificate
Account attributable to the related Mortgage Loan Group that may not be
withdrawn therefrom pursuant to a final and nonappealable order of a United
States bankruptcy court of competent jurisdiction imposing a stay pursuant to
Section 362 of the United States Bankruptcy Code and that would otherwise have
been included in Available Funds for such Mortgage Loan Group on such
Distribution Date and (B) received by the Trustee that are recoverable and
sought to be recovered from the Trustee 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) the total amount of interest payments on or in respect of the
Mortgage Loans in the related Mortgage Loan Group received by or on
behalf of the Servicer during the related Collection Period, plus any
Compensating Interest Payments made by the Servicer in respect of the
related Mortgage Loans and any net income from related REO Properties
(as defined herein) for such Collection Period;
(b) all Principal Payments received or deemed to be received during
the related Collection Period in respect of the Mortgage Loans in the
related Mortgage Loan Group;
(c) the aggregate of any proceeds from or in respect of any policy
of insurance covering a Mortgage Loan in such Mortgage Loan Group that
are received during the related Collection Period and applied by the
Servicer to reduce the Principal Balance of the related Mortgage Loan
("Trust 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 in such Mortgage Loan
Group, 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"), less expenses incurred by the Servicer in connection with
the liquidation of such Mortgage Loan ("Net Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Mortgage
Loans in such Mortgage Loan Group that are required or permitted to be
purchased, repurchased or substituted by the Sponsor or the Servicer, as
the case may be, during the related Collection Period as described in
"-- Assignment of Mortgage Loans" and "Origination and Servicing of the
Mortgage Loans -- Servicing of Mortgage Loans" herein, to the extent
such amounts are received by the Trustee on or before the related
Deposit Date;
(f) the amount of any Monthly Advances made in respect of such
Mortgage Loan Group for such Distribution Date;
S-40
42
(g) the aggregate of amounts deposited in the Certificate Account by
the Servicer or the Certificate Insurer, as the case may be, during such
Collection Period in connection with a termination of the Trust as
described under "-- Termination; Retirement of the Certificates" herein;
(h) in the case of the [ ] Distribution Date, amounts,
if any, remaining in the Purchase Account and the Capitalized Interest
Account at the end of the Commitment Period and attributable to the
related Mortgage Loan Group (in each case net of reinvestment income
payable to the Sponsor); and
(i) in the case of the [ ] Distribution Date, amounts
deposited by the Sponsor representing 30 days of interest on each
Mortgage Loan that does not have a Monthly Payment due in the Collection
Period relating to such Distribution Date.
PURCHASE ACCOUNT
On the Closing Date, cash in the aggregate amount of approximately $[ ]
(the "Purchase Account Deposit") will be deposited by the Sponsor in a
Purchase Account, which account will be part of the Trust and will be
maintained as an Eligible Account with the Trustee, in its corporate trust
department. Approximately $[ ] of the Purchase Account Deposit will
be allocated for the purchase of Mortgage Loans bearing fixed rates of interest
that will be included in the Fixed Rate Group and approximately $[ ]
of the Purchase Account Deposit will be allocated for the purchase of
Mortgage Loans bearing adjustable rates of interest that will be included in
the Adjustable Rate Group. All Mortgage Loans purchased by the Trust through
application of amounts on deposit in the Purchase Account are referred to
herein as the "Subsequent Mortgage Loans." The Purchase Account Deposit may be
increased by an amount equal to the aggregate of the principal balances of any
mortgage loans removed from the Mortgage Pool prior to the Closing Date,
provided that any such increase shall not exceed $[ ]. During
the period (the "Commitment Period") from the Closing Date until the earlier of
(i) the date on which the Purchase Account Deposit is reduced to zero, and (ii)
[ ], the Purchase Account Deposit will be reduced by the amount
thereof used to purchase Subsequent Mortgage Loans from the Sponsor in
accordance with the applicable provisions of the Pooling and Servicing
Agreement. Subsequent Mortgage Loans purchased by and added to the Trust on
any Subsequent Transfer Date must satisfy the criteria set forth in the Pooling
and Servicing Agreement and must be approved by the Certificate Insurer. On
the Distribution Date in [ ], the portion of the Purchase Account Deposit
allocated to the Fixed Rate Group that is remaining at the end of the
Commitment Period (net of reinvestment income payable to the Sponsor) will be
applied to reduce the Class A-1 Certificate Principal Balance and the portion
of the Purchase Account Deposit allocated to the Adjustable Rate Group that is
remaining at the end of the Commitment Period (net of reinvestment income
payable to the Sponsor) will be applied to reduce the Class A-2 Certificate
Principal Balance. Although it is intended that the principal amount of
Subsequent Mortgage Loans sold to the Trust will require application of
substantially all of the Purchase Account Deposit and it is not currently
anticipated that there will be any material amount of principal distributions
from amounts remaining on deposit in the Purchase Account in reduction of the
Class A Certificate Principal Balance of either Class of Class A Certificates,
no assurance can be given that such a distribution with respect to either Class
or both Classes of Class A Certificates will not occur on the Distribution Date
in [ ]. In any event, it is unlikely that the Sponsor will be
able to deliver Subsequent Mortgage Loans with aggregate principal balances
that exactly equal the Purchase Account Deposit, and any portion of the
Purchase Account Deposit allocated to the related Mortgage Loan Group remaining
at the end of the Commitment Period will be distributed on the [ ]
Distribution Date in reduction of the Class A Certificate Principal Balances
of the related Classes, thereby reducing the weighted average lives of such
Certificates.
Amounts remaining on deposit in the Purchase Account after the purchase
of Subsequent Mortgage Loans will be invested in Permitted Investments as
defined in the Pooling and Servicing Agreement. Permitted Investments are
required to mature as may be necessary for the purchase of Subsequent Mortgage
Loans on any Subsequent Transfer Date no later than the Business Day prior to
the related Subsequent Transfer Date, and in any case, no later than the
Business Day prior to the [ ] Distribution Date. All interest
and any other investment
S-41
43
earnings on amounts on deposit in the Purchase Account will be distributed to
the Sponsor on the [ ] Distribution Date. The Purchase
Account will not be part of the REMIC Pool.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, cash will be deposited by the Sponsor in the
Capitalized Interest Account, which account will be part of the Trust and will
be maintained as an Eligible Account with the Trustee, in its corporate trust
department. The amount on deposit in the Capitalized Interest Account will be
specifically allocated to cover shortfalls in interest on each Class of Class A
Certificates that may arise as a result of the utilization of the Purchase
Account for the purchase by the Trust of Subsequent Mortgage Loans after the
Cut-off Date and will be so applied by the Trustee on the [ ]
Distribution Date. [In the unlikely event that the full amount allocated to
cover interest shortfalls in respect of a Class of Class A Certificates is not
required for such purpose, the amount remaining (net of reinvestment income
payable to the Sponsor) will be deposited in the Certificate Account and will
be part of Available Funds for the related Mortgage Loan Group on the [ ]
Distribution Date.]
Amounts on deposit in the Capitalized Interest Account will be invested
in Permitted Investments as defined in the Pooling and Servicing Agreement.
All such Permitted Investments are required to mature no later than the
Business Day prior to the [ ] Distribution Date
as specified in the Pooling and Servicing Agreement. All interest and any
other investment earnings on amounts on deposit in the Capitalized Interest
Account will be distributed to the Sponsor on the [ ] Distribution Date.
The Capitalized Interest Account will not be part of the REMIC Pool.
OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to the Class A-1 Certificates is
expected to result from the application of Excess Cash on each Distribution
Date to the reduction of the Certificate Principal Balance of the Class A-1
Certificates so that over time the Aggregate Principal Balance of the Mortgage
Loans in the Fixed Rate Group will exceed the aggregate of the Certificate
Principal Balance of the Class A-1 Certificates. Credit enhancement with
respect to the Class A-2 Certificates initially will be provided in part by
overcollateralization resulting from the Aggregate Principal Balance of the
Initial Mortgage Loans in the Adjustable Rate Group as of the Cut-off Date and
the Purchase Account Deposit attributable to such Adjustable Rate Group
exceeding the Original Class A-2 Certificate Principal Balance which is
expected to be supplemented by the application of Excess Cash on each
Distribution Date so that over time such overcollateralization will increase.
In either case, such overcollateralization is intended to result in receipts,
collections and recoveries on the Mortgage Loans in the related Mortgage Loan
Group in excess of the amount necessary to pay the related Class A Monthly
Interest required to be distributed on the related Class of Class A
Certificates on any Distribution Date and to reduce the Class A Certificate
Principal Balances to zero no later than the respective Final Scheduled Payment
Date (as defined herein) of each such Class or subclass, as applicable. Excess
Cash attributable to a Mortgage Loan Group will be distributed on the related
Class of Class A Certificates on each Distribution Date to the extent necessary
to reduce the Class A Certificate Principal Balance of such Class until the
related Coverage Amount equals the Required Coverage Amount for such Class.
Any Excess Cash that is not distributed on the related Class of Class A
Certificates on a given Distribution Date will be distributed on the other
Class of Class A Certificates, first to cover any shortfall in the Class A
Monthly Interest for such Class and Distribution Date and then to the extent
necessary to reduce the Class A Certificate Principal Balance of such Class
until the related Coverage Amount equals the applicable Required Coverage
Amount. Once the then applicable Required Coverage Amount for each Class of
Class A Certificates is reached, and so long thereafter as such Required
Coverage Amount for such Class of Class A Certificates is maintained, Excess
Cash with respect to such Class of Class A Certificates shall be applied first,
to reimburse the Certificate Insurer for amounts to which it then may be
entitled in respect of Insured Amounts for the other Class and to pay amounts
of any unpaid Certificate Insurer Premium on prior Distribution Dates; second,
to reimburse the Servicer for any amounts to which it may then be entitled; and
thereafter, any remaining amount shall be distributed to the holder of the
Class R Certificate. Amounts distributed to the Class
S-42
44
R Certificateholder on any Distribution Date will not be available to pay
amounts due to Class A Certificateholders on subsequent Distribution Dates.
The "Excess Cash" for each Class of Class A Certificates on any
Distribution Date will be equal to Available Funds for the related Mortgage
Loan Group and such Distribution Date, reduced by (i) the amount of the Class A
Monthly Interest for such Class and such Distribution Date, (ii) the Monthly
Principal for such Mortgage Loan Group and such Distribution Date, (iii) the
Certificate Insurer Premium (as defined herein) with respect to such Class on
such Distribution Date and (iv) any amounts payable to the Certificate Insurer
for unreimbursed Insured Amounts attributable to such Class paid on prior
Distribution Dates and the amount of any unpaid Certificate Insurer Premium
from prior Distribution Dates for the related Class.
The "Coverage Amount" with respect to any Distribution Date and each
Class of Class A Certificates is the amount, if any, by which (x) the Aggregate
Principal Balance of the Mortgage Loans in the related Mortgage Loan Group as
of the end of the related Collection Period exceeds (y) the Class A Certificate
Principal Balance of the related Class of Class A Certificates as of such
Distribution Date after taking into account distributions of Monthly Principal
(disregarding any permitted reduction in Monthly Principal due to a Coverage
Surplus in respect of such Class of Class A Certificates) made on such
Distribution Date. The required level of the Coverage Amount with respect to
any Distribution Date (the "Required Coverage Amount") will be equal to the
amount specified as such in the Pooling and Servicing Agreement. With respect
to the Class A-1 Certificates and the Class A-2 Certificates, the Pooling and
Servicing Agreement will provide that the applicable Required Coverage Amount
in respect of the related Class of Class A Certificates may increase or
decrease during the period such Class A Certificates remain outstanding. With
respect to the Class A-2 Certificates, if on any Distribution Date occurring
after [ ], the amount of Excess Cash distributable on the Class
A-2 Certificates is less than an amount specified in the Pooling and Servicing
Agreement, the Required Coverage Amount for the Class A-2 Certificates will be
increased (any such Distribution Date, a "Class A-2 Trigger Event Date");
provided, however, that upon the satisfaction of certain cash flow requirements
in respect of the Class A-2 Certificates for a period of six consecutive
Distribution Dates as specified in the Pooling and Servicing Agreement, such
Required Coverage Amount will return to its original level. Any increase in
the applicable Required Coverage Amount for a Class of Class A Certificates
(including, in the case of the Class A-2 Certificates, an increase required on
a Class A-2 Trigger Event Date) may result in an accelerated amortization of
such Class until such Required Coverage Amount is reached. Conversely, any
decrease in the Required Coverage Amount with respect to such Class will result
in a decelerated amortization of such Class until such Required Coverage Amount
is reached.
The application of Excess Cash to reduce the Class A Certificate
Principal Balance of the related Class and thereafter to reduce the Class A
Certificate Principal Balance of the other Class on any Distribution Date will
have the effect of accelerating the amortization of the Class A Certificates
relative to the amortization of the Mortgage Loans in the related Mortgage Loan
Group.
In the event that the Required Coverage Amount with respect to a Class
of Class A Certificates is permitted to decrease or "step down" on any
Distribution Date in the future, the Pooling and Servicing Agreement will
provide that all or a portion of the Excess Cash that would otherwise be
distributed to the related Class of Class A Certificates on any such
Distribution Date in reduction of the Class A Certificate Principal Balance of
such Class will be distributed to the other Class of Class A Certificates in
reduction of the Class A Certificate Principal Balance of such Class until the
Required Coverage Amount with respect to the other Class of Class A
Certificates is reached, and thereafter applied to reimburse the Certificate
Insurer and the Servicer, in that order, for any amounts to which they may then
be entitled. Any remaining Excess Cash shall be distributed to the holder of
the Class R Certificate. This may have the effect of decelerating the
amortization of the Class A Certificates relative to the amortization of the
related Mortgage Loans, and of reducing the related Coverage Amount. If, on
any Distribution Date, the Coverage Surplus with respect to the related Class
of Class A Certificates is, or, after taking into account distributions of
Monthly Principal (without taking into account any reduction thereof as a
result of a Coverage Surplus on such Distribution Date), would be, greater than
zero (i.e., the Coverage Amount is or would
S-43
45
be greater than the then applicable Required Coverage Amount), then any amounts
that would otherwise be distributed to such Class on such Distribution Date as
Monthly Principal will instead be distributed to the other Class of Class A
Certificates in reduction of the Class A Certificate Principal Balance of such
Class until the then applicable Required Coverage Amount with respect to the
other Class of Class A Certificates, is reached, and thereafter applied to
reimburse the Certificate Insurer and the Servicer, in that order, for any
amounts to which they may be then entitled. Any remaining Excess Cash will be
paid to the holder of the Class R Certificate, in an amount equal to the lesser
of (x) the remaining amount of such Coverage Surplus not used to reimburse the
Certificate Insurer for such Mortgage Loan Group and (y) the amount of the
Monthly Principal for such Distribution Date. With respect to any Distribution
Date and any Class of Class A Certificates, a "Coverage Surplus" means, the
amount, if any, by which (x) the Coverage Amount for such Class and such
Distribution Date exceeds (y) the then applicable Required Coverage Amount for
such Class and such Distribution Date. As a technical matter, a Coverage
Surplus may result even prior to the occurrence of any decrease or "step down"
in the related Required Coverage Amount because the related Class of Class A
Certificates will be entitled to receive 100% of collected principal on the
Mortgage Loans, even though the related Class A Certificate Principal Balance
will, as a result of the initial overcollateralization and the accelerated
amortization caused by the application of the Excess Cash, be less than the
Aggregate Principal Balance of the Mortgage Loans in the related Mortgage Loan
Group, in the absence of any Realized Losses (as defined herein) on the
Mortgage Loans.
The Pooling and Servicing Agreement will provide that, on any
Distribution Date, all amounts collected on the Mortgage Loans in the related
Mortgage Loan Group in respect of principal during the applicable Collection
Period will be distributed to holders of the related Class of Class A
Certificates in reduction of the Class A Certificate Principal Balance of such
Class on such Distribution Date, except as provided above with respect to any
Distribution Date for which there exists a Coverage 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 Pooling and Servicing
Agreement will provide that the Principal Balance of any Mortgage Loan that
becomes a Liquidated Mortgage Loan shall equal zero. The Pooling and Servicing
Agreement will not require that the amount of any Realized Loss be distributed
to Class A Certificateholders on the Distribution Date following the event of
loss. However, the occurrence of a Realized Loss will reduce the Coverage
Amount for the related Class of Class A Certificates, and will result in more
Excess Cash, if any, being distributed on the related Class of Class A
Certificates in reduction of the Class A Certificate Principal Balance of such
Class on subsequent Distribution Dates than would be the case in the absence of
such Realized Loss. The effect of the foregoing is to allocate losses to the
holder of the Class R Certificate by reducing, or eliminating entirely,
payments of Excess Cash to which such Certificateholder would otherwise be
entitled.
Overcollateralization and the Certificate Insurance Policy. The Pooling
and Servicing Agreement will require the Trustee to make a claim for an Insured
Amount under the Certificate Insurance Policy not later than the second
Business Day prior to any Distribution Date as to which the Trustee has
determined that a Coverage Deficit with respect to a Class of Class A
Certificates will occur for the purpose of applying the proceeds of such
Insured Amount as a payment of principal to the related Class of Class A
Certificateholders on such Distribution Date. With respect to any Distribution
Date and any Class of Class A Certificates, a "Coverage Deficit" will mean the
amount, if any, by which (x) the related Class A Certificate Principal Balance,
after taking into account all distributions to be made on such Distribution
Date in reduction thereof, including any Excess Cash distributions in respect
of the Mortgage Loan Group relating to the other Class of Class A Certificates,
exceeds (y) the Aggregate Principal Balance of the Mortgage Loans in the
related Mortgage Loan Group as of the end of the applicable Collection Period.
Accordingly, the Certificate Insurance Policy is similar to the provisions
described above insofar as the Certificate Insurance Policy guarantees ultimate
collection of the full amount of the Class A Certificate Principal Balance of
each Class of Class A Certificates, rather than current payments of the amounts
of any
S-44
46
Realized Losses to the holders of each Class of Class A Certificates.
INVESTORS IN THE CLASS A CERTIFICATES SHOULD REALIZE THAT, UNDER CERTAIN LOSS
OR DELINQUENCY SCENARIOS APPLICABLE TO THE MORTGAGE LOAN GROUPS, THEY MAY
TEMPORARILY RECEIVE NO DISTRIBUTIONS IN REDUCTION OF THE CLASS A CERTIFICATE
PRINCIPAL BALANCE OF THEIR RESPECTIVE CLASS.
THE CERTIFICATE INSURANCE POLICY
The Certificate Insurer will issue a Certificate Insurance Policy in
favor of the Trustee for the benefit of the related Class A Certificateholders.
The Certificate Insurance Policy unconditionally and irrevocably guarantees
payment of the Class A Monthly Interest and any Coverage Deficit in respect of
each Class of Class A Certificates on each Distribution Date. Insured Amounts
paid by the Certificate Insurer under the Certificate Insurance Policy will not
cover any Interest Shortfalls for the related Distribution Date.
In the event that, on any Distribution Date, (i) the Available Funds for
any Mortgage Loan Group and any available Excess Cash from the other Mortgage
Loan Group are less than the full amount of the Class A Monthly Interest for
the related Class of Class A Certificates and such Distribution Date or (ii) a
Coverage Deficit exists for the related Class of Class A Certificates, the
Trustee will make a claim on the Certificate Insurance Policy for payment of:
(a) an amount equal to the amount necessary to pay the full amount of the Class
A Monthly Interest for such Class on such Distribution Date and (b) an amount
equal to any such Coverage Deficit (the amount of any shortfalls in the Class A
Monthly Interest, together with any Coverage Deficit for such Class with
respect to any Distribution Date is the "Insured Amount"). The Certificate
Insurer will be obligated to pay to the Trustee on each Distribution Date the
full amount of the Insured Amount under the Certificate Insurance Policy for
such Distribution Date. See "The Certificate Insurance Policy and the
Certificate Insurer" herein.
Any portion of an Insured Amount distributed to the related Class of
Class A Certificateholders will be allocated first to make up any shortfall on
such Distribution Date in the related Class A Monthly Interest and second to
make up any Coverage Deficit on such Distribution Date. Any Insured Amount
distributed in respect of the Class A-1 Certificates to make up any shortfall
in Class A Monthly Interest shall be distributed pro rata to Class A-1A
Certificateholders, Class A-1B Certificateholders and Class A-1C
Certificateholders in proportion to the shortfalls in Class A-1A Monthly
Interest, Class A-1B Monthly Interest and Class A-1C Monthly Interest. Any
Insured Amount distributed in respect of the Class A-1 Certificates to make up
any Coverage Deficit shall be distributed first to Class A-1A
Certificateholders, in reduction of the Class A-1A Certificate Principal
Balance, until the Class A-1A Certificate Principal Balance is reduced to zero,
then to Class A-1B Certificateholders, in reduction of the Class A-1B
Certificate Principal Balance, until the Class A-1B Certificate Principal
Balance is reduced to zero and thereafter to Class A-1C Certificateholders, in
reduction of the Class A-1C Certificate Principal Balance, until the Class A-1C
Certificate Principal Balance is reduced to zero.
The Certificate Insurer will be subrogated to the rights of holders of
the Class A Certificates to receive any payments on the related Class or
subclass of Class A Certificates for which the Certificate Insurer paid Insured
Amounts that were not subsequently reimbursed; provided, however, that the
Certificate Insurer is not entitled to reimbursement on any Distribution Date
for previously paid Insured Amounts unless the holders of the related Class or
subclass of Class A Certificates will receive the full amount of the applicable
Class A Monthly Interest on such Distribution Date and no Coverage Deficit
exists with respect to the related Class of Class A Certificates.
THE CERTIFICATE INSURER PREMIUM
The Certificate Insurer will be entitled to receive a monthly premium
from the Trust (the "Certificate Insurer Premium") payable out of Available
Funds on each Distribution Date in respect of the related Class of Class A
Certificates. The Certificate Insurer Premium as of any Distribution Date will
equal one-twelfth (1/12) of the product of the applicable Insurer Premium Rate
and the Class A Certificate Principal Balance of the related Class of Class A
Certificates for such Distribution Date. The "Insurer Premium Rate" will be
[ ]%; provided,
S-45
47
however, that with respect to the Class A-2 Certificates and each Distribution
Date commencing on the Distribution Date after [ ], if the
Coverage Amount for the Class A-2 Certificates is less than the then applicable
Required Coverage Amount for such Class as of the immediately preceding
Distribution Date, the Insurer Premium Rate with respect to the Class A-2
Certificates and such Distribution Date shall be equal to [ ]% See " --
Distributions on the Certificates" herein.
MONTHLY ADVANCES; SERVICING ADVANCES; COMPENSATING INTEREST AND INTEREST
SHORTFALLS
Not later than the close of business on the Deposit Date prior to each
Distribution Date, the Servicer will be required to remit a Monthly Advance, if
any, to the Trustee for deposit in the Certificate Account to be distributed on
the related Distribution Date. A "Monthly Advance" with respect to each Class
of Class A Certificates will be equal to the sum of the interest portions of
the aggregate amount of monthly payments (net of the related Servicing Fee) due
on the Mortgage Loans in the related Mortgage Loan Group during the related
Collection Period but delinquent as of the close of business on the last day of
the related Collection Period, plus, with respect to each Mortgaged Property in
the related Mortgage Loan Group which 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 relating to such REO Property for the related
Collection Period at the related Mortgage Interest Rate (net of the Servicing
Fee) over the net income from the REO Property transferred to the Certificate
Account for such Distribution Date.
In the course of performing its servicing obligations during any
Collection Period with respect to each Mortgage Loan Group, the Servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred in
the performance of its servicing obligations as it deems appropriate and
advisable under the circumstances ("Servicing Advances" and together with
Monthly Advances, "Advances"), including, but not limited to, the cost of (i)
maintaining REO Properties; (ii) any enforcement or judicial proceedings,
including foreclosures; (iii) the management and liquidation of any Mortgaged
Property acquired in satisfaction of the related Mortgage Loan; and (iv)
payments in respect of real estate taxes and assessments and insurance
premiums. The Pooling and Servicing Agreement provides that the Servicer may
pay all or a portion of any Advance out of amounts on deposit in the Collection
Account which are being held for distribution on a subsequent Distribution 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 Distribution Date.
The Servicer may recover Monthly Advances and Servicing Advances, if not
theretofore recovered from the Mortgagor on whose behalf such Servicing Advance
or Monthly Advance was made, from late collections on the related Mortgage
Loan, including Liquidation Proceeds, Trust 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 not be ultimately
recoverable from late collections, Trust Insurance Proceeds, Liquidation
Proceeds on the related Mortgage Loans or otherwise ("Nonrecoverable
Advances"), the Servicer may reimburse itself on the first Distribution Date
thereafter on which Available Funds remaining in the Certificate Account would
otherwise be distributable to the Class R Certificateholder.
The Servicer will not be required to make any Servicing Advance which it
determines would be a Nonrecoverable Advance.
With respect to each Mortgage Loan as to which a prepayment was
received, which became a Liquidated Mortgage Loan or was otherwise charged off
during the Collection Period related to a Distribution Date, the Servicer will
be required with respect to such Distribution Date to remit to the Trustee,
from amounts otherwise payable to the Servicer as the Servicing Fee for the
related Mortgage Loan Group and Collection Period, an amount equal to the
excess, if any, of (a) 30 days' interest on the Principal Balance of each such
Mortgage Loan
S-46
48
(immediately prior to such payment) at the related Mortgage Interest Rate, net
of the applicable Servicing Fee, less (b) the amount of interest actually
received on such Mortgage Loan during such Collection Period ("Compensating
Interest Payments") for distribution on the related Class of Class A
Certificates on such Distribution Date. The Servicer will not be entitled to
be reimbursed from collections on the Mortgage Loans or any assets of the Trust
for any Compensating Interest Payments made. If the Servicing Fee for the
related Mortgage Loan Group in respect of such Collection Period is
insufficient to make the entire required Compensating Interest Payment, the
resulting shortfall (a "Prepayment Interest Shortfall") will reduce the amount
of interest due and payable on the related Class of Class A Certificates on
such Distribution Date and such reduction will not be recoverable thereafter.
In addition, the application of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), or similar legislation to any Mortgage
Loan may adversely affect, for an indeterminate period of time, the ability of
the Servicer to collect full amounts of interest on such Mortgage Loan ("Relief
Act Shortfalls"; Relief Act Shortfalls and Prepayment Interest Shortfalls are,
collectively, "Interest Shortfalls"). See "Risk Factors -- Limitations on
Interest Payments and Foreclosures" in the Prospectus. Interest Shortfalls
will not be covered by the Certificate Insurance Policy.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to Certificateholders, the Trustee
will mail a statement to each Class A-1A Certificateholder, Class A-1B
Certificateholder, Class A-1C Certificateholder and Class A-2 Certificateholder
in the form required by the Pooling and Servicing Agreement and setting forth
the following information:
(a) the amount of such distribution to Class A-1A
Certificateholders, Class A-1B Certificateholders, Class A-1C
Certificateholders and Class A-2 Certificateholders allocable to (i)
Monthly Principal and (ii) any Excess Cash distribution;
(b) the amount of such distribution to Class A-1A
Certificateholders, Class A-1B Certificateholders, Class A-1C
Certificateholders and Class A-2 Certificateholders allocable to Class A
Monthly Interest;
(c) the amount of such distribution to Class A-1A
Certificateholders, Class A-1B Certificateholders and Class A-1C
Certificateholders allocable to any Excess Cash distribution
attributable to the Adjustable Rate Group and the amount of such
distribution to Class A-2 Certificateholders allocable to any Excess
Cash distribution attributable to the Fixed Rate Group;
(d) the Class A-1A Certificate Principal Balance, the Class A-1B
Certificate Principal Balance, the Class A-1C Certificate Principal
Balance and the Class A-2 Certificate Principal Balance of the related
Class or subclass after giving effect to the distribution of Monthly
Principal and any Excess Cash applied to reduce the related Certificate
Principal Balance on such Distribution Date with respect to such Class
or subclass;
(e) the Aggregate Principal Balance of the related Mortgage Loan
Group and the Group Factor (as defined below) for the following
Distribution Date;
(f) the amount of unreimbursed Monthly Advances and/or Servicing
Advances, if any, with respect to the related Mortgage Loan Group;
(g) the number and the aggregate of the Principal Balances of the
Mortgage Loans in the related Mortgage Loan Group delinquent (i) one
month, (ii) two months and (iii) three or more months as of the end of
the related Collection Period;
S-47
49
(h) the aggregate of the Principal Balances of the Mortgage Loans in
the related Mortgage Loan Group in foreclosure or other similar
proceedings and the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure;
(i) the Insured Amount, if any, relating to the related Class of
Class A Certificates and such Distribution Date;
(j) the amount of the Servicing Fee paid to or retained by the
Servicer in respect of the related Mortgage Loan Group for the related
Collection Period; and
(k) the Coverage Amount, the then applicable Required Coverage
Amount, the Coverage Surplus, if any, and the Coverage Deficit, if any,
in respect of the related Mortgage Loan Group.
In the case of information furnished pursuant to clauses (a) through (c)
above, the amounts shall be expressed as a dollar amount per Class A-1A
Certificate, Class A-1B Certificate, Class A-1C Certificate and Class A-2
Certificate with a $1,000 principal denomination.
As to any Distribution Date, the "Group Factor" will be the percentage
obtained (carried to eight decimal places, rounded down) by dividing the
Aggregate Principal Balance of the related Mortgage Loan Group on such
Distribution Date (after giving effect to any distribution of principal on the
Class A Certificates on such Distribution Date) by the Aggregate Principal
Balance of the related Mortgage Loan Group as of the Cut-off Date.
Within 90 days after the end of each calendar year, the Trustee will
mail to each person who at any time during such calendar year was a Class A-1A
Certificateholder, Class A-1B Certificateholder, Class A-1C Certificateholder
and Class A-2 Certificateholder and to the Underwriters a statement containing
the information set forth in clauses (a) through (c) above, aggregated for such
calendar year or, in the case of each person who was a Class A-1A
Certificateholder, Class A-1B Certificateholder, Class A-1C Certificateholder
and Class A-2 Certificateholder for a portion of such calendar year, setting
forth such information for each month thereof.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate upon the payment to Certificateholders of all amounts held in the
Certificate Account or by or on behalf of the Servicer and required to be paid
to the Certificateholders pursuant to the Pooling and Servicing Agreement
following the earlier of (a) the purchase by the Servicer of all Mortgage Loans
and all property acquired in respect of any Mortgage Loan remaining in the
Trust at a price not less than the sum of (x) 100% of the Principal Balance of
each Mortgage Loan (other than any Mortgage Loan as to which title to the
underlying Mortgaged Property has been acquired and whose fair market value is
included pursuant to clause (y) below) as of the final Distribution Date, and
(y) the fair market value of each Mortgaged Property then held by the Trust (as
determined by the Servicer as of the close of business on the third Business
Day next preceding the date upon which notice of any such termination is
furnished to Certificateholders), plus one month's interest at the interest
rate on each Mortgage Loan (including any Mortgage Loan as to which title to
the underlying Mortgaged Property has been acquired by the Trust) less any
payments of principal and interest received during the related Collection
Period in respect of such Mortgage Loans; and (b) the final payment or other
liquidation of the Principal Balance of the last Mortgage Loan remaining in the
Trust or the disposition of all property remaining in the Trust acquired in
respect of any Mortgage Loan. In no event, however, will the Trust continue
beyond the expiration of 21 years from the death of the last survivor of
certain persons named in such Pooling and Servicing Agreement. Written notice
of termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Trustee which will be specified in the notice of termination. The right of
the Servicer to make the purchase described in clause (a) above is conditioned
upon
S-48
50
the Pool Balance prior to such purchase being less than 10% of the sum of the
Pool Balance as of the Cut-off Date and the Purchase Account Deposit.
In addition, the Certificate Insurer will have the option to purchase
from the Trust all Mortgage Loans and all property acquired in respect of any
Mortgage Loan then remaining in the Trust at the price set forth in the
immediately preceding paragraph plus the amount of any outstanding and unpaid
fees and expenses of the Trustee and the Servicer if, on any Distribution Date,
Mortgage Loans with aggregate Cut-off Date Principal Balances that equal or
exceed 25% of the sum of the Pool Balance as of the Cut-off Date and the
Purchase Account Deposit have become Liquidated Mortgage Loans.
The Pooling and Servicing Agreement will provide that notice of any
termination, specifying the final Distribution Date upon which the
Certificateholders may surrender their Certificates to the Trustee for payment
of the final distribution and cancellation, will be given promptly by the
Trustee by letter to Certificateholders specifying (a) the Distribution Date
for the final distribution, (b) the amount of any such final distribution and
(c) that the final distribution will be made only upon presentation and
surrender of the Certificates at the office or agency of the Trustee therein
specified.
If the termination of the Trust is in connection with a purchase of the
assets of the Trust by the Servicer or the Certificate Insurer and the fair
market value of any acquired property is less than the Principal Balance of the
related Mortgage Loan, then the excess of such Principal Balance over such fair
market value shall be allocated in reduction of the amounts otherwise
distributable on the final Distribution Date in the following order of
priority: first, to the holder of the Class R Certificate and, second, to the
holders of the Class A Certificates. The distribution on the final
Distribution Date in connection with the purchase by the Servicer or the
Certificate Insurer of the assets of the Trust shall be in lieu of the
distribution otherwise required to be made on such Distribution Date in respect
of the Class A Certificates.
Any such termination of the Trust by the Servicer or the Certificate
Insurer will be effected only pursuant to a "qualified liquidation" as defined
in Code Section 860F(a)(4)(A) and the receipt by the Trustee of a satisfactory
opinion of counsel that such purchase will not (i) result in the imposition of
a tax on "prohibited transactions" under Code Section 860F(a)(1) or (ii) cause
the REMIC Pool to fail to qualify as a REMIC.
THE TRUSTEE
[Name of Trustee] will be the Trustee under the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement will provide that the Trustee
is entitled to certain fees and reimbursement of expenses. The Trustee may
resign at any time, in which event the Servicer will be obligated to appoint a
successor Trustee. The Servicer may also remove the Trustee if the Trustee
ceases to be eligible to continue as such under the Pooling and Servicing
Agreement or if the Trustee becomes insolvent. Upon becoming aware of such
circumstances, the Servicer will be obligated to appoint a successor Trustee.
Any resignation or removal of the Trustee and appointment of a successor
Trustee will not become effective until acceptance of the appointment by the
successor Trustee. See "The Pooling and Servicing Agreement -- The Trustee" in
the Prospectus.
THE MORTGAGE LOANS
GENERAL
The following is a brief description of certain terms of the Initial
Mortgage Loans based on the Initial Mortgage Loans and each Mortgage Loan Group
as of the date of this Prospectus Supplement. Certain mortgage loans may be
removed, prior to the Closing Date, from the Mortgage Pool and each Mortgage
Loan Group as described herein, in which case an amount equal to the aggregate
principal balances of such mortgage loans, but in no event more than $[ ]
will be added to the Purchase Account Deposit on the Closing Date. As a result,
S-49
51
the statistical information presented below regarding the Initial Mortgage
Loans and each Mortgage Loan Group set forth herein may vary in certain limited
respects from comparable information based on the actual composition of the
Mortgage Pool and each Mortgage Loan Group at the Closing Date. In addition,
the Mortgage Pool may vary from the description below due to a number of
factors, including prepayments and the purchase of Subsequent Mortgage Loans.
See "-- Conveyance of Subsequent Mortgage Loans" herein.
None of the Mortgage Loans is or will be insured or guaranteed by the
Sponsor, the Servicer, the Trustee, any Originator or any of their respective
affiliates, or by any governmental agency or other person.
A schedule of the Initial Mortgage Loans included in the Mortgage Loan
Group as of the Closing Date will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Certificates. A
Current Report on Form 8-K containing a description of the Mortgage Loans
included in the final Mortgage Pool as of the end of the Commitment Period in a
form comparable to the description of the Initial Mortgage Loans contained in
"ANNEX A: Description of the Mortgage Pool" will be filed with the Securities
and Exchange Commission within 15 days after the expiration of the Commitment
Period.
The term "Aggregate Principal Balance" means the aggregate of the
Principal Balances of the Mortgage Loans in the related Mortgage Loan Group or
in the Mortgage Pool, as specified. The information expressed as a percentage
of the Aggregate Principal Balance may not total 100% due to rounding. For a
more detailed description of certain characteristics of the Initial Mortgage
Loans in tabular form, see "ANNEX A: Description of the Mortgage Pool" at the
end of this Prospectus Supplement.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups (the "Fixed Rate Group" and the "Adjustable Rate Group," and each a
"Mortgage Loan Group") comprised of Mortgage Loans which bear fixed interest
rates only, in the case of the Fixed Rate Group, and Mortgage Loans which bear
adjustable interest rates only, in the case of the Adjustable Rate Group. The
Initial Mortgage Loans contained in the Fixed Rate Group are secured by first,
second and third liens with respect to the related Mortgaged Properties.
Substantially all of the Initial Mortgage Loans contained in the Adjustable
Rate Group are secured by first liens on the related Mortgaged Properties. The
Class A-1 Certificates represent undivided beneficial ownership interests in
all Mortgage Loans contained in the Fixed Rate Group, and the Class A-2
Certificates represent undivided beneficial ownership interests in all Mortgage
Loans contained in the Adjustable Rate Group.
Each Mortgage Loan will have the interest due thereon computed on an
actuarial basis. Each Mortgage Loan generally will provide for the payment of
a charge if the principal thereof is paid prior to its stated maturity date.
Such charge, however, will not be available to the Trust but will instead be
paid to the Servicer as additional servicing compensation. All of the Mortgage
Loans will be required to be covered by standard hazard insurance policies
insuring against certain losses.
In connection with the assignment of the Initial Mortgage Loans to the
Trust, the Sponsor will represent and warrant that, among other things, as of
the Cut-off Date, no Mortgage Loan had [ ] or more monthly payments
past due and not more than [ ]% of the Initial Mortgage Loans (by Cut-off
Date Principal Balance) had [ ] or more monthly payments past due.
However, investors in the Class A Certificates should be aware that only
approximately [ ]% and approximately [ ]% (by Cut-off Date Principal
Balance) of the Mortgage Loans in the Fixed Rate Group and the Adjustable Rate
Group, respectively, had a first monthly payment due on or before [ ]
and it was not possible for any Mortgage Loan other than such Mortgage Loans to
have had two or more monthly payments past due as of the Cut-off Date.
S-50
52
FIXED RATE GROUP
As of the Cut-off Date, the Aggregate Principal Balance of the Initial
Mortgage Loans in the Fixed Rate Group was $[ ]. Approximately
[ ]%, [ ]% and [ ]% of the related Mortgaged Properties (by Cut-off
Date Principal Balance) were single family residences, two- to four-family
residences and units in condominium developments, respectively, and no more
than [ ]% of the Mortgage Loans in the Fixed Rate Group (by Cut-off Date
Principal Balance) were secured by Mortgaged Properties located in any single
ZIP code.
The original weighted average Combined Loan-to-Value Ratio of all
Initial Mortgage Loans in the Fixed Rate Group was approximately [ ]%.
The maximum and average current balances as of the Cut-off Date were
approximately $[ ] and $ [ ], respectively. The average
appraised value of the Mortgaged Properties securing Mortgage Loans in the
Fixed Rate Group was approximately $[ ]. The "Combined
Loan-to-Value Ratio" is the sum of the outstanding principal balance (at
origination of each Mortgage Loan) of each mortgage loan, if any, senior to
such Mortgage Loan and the Original Principal Balance of such Mortgage Loan as
a percentage of the appraised valuation (or, if the Mortgage Loan was obtained
in connection with the purchase of the related Mortgaged Property, the purchase
price, if less) of the related Mortgaged Property determined by the Originator
at the time of origination of such Mortgage Loan. See "Risk Factors -- Risks
Associated with Underwriting Standards" herein.
The interest rates borne by the Initial Mortgage Loans (each, a
"Mortgage Interest Rate") in the Fixed Rate Group as of the Cut-off Date ranged
from approximately [ ]% per annum to [ ]% per annum. As of the Cut-off
Date, the weighted average Mortgage Interest Rate of the Initial Mortgage Loans
in the Fixed Rate Group was approximately [ ]% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in the Fixed Rate Group was approximately [ ] months. The
weighted average original term to maturity of the Initial Mortgage Loans in the
Fixed Rate Group was approximately [ ] months. As of the Cut-off Date, the
weighted average seasoning of the Initial Mortgage Loans in the Fixed Rate
Group was less than [ ] months.
Based on the Aggregate Principal Balance of the Mortgage Loans in the
Fixed Rate Group as of the Cut-off Date, approximately [ ]% of the Mortgage
Loans (by Cut-off Date Principal Balance) provide for the payment of principal
and interest on a level basis to fully amortize such Mortgage Loan over its
stated term. The remaining approximately [ ]% of the Mortgage Loans in the
Fixed Rate Group (by Cut-off Date Principal Balance) are Balloon Loans which
provide for regular monthly payments of principal and interest computed on the
basis of an amortization term of 360 months that is longer than the related
term to stated maturity, with a "balloon" payment due at stated maturity that
will be significantly larger than the monthly payments. The Mortgage Loans in
the Fixed Rate Group have original terms to stated maturity of up to 30 years.
ADJUSTABLE RATE GROUP
As of the Cut-off Date, the Aggregate Principal Balance of the Initial
Mortgage Loans in the Adjustable Rate Group was $[ ]. Approximately
[ ]%, [ ]% and [ ]% of the related Mortgaged Properties (by Cut-off
Date Principal Balance) were single family residences, two- to four-family
residences and units in condominium developments, respectively, and no more
than [ ]% of the Mortgage Loans in the Adjustable Rate Group (by Cut-off
Date Principal Balance) were secured by Mortgaged Properties located in any
single ZIP code.
The original weighted average Combined Loan-to-Value Ratio of all
Initial Mortgage Loans in the Adjustable Rate Group was approximately [ ]%.
The maximum and average current balances as of the Cut-off Date were
approximately $[ ] and $[ ], respectively. The average
appraised value of the Mortgaged Properties securing Initial Mortgage Loans in
the Adjustable Rate Group was approximately $[ ].
S-51
53
The Initial Mortgage Loans in the Adjustable Rate Group bear interest
rates that, after a period of approximately six months, two years, three years
or five years following the related date of origination, adjust based on either
(i) the London interbank offered rate for six-month United States Dollar
deposits (the "six-month LIBOR index") based on quotations of major banks as
published in The Wall Street Journal or (ii) the one-year CMT index. The
Initial Mortgage Loans in the Adjustable Rate Group that have interest rates
adjusted on the basis of the six-month LIBOR index have semi-annual interest
rate and payment adjustment frequencies after the applicable next interest rate
adjustment date. The Initial Mortgage Loans that have interest rates adjusted
on the basis of the one-year CMT index have annual interest rate and payment
adjustment frequencies after the applicable next interest rate adjustment date.
As of the Cut-off Date, not more than [ ]% of the Mortgage Loans in the
Adjustable Rate Group (by Cut-off Date Principal Balance) have Mortgage
Interest Rates that remain fixed for a period of approximately two years, three
years or five years from the related date of origination and thereafter are
adjustable semi-annually on the basis of the six-month LIBOR index, subject to
the initial and periodic rate adjustment caps described below. As of the
Cut-off Date, the weighted average remaining period to the next interest rate
adjustment date for the Initial Mortgage Loans was approximately [ ]
months.
Each Mortgage Loan in the Adjustable Rate Group that has its interest
rate adjusted on the basis of the six-month LIBOR index has a semi-annual rate
adjustment cap of [ ]% to [ ]% above the then current interest rate for
such Mortgage Loan. In addition, each Mortgage Loan in the Adjustable Rate
Group that has an initial rate adjustment date that is approximately two years,
three years or five years from its date of origination has or will have an
initial rate adjustment cap of [ ]% to [ ]% above the related initial
Mortgage Interest Rate. Each Mortgage Loan in the Adjustable Rate Group that
has its interest rate adjusted on the basis of the one-year CMT index has an
annual rate adjustment cap of [ ]% above the then current interest rate for
such Mortgage Loan. The Mortgage Loans in the Adjustable Rate Group have a
weighted average periodic rate adjustment cap as of the Cut-off Date equal to
approximately [ ]%. As of the Cut-off Date, the weighted average Mortgage
Interest Rate was approximately [ ]% per annum. The Mortgage Loans in the
Adjustable Rate Group had a weighted average gross margin as of the Cut-off
Date of approximately [ ]%. The initial gross margin for the Initial
Mortgage Loans in the Adjustable Rate Group ranged from approximately [ ]%
to [ ]%. The interest rates borne by the Mortgage Loans in the Adjustable
Rate Group as of the Cut-off Date ranged from approximately [ ]% per annum
to approximately [ ]% per annum. As of the Cut-off Date, the maximum rates
at which interest may accrue on the Mortgage Loans in the Adjustable Rate Group
(the "Maximum Rates") ranged from [ ]% per annum to [ ]% per annum. The
Mortgage Loans in the Adjustable Rate Group had a weighted average Maximum Rate
as of the Cut-off Date of approximately [ ]% per annum. As of the Cut-off
Date, the minimum rates at which interest may accrue on the Mortgage Loans in
the Adjustable Rate Group after their respective first interest adjustment
dates (the "Minimum Rates") ranged from approximately [ ]% per annum to
approximately [ ]% per annum. As of the Cut-off Date, the weighted average
Minimum Rate was approximately [ ]% per annum.
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans in the Adjustable Rate Group was approximately [ ] months.
The weighted average original term to maturity of the Initial Mortgage Loans in
the Adjustable Rate Group was approximately [ ] months. As of the Cut-off
Date, the weighted average seasoning of the Initial Mortgage Loans in the
Adjustable Rate Group was less than [ ] months.
Approximately [ ]% of the Initial Mortgage Loans in the Adjustable
Rate Group (by Cut-off Date Principal Balance) are Balloon Loans.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust to purchase the Subsequent Mortgage Loans on
a Subsequent Transfer Date for assignment to the Mortgage Pool is subject to
the following requirements: (i) no Subsequent Mortgage Loans may be 30 or more
days contractually delinquent as of the related Subsequent Cut-off Date, (ii)
the original term to stated maturity of such Subsequent Mortgage Loans may not
exceed 30 years; (iii) each Subsequent Mortgage Loan will have an interest rate
of not
S-52
54
less than [ ]% if it is a fixed rate Mortgage Loan and an initial interest
rate of not less than [ ]% if it is an adjustable rate Mortgage Loan, (iv)
such Subsequent Mortgage Loans will be underwritten or re-underwritten, as
applicable, in accordance with the criteria set forth under "The Originators --
Underwriting Guidelines -- Sponsor's Guidelines" in the Prospectus, and (v)
following the purchase of such Subsequent Mortgage Loans by the Trust, the
Mortgage Loans in the related Mortgage Loan Group (including the Subsequent
Mortgage Loans) (a) will have a weighted average Mortgage Interest Rate of at
least [ ]% with respect to the Mortgage Loans in the Fixed Rate Group and
an initial weighted average Mortgage Interest Rate of at least [ ]% with
respect to the Mortgage Loans in the Adjustable Rate Group; and (b) will each
have a principal balance not in excess of $500,000. See "Risk Factors -- The
Subsequent Mortgage Loans and the Purchase Account" herein. In addition, the
transfer of Subsequent Mortgage Loans to the Trust on any Subsequent Transfer
Date is subject to the approval of the Certificate Insurer.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of and, if purchased at other than par, the
yield to maturity on a Class A Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans in the related Mortgage Loan
Group, including for this purpose voluntary payment in full of Mortgage Loans
prior to stated maturity, liquidations due to defaults, casualties and
condemnations, and repurchases of Mortgage Loans by the Sponsor or the Servicer
or purchases of the Mortgage Loans by the Certificate Insurer. The actual rate
of principal prepayments on the Mortgage Loans may be influenced by a variety
of economic, tax, geographic, demographic, social, legal and other factors and
has fluctuated considerably in recent years. In addition, the rate of
principal prepayments may differ between the Mortgage Loan Groups at any time
because of specific factors relating to the Mortgage Loans in the particular
group, including, among other things, the age of the Mortgage Loans, the manner
in which the Mortgage Interest Rates on the Mortgage Loans are calculated, the
geographic locations of the Mortgaged Properties and the extent of the
Mortgagors' equity in such Mortgaged Properties, and changes in the Mortgagors'
housing needs, job transfers and unemployment.
Because all amounts available for distribution on each Class of Class A
Certificates after distributions in respect of the Class A Monthly Interest on
such Class, including all or a portion of the Excess Cash, are applied as
reductions of the Class A Certificate Principal Balance of the related Class,
the weighted average lives of such Certificates will be influenced by the
amount of Excess Cash so applied. Because Excess Cash attributable to the
overcollateralization feature is derived, in part, from interest collections on
the Mortgage Loans and will be applied to reduce the related Class A
Certificate Principal Balance of each Class, the aggregate payments in
reduction of the related Class A Certificate Principal Balance of each Class on
a Distribution Date will usually be greater than the aggregate amount of
principal payments (including prepayments) on the Mortgage Loans in the related
Mortgage Loan Group distributable on such Distribution Date. As a consequence,
Excess Cash available for distribution in reduction of the Class A Certificate
Principal Balance of a Class will increase in proportion to the outstanding
Class A Certificate Principal Balance of the related Class over time in the
absence of offsetting Realized Losses on the Mortgage Loans in the related
Mortgage Loan Group.
Excess Cash attributable to any Mortgage Loan Group will be distributed
on the related Class of Class A Certificates in reduction of the related Class
A Certificate Principal Balance of such Class on each Distribution Date to the
extent the then applicable Required Coverage Amount exceeds the Coverage Amount
for such Class on such Distribution Date and, after such Required Coverage
Amount equals the Coverage Amount for such Class, any remaining Excess Cash
attributable to such Mortgage Loan Group will be distributed on the other Class
of Class A Certificates until the Coverage Amount for that Class equals the
then applicable Required Coverage Amount for such Class (after application of
Excess Cash to cover any Class A Monthly Interest shortfall for such Class).
If a Class A Certificate is purchased at other than par, its yield to maturity
will be affected by the rate at which Excess Cash is distributed to Class A
Certificateholders. If the actual rate of Excess Cash distributions on the
Class A Certificates applied in reduction
S-53
55
of the related Class A Certificate Principal Balance is slower than the rate
anticipated by an investor who purchases a Class A Certificate 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 distributions applied in
reduction of the related Class A Certificate Principal Balance is faster than
the rate anticipated by an investor who purchases a Class A Certificate 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 Distribution 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 Interest Rates resulting from prepayment and
liquidations of Mortgage Loans, by adjustments of adjustable Mortgage Interest
Rates with respect to Mortgage Loans in the Adjustable Rate Group and by
adjustments in the Class A-2 Pass-Through Rate. The amount of Excess Cash
distributed to the Class A Certificateholders applied in reduction of the
related Class A Certificate Principal Balance on each Distribution Date will be
based on the Required Coverage Amount applicable to the related Class of Class
A Certificates, which may increase or decrease during the period such Class
remains outstanding. In this regard, the Pooling and Servicing Agreement
provides that on and after a Class A-2 Trigger Event Date, the Required
Coverage Amount in respect of the Class A-2 Certificates will be increased for
each Distribution Date thereafter; provided, however, that upon the
satisfaction of certain cash flow requirements in respect of the Class A-2
Certificates for a period of six consecutive Distribution Dates as specified in
the Pooling and Servicing Agreement, such Required Coverage Amount will return
to its original level. Any increase in the Required Coverage Amount for a
Class of Class A Certificates (including, in the case of the Class A-2
Certificates, an increase required on a Class A-2 Trigger Event Date) may
result in an accelerated amortization of such Class until such Required
Coverage Amount for such Class is reached. Conversely, any decrease in the
Required Coverage Amount for a Class of Class A Certificates will result in a
decelerated amortization of such Class until such Required Coverage Amount for
such Class is reached.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect
will be on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal prepayments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Class A Certificates will not be offset by a
subsequent like reduction (or increase) in the rate of principal prepayments.
Investors must make their own decisions as to the appropriate prepayment
assumptions to be used in deciding whether to purchase any of the Class A
Certificates. The Sponsor makes no representations or warranties as to the
rate of prepayment or the factors to be considered in connection with such
determination.
PROJECTED PREPAYMENTS AND YIELDS FOR THE CLASS A CERTIFICATES
If a Class A Certificate is purchased at other than par, its yield to
maturity will be affected by the rate of the payment of principal on the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group is slower
than the rate anticipated by an investor who purchases a Class A Certificate at
a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of payments on the Mortgage
Loans in the related Mortgage Loan Group is faster than the rate anticipated by
an investor who purchases a Class A Certificate at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield.
The rate of prepayments with respect to conventional fixed rate mortgage
loans has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates on fixed rate
mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rate
on such mortgage loans. However, the monthly payment on a home equity loan is
often smaller than the monthly payment on a purchase money first mortgage loan.
Consequently, a decrease in the interest rate payable results in a smaller
reduction in the amount of the monthly payment on the smaller balance loan.
Conversely, if prevailing interest rates rise appreciably above the interest
rate on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the
interest rates on such mortgage loans.
S-54
56
As is the case with conventional fixed rate mortgage loans, adjustable
rate mortgage loans may be subject to a greater rate of principal prepayments
in a declining interest rate environment. For example, if prevailing interest
rates fall significantly, adjustable rate mortgage loans are likely to be
subject to a higher prepayment rate than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable rate
mortgage loans to "lock in" a lower fixed interest rate. However, no assurance
can be given as to the expected level of prepayments on the Mortgage Loans. The
Sponsor does not have representative prepayment experience that may be referred
to for purposes of estimating the future prepayment experience of the Mortgage
Loans that are adjustable rate Mortgage Loans.
The "Final Scheduled Payment Dates" for the Class A Certificates are set
forth in the "Summary of Terms" herein. For the Class A-1A Certificates and
the Class A-1B Certificates, the Final Scheduled Payment Date is the latest
date on which the Certificate Principal Balances of the Class A Certificates
would be reduced to zero, assuming (i) no prepayments are received on the
Mortgage Loans; (ii) scheduled monthly payments on the Mortgage Loans are
timely received; and (iii) Excess Cash will be used to make accelerated
principal payments on the Class A Certificates. The Final Scheduled Payment
Date for the Class A-1C Certificates and the Class A-2 Certificates is the
Distribution Date two years and two months after the latest scheduled maturity
date of any Mortgage Loan in the Mortgage Pool. The weighted average lives of
the Class A Certificates are likely to be shorter, and the actual final
Distribution Date could occur significantly earlier than the Final Scheduled
Payment Dates because (i) prepayments are likely to occur which shall be
applied to the payment of the Class A Certificate Principal Balances of the
Class A Certificates, (ii) distributions of Excess Cash may occur on each
Distribution Date which will accelerate the amortization of the Class A
Certificates, (iii) the Servicer may cause a termination of the Trust when the
Aggregate Principal Balance of the Mortgage Loans in the Trust has declined to
less than 10% of the sum of the Pool Balance as of the Cut-off Date and the
Purchase Account Deposit and (iv) the Certificate Insurer may cause a
termination of the Trust on any Distribution Date on which Mortgage Loans with
aggregate Cut-off Date Principal Balances that equal or exceed 25% of the sum
of the Pool Balance as of the Cut-off Date and the Purchase Account Deposit
have become Liquidated Mortgage Loans.
The tables entitled "Weighted Average Lives" have been prepared on the
basis of the following assumptions, except as set forth in the respective
tables: (i) the Class A Certificates are purchased on [ ]; (ii)
the Trustee on behalf of the Trust purchases Subsequent Mortgage Loans equal to
the Purchase Account Deposit; (iii) the Mortgage Interest Rate for each
Mortgage Loan in the Adjustable Rate Group is adjusted on its next Mortgage
Interest Rate change date (and on subsequent Mortgage Interest Rate change
dates, if necessary) to equal the sum of the applicable Gross Margin plus the
applicable Index (such sum being subject to the assumed periodic adjustment
caps set forth below and, in the case of Mortgage Loans with a six-month LIBOR
index having initial Mortgage Interest Rates that remain fixed for a period of
approximately two, three or five years from the related dates of origination,
an assumed initial interest rate adjustment cap of [ ]%; (iv) scheduled
payments are timely received on the first day of each month commencing in [ ]
([ ] with respect to the Subsequent Mortgage Loans); (v)
distributions on the Class A Certificates are received, in cash, on the 15th
day of each month, commencing in [ ]; (vi) no defaults or
delinquencies in, or modifications, waivers or amendments respecting, the
payment by the Mortgagors of principal and interest on the Mortgage Loans
occur; (vii) prepayments represent payment in full of individual Mortgage Loans
and are received on the last day of each month, commencing in [ ]
([ ] with respect to the Subsequent Mortgage Loans) and
include 30 days' interest thereon; (viii) the Mortgage Loans prepay according
to the indicated Prepayment Scenario as described below; (ix) six-month LIBOR
is [ ]% for the first month and for each Interest Period thereafter
remains constant at [ ]%, one-year CMT is [ ]% for the first month
and for each Interest Period thereafter remains constant at [ ]% and, for
Interest Periods on or prior to the Distribution Date in [ ],
the Class A-2 Pass-Through Rate remains constant at [ ]% and for
each Interest Period thereafter remains constant at [ ]%; (x)
early termination occurs in the manner set forth in the respective tables; (xi)
no Class A-2 Trigger Event Date occurs; (xii) the initial overcollateralization
step down referred to herein under the caption "Description of the Certificates
- -- Overcollateralization Feature" occurs at the earliest possible time on a
single Distribution Date, whereas under the Pooling and Servicing Agreement
such initial step
S-55
57
down would occur over the succeeding 12 months; and (xiii) each Mortgage Loan
Group consists of Mortgage Loans having the following characteristics:
INITIAL FIXED RATE GROUP
Remaining Original
Remaining Term of Term of
Gross Mortgage Term to Amortization Amortization Amortization
Principal Balance Interest Rate Maturity (months) (months) (months) Method
----------------- ------------- ----------------- ------------ ------------ ---------
SUBSEQUENT FIXED RATE GROUP
Remaining Original
Remaining Term of Term of
Gross Mortgage Term to Amortization Amortization Amortization
Principal Balance Interest Rate Maturity (months) (months) (months) Method
----------------- ------------- ----------------- ------------ ------------ ---------
INITIAL ADJUSTABLE RATE GROUP
Months to
Maximum Next Original
Gross Mortgage Gross Mortgage Remaining Term Mortgage Term to Periodic
Principal Interest Interest of Amortization Gross Rate Maturity Amortization Adjustment
Balance Rate Rate (months) Margin Change (months) Method Cap Index
------- --------- ----------- ----------- ------- ---------- --------- --------- ------- -----
SUBSEQUENT ADJUSTABLE RATE GROUP
Months to
Maximum Next Original
Gross Mortgage Gross Mortgage Remaining Term Mortgage Term to Periodic
Principal Interest Interest of Amortization Gross Rate Maturity Amortization Adjustment
Balance Rate Rate (months) Margin Change (months) Method Cap Index
------- --------- ----------- ----------- ------- ---------- --------- --------- ------- ------
S-56
58
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security will be repaid to the investor. The weighted average lives of
the Class A Certificates will be influenced by the rate at which principal
payments on the Mortgage Loans in the related Mortgage Loan Group are made,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments and liquidations due to
default). The weighted average lives of the Class A Certificates also will be
influenced by the overcollateralization of the Class A-1 Certificates and the
Class A-2 Certificates because collections otherwise distributable to the Class
R Certificate are applied as principal prepayments to the Class A Certificates
until the outstanding Class A Certificate Principal Balance of the related
Class is less than the Aggregate Principal Balance of the related Mortgage Loan
Group by the Required Coverage Amount for such Mortgage Loan Group. These
prepayments have the effect of accelerating the amortization of the Class A
Certificates, thereby shortening their respective weighted average lives.
[Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. A common model (the "Constant Prepayment Rate"
or "CPR") represents an assumed annualized rate of prepayment relative to the
then outstanding principal balance on a pool of new mortgage loans. The Class
A Certificates are priced at various Home Equity Prepayment ("HEP")
assumptions. HEP assumes that a pool of loans prepays in the first month at a
constant prepayment rate that corresponds in CPR to one-tenth (1/10) the given
HEP percentage and increases by an additional one-tenth (1/10) each month
thereafter until the tenth month, whereupon it remains at a CPR equal to the
given HEP percentage.]
Neither [the CPR or HEP] 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 Trust. Variations in the actual
prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease each weighted average life shown in the following tables.
Such variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of [the CPR or HEP], as
applicable. The Sponsor is not aware of any existing statistics that provide a
reliable basis for prospective investors in the Class A Certificates to predict
the amount or timing of receipt of prepayments on the Mortgage Loans.
The Prepayment Scenarios are defined as follows:
Percentages of [HEP]
------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
Fixed Rate Group . . . . . . . . . . .
Adjustable Rate Group. . . . . . . . .
S-57
59
WEIGHTED AVERAGE LIVES
CLASS A-1A CERTIFICATES
Weighted Average Life Earliest Retirement
Prepayment Scenario (years) Date(1)
------------------- -------------------- ------------------
I
II
III
IV
V
- ----------------------------
(1) Assuming early termination of the Mortgage Loans when the Aggregate
Principal Balance of the Mortgage Loans declines to a level less than
or equal to 10% of the sum of the Aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date and the Purchase Account
Deposit.
CLASS A-1B CERTIFICATES
Weighted Average Life Earliest Retirement
Prepayment Scenario (years) Date(1)
------------------- -------------------- --------------------
I
II
III
IV
V
- ----------------------------
(1) Assuming early termination of the Mortgage Loans when the Aggregate
Principal Balance of the Mortgage Loans declines to a level less than
or equal to 10% of the sum of the Aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date and the Purchase Account
Deposit.
CLASS A-1C CERTIFICATES
Weighted Average Life Earliest Retirement
Prepayment Scenario (years) Date(1)
------------------- -------------------- ---------------------
I
II
III
IV
V
- ----------------------------
(1) Assuming early termination of the Mortgage Loans when the Aggregate
Principal Balance of the Mortgage Loans declines to a level less than
or equal to 10% of the sum of the Aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date and the Purchase Account
Deposit.
S-58
60
CLASS A-2 CERTIFICATES
Weighted Average Life Earliest Retirement
Prepayment Scenario (years) Date(1)
------------------- -------------------- ---------------------
I
II
III
IV
V
- ----------------------------
(1) Assuming early termination of the Mortgage Loans when the Aggregate
Principal Balance of the Mortgage Loans declines to a level less than
or equal to 10% of the sum of the Aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date and the Purchase Account
Deposit.
ORIGINATION AND SERVICING OF THE MORTGAGE LOANS
THE ORIGINATORS
Approximately [ ]% of the Initial Mortgage Loans (by Cut-off
Date Principal Balance) were originated by one or more affiliates of the
Sponsor (the "Affiliated Originators"). The remaining [ ]% of the Initial
Mortgage Loans were originated by entities not affiliated with the Sponsor (the
"Unaffiliated Originators" and, together with the Affiliated Originators, the
"Originators") and acquired by the Sponsor in arm's-length transactions.
Certain of the Subsequent Mortgage Loans may be originated by Unaffiliated
Originators, but the Sponsor does not anticipate that the proportion of
Mortgage Loans in the final Mortgage Pool (after inclusion of any Subsequent
Mortgage Loans) that have been originated by Unaffiliated Originators will be
materially different from the proportion of Initial Mortgage Loans originated
by Unaffiliated Originators. See "The Originators" in the Prospectus.
UNDERWRITING OF MORTGAGE LOANS
Mortgage Loans originated by Affiliated Originators have been
underwritten in accordance with standard guidelines (the "Sponsor's
Guidelines") developed by the Sponsor and the related Affiliated Originator for
customary application in the Affiliated Originator's loan origination
activities, as described in the Prospectus. Mortgage Loans originated by
Unaffiliated Originators are re-underwritten in accordance with applicable
Sponsor's Guidelines. See "The Originators -- Underwriting Guidelines" in the
Prospectus.
MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
Certain information concerning the delinquency and foreclosure
experience, for the three year period ended [ ], with respect to
home equity mortgage loans serviced by affiliates of the Sponsor, including
home equity loans pooled and sold in the secondary market, is set forth under
the caption "The Sponsor -- Mortgage Loan Delinquency and Foreclosure
Experience" in the Prospectus. Such information includes delinquency and
foreclosure experience with respect to home equity mortgage loans originated by
Affiliated Originators or purchased by the Sponsor and, in each case, serviced
by or on behalf of the Sponsor as of the end of the period indicated.
S-59
61
The following table sets forth delinquency and foreclosure experience
of home equity loans included in the Sponsor's servicing portfolio for the
[ ] months ended [ ].
[ ] months ended
[ ]
-----------------------------
Percentage of dollar amount of delinquent loans to loans serviced
(period end)(1)(2)(3)
One month . . . . . . . . . . . . . . . . . . . . . . . . .
Two months . . . . . . . . . . . . . . . . . . . . . . . . .
Three or more months:
Not foreclosed(4) . . . . . . . . . . . . . . . . . . .
Foreclosed(5) . . . . . . . . . . . . . . . . . . . . .
Percentage of dollar amount of loans foreclosed to loans serviced
(period end)(2)(3) . . . . . . . . . . . . . . . . . . . . . . .
Number of loans foreclosed . . . . . . . . . . . . . . . . . . .
Principal amount at time of foreclosure of foreclosed loans
(in thousands)(3) . . . . . . . . . . . . . . . . . . . . . . .
Losses on foreclosed loans originated or purchased and serviced (in
thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . .
-------------------------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the
basis of the total dollar amount of home equity mortgage loans
originated by Affiliated Originators or purchased by the Sponsor
and, in each case, serviced by or on behalf of the Sponsor as of
the end of the period indicated. The total outstanding principal
balance of such loans serviced by the Sponsor as of the end of the
period indicated includes many loans that will not have been
outstanding long enough to give rise to the indicated periods of
delinquency.
(3) Does not include loans for which only the servicing rights were
purchased by the Company.
(4) Loans for which foreclosure proceedings have not concluded.
(5) Properties acquired by the Sponsor or private investors following
foreclosure sale.
Affiliates of the Sponsor commenced the pooling and securitization of
home equity loans for sale in the secondary market in June 1992 and the Sponsor
has been pooling and securitizing home equity loans for sale in the secondary
market on a quarterly basis since December 1993. During the period from June
1992 through [ ], the percentage of properties that secured home equity loans
pooled and sold in the secondary market which were acquired by foreclosure to
total home equity loans pooled and sold in the secondary market by the Sponsor
or its affiliates during such period based on the principal balance of the
foreclosed loans at foreclosure and the aggregate principal balances of such
pooled and sold home equity loans, was approximately [ ]%. The number of
such home equity loans foreclosed during such period ending [ ]
was [ ]; the aggregate outstanding principal balances of such foreclosed loans
at foreclosure was approximately $[ ] million. The number of such foreclosed
loans which became liquidated loans during such period was [ ]; the aggregate
outstanding principal balances at foreclosure of such liquidated loans were
approximately $[ ] million; and losses realized on such liquidated loans
totaled approximately $[ ]. The foregoing information excludes any
gains realized on such foreclosed properties during such period ending [ ].
In addition, because foreclosures and losses typically occur months or years
after a loan is originated, data relating to delinquencies, foreclosures and
losses as a percentage of the current portfolio can understate the risk of
future delinquencies, foreclosures and losses.
There is no assurance that the delinquency, foreclosure and loss
experience with respect to any of the Mortgage Loans or with respect to either
Mortgage Loan Group will be comparable to the experience reflected above or in
the Prospectus. Because certain Mortgage Loans may have been underwritten
pursuant to standards
S-60
62
that rely primarily on the value of the related Mortgaged Properties rather
than the creditworthiness of the related Mortgagor, the actual rates of
delinquencies, foreclosures and losses on such Mortgage Loans could be higher
than those historically experienced in the mortgage lending industry in
general, particularly in periods during which the values of the related
Mortgaged Properties decline. In addition, the rate of delinquencies,
foreclosures and losses with respect to the Mortgage Loans will also be
affected by, among other things, interest rate fluctuations and general and
regional economic conditions. See "Risk Factors -- Nature of the Security for
Mortgage Loans" and "The Originators -- Underwriting Guidelines" in the
Prospectus.
SERVICING OF MORTGAGE LOANS
The Servicer will service the Mortgage Loans in accordance with the
provisions of the Pooling and Servicing Agreement and the policies, procedures
and practices customarily employed by the Servicer in servicing other
comparable mortgage loans. Consistent with the foregoing, the Servicer may, in
its discretion (a) waive any assumption fees, late payment charges, charges for
checks returned for insufficient funds, or other fees which may be collected in
the ordinary course of servicing a Mortgage Loan, (b) arrange a schedule for
the payment of delinquent payments on the related Mortgage Loan, subject to
conditions set forth in the Pooling and 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.
In any case in which the Servicer becomes aware that a Mortgaged
Property has been or is about to be conveyed by the related Mortgagor, the
Pooling and Servicing Agreement will require the Servicer to enforce any
due-on-sale clause contained in the related Mortgage Note or mortgage, to the
extent permitted by the related Mortgage Note and mortgage and applicable law
or regulation, but only to the extent such enforcement will not adversely
affect or jeopardize coverage under any related insurance policy or result in
legal action by the Mortgagor. Additionally, the Servicer may, with the prior
written consent of the Certificate Insurer, enter into an assumption and
modification agreement with the person to whom such Mortgaged Property has been
or is about to be conveyed, pursuant to which such person becomes liable under
the related promissory note and, to the extent permitted by applicable law, the
Mortgagor remains liable thereon or, if such person satisfies the Servicer's
then current underwriting standards for mortgage loans similar to the Mortgage
Loans and the Servicer finds it appropriate, the Mortgagor is released from
liability thereon. Any fees collected by the Servicer for entering into an
assumption or substitution of liability agreement will be retained by the
Servicer as additional servicing compensation. See "Certain Legal Aspects of
the Mortgage Loans and Related Matters -- Enforceability of Due-on-Sale
Clauses" in the Prospectus.
The Servicer, acting as agent for the Trust, 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, thereby removing such Mortgage Loan from the Trust. If, notwithstanding
the foregoing, the placement of a lien or liens of equal or higher priority to
that of the lien securing the related Mortgage Loan is consented to by the
Servicer, the Pooling and Servicing Agreement will require that the Servicer
purchase such Mortgage Loan at the applicable Purchase Price.
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, the presence of an acceptable
party to assume a Mortgage Loan 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 a monthly billing statement ten days prior to the
monthly payment due date. 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 Pooling and
Servicing Agreement) if a Monthly Payment on a Mortgage Loan is not
S-61
63
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.
As a general matter, if efforts to obtain payment have not been
successful shortly after the due date of the next subsequently scheduled
installment, a pre-foreclosure notice will be sent to the Mortgagor providing
30 days' notice of impending foreclosure action. During the 30 day notice
period, collection efforts continue. However, if no substantial progress has
been made in obtaining delinquent monies from the Mortgagor, foreclosure
proceedings will be commenced.
Regulations and practices regarding foreclosure vary greatly from state
to state. Generally, the Servicer will have commenced foreclosure proceedings
prior to the time when a loan is 90 days delinquent. If the Servicer determines
that purchasing a property securing a mortgage loan will minimize the loss
associated with such defaulted loan, the Servicer may bid at the foreclosure
sale for such property or accept a deed in lieu of foreclosure. After the
Servicer acquires title to a mortgaged property by foreclosure or deed in lieu
of foreclosure, a real estate broker is selected to list and advertise the
property.
Servicing and collection practices may change over time in accordance
with, among other things, the Servicer's business judgment, changes in
portfolio and applicable laws and regulations.
Due to changes in interest rates, property appreciation, loan seasoning
and other factors, borrowers with mortgage loans serviced by the Servicer may
be the subject of solicitations from competitors of the Servicer to refinance
their loans (including the Mortgage Loans). In order to maintain an ongoing
relationship with such borrowers, the Servicer or an Affiliated Originator will
usually solicit the refinancing of such loans pursuant to criteria that are
applied to all loans then being serviced by the Servicer and not pursuant to
criteria that would specifically target the Mortgage Loans. Such solicitations
by the Servicer or an Affiliated Originator may include certain incentives
(such as reduced origination or closing costs or pre-approved applications).
Any such loans actually refinanced by the Servicer or an Affiliated Originator
will generate fee income to the refinancing lender. Any refinancing of the
Mortgage Loans, whether such refinancing is effected by the Servicer, an
Affiliated Originator or a competitor, will affect the rate of prepayment of
the Mortgage Loans.
SUB-SERVICING
The Servicer intends to enter into sub-servicing agreements with other
mortgage servicing institutions, which may include affiliates of the Sponsor,
meeting the requirements set forth in the Pooling and Servicing Agreement
(each, a "Sub-Servicer"), to service certain Mortgage Loans on behalf of the
Servicer. Any such sub-servicing arrangements will provide that the
Sub-Servicer will service the Mortgage Loans specified therein in accordance
with the provisions and requirements of the Pooling and Servicing Agreement,
but will not relieve the Servicer of any liability associated with servicing
the Mortgage Loans. Compensation for the services of the Sub-Servicer will be
paid by the Servicer.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default and as to which no satisfactory arrangements can be made for the
collection of delinquent payments; 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 need not
cause the Trust to acquire title to such Mortgaged Property in a foreclosure or
similar proceeding. 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,
S-62
64
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 the event that the Trust acquires any Mortgaged Property in
connection with a default or imminent default on a Mortgage Loan, such
Mortgaged Property will be disposed of by or on behalf of the Trust within two
years after its acquisition by the Trust, unless (i) the Servicer, on behalf of
the Trust, has applied for and received an extension of such two-year period
pursuant to the applicable Code provisions, in which case the Servicer shall
sell such Mortgage Property within the applicable extension period or (ii) at
the request of the Servicer, the Trustee shall have received a satisfactory
opinion of counsel to the effect that the holding by the Trust of such
Mortgaged Property more than two years after its acquisition will not result in
a tax on prohibited transactions imposed by the Code, otherwise subject the
REMIC Pool to tax or cause it to fail to qualify as a REMIC at any time any
Certificates are outstanding. The Servicer will further ensure that the
Mortgaged Property is administered so that it constitutes "foreclosure
property" as defined in the Code, that the sale of such Mortgaged Property does
not result in the receipt by the REMIC Pool of any income from non-permitted
assets as described in the Code and that the REMIC Pool does not derive any
"net income from foreclosure property" as defined in the Code.
HAZARD INSURANCE
Each Mortgage Loan that is secured by a first- or second-lien mortgage
or deed of trust, as applicable, on the related Mortgaged Property requires the
Mortgagor to maintain a hazard insurance policy for the corresponding Mortgaged
Property. Hazard insurance policies generally insure against loss by fire and
by hazards included within the term "extended coverage" for the term of the
corresponding Mortgage Loan. Upon acquisition by the Sponsor of each Mortgage
Loan, the Sponsor will have confirmed the existence of such hazard insurance
and required that it be named as a joint loss-payee on the policy. In the
event that the Mortgagor did not obtain such hazard insurance prior to the
close of escrow, the Originator obtains a hazard insurance policy on behalf of
the borrower and deducts the cost of such policy from the net funds paid to the
borrower. However, if the Mortgagor obtains the necessary insurance within 30
days from the close of escrow, the Originator will refund a prorated portion of
the cost of such Originator-obtained insurance to the Mortgagor. Such
Originator-obtained insurance insures only against loss by fire.
When a Mortgage Loan that is originated in California is secured by a
second or third priority deed of trust on the related Mortgaged Property, the
Originator will generally attempt to obtain, on the Mortgagor's behalf, a
policy of contingent dual insurance (a "CDI Policy") which insures the
Mortgaged Property against loss by fire in an amount equal to the original
principal amount of the Mortgage Loan, naming the Originator as joint
loss-payee. Any transfer of the related Mortgage Loan will include an
assignment of the benefits of such CDI Policy. The entire premium for such CDI
Policy is deducted from the net funds paid to the Mortgagor. In the event that
the principal amount of such Mortgage Loan exceeds $100,000, the Mortgagor must
provide additional hazard insurance to cover such amounts in excess thereof.
In the event that the Mortgagor declines to obtain a CDI Policy, he may provide
an endorsement of an existing hazard insurance policy or obtain new hazard
insurance covering the full amount of the Mortgage Loan. In addition, if a CDI
Policy is obtained on behalf of a Mortgagor who shows proof of the necessary
insurance within 30 days after the close of escrow, the Originator will refund
the cost of such CDI Policy to the Mortgagor. CDI Policies are generally not
obtained with respect to loans secured by Mortgaged Properties located outside
of California.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
hazards such as fire, lightning, explosion and smoke. Other hazards may be
covered if specified in the policy. Although the policies are underwritten by
different insurers and therefore do not contain identical terms and conditions,
generally such policies do not cover physical damage resulting from the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, pollution, wet or dry rot, vermin, rodents,
insects or domestic animals, theft and, in certain cases, vandalism. The
foregoing list is merely indicative of certain
S-63
65
kinds of uninsured risks and is not intended to be all-inclusive. The
existence of a hazard insurance policy is verified upon origination of any
Mortgage Loan meeting the criteria set forth above and the Servicer will
maintain a record and monitor scheduled expirations of the related coverage,
except with respect to policies that have no stated scheduled expiration. In
the event the Servicer is made aware of any such expiration or cancellation,
the Servicer will generally force-place hazard insurance covering loss by fire
in an amount equal to 110% of the Principal Balance of the related Mortgage
Loan.
The Servicer will be required under the Pooling and Servicing Agreement
to maintain on property acquired in foreclosure, or by deed in lieu of
foreclosure, hazard insurance with extended coverage in an amount which is at
least equal to the lesser of (a) the maximum insurable value of the
improvements which are a part of the Mortgaged Property or (b) the combined
Principal Balance of such Mortgage Loan and the principal balance of each
senior mortgage loan plus accrued interest and estimated Liquidation Expenses.
The Pooling and Servicing Agreement will provide that the Servicer may satisfy
this obligation by maintaining a blanket policy insuring against hazard losses
on the Mortgage Loans issued by an insurer acceptable to the Rating Agencies
and the Certificate Insurer. If such blanket policy contains a deductible
clause, the Servicer will deposit in the Collection Account in respect of the
related Distribution Date amounts which would have been deposited therein but
for such clause. Generally, the Servicer will maintain no other policies of
insurance on the Mortgage Loans or the Mortgaged Properties.
SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
The Servicing Fee will be the primary compensation to be paid to the
Servicer in respect of its servicing activities 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 will equal one-twelfth (1/12) of the product of (a) the applicable
Servicing Fee Rate and (b) the Aggregate Principal Balance of the Mortgage
Loans in the related Mortgage Loan Group at the beginning of such Collection
Period. The "Servicing Fee Rate" for each Mortgage Loan Group will be [ ]%
for each Collection Period. In addition, the Servicer will retain the
benefit, if any, from any investment of funds in the Collection Account and the
Certificate Account. Assumption fees, late payment charges, prepayment
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.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities as Servicer under
the Pooling and Servicing Agreement, including, among other things, the payment
of fees for any Sub-Servicers. In addition, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with Liquidated
Mortgage Loans and the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related insurance proceeds or Net Liquidation Proceeds. See "Description of
the Certificates -- Monthly Advances; Servicing Advances; Compensating Interest
and Interest Shortfalls" herein.
CERTAIN MATTERS REGARDING SERVICER'S SERVICING OBLIGATIONS
The Pooling and Servicing Agreement will provide that the Servicer may
not resign from its obligations and duties as the Servicer thereunder, except
upon determination 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 Pooling and Servicing Agreement. No such resignation will
become effective until the Trustee or a successor servicer has assumed the
servicing obligations and duties of the Servicer under the Pooling and
Servicing Agreement.
The Pooling and Servicing Agreement will also provide that neither the
Servicer, nor any of its directors, officers, employees or agents, will be
liable to the Trustee, the Trust or the Certificateholders for any action taken
S-64
66
or for refraining from the taking of any action by the Servicer pursuant to the
Pooling and 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 Pooling and 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 Pooling and Servicing Agreement and which in its opinion may
involve it in any expense or liability.
The Pooling and Servicing Agreement will provide that any corporation or
other entity (a) into which the Servicer may be merged or consolidated, (b)
which may result from any merger, conversion, or consolidation to which the
Servicer shall be a party, or (c) which 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 Pooling and 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 Pooling
and Servicing Agreement; provided, however, that if the Servicer in any of the
foregoing cases is not the surviving entity, the surviving entity shall execute
an agreement of assumption to perform every obligation of the Servicer
thereunder.
THE CERTIFICATE INSURANCE POLICY
AND THE CERTIFICATE INSURER
THE CERTIFICATE INSURER
The information set forth in this section has been provided by [ ]
(the "Certificate Insurer"). No representation is made by the Sponsor or any
of its affiliates as to the accuracy or completeness of any such information.
[The Certificate Insurer is a monoline insurance company incorporated in
[ ] under the laws of the State of New York. The Certificate Insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia and Puerto Rico.]
[The Certificate 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
Certificate 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 Certificate Insurer insures both newly
issued securities sold in the primary market and outstanding securities sold in
the secondary market that satisfy the Certificate Insurer's underwriting
criteria.]
[The Certificate Insurer is a wholly owned subsidiary of [ ]
("[ ]"), a New York Stock Exchange listed company. Major shareholders of
[ ] include [ ], [ ]
and [ ]. No shareholder of Holdings is
obligated to pay any debt of the Certificate Insurer or any claim under any
insurance policy issued by the Certificate Insurer or to make any additional
contribution to the capital of the Certificate Insurer.]
S-65
67
[The principal executive offices of the Certificate Insurer are located
at [ ], and its telephone number at
that location is [ ].]
[Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by the
Certificate Insurer or any of its domestic operating insurance company
subsidiaries are 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 Certificate
Insurer reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by the Certificate Insurer as a risk management device and to comply
with certain statutory and rating agency requirements; it does not alter or
limit the Certificate Insurer's obligations under any financial guaranty
insurance policy.]
[Ratings of Claims-Paying Ability. The Certificate Insurer's
claims-paying ability is rated "[ ]" by [ ] and "[ ]" by
[ ]. 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 tables sets forth the capitalization of
the Certificate Insurer and its wholly owned subsidiaries on the basis of
generally accepted accounting principles as of [ ]
(in thousands):
[AS OF DATE]
------------
(Unaudited)
Unearned Premium Reserve (net of prepaid reinsurance premiums) . . . . . . . . . .
Shareholder's Equity:
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized Loss on Investments (net of deferred income taxes) . . . . . . . . . .
Accumulated Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Shareholder's Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Unearned Premium Reserve and Shareholder's Equity . . . . . . . . . . . . .
For further information concerning the Certificate Insurer, see the
consolidated financial statements of the Certificate Insurer and its
subsidiaries, and the notes thereto, incorporated by reference herein. Copies
of the statutory quarterly and annual statements filed with the State of New
York Insurance Department by the Certificate 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 Certificate Insurer and its subsidiaries for the
year ended [ ], included as an exhibit to the
Annual Report on Form 10-K for the year ended [ ], and the
unaudited financial statements of the Certificate Insurer and its subsidiaries
for the three month period ended [ ], included as an
exhibit to the Quarterly Report on Form 10-Q for the period ended [ ],
each of which has been filed with the Securities and Exchange Commission by
[ ], are hereby incorporated by reference in this Prospectus Supplement.
All financial statements of the Certificate Insurer included in documents filed
by [ ] pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the
Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing of such documents.]
S-66
68
[Such consolidated financial statements of the Certificate Insurer and
its subsidiaries have been prepared on the basis of generally accepted
accounting principles. The New York State Insurance Department recognizes only
statutory accounting practices for determining and reporting the financial
conditions and results of operations of an insurance company, for determining
solvency under the New York Insurance Law, and for determining whether its
financial condition warrants the payment of a dividend to its stockholders. No
consideration is given by the New York State Insurance Department to financial
statements prepared in accordance with generally accepted principles in making
such determinations.]
[Insurance Regulation. The Certificate 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 Certificate
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 Certificate 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
Certificate Insurer, regulate, among other things, permitted investments,
payment of dividends, transactions with affiliates, mergers, consolidations,
acquisitions or sales of assets and incurrence of liabilities for borrowings.]
THE CERTIFICATE INSURANCE POLICY
The Sponsor will obtain the Certificate Insurance Policy, issued by the
Certificate Insurer, in favor of the holders of the Class A Certificates.
Under the Certificate Insurance Policy, the Certificate Insurer shall
unconditionally and irrevocably guaranty to the Trustee for the benefit of each
Class A Certificateholder the full and complete payment of Class A Monthly
Interest and any Coverage Deficit in respect of the related Class or subclass,
as applicable, of Class A Certificates for the related Distribution Date. The
Certificate Insurance Policy does not insure final payment of the Class A
Certificates on any specific Distribution Date and does not cover Interest
Shortfalls.
The Certificate Insurer is required to pay Insured Amounts to the
Trustee as paying agent following Receipt (as defined below) by the Certificate
Insurer of the appropriate notice for payment on the later to occur of (a)
12:00 noon, New York City time, on the second Business Day following Receipt of
such notice for payment and (b) 12:00 noon, New York City time, on the related
Distribution Date.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made
under the Certificate Insurance Policy, the Certificate Insurer shall cause
such payment to be made on the latter 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 Certificate Insurer from the
Trustee of (A) a certified copy of the order (the "Order") of the court or
other governmental body which exercised jurisdiction to the effect that the
relevant Certificateholders are required to return principal or interest paid
with respect to such Certificates during the term of the Certificate Insurance
Policy because such payments were avoidable as preference payments under
applicable bankruptcy law, (B) a certificate of each relevant Certificateholder
that the Order has been entered and is not subject to any stay and (C) an
assignment duly executed and delivered by each relevant Certificateholder, in
such form as is reasonably required by the Certificate Insurer and provided to
the relevant Certificateholder by the Certificate Insurer, irrevocably
assigning to the Certificate Insurer all rights and claims of the
Certificateholder relating to or arising under the relevant Certificates held
by such Certificateholder against the debtor that made such preference payment
or otherwise with respect to such preference payment or (ii) the date of
Receipt by the Certificate Insurer from the Trustee of the items referred to in
clauses (A), (B) and (C) of (i) above if, at least four Business Days prior to
such date of Receipt, the Certificate Insurer shall have Received written
S-67
69
notice from the 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 trustee in bankruptcy named in
the Order and not to the Trustee or any Certificateholder directly (unless such
Certificateholder has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order in which such
case payment shall be disbursed to the Trustee for distribution to such
Certificateholder upon proof of such payment reasonably satisfactory to the
Certificate Insurer). In connection with the foregoing, the Certificate
Insurer shall have certain rights of subrogation, as described in the Pooling
and Servicing Agreement.
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, mean actual delivery to the Certificate Insurer and to the
Certificate Insurer's fiscal agent, if any, prior to 12:00 noon, New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 noon, New York City time, shall be deemed to be Received on the
next succeeding Business Day. If any notice or certificate given under the
Certificate Insurance Policy by the 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 Certificate Insurer or its fiscal agent shall promptly so
advise the Trustee and the Trustee may submit an amended notice.
Under the Certificate 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 are authorized or obligated by law or
executive order to be closed.
The Certificate Insurer has the right to terminate the Trust if Mortgage
Loans with aggregate original Principal Balances that equal or exceed 25% of
the sum of the Cut-off Date Pool Balance and the Purchase Account Deposit have
become Liquidated Mortgage Loans. See "Description of the Certificates --
Termination; Retirement of the Certificates" herein.
The Certificate Insurance Policy is non-cancelable.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The Certificate Insurer's obligation under the Certificate Insurance
Policy will be discharged to the extent that funds are disbursed by the
Certificate Insurer in accordance with the Certificate Insurance Policy,
whether or not such funds are properly distributed by the Trustee.
The Certificate Insurance Policy does not guarantee to the holders of
either Class of Class A Certificates any specific rate of prepayments of
principal of the Mortgage Loans in the related Mortgage Loan Group. Payments of
principal on the Class A Certificates are covered only to the extent of any
Coverage Deficit on a Distribution Date, but such coverage will result in
ultimate collection of the Certificate Principal Balance of each Class of Class
A Certificates.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer Default exists, the Certificate Insurer shall be deemed to
be the Certificateholders for all purposes (other than with respect to payment
on the Certificates), will be entitled to exercise all rights of the Class A
Certificateholders thereunder, without the consent of such Certificateholders,
and the Class A Certificateholders may exercise such rights only with the prior
written consent of the Certificate Insurer. In addition, the Certificate
Insurer will, as a third party beneficiary to the Pooling and Servicing
Agreement, have among others, the following rights: (i) the right to give
notices of breach or to terminate the rights and obligations of the Servicer
under the Pooling and Servicing Agreement in the event of an Event of Default
by the Servicer; (ii) the right to direct the actions of the Trustee during the
continuation of a Servicer default; (iii) the right to require the Sponsor to
repurchase Mortgage Loans for breach of representation and warranty or defect
in documentation; and (iv) the right to direct foreclosures upon
S-68
70
the failure of the Servicer to do so in accordance with the Pooling and
Servicing Agreement. The Certificate Insurer's consent will be required prior
to, among other things, (i) the appointment of any successor Trustee or
Servicer or (ii) any amendment to the Pooling and Servicing Agreement (which
consent will not be unreasonably withheld).
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Certificate Insurance Policy
is protection for credit risk and not for prepayment risk. A claim may not be
made under the Certificate Insurance Policy, in an attempt to guarantee or
insure that any particular rate of prepayment is experienced by the Trust.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust (other than the Purchase
Account and the Capitalized Interest Account), and the Trust (other than the
Purchase Account and the Capitalized Interest Account) will qualify, as a REMIC
for federal income tax purposes. The Class A-1A Certificates, Class A-1B
Certificates, Class A-1C Certificates and the Class A-2 Certificates will be
designated as regular interests in the REMIC, and the Class R Certificate will
be designated as the residual interest in the REMIC. See "Certain Federal
Income Tax Consequences" in the Prospectus.
The Class A Certificates generally will be treated as newly originated
debt instruments for federal income tax purposes. Beneficial owners of the
Class A Certificates will be required to report income on such Certificates in
accordance with the accrual method of accounting. [It is anticipated that the
Class A Certificates will be issued without original issue discount for federal
income tax purposes. However, it is possible that the Internal Revenue Service
could treat a portion of the additional interest which would become payable on
the Class A-2 Certificates after the Distribution Date in [ ]
as original issue discount.] Certificateholders are urged to consult their tax
advisors with respect to the tax consequences of holding the Class A
Certificates.
The Prepayment Assumption (as defined in the Prospectus) that is to be
used in determining whether any Class of Class A Certificates is issued with
original issue discount and the rate of accrual of original issue discount is
[ ]% of HEP (as defined under "Prepayment and Yield Considerations -- Projected
Prepayments and Yields for the Class A Certificates"). No representation is
made as to the actual rate at which the Mortgage Loans will prepay. See
"Certain Federal Income Tax Consequences -- Taxation of Regular Certificates"
in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and certain other retirement plans and arrangements, as well as on collective
investment funds and separate accounts in which such plans or arrangements are
invested (all of which are hereinafter referred to as a "Plan") and on persons
who are fiduciaries with respect to such Plans. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Class A Certificates will be
required to determine whether such an investment is permitted under the
governing Plan instruments and is prudent and appropriate for the Plan in view
of its overall investment policy and the composition and diversification of its
portfolio. In addition, ERISA and the Code prohibit certain transactions
involving the assets of a Plan and "disqualified persons" (within the meaning
of the Code) and certain specified relationships to the Plan. Therefore, a
Plan fiduciary considering an investment in the Class A Certificates should
also consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Class A Certificates should
consult with its counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of Class A Certificates.
S-69
71
The U.S. Department of Labor has granted to [ ]
an administrative exemption (Prohibited Transaction Exemption [ ], as
amended; Exemption Application No. [ ], [ ] Fed. Reg. [ ]
([ ])) (the "Exemption") from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption. The loans covered by the Exemption include mortgage loans such as
the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on
terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from Moody's Investors Service ("Moody's"),
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"
and, together with Moody's, the "Rating Agencies"), Duff & Phelps
Credit Rating Co. ("D&P") or Fitch Investors Service, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other
member of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
sponsor pursuant to the assignment of the mortgage loans to the trust
represents not more than the fair market value of such mortgage loans;
the sum of all payments made to and retained by the servicer and any
other servicer represents not more than reasonable compensation for
such person's services under the pooling and servicing agreement and
reimbursement of such person's reasonable expenses in connection
therewith;
(6) the Plan investing in the certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933,
as amended; and
(7) the trust must also meet the following requirements:
(i) the corpus of the trust must consist
solely of assets of the type that have been included in
other investment pools;
(ii) certificates in such investment pools
must have been rated in one of the three highest rating
categories of Moody's, S&P, D&P or Fitch for at least
one year prior the Plan's acquisition of certificates;
and
(iii) certificates evidencing interest 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 certificates.
S-70
72
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group (as defined herein);
(ii) such fiduciary (or its affiliate) is an obligor with respect to 5% or less
of the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed 25% of all of
the certificates of that class outstanding at the time of the acquisition; and
(iv) immediately after the acquisition, no more than 25% of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or served by the same entity. The Exemption does not apply to Plans
sponsored by the Sponsor, the Underwriters, the Trustee, the Servicer, the
Certificate Insurer, any obligor with respect to mortgage loans included in the
trust constituting more than 5% of the aggregate unamortized principal balance
of the assets in the trust, or any affiliate of such parties (the "Restricted
Group").
It is believed that the Exemption will apply to the acquisition and
holding of Class A Certificates by Plans and that all conditions of the
Exemptions as they relate to the acquisition and holding by Plans of Class A
Certificates other than those within the control of the investors will be met
after such time, provided that either the Subsequent Mortgage Loans are
identified as of the Closing Date or the Subsequent Mortgage Loans have been
acquired by the Trust on the Closing Date. The Sponsor expects to satisfy one
or both of these conditions.
USE OF PROCEEDS
The Sponsor intends to use the net proceeds to be received from the sale
of the Class A Certificates to pay off certain indebtedness incurred in
connection with the acquisition of the Initial Mortgage Loans, to fund the
Purchase Account and the Capitalized Interest Account and to pay other expenses
associated with the pooling of the Mortgage Loans and the issuance of the
Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. Accordingly, many institutions with legal
authority to invest in comparably rated securities may not be legally
authorized to invest in the Class A Certificates. No representation is made
herein as to whether the Class A Certificates constitute legal investments for
any entity under any applicable statute, law, rule, regulation or order.
Prospective purchasers are urged to consult with their counsel concerning the
status of the Class A Certificates as legal investments for such purchasers
prior to investing in the Class A Certificates.
UNDERWRITING
Under the terms set forth in the Underwriting Agreement and the related
Pricing Agreement, (collectively, the "Underwriting Agreement") for the sale of
the Class A Certificates, dated [ ], the Sponsor has agreed to
sell and [ ] (collectively, the "Underwriters")
have severally agreed to purchase the respective principal amounts of Class A
Certificates set forth opposite their respective names. In the Underwriting
Agreement, the Underwriters have agreed, subject to the terms and conditions
set forth therein, to purchase the entire principal amount of the Class A
Certificates.
S-71
73
Principal Principal Principal Principal
Amount of Amount of Amount of Amount of
Class A-1A Class A-1B Class A-1C Class A-2
Underwriter Certificates Certificates Certificates Certificates
----------- ------------ ------------ ------------ ------------
Total
The Underwriters have informed the Sponsor that they propose to offer
the Class A Certificates 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 Class A Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters. In connection with the sale of the Class A
Certificates, the Underwriters may be deemed to have received compensation from
the Sponsor in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Class
A Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Sponsor has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act.
The Sponsor has been advised by the Underwriters that the Underwriters
intend to make a market in the Class A Certificates, as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Class A Certificates 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
Class A Certificates.
[Each of the Underwriters has further represented that: (i) it has not
offered or sold and will not offer or sell, prior to the date six months after
their date of issuance, any Class A Certificates to persons in the United
Kingdom, except to persons whose activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes
of their businesses or otherwise in circumstances which have not resulted in
and will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the Class
A Certificates in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance of the
Class A Certificates to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exceptions) Order
1996 (as amended) or is a person to whom the document can lawfully be issued or
passed on.]
REPORT OF EXPERTS
[The consolidated balance sheets of the Certificate Insurer and its
subsidiaries as of [ ] and [ ] and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the [ ] years in the period ended [ ]
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of [ ], independent
accountants, given on the authority of that firm as experts in accounting and
auditing.]
S-72
74
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Sponsor by Andrews & Kurth L.L.P., Washington, D.C. [ ] will
act as counsel for the Underwriters. Certain legal matters relating to
the Certificate Insurer and the Certificate Insurance Policy will be passed
upon by inside counsel to the Certificate Insurer.
RATING OF THE CLASS A CERTIFICATES
It is a condition to the issuance of each of the Class A-1A
Certificates, the Class A-1B Certificates, the Class A-1C Certificates and the
Class A-2 Certificates that each shall be rated ["AAA"]["AA"] by [ ].
Explanations of the significance of such ratings may be obtained from
[ ] and [ ]. Each rating will be the view only of the
assigning Rating Agency.
The ratings on the Class A Certificates are based in substantial part on
the claims-paying ability of the Certificate Insurer. Any change in the
ratings of the Certificate Insurer by the Rating Agencies may result in a
change in the ratings of the Class A Certificates.
There is no assurance that any rating assigned to the Class A
Certificates 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 Class A
Certificates.
The ratings of the Class A Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities.
There can be no assurance as to whether any other rating agency will
rate the Class A Certificates, or, if one does, what rating will be assigned by
such other rating agency. A rating on the Class A Certificates by another
rating agency, if assigned at all, may be lower than the ratings assigned to
the Class A Certificates by [ ].
S-73
75
ANNEX A
DESCRIPTION OF THE MORTGAGE POOL
The following is a brief description of certain terms of the Initial
Mortgage Loans based on the Initial Mortgage Loans and each Mortgage Loan Group
as of the Cut-off Date. Certain mortgage loans may be removed, prior to the
Closing Date, from the Mortgage Pool and each Mortgage Loan Group as described
herein, in which case an amount equal to the aggregate principal balances of
such mortgage loans, but in no event more than $[ ], will be added to the
Purchase Account Deposit on the Closing Date. As a result, the statistical
information presented below regarding the Initial Mortgage Loans and each
Mortgage Loan Group as of the Cut-off Date may vary in certain limited respects
from comparable information based on the actual composition of the Mortgage
Pool and each Mortgage Loan Group at the Closing Date. In addition, the actual
Mortgage Pool may vary from the description below due to a number of factors,
including the purchase of Subsequent Mortgage Loans on the Closing Date and
prepayments of the Initial Mortgage Loans. See "-- Conveyance of Subsequent
Mortgage Loans" herein.
The term "Aggregate Principal Balance" means the aggregate Principal
Balance of the Mortgage Loans in the specified Mortgage Loan Group. The
information expressed as a percentage of the Aggregate Principal Balance may
not total 100% due to rounding.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups (the "Fixed Rate Group" and the "Adjustable Rate Group," and each a
"Mortgage Loan Group"). The Initial Mortgage Loans comprising the Fixed Rate
Group will be secured by first, second and third liens with respect to the
related Mortgaged Properties and will bear fixed rates of interest.
Substantially all of the Initial Mortgage Loans comprising the Adjustable Rate
Group will be secured by first liens on the related Mortgaged Properties and
will bear interest at rates that adjust based on the index described in the
related mortgage notes. The Class A-1 Certificates represent undivided
ownership interests in all Mortgage Loans contained in the Fixed Rate Group,
and the Class A-2 Certificates represent undivided ownership interests in all
Mortgage Loans contained in the Adjustable Rate Group.
A-1
76
FIXED RATE GROUP
TYPE OF MORTGAGED PROPERTY
[insert Table here]
FIXED RATE GROUP
OCCUPANCY STATUS
[insert Table here]
FIXED RATE GROUP
PRIORITY OF LIEN
[insert Table here]
FIXED RATE GROUP
TYPE OF LOAN BY AMORTIZATION METHOD
[insert Table here]
FIXED RATE GROUP
COMBINED LOAN-TO-VALUE RATIOS
[insert Table here]
A-2
77
FIXED RATE GROUP
ORIGINAL TERM TO MATURITY
[insert Table here]
FIXED RATE GROUP
REMAINING TERM TO MATURITY
[insert Table here]
FIXED RATE GROUP
RANGE OF MORTGAGE INTEREST RATES
[insert Table here]
FIXED RATE GROUP
CUT-OFF DATE PRINCIPAL BALANCE
[insert Table here]
FIXED RATE GROUP
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
[insert Table here]
A-3
78
FIXED RATE GROUP
ORIGINATORS OF THE MORTGAGE LOANS
[insert Table here]
ADJUSTABLE RATE GROUP
TYPE OF MORTGAGED PROPERTY
[insert Table here]
ADJUSTABLE RATE GROUP
OCCUPANCY STATUS
[insert Table here]
ADJUSTABLE RATE GROUP
PRIORITY OF LIEN
[insert Table here]
ADJUSTABLE RATE GROUP
TYPE OF LOAN BY AMORTIZATION METHOD
[insert Table here]
A-4
79
ADJUSTABLE RATE GROUP
COMBINED LOAN-TO-VALUE RATIOS
[insert Table here]
ADJUSTABLE RATE GROUP
ORIGINAL TERM TO MATURITY
[insert Table here]
ADJUSTABLE RATE GROUP
REMAINING TERM TO MATURITY
[insert Table here]
ADJUSTABLE RATE GROUP
RANGE OF MORTGAGE INTEREST RATES
AS OF CUT-OFF DATE
[insert Table here]
ADJUSTABLE RATE GROUP
CUT-OFF DATE PRINCIPAL BALANCE
[insert Table here]
A-5
80
ADJUSTABLE RATE GROUP
RANGE OF GROSS MARGINS
[insert Table here]
ADJUSTABLE RATE GROUP
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
[insert Table here]
ADJUSTABLE RATE GROUP
RANGE OF MINIMUM MORTGAGE RATES
[insert Table here]
ADJUSTABLE RATE GROUP
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
[insert Table here]
ADJUSTABLE RATE GROUP
ORIGINATORS OF THE MORTGAGE LOANS
[insert Table here]
A-6
81
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series 1996-[ ] (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 tradeable 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 procedure applicable
to U.S. corporate debt obligations and prior Mortgage Pass-Through Certificates
issues.
Secondary cross-market trading between participants of Cedel or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedel and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede, 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 DTC Participants.
Investors electing 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.
B-1
82
Trading between DTC Participants. Second market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
pass-through certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participant will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the 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 DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Participant and Euroclear Participant 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. Participants or Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
DTC Participant 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 DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
Cedel or Euroclear will instruct the Relevant Depositary, as appropriate, to
deliver the Global Securities to the DTC
B-2
83
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 DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing though 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 DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, 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 or Business in the
United States).
B-3
84
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 Certificate 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 Certificate 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 though 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.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
that is subject to United States federal income tax, regardless of the source
of its income. The term "Non-U.S. Person" means any person who is not a U.S.
Person. This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of Global Securities.
B-4
85
PROSPECTUS
DATED AUGUST 14, 1996
AAMES CAPITAL CORPORATION
SPONSOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates"), issuable in series (each, a "Series"), that may be sold from
time to time by Aames Capital Corporation (the "Sponsor") on terms determined at
the time of sale and described in the related Prospectus Supplement. Each Series
of Certificates will be issued by a separate trust fund (each, a "Trust"). The
primary assets of each Trust will consist of one or more pools (each, a
"Mortgage Pool") of mortgage loans (collectively, the "Mortgage Loans") secured
by first or junior liens on one- to four-family residential properties. The
Mortgage Loans will be acquired by the Sponsor, either directly or indirectly,
from one or more affiliated or unaffiliated entities (the "Originators") and
will be conveyed by the Sponsor to the Trust. A Trust may include, in addition
to the Mortgage Loans, insurance policies, cash accounts, letters of credit,
financial guaranty insurance policies, third party guarantees or other forms of
credit enhancement, to the extent described in the related Prospectus
Supplement.
Each Series of Certificates will be issued in one or more classes (each, a
"Class"). Each Class of Certificates will evidence a beneficial ownership
interest of a specified percentage (which may be 0%) or portion of future
interest payments and a specified percentage (which may be 0%) or portion of
future principal payments on the Mortgage Loans in the related Trust. A Series
of Certificates may include one or more senior Classes that receive certain
preferential treatment with respect to one or more other Classes of Certificates
of such Series. One or more Classes of Certificates of a Series may be entitled
to receive distributions of principal, interest or any combination thereof prior
to one or more other Classes of Certificates of such Series or after the
occurrence of specified events, or may be required to absorb one or more types
of losses prior to one or more other Classes of Certificates, in each case as
specified in the related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders") will be made
on certain dates specified in the related Prospectus Supplement (each, a
"Distribution Date"), which may occur at monthly, quarterly, semi-annually or at
such other intervals as are specified therein.
The Certificates will not represent an obligation of or interest in the
Sponsor or any affiliates thereof, the Servicer (as defined herein), any
Originator or any other person, except to the limited extent specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the obligations of the Sponsor with respect to a Series
of Certificates will be limited to those arising in respect of certain
representations and warranties on the Mortgage Loans. The principal obligations
of the Servicer named in the related Prospectus Supplement with respect to the
related Series of Certificates will be limited to obligations pursuant to
certain representations and warranties and to its contractual servicing
obligations, including any obligation it may have to advance delinquent payments
on the Mortgage Loans in the related Trust.
THE YIELD ON EACH CLASS OF CERTIFICATES MAY BE AFFECTED BY, AMONG OTHER
THINGS, THE RATE OF PAYMENT OF PRINCIPAL (INCLUDING PREPAYMENTS) OF THE MORTGAGE
LOANS IN THE RELATED TRUST AND THE TIMING OF RECEIPT OF SUCH PAYMENTS AS
DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. A TRUST MAY BE
SUBJECT TO EARLY TERMINATION UNDER THE CIRCUMSTANCES DESCRIBED HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT. SEE "RISK FACTORS -- YIELD, MATURITY AND
PREPAYMENT CONSIDERATIONS" AND "MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS"
HEREIN.
If specified in a Prospectus Supplement, one or more elections may be made
to treat each Trust or specified portions thereof as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes.
---------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING HEREIN UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 16 BEFORE PURCHASING
ANY CERTIFICATES.
---------------------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE SPONSOR,
THE SERVICER, ANY ORIGINATOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES EXCEPT AS SET FORTH HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED
OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE SPONSOR, THE
SERVICER, ANY ORIGINATOR, THE TRUSTEE
OR ANY OF THEIR RESPECTIVE AFFILIATES
OR BY ANY OTHER PERSON, EXCEPT AS
SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters as more fully described under
"Method of Distribution" herein and under "Underwriting" in the related
Prospectus Supplement. Prior to issuance, there will have been no market for the
Certificates of any Series, and there can be no assurance that a secondary
market for the Certificates will develop or, if it does develop, that it will
continue. THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF A SERIES OF
CERTIFICATES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
86
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO
DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Certificates to be
offered hereunder, among other things, will set forth with respect to such
Series of Certificates: (i) a description of the Class or Classes of such
Certificates; (ii) the rate of interest, the "Pass-Through Rate" or other
applicable rate (or the manner of determining such rate) and authorized
denominations of each Class of such Certificates; (iii) certain information
concerning the Mortgage Loans and insurance policies, cash accounts, letters of
credit, financial guaranty insurance policies, third party guarantees or other
forms of credit enhancement, if any, relating to one or more Mortgage Pools or
all or part of the related Certificates; (iv) the specified interest of each
Class of Certificates in, and manner and priority of, the distributions on the
Mortgage Loans; (v) information as to the nature and extent of subordination
with respect to such Series of Certificates, if any; (vi) the Distribution
Dates; (vii) information regarding the Servicer; (viii) the circumstances, if
any, under which each Trust may be subject to early termination; (ix) whether a
REMIC election will be made and the designation of the regular and residual
interest therein; and (x) additional information with respect to the plan of
distribution of such Certificates.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"), with the Securities and Exchange Commission
(the "Commission") with respect to the Certificates. The Registration Statement
and amendments thereof and the exhibits thereto may be inspected at the Public
Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Electronic filings
made through the Electronic Data Gathering Analysis and Retrieval System are
publicly available through the Commission's Web Site (http://www.sec.gov).
No person has been authorized to give any information or to make any
representation regarding the Series of Certificates referred to in the
accompanying Prospectus Supplement other than those contained or incorporated by
reference in this Prospectus and such Prospectus Supplement with respect to such
Series and, if given or made, such information or representations must not be
relied upon. This Prospectus and the accompanying Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Certificates offered hereby and thereby nor an offer of the
Certificates to any person in any state or other jurisdiction in which such
offer would be unlawful. The delivery of this Prospectus at any time does not
imply that information herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with the Commission by or on behalf of the Trust
referred to in the accompanying Prospectus Supplement pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), after the date of this Prospectus and prior to the termination
of any offering of Certificates issued by such Trust or relating to the terms or
collateral with respect to such offering shall be deemed to be incorporated by
reference in this Prospectus and to be part of this Prospectus from the date of
the filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for all purposes of this Prospectus to the extent that a statement
contained herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be
2
87
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Trustee on behalf of any Trust will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to the Corporate Trust Office of
the Trustee specified in the accompanying Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, no
information that relates to any Series of Certificates other than the Series
referred to in the accompanying Prospectus Supplement shall be deemed to be
incorporated by reference in this Prospectus.
REPORTS TO CERTIFICATEHOLDERS
Monthly and annual reports concerning any Certificates and the related
Trust will be sent by the Trustee to all Certificateholders. See "Description of
the Certificates -- Reports to Certificateholders" herein. If the Certificates
of a Series are to be issued in book-entry form, such reports will be sent to
the Certificateholder of record, and beneficial owners of such Certificates will
have to rely on the procedures described herein under "Description of the
Certificates -- Form of Certificates -- Book-Entry Registration" to obtain such
reports.
3
88
TABLE OF CONTENTS
CAPTION PAGE
- ---------------------------------------------------- ----
SUMMARY............................................. 5
RISK FACTORS........................................ 16
Limited Liquidity............................... 16
Limited Obligations............................. 16
Nature of the Security for Mortgage Loans....... 16
Legal Considerations............................ 18
Yield, Maturity and Prepayment Considerations... 19
The Status of the Mortgage Loans in the Event of
Bankruptcy of the Sponsor..................... 21
Limitations on Interest Payments and
Foreclosures.................................. 21
Certificate Rating.............................. 21
Book-Entry Registration......................... 22
THE TRUSTS.......................................... 22
The Mortgage Loans -- General................... 22
Forward Purchase Agreements; Purchase
Accounts...................................... 24
USE OF PROCEEDS..................................... 25
THE SPONSOR......................................... 25
General......................................... 25
Mortgage Loan Delinquency and Foreclosure
Experience.................................... 25
THE ORIGINATORS..................................... 26
Underwriting Guidelines......................... 26
Representations by Originators.................. 27
DESCRIPTION OF THE CERTIFICATES..................... 28
General......................................... 28
Form of Certificates............................ 29
Distributions on Certificates................... 30
Reports to Certificateholders................... 33
CREDIT ENHANCEMENT.................................. 34
Subordination................................... 35
Reserve Accounts................................ 35
Certificate Guaranty Insurance Policies......... 36
Mortgage Pool Insurance Policies................ 36
Special Hazard Insurance Policies............... 37
Bankruptcy Bonds................................ 37
Cross Support................................... 38
Other Insurance, Guarantees and Similar
Instruments or Agreements..................... 38
Maintenance of Credit Enhancement............... 38
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS....... 39
THE POOLING AND SERVICING AGREEMENT................. 41
Assignment of Mortgage Loans.................... 41
Payments on the Mortgage Loans.................. 43
Investment of Accounts.......................... 44
Permitted Investments........................... 44
Monthly Advances and Compensating Interest...... 45
Realization upon Defaulted Mortgage Loans....... 46
General Servicing Procedures.................... 46
Sub-Servicers................................... 47
Servicing and Other Compensation and Payment of
Expenses...................................... 47
Maintenance of Hazard Insurance................. 47
Enforcement of Due-on-Sale Clauses.............. 48
Voting.......................................... 48
CAPTION PAGE
- ---------------------------------------------------- ----
Amendments...................................... 49
Events of Default............................... 49
Rights Upon Events of Default................... 50
Termination; Optional Termination............... 50
Evidence as to Compliance....................... 51
Indemnification of Officers and Directors of the
Sponsor....................................... 51
The Trustee..................................... 51
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
RELATED MATTERS................................... 52
Nature of the Mortgage Loans.................... 52
Foreclosure/Repossession........................ 52
Rights of Redemption............................ 53
Certain Provisions of California Deeds of
Trust......................................... 54
Anti-deficiency Legislation and Other
Limitations on Lenders........................ 54
Enforceability of Due-on-Sale Clauses........... 55
Prepayment Charges.............................. 55
Applicability of Usury Laws..................... 56
Soldiers' and Sailors' Civil Relief Act......... 56
Environmental Considerations.................... 56
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............. 57
General......................................... 57
Tax Status as a Grantor Trust................... 58
Single Class of Senior Certificates............. 58
Multiple Classes of Senior Certificates......... 61
Sale or Exchange of a Senior Certificate........ 64
Non-U.S. Persons -- Senior Certificates......... 64
Information Reporting and Backup Withholding.... 64
Tax Status as a REMIC........................... 65
Tiered REMIC Structures......................... 66
Taxation of Regular Certificates................ 66
Residual Certificates........................... 72
Prohibited Transactions and Other Taxes......... 74
Liquidation and Termination..................... 74
Administrative Matters.......................... 74
STATE TAX CONSIDERATIONS............................ 75
ERISA CONSIDERATIONS................................ 75
Plan Asset Regulations.......................... 75
Prohibited Transaction Class Exemption.......... 76
LEGAL INVESTMENT CONSIDERATIONS..................... 77
SMMEA........................................... 77
FFIEC Policy Statement.......................... 77
General......................................... 78
METHOD OF DISTRIBUTION.............................. 78
LEGAL MATTERS....................................... 79
FINANCIAL INFORMATION............................... 79
RATING.............................................. 79
INDEX OF PRINCIPAL TERMS............................ 80
4
89
SUMMARY
This Summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement. Reference is made to the Index of Principal Terms for the location
in this Prospectus of the definitions of certain capitalized terms.
Certificates Offered................ Mortgage Pass-Through Certificates
(the "Certificates"), issuable in
series (each, a "Series").
The Sponsor......................... Aames Capital Corporation, a
California corporation (the
"Sponsor"). The principal office of
the Sponsor is located in Los
Angeles, California. See "The
Sponsor" herein.
The Servicer........................ The entity specified in the related
Prospectus Supplement (the
"Servicer") as responsible for
servicing the Mortgage Loans. The
Sponsor or one of its affiliates may
act as the Servicer for one or more
Series of Certificates. See "The
Pooling and Servicing
Agreement -- General Servicing
Procedures" herein.
Sub-Servicers....................... The Servicer may appoint one or more
mortgage servicing institutions
(each, a "Sub-Servicer") to service
and administer the Mortgage Loans in
a Mortgage Pool if so indicated in
the related Prospectus Supplement.
The Trustee......................... The Trustee for each Series of
Certificates will be specified in the
related Prospectus Supplement.
The Certificates.................... Each Series of Certificates will be
issued at the direction of the
Sponsor by a separate trust fund
(each, a "Trust"), created pursuant
to an agreement between the Sponsor,
the Servicer and the Trustee (each, a
"Pooling and Servicing Agreement").
Each Certificate will represent a
beneficial ownership interest in the
assets of the related Trust which
will consist primarily of the
Mortgage Loans.
The Certificates of any Series may be
issued in one or more classes (each,
a "Class"), as specified in the
related Prospectus Supplement. A
Series of Certificates may include
one or more Classes of senior
Certificates (collectively, the
"Senior Certificates") which receive
certain preferential treatment
specified in the related Prospectus
Supplement with respect to one or
more Classes of subordinate
Certificates (collectively, the
"Subordinated Certificates"). Certain
Series or Classes of Certificates may
be covered by a Certificate Guaranty
Insurance Policy (as defined herein),
a Mortgage Pool Insurance Policy (as
defined herein), a Special Hazard
Insurance Policy (as defined herein),
a Bankruptcy Bond (as defined herein)
or other insurance policies, cash
accounts, letters of credit,
financial guaranty insurance
policies, third party guarantees or
other forms of credit en-
5
90
hancement, as described herein and in
the related Prospectus Supplement.
See "Credit Enhancement" herein.
Each Class of Certificates within a
Series will evidence the interests
specified in the related Prospectus
Supplement, which may (i) include the
right to receive distributions
allocable only to principal, only to
interest or to any combination
thereof; (ii) include the right to
receive distributions only of
prepayments of principal throughout
the lives of the Certificates or
during specified periods; (iii) be
subordinated in the right to receive
distributions of scheduled payments
of principal, prepayments of
principal, interest or any
combination thereof to one or more
other Classes of Certificates of such
Series throughout the lives of the
Certificates or during specified
periods or may be subordinated with
respect to certain losses or
delinquencies; (iv) include the right
to receive such distributions only
after the occurrence of events
specified in the related Prospectus
Supplement; (v) include the right to
receive distributions in accordance
with a schedule or formula or on the
basis of collections from designated
portions of the assets in the related
Trust; (vi) include, as to
Certificates entitled to
distributions allocable to interest,
the right to receive interest at a
fixed rate or an adjustable rate; and
(vii) include, as to Certificates
entitled to distributions allocable
to interest, the right to
distributions allocable to interest
only after the occurrence of events
specified in the related Prospectus
Supplement and, in each case, may
accrue interest until such events
occur, as specified in such
Prospectus Supplement. The timing and
amount of such distributions may vary
among Classes as specified in the
related Prospectus Supplement.
Unless otherwise specified in the
related Prospectus Supplement, the
Certificates will be issuable in
fully registered form, in the minimum
denominations set forth in such
Prospectus Supplement. See
"Description of Certificates" herein.
The Mortgage Loans.................. The primary assets of each Trust will
consist of one or more pools (each, a
"Mortgage Pool") of first and junior
lien mortgage loans or deeds of trust
(the "Mortgage Loans"), including any
note or other instrument of
indebtedness (each, a "Mortgage
Note"). The Mortgage Loans will be
secured by one- to four-family
residential properties, including
townhouses, condominiums and
manufactured housing (which is
permanently affixed to and treated as
real property under local law), but
excluding co-operatives and mobile
homes.
6
91
Unless otherwise specified in the
related Prospectus Supplement, the
Mortgage Loans will not be insured or
guaranteed by any governmental
agency.
The Mortgage Loans to be included in
any Mortgage Pool will be described
in the related Prospectus Supplement.
The Mortgage Loans will have interest
payable thereon at (i) fixed rates
specified in the related Prospectus
Supplement, (ii) adjustable rates
computed as specified in the related
Prospectus Supplement, or (iii)
graduated or other variable rates
described in the related Prospectus
Supplement. Unless otherwise
specified in the related Prospectus
Supplement, each Mortgage Loan will
require monthly payment of principal
and interest. Scheduled payments of
principal on any Mortgage Loan may be
computed (i) on a level debt service
basis that will result in full
amortization over the stated term of
such Mortgage Loan, (ii) in the case
of a Balloon Loan (as defined
herein), on the basis of an assumed
amortization schedule that is
significantly longer than the
original term of maturity of such
Mortgage Loan and will require
payment of a substantial amount of
principal at the stated maturity
specified in the related Mortgage
Note, or (iii) on such other basis as
is specified in the related
Prospectus Supplement.
If so specified in the related
Prospectus Supplement, the Mortgage
Pool may be divided into two or more
groups based on certain
characteristics of the related
Mortgage Loans (such as type or
amount of Mortgage Rate, remaining
term to maturity or type of Mortgaged
Property) and amounts received,
collected or recovered in respect of
any such group will be the primary
source from which distributions on
certain Classes of Certificates will
be derived.
The property securing a Mortgage Loan
(each, a "Mortgaged Property") may be
located in any one of the fifty
states or the District of Columbia.
Unless otherwise specified in the
related Prospectus Supplement, all of
the Mortgage Loans will be covered by
standard hazard insurance policies
("Standard Hazard Insurance
Policies") insuring against certain
losses due to fire and other causes.
The Prospectus Supplement for each
Series of Certificates will specify
with respect to all Mortgage Loans
included in each related Mortgage
Pool, among other things, (i) the
aggregate outstanding principal
balance and the average outstanding
principal balance of the Mortgage
Loans in such Pool as of the date
specified in the Prospectus
Supplement (the "Cut-off Date"), (ii)
the largest principal balance of any
of
7
92
the Mortgage Loans, (iii) the types
of Mortgaged Properties securing the
Mortgage Loans, (iv) the original
terms to maturity of the Mortgage
Loans, (v) the weighted average term
to maturity of the Mortgage Loans as
of the Cut-off Date and the range of
the terms to maturity, (vi) the
ranges of the Combined Loan-to-Value
Ratios (as defined herein) at
origination, (vii) the weighted
average Mortgage Rate and ranges of
Mortgage Rates borne by the Mortgage
Loans and (viii) the geographic
distribution of the Mortgaged
Properties on a state-by-state basis.
Forward Purchase Commitments;
Purchase Accounts................... If so specified in the related
Prospectus Supplement, the related
Pooling and Servicing Agreement may
contain provisions pursuant to which
the Sponsor will agree to transfer
additional Mortgage Loans to the
related Trust following the date on
which such Trust is established and
the related Certificates are issued
(such provisions being referred to
herein as a "Forward Purchase
Commitment"). Any Forward Purchase
Commitment will require that any
Mortgage Loans so transferred to a
Trust conform to the requirements
specified in the related Pooling and
Servicing Agreement. If a Forward
Purchase Commitment is to be
utilized, unless otherwise specified
in the related Prospectus Supplement,
the Trustee will be required to
deposit in a segregated account
(each, a "Purchase Account") all or a
portion of the proceeds received by
the Sponsor in connection with the
sale of one or more Classes of
Certificates of the related Series.
Subsequently, the additional Mortgage
Loans will be conveyed by the Sponsor
to the related Trust in exchange for
cash from the related Purchase
Account in one or more transfers.
Unless otherwise specified in the
related Prospectus Supplement, the
transfer of additional Mortgage Loans
to the related Trust pursuant to any
Forward Purchase Commitment must be
completed within three months from
the date such Trust is established.
The related Pooling and Servicing
Agreement will require that, if all
amounts originally deposited to such
Purchase Account are not applied to
purchase additional Mortgage Loans by
the end of such period, then any
amounts remaining on deposit in the
Purchase Account will be released
from the Purchase Account and
distributed in reduction of the
principal balance of the related
Class or Classes of Certificates as
specified in the related Prospectus
Supplement.
Credit Enhancement.................. The Mortgage Loans in a Trust or the
Certificates of one or more Classes
in the related Series may have the
benefit of one or more types of
credit enhance-
8
93
ment, as described in the related
Prospectus Supplement. The protection
against losses afforded by any such
credit support will be limited. Such
credit enhancement may include one or
more of the following types or
another type of credit enhancement as
specified in the Prospectus
Supplement:
A. Subordinated Certificates... The rights of the holders of any
Subordinated Certificates of a Series
to receive distributions with respect
to the related Trust will be
subordinated to the rights of the
holders of the Senior Certificates of
the same Series to receive
distributions to the extent described
in the related Prospectus Supplement.
This subordination is intended to
enhance the likelihood of regular
receipt by holders of Senior
Certificates of the full amount of
payments which such holders would be
entitled to receive if there had been
no losses; however, there can be no
assurance that the Senior
Certificates will receive the full
amount of payments to which they are
entitled as a result of such
subordination or the existence of the
Reserve Accounts described below. The
protection afforded to the holders of
Senior Certificates through
subordination may be accomplished by
the preferential right of such
Certificateholders to receive, prior
to any distribution being made in
respect of the related Subordinated
Certificates, the amounts of
principal and interest due to them on
each Distribution Date (as defined
herein) out of the funds available
for distribution on such date in the
related Certificate Account (as
defined herein) to the extent
described in the related Prospectus
Supplement. The protection afforded
to the holders of Senior Certificates
through subordination also may be
accomplished by allocating certain
types of losses or delinquencies to
the related Subordinated Certificates
to the extent described in the
related Prospectus Supplement.
If so specified in the related
Prospectus Supplement, a Subordinated
Class of Certificates may be senior
to other Classes of Certificates with
respect to the right to receive
certain types of payments or with
respect to allocation of certain
losses or delinquencies. If so
specified in the related Prospectus
Supplement, subordination may apply
only in the event of certain types of
losses not covered by other forms of
credit enhancement, such as hazard
losses not covered by Standard Hazard
Insurance Policies or losses due to
the bankruptcy of the borrower under
a Mortgage Loan (the "Mortgagor") not
covered by a Bankruptcy Bond. The
related Prospectus Supplement will
set forth information concerning the
amount of subordination of a Class or
Classes of Subordinated Certificates
in a Series, the circumstances in
which
9
94
such subordination will be applicable
and the manner, if any, in which the
amount of subordination will decrease
over time.
B. Reserve Account............. If so specified in the related
Prospectus Supplement, one or more
reserve or spread accounts (each, a
"Reserve Account") may be established
and maintained, in whole or in part,
by the deposit therein of
distributions allocable to the
holders of specified Classes of
Certificates for a specified time or
until a specified level is reached.
The related Prospectus Supplement
will set forth information concerning
the manner of funding any Reserve
Account and the conditions under
which amounts in any such Reserve
Account will be used to make
distributions to holders of certain
Classes of Certificates or released
to holders of certain Classes of
Certificates, the Servicer, the
Sponsor or another entity.
C. Certificate Guaranty
Insurance Policy........... If so specified in the related
Prospectus Supplement, a certificate
guaranty insurance policy or policies
(each, a "Certificate Guaranty
Insurance Policy") may be obtained
and maintained for a Class or Series
of Certificates. A Certificate
Guaranty Insurance Policy generally
will unconditionally and irrevocably
guarantee that the full amount of
principal and interest distributable
to Certificateholders on any
Distribution Date, as well as any
other amounts specified in the
related Prospectus Supplement (the
"Insured Amount"), will be available
for distribution to
Certificateholders on such
Distribution Date. The terms of any
such Certificate Guaranty Insurance
Policy will be described in the
related Prospectus Supplement.
D. Mortgage Pool Insurance
Policy..................... If so specified in the related
Prospectus Supplement, a mortgage
pool insurance policy or policies
(each, a "Mortgage Pool Insurance
Policy") may be obtained and
maintained for all or certain of the
Mortgage Loans in the related Trust,
limited in scope, covering losses on
the related Mortgage Loans up to a
maximum amount. The terms of any such
Mortgage Pool Insurance Policy will
be described in the related
Prospectus Supplement.
E. Special Hazard Insurance
Policy..................... If so specified in the related
Prospectus Supplement, certain
physical risks with respect to the
related Mortgage Properties that
would not otherwise be insured
against by Standard Hazard Insurance
Policies may be covered by a special
hazard insurance policy or policies
(each, a "Special Hazard Insurance
Policy"). Each Special Hazard
Insurance Policy will be limited in
scope and will cover losses up to a
maximum amount. The terms of any such
Special
10
95
Hazard Insurance Policy will be
described in the related Prospectus
Supplement.
F. Bankruptcy Bond............. If so specified in the related
Prospectus Supplement, a mortgagor
bankruptcy bond or bonds (each, a
"Bankruptcy Bond") may be obtained to
cover certain losses resulting from a
reduction by a bankruptcy court of
scheduled payments of principal or
interest on a Mortgage Loan or a
reduction by such court of the
principal amount of a Mortgage Loan.
The level of coverage and other terms
of each Bankruptcy Bond will be
specified in the related Prospectus
Supplement.
G. Cross Support............... If so specified in the related
Prospectus Supplement, the ownership
interests of separate Trusts or
separate groups of assets in a single
Trust may be evidenced by separate
Classes of the related Series of
Certificates. In such case, credit
support may be provided by a
cross-support feature which requires
that distributions be made with
respect to certain Certificates
evidencing interests in one or more
Trusts or asset groups prior to
distributions to other Certificates
evidencing interests in other Trusts
or asset groups. If specified in the
related Prospectus Supplement, the
coverage provided by one or more
other forms of credit support, such
as Reserve Accounts or Certificate
Guaranty Insurance Policies, may
apply concurrently to two or more
separate Trusts, without priority
among such Trusts, until the credit
support is exhausted. If applicable,
the Prospectus Supplement will
identify the Trusts or asset groups
to which such credit support relates
and the manner of determining the
amount of the coverage provided
thereby and of the application of
such coverage to the identified
Trusts or asset groups.
H. Other Credit Enhancement.... Other credit enhancement
arrangements, including, but not
limited to, letters of credit or
third party guarantees, may be used
to provide coverage for certain risks
of losses on the Mortgage Loans in a
given Trust. These arrangements may
be in addition to or in lieu of any
forms of credit support described in
this Prospectus. The related
Prospectus Supplement will describe
any such arrangements, including
information as to the extent of
coverage and any conditions thereto
or limitations thereon. Any such
arrangement must be acceptable to
each nationally recognized
statistical rating agency that is
engaged by the Sponsor to provide a
rating for any Class of Certificates
of the related Series (each, a
"Rating Agency").
Advances............................ Unless otherwise specified in the
related Prospectus Supplement, the
Servicer and, if applicable, each
11
96
Sub-Servicer will be obligated each
month (or at such other intervals
specified in the related Prospectus
Supplement) to advance amounts
corresponding to all or a portion of
delinquent interest payments on such
Mortgage Loan until the date on which
the related Mortgaged Property is
sold at a foreclosure sale or the
related Mortgage Loan is otherwise
liquidated or charged off. Any such
obligation to make advances may be
limited to amounts due to holders of
Senior Certificates, to amounts
deemed to be recoverable from late
payments or liquidation proceeds, for
specified periods or any combination
thereof, in each case as specified in
the related Prospectus Supplement.
See "The Pooling and Servicing
Agreement -- Monthly Advances and
Compensating Interest" herein.
Compensating Interest............... Unless otherwise specified in the
related Prospectus Supplement, with
respect to each Mortgage Loan as to
which the Servicer receives a
principal payment in full in advance
of the final scheduled due date (a
"Principal Prepayment"), the Servicer
will be required to remit to the
Trustee, from amounts otherwise
payable to the Servicer as servicing
compensation, an amount generally
representing the excess of interest
on the principal balance of such
Mortgage Loan prior to such Principal
Prepayment over the amount of
interest actually received on the
related Mortgage Loan during the
applicable period. See "The Pooling
and Servicing Agreement -- Monthly
Advances and Compensating Interest"
herein.
Optional Termination................ The Sponsor, the Servicer, the
holders of REMIC Residual
Certificates (as defined herein) or
certain other entities specified in
the related Prospectus Supplement may
have the option to effect early
retirement of a Series of
Certificates through the purchase of
the Mortgage Loans in the Trust,
subject to the aggregate principal
balance of the related Mortgage Loans
being less than the percentage
specified in the related Prospectus
Supplement of the aggregate principal
balance of the Mortgage Loans at the
Cut-off Date for the related Series.
Typically, the Sponsor, the Servicer
or such other entity will cause the
retirement of a Series of
Certificates when servicing of the
then remaining amount of Mortgage
Loans becomes inefficient. See "The
Pooling and Servicing
Agreement -- Termination; Optional
Termination" herein.
Certain Federal Income Tax
Consequences........................ The federal income tax consequences
of the purchase, ownership and
disposition of the Certificates of
each Series will depend on, among
other
12
97
things, whether an election is made
to treat the corresponding Trust (or
certain assets of the Trust) as a
"real estate mortgage investment
conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the
"Code").
A. REMIC....................... If an election is to be made to treat
the Trust for a Series of
Certificates as a REMIC for federal
income tax purposes, the related
Prospectus Supplement will specify
which Class or Classes thereof will
be designated as regular interests in
the REMIC ("Regular Certificates")
and which Class of Certificates will
be designated as the residual
interest in the REMIC ("Residual
Certificates"). To the extent
provided herein and in the related
Prospectus Supplement, Certificates
representing an interest in the REMIC
will be considered "qualifying real
property loans" within the meaning of
Section 593(d) of the Code, "real
estate assets" for purposes of
Section 856(c)(5)(A) of the Code and
assets described in Section
7701(a)(19)(C) of the Code.
For federal income tax purposes,
Regular Certificates generally will
be treated as debt obligations of the
Trust with payment terms equivalent
to the terms of such Certificates.
Holders of Regular Certificates will
be required to report income with
respect to such Certificates under an
accrual method, regardless of their
normal tax accounting method.
Original issue discount, if any, on
Regular Certificates will be
includible in the income of the
Certificateholders thereof as it
accrues, in advance of receipt of the
cash attributable thereto, which rate
of accrual will be determined based
on a reasonable assumed prepayment
rate. The Residual Certificates
generally will not be treated as
evidences of indebtedness for federal
income tax purposes, but instead, as
representing rights to the taxable
income or net loss of the REMIC.
B. Grantor Trust............... If no election is to be made to treat
the Trust for a Series of
Certificates ("Non-REMIC
Certificates") as a REMIC, the Trust
will be classified as a grantor trust
for federal income tax purposes and
not as an association taxable as a
corporation. Holders of Non-REMIC
Certificates will be treated for such
purposes, subject to the possible
application of the stripped bond
rules, as owners of undivided
interests in the related Mortgage
Loans and generally will be required
to report as income their pro rata
share of the entire gross income
(including amounts paid as reasonable
servicing compensation) from the
Mortgage Loans and will be entitled,
subject to certain
13
98
limitations, to deduct their pro rata
share of expenses of the Trust.
To the extent provided herein and in
the related Prospectus Supplement,
Non-REMIC Certificates will represent
interests in "qualifying real
property loans" within the meaning of
Section 593(d) of the Code, "real
estate assets" for purposes of
Section 856(c)(5)(A) of the Code and
"Loans . . . principally secured by
an interest in real property" within
the meaning of Section
7701(a)(19)(C)(v) of the Code.
Investors are advised to consult
their tax advisors and to review
"Certain Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
ERISA Considerations................ Fiduciaries of employee benefit plans
subject to Title I of the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), should
consider the ERISA fiduciary
investment standards before
authorizing an investment by a plan
in a Series of Certificates. In
addition, fiduciaries of employee
benefit plans subject to Title I of
ERISA, as well as certain plans not
subject to ERISA, but which are
subject to Section 4975 of the Code,
such as individual retirement
accounts and Keogh plans covering
only a sole proprietor or partners
(collectively, "Plan(s)"), should
consult with their legal counsel to
determine whether an investment in a
Series of Certificates will cause the
Mortgage Loans of the Trust to be
considered plan assets pursuant to
the plan asset regulations set forth
in 29 C.F.R. sec. 2510.3-101 (the
"Plan Asset Regulations"), thereby
subjecting the Plan to the prohibited
transaction rules with respect to the
Mortgage Loans and the Trustee or the
Servicer to the fiduciary investment
standards of ERISA, or cause the
excise tax provisions of Section 4975
of the Code to apply to the Mortgage
Loans unless some exemption granted
by the Department of Labor applies to
the purchase, sale, transfer or
holding of a Series of Certificates.
See "ERISA Considerations" herein.
Rating.............................. At the date of issuance, each Class
of Certificates offered pursuant to
the related Prospectus Supplement
will be rated in one of the four
highest rating categories by one or
more Rating Agencies. See "Rating"
herein.
Legal Investment.................... As disclosed in the related
Prospectus Supplement, certain
Classes of Certificates may not
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of
14
99
1984 ("SMMEA") and, if so, will not
be legal investments for certain
types of institutional investors
under SMMEA. Institutions whose
investment activities are subject to
legal investment laws and regulations
or to review by certain regulatory
authorities may be subject to
additional restrictions on investment
in certain Classes of Certificates.
Any such institution should consult
its own legal advisors in determining
whether and the extent to which a
Class of Certificates constitutes
legal investments for such investors.
See "Legal Investment Considerations"
herein.
Registration of Certificates........ Unless otherwise specified in the
Prospectus Supplement, the
Certificates will be issued as
physical certificates ("Definitive
Certificates") in fully registered
form in the denominations specified
in the Prospectus Supplement.
Certificates may be represented,
however, by global certificates
registered in the name of Cede & Co.
("Cede"), as nominee of The
Depository Trust Company ("DTC"), or
another nominee if so specified in
the related Prospectus Supplement. In
such case, Certificateholders will
not be entitled to receive Definitive
Certificates representing such
Certificateholders' interests, except
in certain circumstances described in
the related Prospectus Supplement.
See "Description of the
Certificates -- Form of
Certificates -- Book-Entry
Registration" herein.
15
100
RISK FACTORS
LIMITED LIQUIDITY
Prior to issuance, there will have been no market for the Certificates of
any Series. There can be no assurance that a secondary market for the
Certificates will develop or, if a secondary market does develop, that it will
provide Certificateholders with liquidity of investment or that it will continue
for the lives of the Certificates. Unless otherwise specified in the related
Prospectus Supplement, the Certificates will not constitute "mortgage related
securities" under the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), and certain investors may be subject to legal restrictions
that preclude their purchase of any such non-SMMEA Certificates. In addition,
certain Classes of Certificates may be restricted as to transferability to
certain entities if so specified in the related Prospectus Supplement. Any
restrictions on the purchase or transferability of the Classes of a given Series
of Certificates may have a negative effect on the development of a secondary
market in such Certificates.
LIMITED OBLIGATIONS
Proceeds of the assets of any Trust, including the Mortgage Loans, any
Reserve Account and any Certificate Guaranty Insurance Policy or other form of
credit enhancement, will be the sole source of funds for the payment of the
required distributions on the Certificates of the related Series and there will
be no recourse to the Sponsor or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make any such required
distributions on such Certificates. The Certificates will represent beneficial
ownership interests in the related Trust only and will not represent interests
in or other obligations of the Sponsor, the Servicer, any Originator, any
Sub-Servicer or any other person. Neither the Certificates nor the Mortgage
Loans will be insured or guaranteed by any governmental agency or
instrumentality. The only obligations of the foregoing entities with respect to
the Certificates or the Mortgage Loans will be the obligations (if any) of the
Sponsor and the Servicer pursuant to certain limited representations and
warranties made with respect to the Mortgage Loans, and the servicing
obligations of the Servicer and any Sub-Servicer under the related Pooling and
Servicing Agreement (including their respective limited obligations to make
certain advances in the event of delinquencies on the Mortgage Loans, but only
to the extent deemed recoverable). Except as described in the related Prospectus
Supplement, neither the Certificates nor the underlying Mortgage Loans will be
guaranteed or insured by the Sponsor, the Servicer, the related Originators, the
Trustee, any Sub-Servicer or any of their respective affiliates. Notwithstanding
the foregoing, and as specified in the related Prospectus Supplement, certain
types of credit enhancement, such as a Certificate Guaranty Insurance Policy or
a letter of credit, may constitute a full recourse obligation of the issuer of
such credit enhancement.
NATURE OF THE SECURITY FOR MORTGAGE LOANS
Risks Associated with Any Decline in Value of Mortgaged Properties. An
overall decline in the market value of residential real estate, the general
condition of a Mortgaged Property or other factors, including acts of nature
such as hurricanes, floods, tornadoes or earthquakes, could adversely affect the
values of the Mortgaged Properties such that the outstanding balances of the
Mortgage Loans, together with any other liens on the Mortgaged Properties, equal
or exceed the value of the Mortgaged Properties. Such a decline could, in
certain circumstances, result in the interest of the related Trust in the
Mortgaged Property being extinguished. In addition, certain areas of the country
may from time to time experience significant declines in real estate values. The
Sponsor will not be able to quantify the impact of any such declines in the
value of any Mortgaged Properties or predict whether, to what extent or how long
such declines may continue. Because certain Mortgage Loans may have been
underwritten pursuant to standards that rely primarily on the value of the
related Mortgaged Properties rather than the creditworthiness of the borrowers
under such Mortgage Loans (each, a "Mortgagor"), the actual rates of
delinquencies, foreclosures and losses on such Mortgage Loans, particularly in
periods during which the value of the related Mortgaged Properties has declined,
could be higher than those historically experienced by the mortgage lending
industry in general.
Risks Associated with Junior Liens. Certain of the Mortgage Loans will be
home equity loans secured by junior liens (each, a "Junior Loan") subordinate to
the rights of the mortgagees under the related senior
16
101
mortgages (each, a "Senior Lien"). As a result, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the principal balance of a Junior Loan only to the extent that the claims, if
any, of each such Senior Lien are satisfied in full, including any related
foreclosure costs. In addition, a junior mortgagee may not foreclose on the
Mortgaged Property securing the related Junior Loan unless it forecloses subject
to the related Senior Lien, in which case it must either pay the entire amount
of each Senior Lien to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on each Senior Lien in the
event of a default thereunder. Generally, a servicer will satisfy each such
Senior Lien at or prior to the foreclosure sale only to the extent it determines
that any amounts so paid will be recoverable from future payments and
collections on the Junior Loan or otherwise. The Trusts will not have any source
of funds (and may not be permitted under the REMIC provisions of the Code) to
satisfy any such Senior Lien or make payments due under any Senior Lien. See
"Certain Legal Aspects of the Mortgage Loans and Related
Matters -- Foreclosure/Repossession" herein.
Risks Associated with Balloon Loans. Certain of the Mortgage Loans may
constitute "Balloon Loans." Balloon Loans are loans originated with a term to
stated maturity that is shorter than the period on which the corresponding
amortization schedule is based. As a result, upon the maturity of a Balloon
Loan, the Mortgagor will be required to make a "balloon payment" which will be
significantly larger than the previous monthly payments due on such Balloon
Loan. The ability of such Mortgagor to repay a Balloon Loan at maturity
frequently will depend on such Mortgagor's ability to refinance the Mortgage
Loan. The ability of a Mortgagor to refinance such a Mortgage Loan will be
affected by a number of factors, including the prevailing level of mortgage
rates at the time, the value of the related Mortgaged Property, the Mortgagor's
equity in the related Mortgaged Property, the financial condition of the
Mortgagor, the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a Balloon Loan, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Sponsor,
the Servicer, the Originators, the Trustee or any other entity will be obligated
to provide funds to refinance any Balloon Loan.
Risks Associated with Bankruptcy of the Mortgagor. General economic
conditions and other factors (which may not affect real property values) have an
impact on the ability of Mortgagors to repay Mortgage Loans. Loss of earnings,
illness, divorce and other similar factors may lead to an increase in
delinquencies, defaults and bankruptcy filings by Mortgagors. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risks Associated with Defaulted Mortgage Loans. Even assuming that the
Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the distribution of related
proceeds to the Certificateholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes and
rules and is subject to many of the same delays and expenses as other lawsuits
if defenses or counterclaims are interposed, sometimes requiring several years
to complete. Furthermore, in some states an action to obtain a deficiency
judgment is not permitted following a nonjudicial sale of a Mortgaged Property.
In the event of a default by a Mortgagor, these restrictions, among other
things, may impede the ability of the Servicer or any Sub-Servicer to foreclose
on or sell the Mortgaged Property or to obtain Liquidation Proceeds (as defined
under "Description of the Certificates -- Distributions on
Certificates -- Available Funds" herein) (net of expenses) sufficient to repay
all amounts due on the related Mortgage Loan. The Servicer or any Sub-Servicer
will be entitled to deduct from Liquidation Proceeds all expenses reasonably
incurred in attempting to recover amounts due on the related Liquidated Mortgage
Loan
17
102
(as defined under "The Pooling and Servicing Agreement -- Realization upon
Defaulted Mortgage Loans" herein) and not yet repaid, including unreimbursed
Monthly Advances (as defined under "The Pooling and Servicing
Agreement -- Monthly Advances and Compensating Interest" herein) and Servicing
Advances (as defined under "The Pooling and Servicing Agreement -- Servicing and
Other Compensation and Payment of Expenses" herein), payments to prior
lienholders, legal fees and costs of legal action, real estate taxes, and
maintenance and preservation expenses. In the event that any of the Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans, and
the credit enhancement for the related Series is not available to cover
resulting shortfalls, Certificateholders could experience a loss on their
investment.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that the Servicer or any Sub-Servicer took
the same steps in realizing upon a defaulted Mortgage Loan having a small
remaining principal balance as it would in the case of a defaulted Mortgage Loan
having a larger principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the outstanding principal
balance of the smaller Mortgage Loan than would be the case with a larger
Mortgage Loan. Because the average outstanding principal balances of Mortgage
Loans that are Junior Loans generally are smaller relative to the average
outstanding principal balances of Mortgage Loans that are first mortgage loans,
realizations net of liquidation expenses on defaulted Mortgage Loans that are
Junior Loans may also be smaller as a percentage of the principal amount of such
Mortgage Loans than would be the case if such mortgage loans were secured by
first mortgages.
Environmental Concerns. Under environmental legislation and case law
applicable in various states, a secured party that takes a deed in lieu of
foreclosure, acquires a Mortgaged Property at a foreclosure sale or, prior to
foreclosure, has been involved in decisions or actions that may lead to
contamination of a Mortgaged Property, may be liable for the costs of cleaning
up a contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a Trust, in its capacity as holder of any
related Mortgage Note, because under the terms of the related Pooling and
Servicing Agreement, a Trust is not required to take an active role in operating
the related Mortgaged Properties. See "Certain Legal Aspects of the Mortgage
Loans and Related Matters -- Environmental Considerations" herein.
Risks Associated with Non-Owner Occupied Properties. Certain of the
Mortgaged Properties relating to Mortgage Loans may not be owner occupied. It is
possible that the rates of delinquencies, foreclosures and losses on Mortgage
Loans secured by non-owner occupied properties could be higher than such rates
on Mortgage Loans secured by the primary residence of the borrower.
LEGAL CONSIDERATIONS
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the Originators, the Servicer and any Sub-Servicer. In addition,
most states have other laws, public policies 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. In California, for example, a mortgage lender is subject to the
California Fair Debt Collection Practices Act which regulates practices used to
effect collection on consumer loans. See "Certain Legal Aspects of the Mortgage
Loans and Related Matters" herein.
The Mortgage Loans may also be subject to federal laws, including: (i) the
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 Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; and (v) the Federal Trade Commission Preservation
of Consumer's Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights.
18
103
The federal Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), may affect the ability of the Servicer to collect full
amounts of interest on certain Mortgage Loans and could interfere with the
ability of the Servicer to foreclose on certain properties. See "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Soldiers' and Sailors'
Civil Relief Act" herein.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act amended the Truth in Lending Act, which in turn led to certain
additional provisions being added to Regulation Z, the implementing regulation
of the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high upfront fees and charges. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on Treasury Securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. The provisions can impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related loans. In addition,
any assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Servicer, or any Sub-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
the Servicer, or any Sub-Servicer, to damages and administrative sanctions. If
the Servicer, or any Sub-Servicer, is unable to collect all or part of the
principal or interest on any Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity, the Trust
may be delayed from repaying, or may be unable to repay, all amounts owed to
Certificateholders. Furthermore, depending upon whether damages and sanctions
are assessed against the Servicer or an Originator, such violations may have a
material impact upon the financial ability of the Servicer to continue to act in
such capacity or the ability of an Originator to repurchase or replace Mortgage
Loans if such violation breaches a representation or warranty contained in the
related Pooling and Servicing Agreement.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The yield to maturity of any Class of Certificates will be affected by the
amount and timing of principal payments on the related Mortgage Loans, the
manner of allocation of available funds and/or losses to such Class, the
interest rates or amounts of interest payable on such Class and the purchase
price paid for such Class. The interaction of the foregoing factors may have
different effects on, and create different risks for, the various Classes of
Certificates, and the effects and/or risks for any one Class may vary over the
life of such Class. The related Prospectus Supplement may include additional
prepayment considerations with respect to different Classes of Certificates of a
Series. Investors should carefully consider the different consequences of such
risks as may be described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that may be experienced on Mortgage Loans included in any Trust.
Although published statistical data regarding the effects of interest rates
on prepayment rates for Mortgage Loans of the type typically made or acquired by
the Originators is limited, a number of factors suggest that the prepayment
behavior of a pool including Mortgage Loans may be significantly different from
that of a pool composed entirely of conforming, non-conforming, "jumbo" or
government-insured (i.e., "traditional") first mortgage loans with equivalent
interest rates and maturities. One such factor is the smaller
19
104
average principal balance of Mortgage Loans that may result in a higher
prepayment rate than that of a traditional first mortgage loan with a larger
average balance, regardless of the interest rate environment. A small principal
balance, however, also may make refinancing Mortgage Loans at a lower interest
rate less attractive to the borrower relative to refinancing a larger balance
first mortgage loan, as the perceived impact to the borrower of lower interest
rates on the amount of the monthly payment for a Mortgage Loan may be less than
for a traditional first mortgage loan with a larger balance. Other factors that
might be expected to affect the prepayment rate of a pool of Mortgage Loans
include the amounts of, and interest rates on, the underlying Senior Liens, if
any, and the use of first mortgage loans as long-term financing for home
purchase and home equity loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, Mortgage Loans may
experience a higher rate of prepayments than traditional first mortgage loans.
In addition, any future limitations on the deductibility of interest payments on
the Mortgage Loans for federal income tax purposes may further increase the rate
of prepayments on the Mortgage Loans.
In addition, certain of the Mortgage Loans comprising the Mortgage Pool may
have adjustable Mortgage Interest Rates ("ARM Loans"). As is the case with
conventional fixed-rate mortgage loans, ARM Loans may be subject to a greater
rate of principal prepayments in a declining interest rate environment. For
example, if prevailing interest rates fall significantly, ARM Loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed-rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their ARM Loans to "lock
in" a lower fixed interest rate. Conversely, if prevailing interest rates rise
significantly, ARM Loans may prepay at lower rates than if prevailing rates
remain at or below those in effect at the time such ARM Loans were originated.
There can be no certainty as to the rate of prepayments on the ARM Loans in
stable or changing interest rate environments. See "Maturity, Prepayment and
Yield Considerations" herein.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of any related Senior
Liens), sales of Mortgaged Properties subject to due-on-sale provisions and
liquidations due to default, as well as the receipt of proceeds from physical
damage, credit life and disability insurance policies. In addition, repurchases
or purchases of Mortgage Loans from a Trust required to be made by the Sponsor
or the Servicer under the related Pooling and Servicing Agreement will have the
same effect on the Certificateholders as a prepayment of such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans contain due-on-sale provisions, and the Servicer will be required
to enforce such provisions unless (i) such enforcement would materially increase
the risk of default or delinquency on, or materially decrease the security for,
such Mortgage Loan or (ii) such enforcement is not permitted by applicable law,
in which case the Servicer is authorized to permit the purchaser of the related
Mortgaged Property to assume the Mortgage Loan. Additionally, should any
Originator solicit refinancings from existing borrowers, the rate of prepayments
on the Mortgage Loans may increase due to any resulting refinancings.
Prepayments on the Mortgage Loans for a Series generally will result in a
faster rate of distributions of principal on the Certificates. Thus, the
prepayment experience of the Mortgage Loans will affect the average life and
yield to investors of each Class and the extent to which each such Class is paid
prior to its final scheduled Distribution Date. A Series may include Classes of
Certificates which pay "interest only" or are entitled to receive a
disproportionately high level of interest distributions as compared to the
amount of principal to which such Classes of Certificates are entitled (each, an
"Interest Weighted Class") or Classes of Certificates which pay "principal only"
or are entitled to receive a disproportionately high level of principal
distributions compared to the amount of interest to which such Classes of
Certificates are entitled (each, a "Principal Weighted Class"). A Series may
include an Interest Weighted Class offered at a significant premium or a
Principal Weighted Class offered at a substantial discount. Yields on such
Classes of Certificates will be extremely sensitive to prepayments on the
Mortgage Loans for such Series. In general if a Certificate, including a
Certificate of an Interest Weighted Class, is purchased at a premium and
principal distributions on the Mortgage Loans occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity
could be significantly lower than that assumed at the time of purchase. Where
the amount of interest allocated with respect to an Interest Weighted Class is
extremely disproportion-
20
105
ate to principal, a Certificateholder could, under some such prepayment
scenarios, fail to recoup its original investment. Conversely, if a Certificate,
including a Certificate of a Principal Weighted Class, is purchased at a
discount and principal distributions thereon occur at a rate slower than assumed
at the time of purchase, the investor's actual yield to maturity could be
significantly lower than that originally anticipated. See "Maturity, Prepayment
and Yield Considerations" herein.
Any rating assigned to the Certificates by a Rating Agency will reflect
only such Rating Agency's assessment of the likelihood that timely distributions
will be made with respect to such Certificates in accordance with the related
Pooling and Servicing Agreement. Such rating will not constitute an assessment
of the likelihood that principal prepayments on the Mortgage Loans will be made
by Mortgagors or of the degree to which the rate of such prepayments might
differ from that originally anticipated. As a result, such rating will not
address the possibility that prepayment rates higher or lower than anticipated
by an investor may cause such investor to experience a lower than anticipated
yield, or that an investor purchasing an Interest Weighted Certificate at a
significant premium might fail to recoup its initial investment.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of Mortgagors.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF BANKRUPTCY OF THE SPONSOR
In the event of the bankruptcy of the Sponsor, a trustee in bankruptcy of
the Sponsor or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Sponsor or an
affiliate. If such recharacterization were to be upheld, the related
Certificateholders could be deemed to be creditors of the Sponsor or such
affiliate, with the Mortgage Loans constituting security for such debt and,
thus, the Mortgage Loans might be subject to the automatic stay of the
Bankruptcy Court having jurisdiction over the Sponsor's or its affiliate's
bankruptcy estate and a trustee in bankruptcy could elect to accelerate payment
of the Certificates and liquidate the Mortgage Loans, with the
Certificateholders entitled to the then outstanding principal amount thereof
together with accrued interest. Thus, the Certificateholders could lose the
right to future payments of interest and might suffer reinvestment loss in a
lower interest rate environment. Even if such recharacterization were not
upheld, Certificateholders may be subject to substantial delays in distributions
due to the bankruptcy proceedings.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Relief Act or similar state legislation,
a mortgagor who enters military service after the origination of the related
mortgage loan (including a mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the mortgage loan and is
later called to active duty) may not be charged interest (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. It
is possible that such action could affect, for an indeterminate period of time,
the ability of the Servicer to collect full amounts of interest on certain of
the Mortgage Loans. In addition, the Relief Act imposes limitations which would
impair the ability of the Servicer to foreclose on an affected Mortgage Loan
during the Mortgagor's period of active duty status. Thus, in the event that
such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion.
CERTIFICATE RATING
Depending on the structure of the related transaction, the rating of a
Series or Class of Certificates the credit of which is enhanced through external
means, such as a letter of credit, Certificate Guaranty Insurance Policy,
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy or Bankruptcy
Bond (each as defined herein), may depend primarily on the creditworthiness of
the issuer of such external credit enhancement device. Any reduction or
withdrawal of the rating assigned to the claims-paying ability of the credit
enhancement issuer below the rating initially given to such Certificates would
likely result in a reduction
21
106
in the rating of such Certificates and, in such event, the market price of such
Certificates could be adversely affected. See "Rating" herein.
BOOK-ENTRY REGISTRATION
Effect on Liquidity. If so specified in the related Prospectus Supplement,
the Certificates may initially be registered in book-entry form. Issuance of the
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary market because investors may be unwilling to purchase Certificates
for which they cannot obtain physical certificates.
Difficulty in Pledging. Because transactions in Certificates, in most
cases, will be able to be effected only through Participants, Indirect
Participants (both Participants and Indirect Participants are defined under
"Description of the Certificates -- Form of Certificates -- Book-Entry
Registration" herein) and certain banks, the ability of a Certificateholder to
pledge a Certificate to persons or entities that do not participate in the DTC
(as defined herein) system, or otherwise to take actions in respect of such
Certificates, may be impaired because physical certificates representing the
Certificates will not generally be available.
Potential Delays in Receipt of Distributions. Certificateholders may
experience some delay in their receipt of distributions of interest on and
principal of the Certificates because distributions may be required to be
forwarded by the Trustee to DTC and, in such a case, DTC will be required to
credit such distributions to the accounts of its Participants which thereafter
will be required to credit them to the accounts of the applicable
Certificateholders either directly or indirectly through Indirect Participants.
See "Description of the Certificates -- Form of Certificates -- Book-Entry
Registration" herein.
THE TRUSTS
A Trust for any Series of Certificates will include a Mortgage Pool that
may consist of Mortgage Loans together with payments in respect thereof and
certain other accounts, obligations or agreements, in each case as specified in
the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust and will not be entitled to payments in respect of the assets of any other
Trust established by the Sponsor or any of its affiliates.
The following is a brief description of the Mortgage Loans expected to be
included in the Trusts. The related Prospectus Supplement will set forth
detailed information respecting the Mortgage Loans proposed to be included in
the related Mortgage Pool. Information regarding the actual composition of the
Mortgage Loans in the related Mortgage Pool will be set forth in a report on
Form 8-K to be filed with the Commission within 15 days after such Mortgage Pool
is complete (the "Detailed Description"). A schedule of the Mortgage Loans
relating to such Series will be attached to the related Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Certificates.
If so specified in the related Prospectus Supplement, the Mortgage Pool may
be divided into two or more groups based on certain characteristics of the
related Mortgage Loans (such as type or amount of Mortgage Rate, remaining term
to maturity or type of Mortgaged Property) and amounts received, collected or
recovered in respect of any such group will be the primary source from which
distributions on certain Classes of Certificates will be derived.
THE MORTGAGE LOANS -- GENERAL
The real properties (including condominiums and townhouses) which secure
repayment of the Mortgage Loans (the "Mortgaged Properties") may be located in
any one of the fifty states or the District of Columbia. Unless otherwise
specified in the related Prospectus Supplement, all of the Mortgage Loans will
be covered by Standard Hazard Insurance Policies. The existence and extent of
any such coverage will be described in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the
22
107
Mortgage Loans will not be insured or guaranteed by any governmental agency or
covered wholly or partially by primary mortgage insurance policies.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly
on due dates occurring throughout the month.
The Mortgage Loans to be included in any Mortgage Pool will be described in
the related Prospectus Supplement. The Mortgage Loans will have interest payable
thereon at (i) fixed rates specified in the related Prospectus Supplement, (ii)
adjustable rates computed as specified in the related Prospectus Supplement or
(iii) graduated or other variable rates described in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Mortgage Loan will require monthly payment of principal and interest.
Scheduled payments of principal on any Mortgage Loan may be computed (i) on a
level debt service basis that will result in full amortization over the stated
term of such Mortgage Loan, (ii) in the case of a Balloon Loan, on the basis of
an assumed amortization schedule that is significantly longer than the original
term to maturity of such Mortgage Loan and will require payment of a substantial
amount of principal at the stated maturity specified in the related Mortgage
Note or (iii) on such other basis as is specified in the related Prospectus
Supplement.
Certain of the Mortgage Loans may have been originated pursuant to
underwriting standards that rely primarily on the value and adequacy of the
Mortgaged Property as collateral and, to a much lesser extent, on the
creditworthiness of the related Mortgagor. Accordingly, the rates of
delinquencies, foreclosures and losses on such Mortgage Loans, particularly in
periods during which the value of the related Mortgaged Properties has declined,
may be higher than those historically experienced by the mortgage lending
industry in general. See "The Originators -- Underwriting Guidelines" herein.
Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the Mortgage Loan or may decline over time, and may be
prohibited for the life of the Mortgage Loan or for certain periods ("lockout
periods"). Certain Mortgage Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire Mortgage Loan in connection
with the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards of the applicable Originator.
The Prospectus Supplement for each Series of Certificates will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Sponsor, with respect to the Mortgage Loans contained
in the related Mortgage Pool, including (i) the aggregate outstanding principal
balance and the average outstanding principal balance of the Mortgage Loans as
of the applicable Cut-off Date, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Properties securing the Mortgage Loans, (iv) the original terms to
maturity of the Mortgage Loans, (v) the weighted average term to maturity of the
Mortgage Loans as of the related Cut-off Date and the range of the terms to
maturity, (vi) the ranges of Combined Loan-to-Value Ratios at origination, (vii)
the weighted average Mortgage Rate and ranges of Mortgage Rates borne by the
Mortgage Loans and (viii) the geographical distribution of the Mortgaged
Properties on a state-by-state basis. If specific information respecting the
Mortgaged Loans is not known to the Sponsor at the time the related Certificates
are initially offered, more general information of the nature described above
will be provided in the related Prospectus Supplement and specific information
will be set forth in the Detailed Description.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan at any given time is
the ratio, expressed as a percentage, determined by dividing (x) the sum of the
original principal balance of such Mortgage Loan, plus the current principal
balance of any Senior Lien on the related Mortgaged Property, by (y) the
Appraised Value of such Mortgaged Property. "Appraised Value" is the appraised
value of a Mortgaged Property based upon the lesser of (i) the appraisal or
valuation made at the time of the origination of the related Mortgaged Loan, and
(ii) in the case where there is no Senior Lien to the Mortgage Loan and such
Mortgage represents a purchase money instrument, the sales price of the related
Mortgaged Property at such time of origination.
23
108
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 principal
balances of the Mortgage Loans (plus any additional financing by other lenders
secured by the same Mortgaged Properties) in a particular Mortgage Pool become
equal to or greater than the value of such Mortgaged Properties or if the
general condition of a Mortgaged Property declines, the actual rates of
delinquencies, foreclosures and losses on the related Mortgage Loans could be
higher than those now generally experienced in the mortgage lending industry.
Any overall decline in the market value of residential real estate, the general
condition of the Mortgaged Properties or other factors could adversely affect
the values of the Mortgaged Properties such that the outstanding principal
balance of such Mortgage Loans, together with any additional liens on the
Mortgaged Properties, equal or exceed the value of such Mortgaged Properties and
give rise to the consequences discussed in the preceding sentence.
The Sponsor will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the Certificateholders of the related Series. The Servicer designated
as such in the related Prospectus Supplement will service the Mortgage Loans
either directly, or through the Sub-Servicers, pursuant to the Pooling and
Servicing Agreement and will receive a fee for such services. See "The Pooling
and Servicing Agreement -- General Servicing Procedures" herein. The Sponsor or
one of its affiliates may act as the Servicer for one or more Series of
Certificates. With respect to Mortgage Loans serviced through a Sub-Servicer,
the Servicer will remain liable for its servicing obligations under the related
Pooling and Servicing Agreement as if the Servicer alone were servicing such
Mortgage Loans.
The obligations of the Servicer with respect to the Mortgage Loans will
consist principally of its contractual servicing obligations under the related
Pooling and Servicing Agreement (including its obligations to make Servicing
Advances and to enforce the obligations of the Sub-Servicers) and its obligation
to make certain Monthly Advances in the event of delinquencies in payments on or
with respect to the Mortgage Loans in the amounts described herein under "The
Pooling and Servicing Agreement -- Monthly Advances and Compensating Interest."
The obligations of the Servicer to make Monthly Advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
FORWARD PURCHASE AGREEMENTS; PURCHASE ACCOUNTS
If so specified in the related Prospectus Supplement, the Pooling and
Servicing Agreement may contain provisions pursuant to which the Sponsor will
agree to transfer additional Mortgage Loans to the related Trust following the
date on which such Trust is established and the related Certificates are issued
(such provisions being referred to herein as a "Forward Purchase Commitment").
The Forward Purchase Commitment may permit the acquisition by the Trust of
additional Mortgage Loans that have not completed the origination process by the
date on which the Certificates are to be delivered to the Certificateholders
(the "Closing Date") or were otherwise not available to be delivered by the
Sponsor on such Closing Date. Any Forward Purchase Commitment will require that
any Mortgage Loans so transferred to a Trust conform to the requirements
specified in the related Pooling and Servicing Agreement. If a Forward Purchase
Commitment is to be utilized, unless otherwise specified in the related
Prospectus Supplement, the Trustee will be required to deposit in a segregated
account (each, a "Purchase Account") all or a portion of the proceeds received
in connection with the sale of one or more Classes of Certificates of the
related Series. Subsequently, additional Mortgage Loans will be conveyed by the
Sponsor to the related Trust in exchange for cash from the related Purchase
Account in one or more transfers. Unless otherwise specified in the related
Prospectus Supplement, the transfer of additional Mortgage Loans to the related
Trust pursuant to a Forward Purchase Commitment must be completed within three
months from the Closing Date. The related Pooling and Servicing Agreement will
require that, if all amounts originally deposited in such Purchase Account are
not applied to purchase additional Mortgage Loans by the end of such period, any
amounts remaining will be released from the Purchase Account and distributed in
reduction of the principal balance of the related Class or Classes of
Certificates as specified in the related Prospectus Supplement.
24
109
USE OF PROCEEDS
The Sponsor intends to use the net proceeds to be received from the sale of
the Certificates of each Series to acquire the Mortgage Loans to be deposited in
the related Trust and to pay other expenses connected with the pooling of
Mortgage Loans and the issuing of Certificates. Any amounts remaining after such
payments may be used for general corporate purposes. The timing and amount of
offerings of Certificates by the Sponsor will be influenced by a number of
factors, including volume of Mortgage Loans purchased by the Sponsor, prevailing
interest rates, availability of funds and general market conditions.
THE SPONSOR
GENERAL
Aames Capital Corporation (the "Sponsor") was incorporated in the State of
California on August 13, 1993 and is a wholly owned subsidiary of Aames
Financial Corporation (the "Parent"). The Sponsor is primarily engaged in
acquiring, owning, transferring and servicing Mortgage Loans. The Sponsor
maintains its principal offices at 3731 Wilshire Boulevard, Los Angeles,
California, 90010. Its telephone number is (800) 829-2929. Neither the Sponsor
nor any of its affiliates will insure or guarantee distributions on the
Certificates of any Series.
MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
The following table sets forth delinquency and foreclosure experience of
home equity loans originated or purchased by the Sponsor or Affiliated
Originators and included in the servicing portfolio of the Sponsor or its
affiliates for the periods indicated.
YEAR ENDED JUNE 30,
---------------------------
1993 1994 1995
------ ------- ------
Percentage of dollar amount of delinquent loans to loans serviced
(period end)(1)(2)(3)
One Month..................................................... 4.26% 3.78% 3.88%
Two Months.................................................... 1.42% 1.61% 1.56%
Three or More Months:
Not foreclosed(4)........................................... 7.65% 6.71% 5.00%
Foreclosed(5)............................................... 2.35% 3.58% 1.47%
Percentage of dollar amount of loans foreclosed to loans serviced
(period end)(2)(3)............................................... 2.64% 3.02% 1.08%
Number of loans foreclosed......................................... 137 215 159
Principal amount at time of foreclosure of foreclosed loans(3)
(in thousands)................................................... $6,929 $11,528 $6,565
Losses on foreclosed loans originated or purchased and serviced
(in thousands)................................................... $ 663 $ 1,943 $2,243
- -------------------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans originated by Affiliated
Originators or purchased by the Company and, in each case, serviced by the
Company as of the end of the periods indicated. The total outstanding
principal balance of such loans serviced by the Company as of the end of any
indicated period includes many loans that will not have been outstanding
long enough to give rise to some or all of the indicated periods of
delinquency.
(3) Does not include loans for which only the servicing rights were purchased by
Company.
(4) Loans for which foreclosure proceedings have not concluded.
(5) Properties acquired by the Sponsor or private investors following
foreclosure sale and still serviced by the Sponsor at period end.
25
110
The foreclosure and loss information included in the table above reflects
only foreclosure and loss experience with respect to foreclosed properties for
which affiliates of the Sponsor were retained to manage such properties during
such periods. The loss information excludes any gains realized on foreclosed
properties.
The Sponsor's servicing portfolio has grown over the periods presented.
However, because foreclosures and losses typically occur months or years after a
loan is originated, data relating to delinquencies, foreclosures and losses as a
percentage of the current portfolio can understate the risk of future
delinquencies, losses or foreclosures. No information is available to the
Sponsor with respect to delinquencies, foreclosures or losses on loans
originated by affiliates of the Sponsor if the related loans or properties were
not serviced or managed, as applicable, by the Sponsor or such affiliates. In
addition, no information is available to the Sponsor with respect to
delinquency, foreclosure or loss experience with respect to loans originated by
any Unaffiliated Originators if the related loans or properties were not
serviced or managed, as applicable, by the Sponsor.
Losses realized on properties managed by affiliates of the Sponsor and
acquired upon foreclosure of loans originated by such affiliates generally
increased over the three-year period ended June 30, 1995. The Sponsor believes
that the losses realized during such period are attributable primarily to the
recession in the California economy and the associated decline in the market
value of California real estate, including properties securing home equity
mortgage loans originated by affiliates of the Sponsor. However, the amount of
such losses is relatively low in comparison to the volume of home equity
mortgage loans originated by affiliates of the Sponsor during such period, and
the Sponsor believes such losses were limited as a direct result of loan
origination standards, similar to the Sponsor Guidelines, that require a low
initial Combined Loan-to-Value Ratio. See "The Originators -- Underwriting
Guidelines" and "Risk Factors -- Nature of the Security for Mortgage Loans"
herein.
There is no assurance that the delinquency, foreclosure and loss experience
with respect to any of the Mortgage Loans or with respect to any Mortgage Pool
will be comparable to the experience reflected above for home equity mortgage
loans originated and serviced by affiliates of the Sponsor. Because certain
Mortgage Loans may have been underwritten pursuant to standards that rely
primarily on the value of the related Mortgaged Properties rather than the
creditworthiness of the related Mortgagor, the actual rates of delinquencies,
foreclosures and losses on such Mortgage Loans, particularly in periods during
which the value of the related Mortgaged Properties has declined, could be
higher than those historically experienced by the mortgage lending industry in
general. In addition, the rate of delinquencies, foreclosures and losses with
respect to the Mortgage Loans will also be affected by, among other things,
interest rate fluctuations and general and regional economic conditions. See
"Risk Factors -- Nature of the Security for Mortgage Loans" herein.
THE ORIGINATORS
The Sponsor may acquire Mortgage Loans originated by one or more
subsidiaries of the Parent ("Affiliated Originators"). In addition, the Sponsor
may directly, or indirectly through one of the Affiliated Originators, acquire
Mortgage Loans originated by entities unaffiliated with the Sponsor
("Unaffiliated Originators") (together with Affiliated Originators, the
"Originators").
UNDERWRITING GUIDELINES
All Mortgage Loans originated by Affiliated Originators will be
underwritten in accordance with standard guidelines (the "Sponsor's Guidelines")
developed by the Sponsor and the related Affiliated Originator for customary
application in the Affiliated Originator's loan origination activities, as
described below. Mortgage Loans originated by Unaffiliated Originators are
reunderwritten in accordance with the applicable Sponsor's Guidelines. If
Mortgage Loans have been originated by Unaffiliated Originators using
underwriting standards that vary materially from the applicable Sponsor's
Guidelines, such underwriting standards will be described in the related
Prospectus Supplement.
The Sponsor's Guidelines generally are applied primarily to evaluate the
value and adequacy of the Mortgaged Property as collateral and, secondarily, to
evaluate the Mortgagor's credit standing and repayment
26
111
ability. In determining the adequacy of the Mortgaged Property as collateral,
the related Originator obtains an appraisal of each property considered for
financing. The appraiser is required to inspect the property and verify that it
is in acceptable condition and that construction, if new, has been completed.
The appraisal is based on the market value of comparable homes and is conducted
substantially in accordance with mortgage banking industry appraisal standards.
Appraisers utilized by Affiliated Originators are generally employees of the
related Affiliated Originator.
In general, a prospective borrower applying for a Mortgage Loan is required
to fill out a detailed application designed to provide the Originator pertinent
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report that summarizes the borrower's credit history. The
Originator obtains credit information from credit reporting agencies. In many
cases, the credit information obtained will include major derogatory credit
items such as credit write-offs, outstanding judgments and prior bankruptcies.
In most cases, the Originator does not verify the borrower's income but in many
cases verifies the borrower's employment.
Once all the signed loan documents, including the promissory note and a
security instrument (i.e., mortgage, deed of trust or security deed), and all
applicable employment, credit and property information are received, a
determination is made as to whether to make the loan. The primary (but not the
only) factor considered by the Originator in making this determination is the
Combined Loan-to-Value Ratio of the related property, taking into account any
existing Senior Liens and the principal amount of the loan made with respect to
the related Mortgaged Property. Generally, a Mortgaged Property with a lower
Combined Loan-to-Value Ratio provides greater security than a Mortgaged Property
with a higher Combined Loan-to-Value Ratio.
After expiration of a three business day rescission period required by the
federal Truth in Lending Act and the security instrument is ready for
recordation, the loan is fully funded. Repayment of principal and interest is
generally scheduled to begin approximately one month after recordation and, in
many cases, the Originator, solely at the direction of the related borrower,
will withhold out of the related loan proceeds at origination the first monthly
payment to become due on such loan. The Sponsor's Guidelines generally require
title insurance coverage issued at origination by an approved title insurance
company issuing an American Land Title Association ("ALTA") title insurance
policy. Such title policy is required to be in an amount at least equal to the
original principal amount of the related Mortgage Loan.
Notwithstanding the foregoing, in circumstances deemed appropriate by the
Sponsor, certain of the Sponsor's Guidelines may be modified or waived with
respect to some or all of the Mortgage Loans included in a Trust for a Series of
Certificates.
REPRESENTATIONS BY ORIGINATORS
Generally, an Originator will make certain representations and warranties
with respect to the Mortgage Loans, as specified below, when the Mortgage Loans
are sold to the Sponsor by such Originator and the Sponsor will make
representations and warranties with respect to the Mortgage Loans under the
related Pooling and Servicing Agreement that are generally consistent with those
made by such Originator.
Such representations and warranties generally include, among other things,
that (A) at the time of the sale by the Originator of each Mortgage Loan to the
Sponsor and (B) at the time of the conveyance by the Sponsor of each Mortgage
Loan to the Trust: (i) the information with respect to each Mortgage Loan set
forth in the Loan Schedule (as defined herein) and delivered upon conveyance of
the Mortgage Loan is true and correct as of the related Cut-off Date; (ii) the
proceeds of each Mortgage Loan have been fully disbursed and there are no
obligations to make further disbursements with respect to any Mortgage Loan;
(iii) each Mortgaged Property is improved by a single (one- to four-) family
residential dwelling, which may include a condominium, townhouse or manufactured
home which is permanently affixed to and treated as real property under local
law; (iv) each Mortgage Loan had, at the time of origination, either an
attorney's certification of title or a title search or title policy; (v) as of
the related Cut-off Date, each Mortgage Loan is secured by a valid and
subsisting lien of record on the Mortgaged Property having the priority
indicated on the related Loan
27
112
Schedule and subject in all cases to exceptions to title set forth in the title
insurance policy, if any, with respect to the related Mortgage Loan; (vi) each
Originator held good and indefeasible title to, and was the sole owner of, each
Mortgage Loan conveyed by such Originator; and (vii) each Mortgage Loan was
originated in accordance with law and is the valid, legal and binding obligation
of the related Mortgagor, subject to certain limitations.
Unless otherwise described in the related Prospectus Supplement, all of the
representations and warranties of an Originator in respect of a Mortgage Loan
will be made as of the date on which such Originator sells the Mortgage Loan to
the Sponsor and all of the representations and warranties of the Sponsor in
respect of a Mortgage Loan will be made as of the date on which the Sponsor
conveys such Mortgage Loan into the related Trust. The date as of which such
representations and warranties are made thus may be a date prior to the date of
the issuance of the related Series of the Certificates. A substantial period of
time may elapse between the date as of which the representations and warranties
are made and the date the related Series of Certificates is issued. However, the
Sponsor will not include any Mortgage Loan in a Trust for any Series of
Certificates if anything has come to the Sponsor's attention that would cause it
to believe that the representations and warranties of an Originator will not be
accurate and complete in all material respects in respect of such Mortgage Loan
as of the date of initial issuance of the related Series of Certificates.
Upon a breach of a representation and/or warranty with respect to a
Mortgage Loan made by the Sponsor under the related Pooling and Servicing
Agreement which occurs after sale of the related Mortgage Loan to a Trust, the
Sponsor may be required to repurchase such Mortgage Loan from such Trust or
remove such Mortgage Loan from the Trust and convey a substantially similar
mortgage loan to the Trust in substitution therefor.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued in classes (each, a "Class")
pursuant to a pooling and servicing agreement (each, a "Pooling and Servicing
Agreement"), dated as of the related Cut-off Date, among the Sponsor, the
Servicer and the Trustee, for the benefit of the holders of the Certificates
("Certificateholders") of such Series. The provisions of each Pooling and
Servicing Agreement will vary depending upon the nature of the Certificates to
be issued thereunder and the nature of the related Trust. 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 following summaries describe
the material provisions relating to the Certificates which may appear in the
Pooling and Servicing Agreement. The Prospectus Supplement for a Series of
Certificates will describe any material provision of the Pooling and Servicing
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 in their entirety by reference
to, all of the provisions of the Pooling and Servicing Agreement for each Series
of Certificates and the applicable Prospectus Supplement. A copy of the Pooling
and Servicing Agreement (without exhibits) relating to any Series of
Certificates will be provided to Certificateholders, without charge, upon
written request to the Sponsor at: Aames Capital Corporation, 3731 Wilshire
Blvd., Los Angeles, California 90010, Attention: Corporate Secretary.
GENERAL
Each Class of Certificates of a Series will evidence undivided beneficial
ownership interests in the assets of the related Trust specified in the related
Prospectus Supplement. A Series of Certificates may include one or more Classes
of senior certificates that receive certain preferential treatment
(collectively, "Senior Certificates") with respect to one or more subordinated
Classes (collectively, "Subordinated Classes") of Certificates of such Series.
Certain Series or Classes of Certificates may be covered by or entitled to the
benefits of a Certificate Guaranty Insurance Policy, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a Bankruptcy Bond or other insurance
policies, cash accounts, letters of credit, financial guaranty insurance
policies, third party guarantees or other forms of credit enhancement, in each
case as described herein and in the related Prospectus Supplement. Distributions
on one or more Classes of a Series of Certificates may be made: (a) prior to one
or more other Classes, (b) after the occurrence of specified
28
113
events, (c) in accordance with a schedule or formula, (d) on the basis of
collections from designated portions of the Mortgage Loans in the related Trust
or (e) on a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among Classes
or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions on Certificates will be made only from the assets of the related
Trust, and the Certificates will not represent interests in or obligations of
the Sponsor, the Servicer, the Trustee, any Originator or any other person. The
assets of each Trust will consist of one or more of the following, to the extent
set forth in the related Prospectus Supplement, (a) the Mortgage Loans that from
time to time are subject to the related Pooling and Servicing Agreement; (b) the
assets of the Trust that from time to time are required by the Pooling and
Servicing Agreement to be deposited in the Certificate Account, the Collection
Account and any other accounts established pursuant to the related Pooling and
Servicing Agreement (collectively, the "Accounts"), or to be invested in
Permitted Investments (the Certificate Account, the Collection Account and
Permitted Investments all being defined herein); (c) property and any proceeds
thereof acquired by foreclosure, deed in lieu of foreclosure or a comparable
conversion of the Mortgage Loans in the related Mortgage Pool; (d) any
Certificate Guaranty Insurance Policy; (e) any Mortgage Pool Insurance Policy;
(f) any Special Hazard Insurance Policy; (g) any Bankruptcy Bond; (h) any funds
on deposit from time to time in any Reserve Account; and (i) all rights under
any other insurance policies, guarantees, surety bonds, letters of credit or
other credit enhancement covering any Certificates, any Mortgage Loan in the
related Mortgage Pool or any related Mortgaged Property required pursuant to the
related Pooling and Servicing Agreement.
FORM OF CERTIFICATES
General. Unless otherwise specified in the Prospectus Supplement, the
Certificates of each Series will be issued as physical certificates ("Definitive
Certificates") in fully registered form only in the denominations specified in
the related Prospectus Supplement. Definitive Certificates, if issued, will be
transferable and exchangeable at the corporate trust office of the Trustee or,
at the election of the Trustee, the office of a Certificate Registrar appointed
by the Trustee, in either case as named in the related Prospectus Supplement. No
service charge will be incurred for any registration of exchange or transfer,
but the Trustee may require payment of a sum sufficient to cover any tax or
other governmental charge. If provided in the related Pooling and Servicing
Agreement, a certificate administrator may perform certain duties in connection
with the administration of the Certificates.
Book-Entry Registration. If so specified in the related Prospectus
Supplement, the Certificates may initially be registered in the name of Cede &
Co. ("Cede"), the nominee of 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 and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. 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 brokers, dealers, banks and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participant").
Under a book-entry format, Certificateholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Certificates registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Certificateholders will receive all distributions of principal of and interest
on the Certificates from the Trustee through DTC and its Participants. Under a
book-entry format, Certificateholders will receive payments after the related
Distribution Date because, while payments are required to be forwarded to Cede,
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 Certificateholders. Under a book-entry format, it is anticipated
that the only
29
114
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Pooling and Servicing Agreement. The beneficial
holders of such Certificates will only be permitted to exercise the rights of
Certificateholders under the Pooling and Servicing Agreement indirectly through
DTC and its 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 Certificates and is required to
receive and transmit payments of principal of and interest on the Certificates.
Participants and Indirect Participants with which Certificateholders have
accounts with respect to the Certificates similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of such
Certificateholders. Accordingly, although Certificateholders will not possess
physical certificates, such rules, regulations and procedures provide a
mechanism by which Certificateholders will receive distributions and will be
able to transfer their interests.
Certificateholders who are not Participants may transfer ownership of
Certificates only through Participants by instructing such Participants to
transfer Certificates, by book-entry transfer, through DTC for the account of
the purchasers of such Certificates, which account is maintained with their
respective Participants. Under the rules and in accordance with DTC's normal
procedures, transfers of ownership of Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the respective Participants will make debits or credits, as
the case may be, on their records on behalf of the selling and purchasing
Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account the Certificates are
credited. Additionally, DTC in general advises that it will take such actions
with respect to specified percentages of the Certificateholders only at the
direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Certificates that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Certificates to the extent that such actions
are taken on behalf of Participants whose holdings include such current
principal amounts of outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered form as Definitive Certificates to
Certificateholders or their nominees, rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement as
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the physical certificates representing the Certificates and instruction for
re-registration, the Trustee will issue the Certificates in the form of
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders. Thereafter, payments of
principal of and interest on the Certificates will be made by the Trustee
directly to Certificateholders in accordance with the procedures set forth
herein and in the Pooling and Servicing Agreement. The final distribution of any
Certificate (whether Definitive Certificates or Certificates registered in the
name of Cede), however, will be made only upon presentation and surrender of
such Certificates on the final Distribution Date at such office or agency as is
specified in the notice of final payment to Certificateholders.
DISTRIBUTIONS ON CERTIFICATES
General. Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, if applicable, of principal only or
interest only) on the related Certificates will be made by the
30
115
Trustee on each Distribution Date specified in the related Prospectus Supplement
(each, a "Distribution Date"), in the amounts specified in the related
Prospectus Supplement. Distributions will be made to the persons in whose names
the Certificates are registered at the close of business on the record dates
specified in the Prospectus Supplement. Distributions will be made by check
mailed to the persons entitled thereto at the address appearing in the register
maintained for Certificateholders (the "Certificate Register") or, to the extent
described in the related Prospectus Supplement, by wire transfer or by such
other means as are described therein, except that the final distribution in
retirement of the Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency of the Trustee or other person
specified in the final distribution notice to Certificateholders.
Each Class of Certificates within a Series will evidence the interests
specified in the related Prospectus Supplement, which may include, among other
things, (i) the right to receive distributions allocable only to principal, only
to interest or to any combination thereof; (ii) the right to receive
distributions only of prepayments of principal throughout the lives of the
Certificates or during specified periods; (iii) interests that are subordinated
in their right to receive distributions of scheduled payments of principal,
prepayments of principal, interest or any combination thereof to one or more
other Classes of Certificates of such Series throughout the lives of the
Certificates or during specified periods or interests that are subordinated with
respect to certain losses or delinquencies; (iv) the right to receive
distributions only after the occurrence of events specified in the related
Prospectus Supplement; (v) the right to receive distributions in accordance with
a schedule or formula or on the basis of collections from designated portions of
the assets in the related Trust; (vi) as to Certificates entitled to
distributions allocable to interest, the right to receive interest at a fixed
rate or an adjustable rate; (vii) as to Certificates entitled to distributions
allocable to interest, the right to distributions allocable to interest only
after the occurrence of events specified in the related Prospectus Supplement;
and (viii) as to Certificates entitled to distributions allocable to interest
only after the occurrence of certain events, the accrual but deferment of
payment of interest until such events occur, in each case as specified in such
Prospectus Supplement.
In general, the method of determining the amount of distributions on a
particular Series of Certificates will depend on the type of credit support, if
any, that is used with respect to such Series. See "Credit Enhancement" herein.
Set forth below is a general description of certain methods that may be used to
determine the amount of distributions on the Certificates of a particular
Series. The Prospectus Supplement for each Series of Certificates will describe
the method to be used in determining the amount of distributions on the
Certificates of such Series.
Distributions allocable to principal and interest on the Certificates of a
Series will be made by the Trustee out of, and only to the extent of, funds in a
segregated account established and maintained by the Trustee for the deposits of
such amounts (the "Certificate Account"). The Certificate Account may include
funds transferred from any Reserve Account and funds received as a result of any
other form of credit enhancement. As between Certificates of different Classes
and as between distributions of interest and principal and, if applicable,
between distributions of prepayments of principal and scheduled payments of
principal, distributions made on any Distribution Date will be applied as
specified in the Prospectus Supplement. Unless otherwise specified in the
Prospectus Supplement, distributions to any Class of Certificates will be made
pro rata to all Certificateholders of that Class.
Available Funds. All distributions on the Certificates of each Series on
any Distribution Date will be made from the funds available for distribution on
such Distribution Date as described below ("Available Funds"), in accordance
with the terms described in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, Available Funds for each
Distribution Date will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including principal prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Mortgage Loans in the related Trust, received by the
Servicer during the related collection period (the "Collection Period")
except:
(a) all payments which were due before the Cut-off Date;
31
116
(b) amounts received on particular Mortgage Loans as late payments
of principal or interest and, unless otherwise specified in the related
Prospectus Supplement, other amounts required to be paid by the
Mortgagors which are to be retained by the Servicer (including any
Sub-Servicer) as additional compensation;
(c) amounts representing reimbursement, to the extent permitted by
the Pooling and Servicing Agreement and as described under "The Pooling
and Servicing Agreement -- Monthly Advances and Compensating Interest"
and "-- Servicing and Other Compensation and Payment of Expenses," for
advances made by the Servicer or any Sub-Servicers that were deposited
into the Certificate Account, and amounts representing reimbursement for
certain other losses and expenses incurred by the Servicer or any
Sub-Servicer as permitted under the related Pooling and Servicing
Agreement;
(d) that portion of each collection of interest on a particular
Mortgage Loan in such Trust representing servicing compensation payable
to the Servicer that is to be retained from such collection or is
permitted to be retained from related Insurance Proceeds, Liquidation
Proceeds or proceeds of Mortgage Loans purchased pursuant to the related
Pooling and Servicing Agreement; and
(e) Trustee fees and other expenses or fees payable by the related
Trust as specified in the related Prospectus Supplement;
(ii) all amounts received and retained, if any, in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds"), net of
unreimbursed liquidation expenses and insured expenses incurred and
unreimbursed advances made by the Servicer or any Sub-Servicer ("Net
Liquidation Proceeds"), including all proceeds (net of unreimbursed
Servicing Advances) of title insurance, hazard insurance and primary
mortgage insurance, if any ("Insurance Proceeds"), all Principal
Prepayments (as defined herein), all proceeds received in connection with
the condemnation of a Mortgaged Property or the release of part of a
Mortgaged Property and all proceeds of any Mortgage Loan purchased by the
Sponsor or any other entity pursuant to the Pooling and Servicing
Agreement;
(iii) the amount of any Monthly Advance (as defined herein) or
Compensating Interest Payment (as defined herein) made by the Servicer or
any Sub-Servicer, as deposited by such in the Certificate Account; and
(iv) if applicable, amounts withdrawn from a Reserve Account or
received in connection with other credit enhancement.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement, each Class of Certificates may bear interest at a different rate
which may be fixed or adjustable ("Pass-Through Rate"). Interest will accrue on
the Certificate Principal Balance (as defined herein) (or, in the case of
Certificates entitled only to distributions allocable to interest, the aggregate
notional principal balance) of each Class of Certificates entitled to interest,
at the Pass-Through Rate and for the periods specified in the Prospectus
Supplement. To the extent funds are available therefor, interest accrued during
each such specified period on each Class of Certificates entitled to interest
(other than a Class of Certificates that provides for interest that accrues, but
is not currently payable, referred to hereafter as "Accrual Certificates") will
be distributable on the Distribution Dates specified in the Prospectus
Supplement until the aggregate Certificate Principal Balance of the Certificates
of such Class has been distributed in full or, in the case of Certificates
entitled only to distributions allocable to interest, until the aggregate
notional principal balance of such Certificates is reduced to zero or for the
period of time designated in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, distributions
allocable to interest on each Certificate that is not entitled to distributions
allocable to principal will be calculated based on the notional principal
balance of such Certificate. The notional principal balance of a Certificate
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
32
117
With respect to any Class of Accrual Certificates, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Certificate Principal Balance
of such Class of Certificates on that Distribution Date. Unless otherwise
specified in the Prospectus Supplement, distributions of interest on each Class
of Accrual Certificates will commence only after the occurrence of the events
specified in the Prospectus Supplement. Prior to such time, the beneficial
ownership interest of such Class of Accrual Certificates in the Trust, as
reflected in the aggregate Certificate Principal Balance of such Class of
Accrual Certificates, will increase on each Distribution Date by the amount of
interest that accrued on such Class during the preceding interest accrual period
but that was not required to be distributed to such Class on such Distribution
Date. Any such Class of Accrual Certificates will thereafter accrue interest on
its outstanding Certificate Principal Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the Prospectus
Supplement, the aggregate principal balance amount of any Class of Certificates
entitled to distributions of principal will be the aggregate original
Certificate Principal Balance of such Class of Certificates specified in the
Prospectus Supplement, less all amounts previously distributed to such
Certificates as allocable to principal ("Certificate Principal Balance"). In the
case of Accrual Certificates, unless otherwise specified in the Prospectus
Supplement, the original Certificate Principal Balance will be increased by all
interest accrued but not then distributable on such Accrual Certificates. The
Prospectus Supplement will specify the method by which the amount of principal
payments on the Certificates will be calculated and the manner in which such
amount will be allocated among the Classes of Certificates entitled to
distributions of principal.
The Prospectus Supplement may provide that one or more Classes of Senior
Certificates will be entitled to receive all or a disproportionate percentage of
any principal payments made by a Mortgagor which are received in advance of
their scheduled due dates and are not accompanied by amounts representing
scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in the Prospectus Supplement. Any such allocation of Principal
Prepayments to such Class or Classes of Certificates will have the effect of
accelerating the amortization of such Senior Certificates while increasing the
interests evidenced by Subordinated Certificates in the Trust. Increasing the
interests of Subordinated Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinated Certificates. See "Credit
Enhancement -- Subordination" herein. The timing and amounts of distributions
allocable to interest and principal and, if applicable, Principal Prepayments
and scheduled payments of principal, to be made on any Distribution Date may
vary among Classes over time, or otherwise, as specified in the Prospectus
Supplement.
REPORTS TO CERTIFICATEHOLDERS
Except as otherwise set forth in the related Prospectus Supplement, the
related Pooling and Servicing Agreement will require that, on or before each
Distribution Date, either the Servicer, any Sub-Servicer or the Trustee to
forward to each Certificateholder of record of the related Series of
Certificates a statement setting forth, to the extent applicable to such Series,
the following information with respect to the distribution for such Distribution
Date.
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and, if so
specified in the related Prospectus Supplement, any prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) if applicable, the aggregate amount (a) otherwise allocable to
the Subordinated Certificateholders on such Distribution Date, and (b)
withdrawn from a Reserve Account, if any, that is included in the amounts
distributed with respect to Senior Certificates;
(iv) the total amount of the Insured Payment (as defined herein)
included in the amount distributed on such Distribution Date;
(v) the Pool Balance (as defined herein) and the Pool Factor (as
defined herein) of the Mortgage Loans for the following Distribution Date;
33
118
(vi) if applicable, the percentage of principal payments on the
Mortgage Loans, if any, which each Class will be entitled to receive on the
following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate, the Pass-Through
Rate applicable to the distribution on the Distribution Date;
(viii) the number and aggregate principal balance of Mortgage Loans in
the related Mortgage Pool contractually delinquent (a) one month, (b) two
months and (3) three or more months as of the end of the related Collection
Period;
(ix) the number and aggregate principal balance of all Mortgage Loans
in foreclosure or other similar proceedings, and the book value of any real
estate acquired through foreclosure or grant of a deed in lieu of
foreclosure;
(x) if applicable, the amount remaining in any Reserve Account or the
amount remaining of any other credit support, after giving effect to the
distribution on the Distribution Date; and
(xi) the amount of Monthly Advances and/or Servicing Advances, if any,
made since the preceding Distribution Date.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant Class having the denomination or
interest specified either in the related Prospectus Supplement or in the report
to Certificateholders. The report to Certificateholders for any Class or Series
of Certificates may include additional or other information of a similar nature
to that specified above.
The "Pool Balance" means the aggregate outstanding principal balance of a
Class and the "Pool Factor" is the percentage obtained by dividing the Pool
Balance after giving effect to the distribution of principal on such
Distribution Date by the Cut-off Date Pool Balance.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer or the Trustee will mail to each person who was a
Certificateholder of record at any time during such calendar year (a) a report
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or desirable
for Certificateholders to prepare their tax returns.
CREDIT ENHANCEMENT
Credit enhancement may be provided with respect to one or more Classes of a
Series of Certificates or with respect to the Mortgage Loans in the related
Trust. Credit enhancement may be in the form of (i) the subordination of one or
more Classes of the Certificates of such Series, (ii) the use of a Certificate
Guaranty Insurance Policy, a Mortgage Pool Insurance Policy, a Special Hazard
Insurance Policy, a Bankruptcy Bond, a Reserve Account or other insurance
policies, cash accounts, letters of credit, limited financial guaranty insurance
policies, third party guarantees or other forms of credit enhancement described
in the related Prospectus Supplement, or the use of a cross-support feature, or
(iii) any combination of the foregoing. The protection against losses afforded
by any credit enhancement will be limited and will not guarantee repayment of
the entire principal balance of the Certificates and interest thereon. If losses
occur that exceed the maximum amount covered by the credit enhancement or that
are not covered by the credit enhancement, Certificateholders will bear their
allocable share of such deficiency. If a form of credit enhancement applies to
several Classes of Certificates, and if principal payments of certain Classes
will be distributed prior to such distributions to other Classes, the Classes
which receive distributions at a later time are more likely to bear any losses
which exceed the amount covered by credit enhancement.
Unless otherwise specified in the Prospectus Supplement, coverage under any
credit enhancement may be cancelled or reduced by the Sponsor without the
consent of Certificateholders, if such cancellation or reduction would not
adversely affect the rating or ratings of the related Certificates.
34
119
SUBORDINATION
If so specified in the related Prospectus Supplement, scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise would
have been distributable to one or more Classes of Subordinated Certificates of a
Series will instead be distributed to holders of one or more Classes of Senior
Certificates, under the circumstances and to the extent specified in such
Prospectus Supplement. If specified in the related Prospectus Supplement, the
holders of Senior Certificates will receive the amounts of principal and
interest due to them on each Distribution Date, out of the funds available for
distribution on such date in the related Certificate Account, prior to any such
distribution being made to holders of the related Subordinated Certificates, in
each case under the circumstances and subject to the limitations specified in
such Prospectus Supplement. The protection afforded to the holders of Senior
Certificates through subordination also may be accomplished by first allocating
certain types of losses or delinquencies to the related Subordinated
Certificates, to the extent described in the related Prospectus Supplement. If
aggregate losses and delinquencies in respect of such Mortgage Loans were to
exceed the total amounts otherwise available for distribution to holders of
Subordinated Certificates or, if applicable, were to exceed the specified
maximum amount, holders of Senior Certificates would experience losses on such
Certificates.
If so specified in the Prospectus Supplement, the same Class of
Certificates may be Senior Certificates with respect to the right to receive
certain types of payments or with respect to the allocation of certain types of
losses or delinquencies and Subordinated Certificates with respect to the right
to receive other types of payments or with respect to the allocation of certain
types of losses or delinquencies. If specified in the Prospectus Supplement,
various Classes of Senior Certificates and Subordinated Certificates may
themselves be subordinate in their right to receive certain distributions to
other Classes of Senior and Subordinated Certificates, respectively, through a
cross-support mechanism or otherwise. As between Classes of Senior Certificates
and as between Classes of Subordinated Certificates, distributions may be
allocated among such Classes (i) in the order of their scheduled final
distribution dates, (ii) in accordance with a schedule or formula, (iii) in
relation to the occurrence of certain events or (iv) otherwise, in each case as
specified in the related Prospectus Supplement.
The related Prospectus Supplement will set forth information concerning the
amount of subordination of a Class or Classes of Subordinated Certificates in a
Series, the circumstances in which such subordination will be applicable, the
manner, if any, in which the amount of subordination will decrease over time,
the manner of funding any Reserve Account and the conditions under which amounts
in any such Reserve Account will be used to make distributions to Senior
Certificateholders or released to Subordinated Certificateholders from the
related Trust.
RESERVE ACCOUNTS
If so specified in the related Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in such Prospectus Supplement may be deposited by the
Sponsor, the Servicer or the Originators, as applicable, on the date specified
in the related Prospectus Supplement in one or more reserve accounts (each, a
"Reserve Account") established with the Trustee. In addition to or in lieu of
the foregoing, if so specified in such Prospectus Supplement, all or any portion
of amounts otherwise distributable to holders of Subordinated Certificates on
any Distribution Date may instead be deposited into a Reserve Account. Such
deposits may be made on the date specified in the related Prospectus Supplement,
which may include each Distribution Date, each Distribution Date for specified
periods or until the balance in the Reserve Account has reached a specified
amount. See "-- Subordination" above.
The cash and other assets in a Reserve Account will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the related Prospectus Supplement, to provide additional protection
against losses in respect of, the assets in the related Trust, to pay the
expenses of the Trust or for such other purposes specified in such Prospectus
Supplement. Any cash in a Reserve Account and the proceeds upon maturity or
liquidation of any other asset or instrument therein will be invested, to the
extent
35
120
acceptable to the applicable Rating Agency, in Permitted Investments (as defined
herein), including obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks, certain repurchase
agreements of United States government securities with eligible commercial banks
and certain other instruments acceptable to the applicable Rating Agency. Unless
otherwise specified in the related Prospectus Supplement, any asset or
instrument deposited in any Reserve Account will name the Trustee, in its
capacity as trustee for the Certificateholders, as beneficiary and will be
issued by an entity acceptable to the applicable Rating Agency.
Any amounts on deposit in a Reserve Account will be available for
withdrawal from such Reserve Account for distribution to holders of certain
Classes of Certificates or release to holders of certain Classes of
Certificates, the Sponsor, the Servicer, the Originators or another entity for
the purposes, in the manner and at the times specified in the related Prospectus
Supplement.
CERTIFICATE GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a certificate
guaranty insurance policy or policies (each, a "Certificate Guaranty Insurance
Policy") may be obtained and maintained for a Class or Series of Certificates.
The issuer of any Certificate Guaranty Insurance Policy (a "Certificate
Insurer") will be described in the related Prospectus Supplement. A copy of any
such Certificate Guaranty Insurance Policy will be attached as an exhibit to the
related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, a
Certificate Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that a certain amount will be available for
distribution to Certificateholders on a related Distribution Date (the "Insured
Amount"). The Insured Amount will equal the full amount of principal and
interest distributable to Certificateholders as of any Distribution Date under
the related Pooling and Servicing Agreement plus any other amounts specified
therein or in the related Prospectus Supplement.
The specific terms of any Certificate Guaranty Insurance Policy will be
described in the related Prospectus Supplement.
Subject to the terms of the related Pooling and Servicing Agreement, a
Certificate Insurer may be subrogated to the rights of Certificateholders to
receive payments under the Certificates to the extent of any payments by such
Certificate Insurer under the related Certificate Guaranty Insurance Policy that
were not previously reimbursed. However, any such subrogation rights of a
Certificate Insurer may not result in a reduction of the amount otherwise
distributable on any Distribution Date to holders of the Certificates covered by
such Certificate Guaranty Insurance Policy.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a mortgage pool
insurance policy or policies (each, a "Mortgage Pool Insurance Policy") issued
by the insurer (the "Mortgage Pool Insurer") named in such Prospectus Supplement
will be obtained and maintained for all or certain of the Mortgage Loans. A
Mortgage Pool Insurance Policy will, subject to the limitations described below,
cover losses on the related Mortgage Loans up to a maximum amount specified in
the related Prospectus Supplement. A Mortgage Pool Insurance Policy, however, is
not a blanket policy against loss, as claims thereunder may be made only
respecting losses on certain Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless otherwise specified in a
related Prospectus Supplement, a Mortgage Pool Insurance Policy will not cover
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy.
A Mortgage Pool Insurance Policy generally will not insure (and many
primary mortgage insurance policies do not insure) against loss sustained by
reason of a default arising from, among other things, (i) fraud or negligence in
the origination or servicing of a Mortgage Loan, including misrepresentation by
the Mortgagor, the Originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to a Mortgage Pool Insurance Policy, a bond or other credit support
may cover
36
121
fraud in connection with the origination of Mortgage Loans. If so specified in
the related Prospectus Supplement, a failure of coverage attributable to an
event specified in clause (i) or (ii) above might result in a breach of the
Sponsor's representations and, in such event, might give rise to an obligation
on the part of the Sponsor to repurchase the defaulted Mortgage Loan if the
breach cannot be cured by the Sponsor. No Mortgage Pool Insurance Policy will
cover losses in respect of a defaulted Mortgage Loan occurring when the Servicer
of such Mortgage Loan, at the time of default or thereafter, was not approved by
the applicable Mortgage Pool Insurer.
The original amount of coverage under a Mortgage Pool Insurance Policy will
be reduced over the life of the related Certificates by the aggregate dollar
amount of claims paid by the Servicer less the aggregate of the net amounts
realized by the Mortgage Pool Insurer upon disposition of all foreclosed
properties. The amount of claims paid will include certain expenses incurred by
the Servicer, as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. Accordingly, if aggregate net claims paid under a
Mortgage Pool Insurance Policy reach the maximum amount, coverage under the
Mortgage Pool Insurance Policy will be exhausted and any further losses will be
borne by the related Certificateholders.
The terms of any Mortgage Pool Insurance Policy will be described in the
related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a special hazard
insurance policy or policies (each, a "Special Hazard Insurance Policy") will be
obtained for the related Mortgage Pool and will be issued by the insurer (the
"Special Hazard Insurer") named in such Prospectus Supplement. Each Special
Hazard Insurance Policy, subject to limitations described below, will protect
the related Certificateholders from (i) loss by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is not located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
a hazard insurance policy. See "The Pooling and Servicing
Agreement -- Maintenance of Hazard Insurance" herein. A Special Hazard Insurance
Policy will not cover losses occasioned by war, civil insurrection, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear reaction, flood (if the Mortgaged Property
is located in a federally designated flood area), chemical contamination and
certain other risks. The amount of coverage under any Special Hazard Insurance
Policy will be specified in the related Prospectus Supplement. A Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the related Mortgaged Property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
The terms of any Special Hazard Insurance Policy will be described in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, because
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Pooling and Servicing Agreement will provide that, if the related
Mortgage Pool Insurance Policy shall have been terminated or been exhausted
through payment of claims, the Servicer will be under no further obligation to
maintain such Special Hazard Insurance Policy.
BANKRUPTCY BONDS
If so specified in the related Prospectus Supplement, a bankruptcy bond or
bonds (each, a "Bankruptcy Bond") for proceedings under the federal Bankruptcy
Code will be issued by an insurer named in such Prospectus Supplement. A
Bankruptcy Bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a Mortgage
Loan or a reduction by such
37
122
court of the principal amount of a Mortgage Loan and will cover certain unpaid
interest on the amount of such a principal reduction from the date of the filing
of a bankruptcy petition. The level of coverage and other terms of a Bankruptcy
Bond will be set forth in the related Prospectus Supplement.
CROSS SUPPORT
If so specified in the related Prospectus Supplement, the beneficial
ownership of separate Trusts or separate groups of assets in a single Trust may
be evidenced by separate Classes of the related Series of Certificates. In such
case, credit support may be provided by a cross-support feature which requires
that distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust. The Prospectus
Supplement for a Series of Certificates which includes a cross-support feature
will describe the manner and conditions for applying such cross-support feature.
If so specified in the related Prospectus Supplement, the coverage provided
by one or more other forms of credit enhancement, such as Certificate Guaranty
Insurance Policies or Reserve Accounts, may apply concurrently to two or more
separate Trusts without priority among such Trusts, until the credit support is
exhausted. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit enhancement relates and the manner of determining the amount
of the coverage provided thereby and the application of such coverage to the
identified Trusts or asset groups.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If so specified in the related Prospectus Supplement, a Trust may include,
in addition to or in lieu of some or all of the foregoing, letters of credit,
third party guarantees and other arrangements for maintaining timely payments or
providing additional protection against losses on the assets included in such
Trust, paying administrative expenses or accomplishing such other purpose. The
related Prospectus Supplement will describe any such arrangements, including
information as to the extent of coverage and any conditions or limitations
thereto. The Trust may include a guaranteed investment contract or reinvestment
agreement pursuant to which funds held in one or more accounts will be invested
at a specified rate. Any such arrangement must be acceptable to each Rating
Agency named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the related Prospectus Supplement expressly provides for
credit enhancement and maintenance arrangements, the following paragraphs shall
apply.
If a form of credit enhancement has been obtained for a Series of
Certificates, the Sponsor or the Servicer will be obligated to exercise its
reasonable efforts to keep or cause to be kept such form of credit support in
full force and effect throughout the term of the related Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below.
In lieu of the obligation to maintain a particular form of credit
enhancement, the Sponsor or the Servicer may obtain a substitute or alternate
form of credit enhancement. If the Sponsor obtains such a substitute form of
credit enhancement, such form of credit enhancement will be maintained and kept
in full force and effect as provided herein. Prior to its obtaining any
substitute or alternate form of credit enhancement, the Sponsor or the Servicer
will obtain written confirmation from each applicable Rating Agency that the
substitution or alternate form of credit enhancement for the existing credit
enhancement will not adversely affect the then current ratings assigned to such
Certificates by each applicable Rating Agency.
The Servicer will provide the Trustee information required for the Trustee
to draw under a Certificate Guaranty Insurance Policy or any letter of credit,
will present claims to any Mortgage Pool Insurer, any Special Hazard Insurer and
to any issuer of a Bankruptcy Bond, and will take such reasonable steps as are
necessary to permit recovery under such Certificate Guaranty Insurance Policy,
letter of credit, Bankruptcy Bond, Special Hazard Insurance Policy, Mortgage
Pool Insurance Policies or other applicable forms of credit enhancement.
Additionally, the Servicer will present such claims and take such steps as are
reasonably
38
123
necessary to provide for the performance by another party of its purchase
obligations. All collections by the Servicer under any Mortgage Pool Insurance
Policy or any Bankruptcy Bond and, where the related property has not been
restored, any Special Hazard Insurance Policy, are to be deposited initially in
the Collection Account and ultimately in the Certificate Account, subject to
withdrawal. All draws under any Certificate Guaranty Insurance Policy or letter
of credit will be deposited directly in the Certificate Account.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Insurance Policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of credit
enhancement, 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 one or more Classes of Certificateholders on liquidation of the
Mortgage Loan after reimbursement to the Servicer for its expenses and (ii) that
such expenses will be recoverable out of related Liquidation Proceeds or
Insurance Proceeds. If recovery under any applicable form of credit enhancement
is not available because the Servicer has been unable to make the above
determinations or has made such determinations incorrectly or recovery is not
available for any other reason, the Servicer is nevertheless obligated to follow
such normal practices and procedures (subject to the preceding sentence) as it
deems necessary or advisable to realize upon the defaulted Mortgage Loan and in
the event such determination has been incorrectly made, is entitled to
reimbursement of its expenses in connection with such restoration.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the amount
and timing of principal payments on or in respect of the Mortgage Loans included
in the related Trusts, the allocation of available funds to various Classes of
Certificates, the Pass-Through Rate for various Classes of Certificates and the
purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given Mortgage
Pool will vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Mortgage Pool. Unless otherwise
specified in the related Prospectus Supplement, Mortgage Loans may be prepaid
without penalty in full or in part at any time, although a prepayment fee or
penalty may be imposed in connection therewith.
The rate of prepayments with respect to mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall below the
Mortgage Rates borne by the Mortgage Loans, such Mortgage Loans are likely to be
subject to higher prepayment rates than if prevailing interest rates remain at
or above such Mortgage Rates. Conversely, if prevailing interest rates rise
appreciably above the Mortgage Rates borne by the Mortgage Loans, such Mortgage
Loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Mortgage Rates. However, there can be no assurance that
such will be the case.
Prepayments are influenced by a variety of economic, geographical, social,
tax, legal and additional factors. The rate of prepayments on Mortgage Loans may
be affected by changes in a Mortgagor's housing needs, job transfers,
unemployment, Mortgagor's net equity in the related Mortgaged Property, the
enforcement of due-on-sale clauses and other servicing decisions. Adjustable
rate mortgage loans, bi-weekly mortgage loans, graduated payment mortgage loans,
growing equity mortgage loans, reverse mortgage loans, buy-down mortgage loans
and mortgage loans with other characteristics may experience a rate of principal
prepayments which is different from that of fixed rate, monthly pay, fully
amortizing mortgage loans.
Generally, mortgage loans secured by junior liens have smaller average
principal balances than senior or first mortgage loans and are not viewed by
borrowers as permanent financing. Accordingly, such mortgage loans may
experience a higher rate of prepayment than mortgage loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on second mortgage loans for federal income tax purposes may
result in a higher rate of prepayment of such mortgage loans. The obligation of
the Servicer to enforce due-on-sale provisions of the mortgage loans may also
increase prepayments. The prepayment experience of the Mortgage Pools may be
affected by a wide variety of factors, including general
39
124
and local economic conditions, mortgage market interest rates, the availability
of alternative financing and homeowner mobility. The Sponsor is unaware of any
reliable studies that would accurately project the prepayment risks associated
with the mortgage loans.
Unless otherwise provided in the related Prospectus Supplement, all of the
Mortgage Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the Mortgage Loan upon sale or certain transfers by
the Mortgagor of the underlying Mortgaged Property. Unless otherwise provided in
the related Prospectus Supplement, the Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the Servicer
will not take any enforcement action that would materially increase the risk of
default or delinquency on, or materially decrease the security for, such
Mortgage Loan. See "The Pooling and Servicing Agreement -- Enforcement of
Due-on-Sale Clauses" herein.
The weighted average lives of Certificates will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Certificateholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Mortgage Loans and foreclosed Mortgaged Properties result in principal
payments on the Mortgage Loans faster than otherwise scheduled.
When a full prepayment occurs on a Mortgage Loan, the Mortgagor will be
charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Interest shortfalls also could result
from the application of the Relief Act, as described under "Certain Legal
Aspects of the Mortgage Loans and Related Matters -- Soldiers' and Sailors'
Civil Relief Act" herein. Unless otherwise specified in the related Prospectus
Supplement, in the event that less than 30 days' interest is collected on a
Mortgage Loan during a Collection Period, the Servicer or any Sub-Servicer, if
applicable, will be obligated to make a Compensating Interest Payment with
respect thereto, but only to the extent of the aggregate Servicing Fee for the
related Distribution Date. To the extent such shortfalls exceed the amount of
the Compensating Interest Payment that the Servicer or any Sub-Servicer is
obligated to pay, the yield on the Certificates could be adversely affected.
Partial prepayments in a given month may be applied to the outstanding principal
balances of the Mortgage Loans so prepaid on the first day of the month of
receipt or the month following receipt. In the latter case, partial prepayments
will not reduce the amount of interest passed through in such month.
Under certain circumstances, the Sponsor, the Servicer, the holders of
REMIC Residual Certificates or certain other entities specified in the related
Prospectus Supplement may have the option to purchase the Mortgage Loans and
other assets of a Trust, thereby effecting early retirement of the related
Series of Certificates, subject to the principal balance of the related Mortgage
Loans being less than the percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Loans at the
Cut-off Date for the related Series. Typically, the Sponsor, the Servicer or
such other entity will cause the retirement of a Series of Certificates at the
point at which servicing of the remaining relatively small pool of Mortgage
Loans becomes inefficient. See "The Pooling and Servicing
Agreement -- Termination; Optional Termination" herein.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on the Certificates from the first
day of each month, the distribution of such interest will not be made earlier
than a specified date in the month following the month of accrual.
The timing of payments on the Mortgage Loans may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Loans, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate faster (or slower) than the rate anticipated by
the investor during the period immediately following the
40
125
issuance of the Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal payments.
The Prospectus Supplement relating to a Series of Certificates may discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments) on the yield, weighted average lives and maturities of
such Certificates, including the effect of prepayments and allocation of
realized losses on the Mortgage Loans as they relate to specific Classes of
Certificates. Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Certificates. The relative combination of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of the Mortgage Loans at
any time or over the lives of the Certificates.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of the material provisions of each Pooling and
Servicing Agreement that are not described elsewhere in this Prospectus. The
summary does not purport to describe all provisions of each Pooling and
Servicing Agreement and is subject to, and qualified in its entirety by
reference to, the provisions of each Pooling and Servicing Agreement. Where
provisions or terms used in a particular Pooling and Servicing Agreement are
different than as described herein, a description of such provisions or terms
will be included in the related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE LOANS
Assignment of the Mortgage Loans. At the Closing Date for a Series of
Certificates, the Sponsor will cause the Mortgage Loans comprising the related
Trust to be sold and assigned to the Trustee, without recourse, together with
all principal and interest received by or on behalf of the Sponsor on or with
respect to the such Mortgage Loans on or after the Cut-off Date, other than
principal and interest due before the Cut-off Date. The Trustee will,
concurrently with such assignment, deliver the Certificates to the Sponsor in
exchange for the Mortgage Loans.
Each Mortgage Loan assigned to the Trustee will be identified in a schedule
appearing as an exhibit to the related Pooling and Servicing Agreement (a "Loan
Schedule"). The Loan Schedule will include information as to the outstanding
principal balance of each Mortgage Loan after application of payments due on the
Cut-off Date, as well as information regarding the Mortgage Rate, the maturity
date of the Mortgage Loan, the Combined Loan-to-Value Ratio at origination and
certain other information.
In connection with the sale, the Sponsor will be required to deliver or
cause to be delivered to the Trustee certain specified items (collectively, with
respect to each Mortgage Loan, the "Mortgage File"). Unless otherwise specified
in the related Prospectus Supplement each Mortgage File will be required to
include:
(a) the original Mortgage Note, with all intervening endorsements
sufficient to show a complete chain of endorsement to the Sponsor, endorsed
by the Sponsor, without recourse, to the order of the Trustee;
(b) the original Mortgage with evidence of recording indicated
thereon;
(c) the original executed assignment of the Mortgage in recordable
form;
(d) originals of all assumption, modification and substitution
agreements, if any, in those instances where the terms or provisions of a
Mortgage or Mortgage Note have been modified or such Mortgage or Mortgage
Note has been assumed;
(e) originals of all intervening mortgage assignments with evidence of
recording indicated thereon sufficient to show a complete chain of
assignment from the originator of the Mortgage Loan to the Sponsor; and
(f) the original lender's title insurance policy issued on the date of
the origination of such Mortgage Loan.
41
126
Unless otherwise specified in the related Prospectus Supplement, the
Sponsor will promptly cause the assignments of the related Mortgage Loans to be
recorded in the appropriate public office for real property records, except in
states in which, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the trustee's interest in such loans
against the claim of any subsequent transferee or any successor to or creditor
of the Sponsor or the originator of such Mortgage Loans.
If the Sponsor cannot deliver the original Mortgage or mortgage assignment
with evidence of recording thereon on the Closing Date solely because of a delay
caused by the public recording office where such original Mortgage or mortgage
assignment has been delivered for recordation, the Sponsor shall deliver to the
Trustee an Officer's Certificate, with a photocopy of such Mortgage attached
thereto, stating that such original Mortgage or mortgage assignment has been
delivered to the appropriate public recording official for recordation. The
Sponsor shall promptly deliver to the Trustee such original Mortgage or mortgage
assignment with evidence of recording indicated thereon upon receipt thereof
from the public recording official. If the Sponsor within six months from the
Closing Date shall not have received such original Mortgage or mortgage
assignment from the public recording official, it shall obtain, and deliver to
the Trustee within eight months from the Closing Date, a copy of such original
Mortgage or mortgage assignment certified by such public recording official to
be a true and complete copy of such original Mortgage or mortgage assignment as
recorded by such public recording office.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Review of the Mortgage File. The Trustee will agree, for the benefit of the
Certificateholders, to review each Mortgage File and the specified items
delivered by or on behalf of the Sponsor within 45 days after the Closing Date,
to determine if the documents described in clauses (a) through (f) above have
been executed and received, and that such documents relate to the Mortgage Loans
in the Loan Schedule. The Trustee is under no duty or obligation to inspect,
review or examine any such documents, instruments, certificates or other papers
to determine that they are genuine, enforceable or appropriate for the
represented purpose or that they are other than what they purport to be on their
face, nor is the Trustee under any duty to determine independently whether there
are any intervening assignments or assumption or modification agreements with
respect to any Mortgage Loan.
If within such 45-day period the Trustee finds that any document
constituting a part of a Mortgage File is not properly executed, has not been
received or is unrelated to the Mortgage Loans identified in the related Loan
Schedule, or that any Mortgage Loan does not conform in a material respect to
the description thereof as set forth in the related Loan Schedule, the Trustee
will be required to promptly notify the Sponsor of any defect. The Sponsor will
use reasonable efforts to remedy a material defect in a document constituting
part of a Mortgage File within 60 days after the Trustee's notice. Thereafter,
the Trustee shall also certify that it has received all of the documents
referred to in clauses (a) through (f) and that all corrections or curative
actions required to be taken by the Sponsor within the 60-day period have been
completed or effected, or that the related Mortgage Loans will be repurchased or
substituted, as specified below.
Repurchase or Substitution of Mortgage Loans. Unless otherwise specified
in the related Prospectus Supplement, if, within 60 days after the Trustee's
notice of defect, the Sponsor has not remedied the defect and the defect
materially and adversely affects the interest of the Certificateholders in the
related Mortgage Loan, the Sponsor will be required to, prior to the next
Distribution Date, at its option, (i) substitute in lieu of such Mortgage Loan
another Mortgage Loan of like kind (a "Qualified Replacement Mortgage Loan") or
(ii) repurchase such Mortgage Loan at a price equal to its Principal Balance
together with one month's interest at the Mortgage Rate, less any payments
received during the related Collection Period ("Loan Purchase Price").
If as provided above, the Sponsor, rather than repurchase the Mortgage
Loan, removes a Mortgage Loan (a "Deleted Mortgage Loan") from the related Trust
and substitutes in its place a Qualified Replacement Mortgage Loan, such
substitution must be effected within 90 days of the date of the initial issuance
of the Certificates of a Series with respect to which no REMIC election is made.
With respect to a Trust for which a
42
127
REMIC election is to be made, except as otherwise provided in the related
Prospectus Supplement, such substitution of a defective Mortgage Loan must be
effected within two years of the date of the initial issuance of the
Certificates, and may not be made if such substitution would cause the Trust to
not qualify as a REMIC or result in a prohibited transaction tax under the Code.
Except as otherwise provided in the related Prospectus Supplement, any Qualified
Replacement Mortgage Loan generally will, on the date of substitution, (i) have
an outstanding principal balance, after deduction of all scheduled payments due
in the month of substitution, not in excess of and not substantially less than
the outstanding principal balance of the Deleted Mortgage Loan (the amount of
any shortfall to be paid to the related Trust in the month of substitution for
distribution to the Certificateholders as a reduction of principal), (ii) have a
Mortgage Rate neither one percentage point less than nor one percentage point
greater than the Mortgage Rate of the Deleted Mortgage Loan as of the date of
substitution, (iii) have a remaining term to maturity neither one year earlier
than nor one year later than that of the Deleted Mortgage Loan and (iv) comply
with all of the representations and warranties set forth in the related Pooling
and Servicing Agreement as of the date of substitution. The related Pooling and
Servicing Agreement may include additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously.
Additionally, unless otherwise specified in the related Prospectus
Supplement, the Sponsor will have made representations and warranties in respect
of the Mortgage Loans sold by the Sponsor and evidenced by a Series of
Certificates. Such representations and warranties generally include, among other
things: (i) that title insurance (or in the case of Mortgaged Properties located
in areas where such policies are generally not available, an attorney's
certificate of title) was in effect on the Closing Date; (ii) that the Sponsor
had title to each such Mortgage Loan and such Mortgage Loan was subject to no
offsets, defenses or counterclaims; (iii) that each Mortgage Loan constituted a
valid first or junior lien on the Mortgaged Property (subject only to
permissible title insurance exceptions, if applicable, and certain other
exceptions described in the Pooling and Servicing Agreement) and that the
Mortgaged Property was free from damage and was in acceptable condition; (iv)
that there were no delinquent tax or assessment liens against the Mortgaged
Property; (v) that no required payment on a Mortgage Loan was more than thirty
days delinquent as of the related Cut-off Date; and (vi) that each Mortgage Loan
was made in compliance with, and, subject to certain limitations, is enforceable
under, all applicable state and federal laws and regulations in all material
respects. Upon the discovery by the Sponsor or the Trustee that the
representations in the applicable Pooling and Servicing Agreement are untrue in
any material respect as of the dates specified therein, with the result that the
interests of the Certificateholders in the related Mortgage Loan are materially
and adversely affected, the party discovering such breach is required to give
prompt written notice to the other parties. Upon the earliest to occur of the
Sponsor's discovery, its receipt of notice of breach from any of the other
parties or such time as a situation resulting from a representation which is
untrue and materially and adversely affects the interests of the
Certificateholders, the Sponsor is required promptly to cure such breach in all
material respects or the Sponsor will (or will cause the applicable Originator
to) on the Distribution Date next succeeding such discovery, receipt of notice
or such other time, repurchase, or provide a Qualified Replacement Mortgage
Loan, as set forth above. The obligation of the Sponsor so to cure, substitute
or repurchase any Mortgage Loan as to which breach has not been remedied
constitutes the sole remedy available to the Certificateholders or the Trustee
respecting such breach.
Any agreements pursuant to which the Sponsor acquires certain Mortgage
Loans to be deposited in a Trust will contain representations and obligations of
the related Originators that are similar to those described in the preceding
paragraph. The Sponsor may enforce any obligations of the related Originators in
connection with its efforts to cure any breach of a representation pursuant to
the related Pooling and Servicing Agreement. See "The
Originators -- Representations by Originators" herein.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to establish and
maintain one or more accounts (each, a "Collection Account") at one or more
institutions meeting the requirements set forth in the related Pooling and
Servicing Agreement. Pursuant to the related Pooling and Servicing Agreement,
the Servicer will be required to deposit all
43
128
collections (other than amounts escrowed for taxes and insurance) related to the
Mortgage Loans into the Collection Account no later than the second business day
after receipt. All funds in the Collection Accounts will be required to be
invested in instruments designated as Permitted Investments. Any investment
earnings on funds held in the Collection Accounts are for the benefit of the
Servicer.
The Servicer may make withdrawals from the Collection Account only for the
following purposes: (a) to make deposits into the Certificate Account, as set
forth below; (b) to pay itself any monthly Servicing Fees; (c) to make any
Servicing Advance or to reimburse itself for any Servicing Advance or Monthly
Advance previously made; (d) to withdraw amounts that have been deposited to the
Collection Account in error; and (e) to clear and terminate the Collection
Account.
Unless otherwise specified in the related Prospectus Supplement, not later
than the third day prior to any Distribution Date (the "Deposit Date"), the
Servicer will be required to wire transfer to the Trustee for deposit in the
Certificate Account the sum (without duplication) of all amounts on deposit in
the Collection Account that constitute any portion of Available Funds for the
related Distribution Date. See "Description of Certificates -- Distribution on
Certificates -- Available Funds" herein.
INVESTMENT OF ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement, all or a
portion of any Account, including the Collection Account, may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount. The Trustee or any affiliate thereof may be the obligor on any
investment in any 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 Trustee will not in any way be held liable by reason of any
insufficiency in any Account resulting from any loss on any Permitted Investment
included therein.
Unless otherwise specified in the related Prospectus Supplement, all income
or other gain from investments in any Account will be held in such Account for
the benefit of the Servicer and will be subject to withdrawal from time to time
as permitted by the related Pooling and 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 is not offset by other income
or gain from investments in such Account and then available for such
application.
PERMITTED INVESTMENTS
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will define "Permitted Investments" generally as
follows:
(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States, the timely payment
or the guarantee of which constitutes a full faith and credit obligation of
the United States.
(b) Federal Housing Administration debentures, but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption.
(c) Federal Home Loan Mortgage Corporation senior debt obligations,
but excluding any such securities whose terms do not provide for payment of
a fixed dollar amount upon maturity or call for redemption.
(d) Federal National Mortgage Association senior debt obligations, but
excluding any such securities whose terms do not provide for payment of a
fixed dollar amount upon maturity or call for redemption.
(e) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365
days) of any domestic bank or trust company, the short-
44
129
term debt obligations of which have been assigned a minimum rating
specified in the related Pooling and Servicing Agreement by the applicable
Rating Agency.
(f) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $50,000,000
which deposits are not in excess of the applicable limits insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation, provided that the long-term deposits
of such bank or savings and loan association are assigned a minimum rating
specified in the related Pooling and Servicing Agreement by the applicable
Rating Agency.
(g) Commercial paper (having original maturities of not more than 180
days) assigned a minimum rating specified in the related Pooling and
Servicing Agreement by the applicable Rating Agency.
(h) Investments in money market funds assigned a minimum rating
specified in the related Pooling and Servicing Agreement by the applicable
Rating Agency.
(i) Other investments acceptable to the applicable Rating Agency.
No instrument described above is permitted to evidence either the right to
receive (a) only interest with respect to obligations underlying such instrument
or (b) both principal and interest payments derived from obligations underlying
such instrument and the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of the yield to
maturity at par of the underlying obligations, and no instrument described above
may be purchased at a price greater than par if such instrument may be prepaid
or called at a price less than its purchase price prior to stated maturity.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest to
Certificateholders (rather than to guarantee or insure against losses), unless
otherwise provided in the related Prospectus Supplement, each Pooling and
Servicing Agreement will require that, on each Distribution Date, the Servicer
or any Sub-Servicer deposit in the Collection Account an amount of its own funds
(a "Monthly Advance"). Unless otherwise specified in the related prospectus
Supplement, a "Monthly Advance" will be equal to the sum of the interest
portions of the aggregate amount of monthly payments (net of the Servicing Fee)
due on the Mortgage Loans during the related Collection Period, but delinquent
as of the close of business on the last day of the related Collection Period,
plus, with respect to each Mortgaged Property which 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
outstanding principal balance of the Mortgage Loan 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
Certificate Account for such Distribution Date.
The Servicer or any Sub-Servicer, if applicable, may recover Monthly
Advances, if not recovered from the Mortgagor on whose behalf such Monthly
Advance was made, from late collections on the related Mortgage Loans, 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 Monthly Advance will not be ultimately recoverable from late
collections, insurance proceeds, Liquidation Proceeds on the related Mortgage
Loans or otherwise, the Servicer may reimburse itself or a Sub-Servicer, if
applicable, on the next Distribution Date from Available Funds remaining in the
Certificate Account after making required payments on such Distribution Date.
With respect to each Mortgage Loan as to which a prepayment is received,
which becomes a Liquidated Mortgage Loan or is otherwise charged-off during the
Collection Period related to a Distribution Date, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be required with respect to
such Distribution Date to remit to the Trustee, from amounts otherwise payable
to the Servicer as the Servicing Fee, a certain amount, as shall be specified in
the related Prospectus Supplement as "Compensating Interest Payments." The
Servicer will not be entitled to be reimbursed from collections on the Mortgage
Loans or any
45
130
assets of the Trust for any Compensating Interest Payments made. If the
Servicing Fee in respect of such Collection Period is insufficient to make the
entire required Compensating Interest Payment, the resulting shortfall will
reduce the amount of interest payable to the Certificateholders on such
Distribution Date and such reduction will not be recoverable thereafter.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is required to foreclose upon or otherwise comparably effect the
ownership in the name of the Servicer, on behalf of the Trustee, of Mortgaged
Properties relating to defaulted Mortgage Loans as to which no satisfactory
arrangements can be made for collection of delinquent payments and which the
Sponsor or the Servicer has not purchased pursuant to its purchase option
described below, unless the Servicer reasonably believes that Liquidation
Proceeds with respect to such Mortgage Loan would not be increased as a result
of such foreclosure or other action, in which case the Mortgage Loan will be
charged off and will be liquidated (a "Liquidated Mortgage Loan"). In connection
with such foreclosure or other conversion, the Servicer is required to exercise
or use foreclosure procedures with the same degree of care and skill as it would
ordinarily exercise or use under the circumstances in the conduct of its own
affairs. Any amounts advanced in connection with such foreclosure or other
action will constitute Servicing Advances.
Unless otherwise specified in the related Prospectus Supplement, if a REMIC
election has been made, the Servicer will be required to sell REO Property
within two years of its acquisition by the Trustee, unless an opinion of counsel
experienced in federal income tax matters, addressed to the Trustee, the Sponsor
and the Servicer is obtained the effect that the holding by the Trust of such
REO Property for a greater specified period will not result in the imposition of
taxes on "prohibited transactions" of the Trust as defined in Section 860F of
the Code or cause the Trust to fail to qualify as a REMIC.
In servicing the Mortgage Loans, the Sponsor is 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 shall become a liquidated Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Sponsor or the Servicer may have the right and the option under the related
Pooling and Servicing Agreement, but not the obligation, to purchase 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. Any such Mortgage
Loan so purchased will be purchased on a Deposit Date at the Loan Purchase Price
thereof.
GENERAL SERVICING PROCEDURES
The Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, in accordance with the provisions of each related Pooling and
Servicing Agreement and the policies and procedures customarily employed by the
Servicer in servicing other comparable mortgage loans. Servicing includes, but
is not limited to, post-origination loan processing, customer service,
remittance handling, collections and liquidations.
The Servicer, in its own name or in the name of any Sub-Servicer, will be
authorized and empowered pursuant to the related Pooling and Servicing Agreement
(i) to execute and deliver 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, (ii) to institute foreclosure proceedings or obtain a deed in lieu
of foreclosure so as to effect ownership of any Mortgaged Property in its own
name on behalf of the Trustee and (iii) to hold title in its own name to any
Mortgaged Property upon such foreclosure or deed in lieu of foreclosure on
behalf of the Trustee.
During a foreclosure, any expenses incurred by the Servicer are added to
the amount owed by the Mortgagor, as permitted by applicable law. Upon
completion of the foreclosure, the property is sold to an
46
131
outside bidder, or passes to the mortgagee, in which case the Servicer will
proceed to liquidate the asset. Servicing and charge-off policies and collection
practices may change over time in accordance with the Servicer's business
judgment, changes in its real estate loan portfolio and applicable laws and
regulations.
SUB-SERVICERS
The Servicer will be permitted under the related Pooling and Servicing
Agreement to enter into sub-servicing arrangements with certain mortgage
servicing institutions meeting the requirements of such Pooling and Servicing
Agreement (each, a "Sub-Servicer") to service the Mortgage Loans in a Mortgage
Pool. Any such sub-servicing arrangements will not relieve the Servicer of any
liability associated with servicing the Mortgage Loans. Compensation for the
services of the Sub-Servicer with respect to the Mortgage Loans will be paid by
the Servicer. See "-- Servicing and Other Compensation and Payment of Expenses"
below.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, as
compensation for its servicing activities under a Pooling and Servicing
Agreement, the Servicer will be entitled to retain the amount of the Servicing
Fee (as defined in the related Pooling and Servicing Agreement) with respect to
each Mortgage Loan. Additional servicing compensation in the form of prepayment
charges, release fees, bad check charges, assumption fees, extension fees, late
payment charges and any other servicing-related fees, Net Liquidation Proceeds
not required to be deposited in the Collection Account and similar items may, to
the extent collected from Mortgagors, be retained by the Servicer.
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 cost of (i) the preservation,
restoration and protection of the Mortgaged Properties, (ii) any enforcement or
judicial proceedings, including foreclosures and (iii) 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 payments due under any Senior Lien, if any,
advancing delinquent property taxes, and upkeep and maintenance of the Mortgaged
Property if it is acquired through foreclosure and similar types of expenses.
The Servicer will be obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. Unless otherwise specified in the
related Prospectus Supplement, the Servicer will be entitled to recover
Servicing Advances, if not theretofore recovered from the Mortgagor on whose
behalf such Servicing Advance was made, from late collections on the related
Mortgage Loans, including Liquidation Proceeds, insurance proceeds and such
other amounts. Servicing Advances will be reimbursable to the Servicer from the
sources described above out of the funds on deposit in the Collection Account.
The Servicer is not required to make any Servicing Advance that it determines
would be nonrecoverable.
In addition, a Sub-Servicer may be entitled to a monthly servicing fee in a
minimum amount set forth in the related Prospectus Supplement. The Sub-Servicer
may also be entitled to collect and retain, as part of its servicing
compensation, any late charges or prepayment penalties provided in the Mortgage
Note or related instruments. The Sub-Servicer will be reimbursed by the Servicer
for certain expenditures that it makes, generally to the same extent that the
Servicer would be reimbursed for such expenditures under the related Pooling and
Servicing Agreement. Compensation for the services of the Sub-Servicer shall be
paid by the Servicer as a general corporate obligation of the Servicer.
MAINTENANCE OF HAZARD INSURANCE
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be required to cause to be maintained fire and hazard insurance
with extended coverage customary in the area where each Mortgaged Property is
located in an amount which is at least equal to the least of (i) the outstanding
principal balance owing on the Mortgage Loan and the related Senior Lien, if
any, (ii) the full insurable value of the related Mortgaged Property and (iii)
the minimum amount required to compensate for damage or loss on a
47
132
replacement cost basis. Unless otherwise specified in the related Prospectus
Supplement, if the Mortgaged Property is in an area identified in the Federal
Register by the Flood Emergency Management Agency as having special flood
hazards, the Servicer will be required to cause to be purchased a flood
insurance policy with a generally acceptable insurance carrier, in an amount
representing coverage not less than the least of (a) the outstanding principal
balance of the Mortgage Loan and the Senior Lien, if any, (b) the minimum amount
required to compensate for damages or loss on a replacement cost basis or (c)
the maximum amount of insurance available under the National Flood Protection
Act of 1973, as amended, provided that such flood insurance is available. The
Servicer will also be required to maintain fire, hazard and, if applicable,
flood insurance on each REO Property in the respective amounts described above,
as well as liability insurance, in each case to the extent such insurance is
available. Any amounts collected by the Servicer under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property, or to be released to the Mortgagor in accordance with customary
mortgage servicing procedures) are required to be deposited by the Servicer in
the Collection Account.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire and hazards of extended coverage on all of the Mortgage
Loans, then, to the extent such policy names the Trustee as loss payee and
provides coverage in an amount equal to the aggregate unpaid principal balances
of the Mortgage Loans without co-insurance, and otherwise complies with the
requirements of the preceding paragraph, the Servicer will be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage. If such blanket policy contains a deductible clause, the
Servicer will be required to pay to the Trustee the difference between the
amount that would have been payable under a policy described in the preceding
paragraph and the amount paid under the blanket policy.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, when a
Mortgaged Property has been or is about to be conveyed by the Mortgagor, the
Servicer, on behalf of the Trustee, in performing its servicing functions, to
the extent it has knowledge of such conveyance or prospective conveyance, will
be required to enforce the rights of the Trustee as the mortgagee of record to
accelerate the maturity of the related Mortgage Loan under any due-on-sale
clause contained in the related Mortgage or Mortgage Note; provided, however,
that the Servicer will not be required to exercise any such right if the
due-on-sale clause, in the reasonable belief of the Servicer, is not enforceable
under applicable law or if such enforcement would materially increase the risk
of default or delinquency on, or materially decrease the security for, such
Mortgage Loan. In such event, the Servicer will attempt to enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note and, to the extent permitted by applicable law or the
mortgage documents, the Mortgagor remains liable thereon. The Servicer also will
be authorized to enter into a substitution of liability agreement with such
person, pursuant to which the original Mortgagor is released from liability and
such person is substituted as Mortgagor and becomes liable under the Mortgage
Note. The Servicer will not enter into an assumption agreement unless permitted
by applicable law and unless such assumption agreement would not materially
increase the risk of default or delinquency on, or materially decrease the
security for, such Mortgage Loan.
VOTING
Unless otherwise specified in the related Pooling and Servicing Agreement,
with respect to any provisions of the Pooling and Servicing Agreement providing
for the action, consent or approval of the holders of all Certificates
evidencing specified "Voting Interests" in the Trust, the holders of any Class
of Certificates will collectively be entitled to the then-applicable percentage
of such Class of Certificates of the aggregate Voting Interests represented by
all Certificates. Each Certificateholder of a Class will have a Voting Interest
equal to the product of the Voting Interest to which such Class is collectively
entitled and the Certificateholder's Percentage Interest (as such term is
defined in the related Pooling and Servicing Agreement) in such Class. With
respect to any provisions of the Pooling and Servicing Agreement providing for
action, consent or approval of a specified Class or Classes of Certificates,
each Certificateholder of such specified Class will have
48
133
a Voting Interest in such Class equal to such Certificateholder's Percentage
Interest in such Class. Any Certificate registered in the name of the Sponsor or
any affiliate thereof will be deemed not to be outstanding and the Percentage
Interest evidenced thereby shall not be taken into account in determining
whether the requisite amount of Percentage Interests necessary to take any such
action, or effect any such consent, has been obtained.
AMENDMENTS
Unless otherwise specified in the related Prospectus Supplement, at any
time and from time to time, without the consent of the Certificateholders, the
Trustee, the Sponsor and the Servicer may amend the related Pooling and
Servicing Agreement for the purposes of (a) curing any ambiguity or correcting
or supplementing any provision of such agreement that may be inconsistent with
any other provision of such agreement, (b) if a REMIC election has been made and
if accompanied by an approving opinion of counsel experienced in federal income
tax matters, removing the restriction against the transfer of a Residual
Certificate to a Disqualified Organization (as such term is defined in the Code)
or (c) complying with the requirements of the Code; provided, however, that such
action shall not, as evidenced by an opinion of counsel delivered to the
Trustee, materially and adversely affect the interests of any Certificateholder.
Unless otherwise specified in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may also be amended by the Trustee, the
Sponsor and the Servicer, at any time and from time to time, with the prior
written approval of not less than a majority of the Percentage Interests
represented by each affected Class of Certificates 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
Certificateholders thereunder; provided, however, that no such amendment shall
(a) change in any manner the amount of, or delay the timing of, payments which
are required to be distributed to any Certificateholder without the consent of
such Certificateholder or (b) change the aforesaid percentages of Percentage
Interests which are required to consent to any such amendments, without the
consent of the Certificateholders of all Certificates of the Class or Classes
affected then outstanding. If a REMIC election has been made with respect to the
related Trust, any such amendment must be accompanied by an opinion of tax
counsel as to REMIC matters.
The Trustee will be required to furnish a copy of any such amendment to
each Certificateholder in the manner set forth in the related Pooling and
Servicing Agreement.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, events of
default (each, an "Event of Default") under a Pooling and Servicing Agreement
will consist of (a) any failure by the Servicer to make a Monthly Advance as
required; (b) any failure by the Servicer to deposit in the Collection Account
or Certificate Account any amount (other than an amount representing a Monthly
Advance) required to be so deposited under the related Pooling and Servicing
Agreement, which failure continues unremedied for one Business Day after the
giving of written notice of such failure to the Servicer by the Trustee or to
the Servicer and the Trustee by Certificateholders evidencing Voting Interest
represented by all Certificates aggregating not less than 51%; (c) any failure
by the Servicer to duly observe or perform in any material respect any other of
its covenants or agreements in the Pooling and Servicing Agreement which
materially and adversely affects the rights of Certificateholders and continues
unremedied for 30 days after the giving of written notice of such failure to the
Servicer by the Trustee or the Certificateholders evidencing Voting Interests
represented by all Certificates aggregating not less than 51%; (d) certain
events of insolvency, readjustment of debt, marshalling 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; (e)
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 Pooling and
Servicing Agreement; and (f) if the Sponsor or any affiliate thereof is the
Servicer, any failure of the Sponsor to duly observe or perform in any material
respect any of its covenants or agreements in the Pooling and Servicing
Agreement which materially and adversely affects the rights of
Certificateholders and continues unremedied for 30 days after the giving of
written notice of such failure to the Sponsor by the Trustee or to the
49
134
Servicer and the Trustee by Certificateholders evidencing Voting Interests
represented by all Certificates aggregating not less than 51%.
RIGHTS UPON EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement,
Certificateholders evidencing Voting Interests represented by all Certificates
aggregating not less than 51% or the Trustee may terminate all of the rights and
obligations of the Servicer under the related Pooling and Servicing Agreement,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under the related Pooling and Servicing Agreement
and will be entitled to such compensation as the Servicer would have been
entitled to under the related Pooling and Servicing Agreement. In the event that
the Trustee would be obligated to succeed the Servicer but is unwilling or
legally unable to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, any established housing and home finance
institution or any institution that regularly services home equity loans that is
currently servicing a home equity loan portfolio that has all licenses, permits
and approvals required by applicable law and a net worth of at least $10,000,000
to act as successor to the Servicer under the related Pooling and Servicing
Agreement, provided that the appointment of any such successor Servicer will not
result in the qualification, reduction or withdrawal of the rating assigned to
the Certificates by any applicable Rating Agency. Pending appointment of a
successor Servicer, unless the Trustee is prohibited by law from so acting, the
Trustee shall be obligated to act as Servicer. The Trustee and such successor
Servicer may agree upon the servicing compensation to be paid, which in no event
may be greater than the compensation described above.
Unless otherwise specified in the related Prospectus Supplement, no
Certificateholder, solely by virtue of its status as a Certificateholder, will
have any right under the related Pooling and Servicing Agreement to institute
any action, suit or proceeding with respect to the related Pooling and Servicing
Agreement unless such Certificateholder previously has given to the Trustee
written notice of default and unless Certificateholders evidencing Voting
Interests represented by all Certificates aggregating not less than 51% have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity for costs, expenses and liabilities to be incurred, and the
Trustee for 60 days has neglected or refused to institute any such action, suit
or proceeding. However, the Trustee will be under no obligation to exercise any
of the rights or powers vested in it by the related Pooling and 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
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Pooling and Servicing Agreement,
the obligations created by each Pooling and Servicing Agreement for each Series
of Certificates will terminate upon the payment to the related
Certificateholders of all amounts held in any Accounts or by the Servicer, and
required to be paid to them pursuant to such Pooling and Servicing Agreement
following the later of (i) the final payment or other liquidation of the last of
the Mortgage Loans subject thereto or the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any such Mortgage Loans
remaining in the Trust and (ii) the purchase by the Sponsor, the Servicer or
other entity specified in the related Prospectus Supplement including, if REMIC
treatment has been elected, the holder of the residual interest in the REMIC
(see "Certain Federal Income Tax Consequences" below), from the related Trust of
all of the remaining Mortgage Loans and all property acquired in respect of such
Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement,
any such purchase of Mortgage Loans and property acquired in respect of Mortgage
Loans evidenced by a Series of Certificates will be made at the option of the
Sponsor, the Servicer or other entity at a price, and in accordance with the
procedures, specified in the Prospectus Supplement. The exercise of such right
will effect early retirement of the Certificates of that Series, but the right
of the Sponsor, the Servicer or other entity to so purchase is subject to the
principal balance of the related Mortgage Loans being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of
50
135
such Mortgage Loans at the Cut-off Date for the Series. The foregoing is subject
to the provisions that if a REMIC election is made with respect to a Trust, any
repurchase pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Code.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Pooling and Servicing Agreement,
each Pooling and Servicing Agreement will provide that on or before a specified
date in each year, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that on the basis of certain procedures
substantially in conformance with the Uniform Single Audit Program for Mortgage
Bankers (to the extent the procedures are applicable to the servicing
obligations set forth in the Pooling and Servicing Agreement), the servicing by
or on behalf of the Servicer of the related Mortgage Loans, under agreements
substantially similar to each other (including the related Pooling and Servicing
Agreement) was conducted in compliance with such agreements and such procedures
have disclosed no exceptions or errors in records relating to the Mortgage Loans
subject to the related Pooling and Servicing Agreement which, in the opinion of
such firm, are material, except for such exceptions as will be referred to in
the report. Unless otherwise specified in the related Pooling and Servicing
Agreement, each Pooling and Servicing Agreement will provide that the Sponsor
will be required to deliver to the Trustee, on or before a specified date in
each year, an annual statement signed by an officer of the Sponsor to the effect
that the Servicer has fulfilled its material obligations under the related
Pooling and Servicing Agreement throughout the preceding year.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE SPONSOR
The related Pooling and Servicing Agreement will provide that neither the
Sponsor nor any of its directors, officers, employees or agents shall have any
liability to the related Trust created thereunder or to any of the
Certificateholders, except with respect to liabilities resulting from willful
malfeasance, bad faith or gross negligence or from the reckless disregard of
obligations or duties arising under the related Pooling and Servicing Agreement.
The related Pooling and Servicing Agreement will further provide that, with the
exceptions stated above, the Sponsor and its directors, officers, employees and
agents are entitled to be indemnified and held harmless by the related Trust
against any loss, liability or expense incurred in connection with legal actions
relating to such Pooling and Servicing Agreement or the Certificates.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related Pooling
and Servicing Agreement. The Pooling and Servicing Agreement will provide that
the Trustee may resign at any time, upon notice to the Sponsor, the Servicer and
any Rating Agency, in which event the Sponsor will be obligated to appoint a
successor Trustee. The Sponsor may remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Pooling and Servicing Agreement or if
the Trustee becomes insolvent. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee. Each Pooling and Servicing Agreement
will provide that the Trustee is under no obligation to exercise any of the
rights or powers vested in it by the Pooling and Servicing Agreement at the
request or direction of any of the Certificateholders, unless such
Certificateholders shall have offered to the 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 Trustee may execute any of
the rights or powers granted by the Pooling and Servicing Agreement or perform
any duties thereunder either directly or by or through agents or attorneys, and
the Trustee is responsible for any misconduct or negligence on the part of any
agent or attorney appointed and supervised with due care by it thereunder.
Pursuant to the Pooling and Servicing Agreement, the 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 Pooling and Servicing Agreement. The Trustee and any director,
officer, employee or agent of the Trustee may rely and will be protected in
acting or refraining from acting in good faith in reliance on any
51
136
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 Pooling and Servicing Agreement.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries, which are general in nature,
of material legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to encompass the
laws of all states in which Mortgaged Properties are situated. The summaries are
qualified in their entirety by reference to the appropriate laws of the states
in which Mortgage Loans may be originated.
NATURE OF THE MORTGAGE LOANS
The Mortgage Loans will be secured by mortgages, deeds of trust, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the Mortgaged Property is located. In California, for example,
Mortgage Loans are secured by deeds of trust. In other states, a mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments and other
charges under governmental police powers. Priority between mortgages depends on
their terms and generally on the order of recording in the appropriate state or
county office. There are two parties to a mortgage: the mortgagor, who is the
borrower and owner of the mortgaged property, and the mortgagee, who is the
lender. The mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust has three
parties: the borrower property owner called the trustor (similar to a
mortgagor), the lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the borrower's
obligation to the lender. A security deed and a deed to secure debt are special
types of deeds that indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid. The
mortgagee's authority under a mortgage, the trustee's authority under a deed of
trust and the grantee's authority under a security deed or deed to secure debt
are governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
Certain of the Mortgage Loans may be loans secured by condominium units.
The condominium building may be a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to condominium ownership. Condominium ownership is a form of ownership of a real
property wherein each owner is entitled to the exclusive ownership and
possession of his or her individual condominium unit and also owns a
proportionate undivided interest in all parts of the condominium building (other
than the individual condominium units) and all areas or facilities, if any, for
the common use of the condominium units. The condominium unit owners appoint or
elect the condominium association to govern the affairs of the condominium.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In addition to this non-judicial
remedy, a deed of trust may be judicially foreclosed. In addition to any notice
requirements contained in a deed of trust, in some states the trustee must
record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor-in-interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. Before
such non-judicial sale takes place, typically a notice of sale must be posted in
a public place and published during a specific period of time in one or more
newspapers, posted on the property and sent to parties having an interest of
record in the property.
52
137
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property.
In some states, the borrower under a mortgage or a deed of trust will have
the right to reinstate the loan at any time following default until shortly
before the foreclosure sale. In such states, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage or deed of trust is not reinstated, a notice of sale must be posted in
a public place and, in most states, published for a specific period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding under
the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property, in which event the lender may be entitled to a deficiency judgment
in certain states. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice earlier than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienholders are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, such as California, there is no right
to reclaim property after a trustee's sale under a deed of trust.
53
138
CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California, including the Affiliated
Originators originating loans secured by real property in California, use a form
of deed of trust that confers on the beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards made in connection with any condemnation proceedings to any indebtedness
secured by the deed of trust, in such order as the beneficiary may determine;
provided, however, that the beneficiary is prohibited (under California law)
from applying insurance and condemnation proceeds to the indebtedness secured by
the deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, and, as a
result thereof, the beneficiary's security is impaired, the beneficiary may
apply any award received in respect of such damages or in connection with such
condemnation to the indebtedness secured by the first deed of trust. Proceeds in
excess of the amount of indebtedness secured by a first deed of trust will, in
most cases, be applied to the indebtedness of a junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are senior to the deed of
trust, to provide and maintain fire and hazard insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the beneficiary under the deed of trust. Upon a
failure of the trustor to perform any of these obligations, the beneficiary is
given the right under the deed of trust to perform the obligation itself, at its
election, with the trustor agreeing to reimburse the beneficiary for any sums
expended by the beneficiary on behalf of the trustor. All sums so expended by
the beneficiary become part of the indebtedness secured by the deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states, including California, have adopted statutory prohibitions
restricting the right of the beneficiary or mortgagee to obtain a deficiency
judgment against borrowers financing the purchase of their residence or
following sale under a deed of trust or certain other foreclosure proceedings. A
deficiency judgment is a personal judgment against the borrower equal in most
cases to the difference between the amount due to the lender and the net amount
received by the lender at the foreclosure sale. As a result of these
prohibitions, it is anticipated that in many instances the Servicer will not
seek deficiency judgments against defaulting Mortgagors.
In addition to laws limiting or prohibiting deficiency judgements, 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 the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on the debtor's residence 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 sale of the
residence 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 reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving
54
139
the lender a general unsecured creditor for the difference between the value of
the residence and the outstanding balance of the loan.
California courts have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, California
courts have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disabilities. In other cases, such courts have limited the right of the lender
to foreclose if the default under the loan is not monetary, such as the
borrower's failure to adequately maintain the property or the borrower's
execution of a second deed of trust affecting the property.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of such loans.
These laws include the federal Truth in Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal and
state laws impose specific statutory liabilities upon lenders who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act adds certain additional provisions to Regulation Z, the
implementing regulation of the Truth-in-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
nonpurchase money mortgage loans with high interest rates or high upfront fees
and charges. In general, mortgage loans within the purview of the Riegle Act
have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle Act
apply on a mandatory basis to all mortgage loans originated on or after October
1, 1995. The provisions can impose specific statutory liabilities upon creditors
who fail to comply with their provisions and may affect the enforceability of
the related loans. In addition, any assignee of the creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
ENFORCEABILITY OF DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan will contain a due-on-sale clause which will generally provide
that if the Mortgagor sells, transfers or conveys the Mortgaged Property, the
Mortgage Loan may be accelerated by the mortgagee. The Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act"), subject to
certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. As to loans secured by an
owner-occupied residence, the Garn-St. Germain Act sets forth nine specific
instances in which a mortgagee covered by such Act may not exercise its rights
under a due-on-sale clause, notwithstanding the fact that a transfer of the
property may have occurred. The inability to enforce a due-on-sale clause may
result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed at all or
after a certain period of time following origination of the mortgage loans with
respect to prepayments on mortgage loans secured by liens encumbering
owner-occupied residential properties. Because many of the Mortgaged Properties
will be owner-occupied, it is anticipated that prepayment charges may not be
imposed with respect to many of the
55
140
Mortgage Loans. The absence of such a restraint on prepayment may increase the
likelihood of refinancing or other early retirement of such Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. 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.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a Mortgagor who enters
military service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the Certificateholders. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan during the Mortgagor's period of active duty status.
Thus, in the event that such a Mortgage Loan goes into default, there may be
delays and losses occasioned by the inability to realize upon the Mortgaged
Property in a timely fashion.
ENVIRONMENTAL CONSIDERATIONS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency (the "EPA") may
impose a lien on property where the EPA has incurred cleanup costs. However, a
CERCLA lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances at a Mortgaged Property,
regardless of whether or not the environmental damage or threat was caused by a
prior owner or operator. CERCLA imposes liability on any and all "responsible
parties" (which term includes, among others, the property owner and operator)
for the cost of clean-up of releases of hazardous substances. However, CERCLA
excludes from the definition of "owner or operator" secured creditors who hold
indicia of ownership for the purpose of protecting their security interest, but
"without participating in the management of the facility." That exclusion was
substantially narrowed by a May 1990 decision of the United States Court of
Appeals for the Eleventh Circuit in United States v. Fleet Factors Corp., which
held 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 management
in order to be liable; rather, liability may attach to the lender if its
involvement with the management of the facility is broad enough to support the
inference that the lender could affect hazardous waste management practices if
it so chose. 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. In
56
141
response to Fleet Factors, the EPA promulgated regulations designed to clarify
the range of activities a lender may engage in without losing the benefit of the
statutory exclusion. See "Final Rule on Lender Liability under CERCLA," 57 F.R.
18,344 (Apr. 29, 1992). The regulations, which took effect in April 1992, permit
a lender to monitor the borrower's environmental practices in order to determine
if the facility is in compliance with applicable law, and to require the
borrower to take measures necessary to achieve or maintain compliance or conduct
necessary cleanups, but the lender may not, however, exercise control over or
assume responsibility for the borrower's environmental practices. Such actions
would be considered "participation in the management of the facility." Also, if
the lender took title to or possession of the property, it might be deemed to
have obviated the security interest exclusion and to be liable for clean-up
costs pursuant to CERCLA. The EPA regulations would allow lenders to take
certain actions with respect to foreclosure, without losing the benefit of the
statutory exclusion. Essentially, the regulations would allow the lender to take
actions consistent with protecting its security interest, but not actions which
demonstrate an intent to exercise a long-term ownership interest in the
property. It must be noted that such protection may not be available under
applicable state law. Furthermore, the regulations are binding only on the EPA
with respect to the EPA's enforcement powers and cost-recovery rights. It has
not yet been definitively determined whether the federal courts will apply the
regulations in cost-recovery actions brought against lenders by other
responsible parties, although the regulations may well be considered persuasive
by the courts. In February 1994, a three judge panel of the U.S. Court of
Appeals for the District of Columbia, in the case of Kelley v. EPA, held that
the regulations are inconsistent with the statutory requirements of CERCLA and
are, therefore, invalid. Kelley v. EPA, 15 F.3d 1100 (D.C. Cir. 1994), cert.
denied, American Bankers Ass'n v. Kelley, 115 S. Ct. 900 (1995). The EPA's
response to the Kelley decision has been to follow the provisions of the "Lender
Liability Rule" as an enforcement policy. On October 6, 1995, the EPA issued a
policy statement whereby the EPA and the Department of Justice intend to apply
as guidance the provisions of the "Lender Liability Rule" promulgated in 1992.
The EPA and the Department of Justice endorsed the policy and will use it to
exercise the enforcement discretion in determining whether particular lenders
that acquire property involuntarily may be subject to CERCLA enforcement action.
This EPA enforcement policy does not govern the actions of third parties. If a
lender is or becomes liable, it can bring an action for contribution against any
other "responsible parties," including a previous owner or operator, who created
the environmental hazard, but those persons or entities may be bankrupt or
otherwise judgment proof. The costs associated with environmental clean-up may
be substantial. It is conceivable that such remedial costs arising from the
circumstances set forth above would become a liability of the Trust and occasion
a loss to Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, at the
time the Mortgage Loans were originated, no environmental assessment or a very
limited environmental assessment of the Mortgage Properties was conducted.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of Certificates is
based on the advice of Andrews & Kurth L.L.P., counsel to the Sponsor. This
summary is based on laws, regulations, including the real estate mortgage
investment conduit ("REMIC") regulations promulgated by the Treasury Department
on December 23, 1992, and generally effective for REMICs with start-up dates on
or after November 12, 1991 (the "REMIC Regulations"), rulings and decisions now
in effect or (with respect to regulations) proposed, all of which are subject to
change either prospectively or retroactively. This summary does not address the
federal income tax consequences of an investment in Certificates applicable to
all categories of investors, some of which (for example, banks and insurance
companies) may be subject to special rules. Prospective investors should consult
their tax advisors regarding the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust relating to a
particular Series of Certificates as a REMIC under the Internal Revenue
57
142
Code of 1986, as amended (the "Code"). The Prospectus Supplement for each Series
of Certificates will specify whether a REMIC election will be made.
TAX STATUS AS A GRANTOR TRUST
If a REMIC election is not made, counsel to the Sponsor will deliver its
opinion that the Trust will be classified as a grantor trust under subpart E,
Part I of subchapter J of Chapter 1 of subtitle A of the Code. In this case,
owners of Certificates will be treated for federal income tax purposes as owners
of a portion of the Trust's assets as described below.
SINGLE CLASS OF SENIOR CERTIFICATES
Characterization
The Trust may be created with one class of Senior Certificates and one
class of Subordinated Certificates. In this case, each Senior Certificateholder
will be treated as the owner of a pro rata undivided interest in the interest
and principal portions of the Trust represented by that Senior Certificate and
will be considered the equitable owner of a pro rata undivided interest in each
of the Mortgage Loans in the Mortgage Pool. Any amounts received by a Senior
Certificateholder in lieu of amounts due with respect to any Mortgage Loan
because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they replace.
Each holder of a Senior Certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans in the Trust represented by that Senior Certificate, including
interest, original issue discount, if any, prepayment fees, assumption fees, any
gain recognized upon an assumption and late payment charges received by the
Servicer in accordance with such Senior Certificateholder's method of
accounting. Under Code Sections 162 or 212, each Senior Certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the Servicer, provided that such amounts are reasonable compensation
for services rendered to the Trust. Senior Certificateholders that are
individuals, estates or trusts will be entitled to deduct their share of
expenses only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. A Senior
Certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
Servicer. A Senior Certificateholder using an accrual method of accounting must
take into account its pro rata share of income and deductions as they become due
or are paid to the Servicer whichever is earlier. If the Servicing Fees paid to
the Servicer were deemed to exceed reasonable servicing compensation, the amount
of such excess could be considered as a retained ownership interest by the
Servicer (or any person to whom the Servicer assigned for value all or a portion
of the Servicing Fees) in a portion of the interest payments on the Mortgage
Loans. The Mortgage Loans may then be subject to the "coupon stripping" rules of
the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
series of Certificates counsel to the Sponsor will have advised the Sponsor
that:
(i) a Senior Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Loans will be considered to
represent "loans . . . secured by an interest in real property which
is . . . residential property" within the meaning of Code Section
7701(a)(19)(C)(v); to the extent that the Mortgage Loans represented by
that Senior Certificate are of a type described in such Code section;
(ii) a Senior Certificate owned by a financial institution described
in Code Section 593(a) representing principal and interest payments on
Mortgage Loans will be considered to represent "qualifying real property
loans" within the meaning of Code Section 593(d) and the Treasury
regulations under Code Section 593; to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section;
58
143
(iii) a Senior Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(5)(A), and
interest income on the Mortgage Loans will be considered "interest on
obligations secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B); to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section; and
(iv) a Senior Certificate owned by a REMIC will be an
"obligation . . . which is principally secured, directly or indirectly, by
an interest in real property" within the meaning of Code Section
860G(a)(3).
Premium
The price paid for a Senior Certificate by a holder will be allocated to
such holder's undivided interest in each Mortgage Loan based on each Mortgage
Loan's relative fair market value, so that such holder's undivided interest in
each Mortgage Loan will have its own tax basis. A Senior Certificateholder that
acquires an interest in Mortgage Loans at a premium may elect to amortize such
premium under a constant interest method, provided that such Mortgage Loan was
originated after September 27, 1985. Premium allocable to a Mortgage Loan
originated on or before September 27, 1985 should be allocated among the
principal payments on the Mortgage Loan and allowed as an ordinary deduction as
principal payments are made. An amortizable bond premium will be treated as an
offset to interest income on such Senior Certificate. The basis for such Senior
Certificate will be reduced to the extent that amortizable premium is applied to
offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used
in computing amortization of premium allowable under Code Section 171.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Senior Certificate acquired at a premium should
recognize a loss, if a Mortgage Loan prepays in full, equal to the difference
between the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a reasonable prepayment
assumption is used to amortize such premium, it appears that such a loss would
be available, if at all, only if prepayments have occurred at a rate faster than
the reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
Original Issue Discount
The Internal Revenue Service (the "IRS") has stated in published rulings
that, in circumstances similar to those described herein, the special rules of
the Code relating to "original issue discount" ("OID") (currently Code Sections
1271 through 1273 and 1275) will be applicable to a Senior Certificateholder's
interest in those Mortgage Loans meeting the conditions necessary for these
sections to apply. Rules regarding periodic inclusion of OID income are
applicable to mortgages of corporations originated after May 27, 1969, mortgages
of noncorporate mortgagors (other than individuals) originated after July 1,
1982, and mortgages of individuals originated after March 2, 1984. Such OID
could arise by the financing of points or other charges by the originator of the
mortgages in an amount greater than a statutory de minimis exception to the
extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. OID generally must be
reported as ordinary gross income as it accrues under a constant interest
method. See "-- Multiple Classes of Senior Certificates -- Accrual of Original
Issue Discount" below.
Market Discount
A Senior Certificateholder that acquires an undivided interest in Mortgage
Loans may be subject to the market discount rules of Code Sections 1276 through
1278 to the extent an undivided interest in a Mortgage Loan is considered to
have been purchased at a "market discount". Generally, market discount is the
excess of the portion of the principal amount of such Mortgage Loan allocable to
such holder's undivided interest
59
144
over such holder's tax basis in such interest. Market discount with respect to a
Senior Certificate will be considered to be zero if the amount allocable to the
Senior Certificate is less than 0.25% of the Senior Certificate's stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
Accrual of Market Discount
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, the relevant legislative
history provides rules to accrue market discount pending the issuance of such
regulations. Under those rules, the holder of a market discount bond may elect
to accrue market discount either on the basis of a constant interest rate or
according to one of the following methods. If a Senior Certificate is issued
with OID, the amount of market discount that accrues during any accrual period
would be equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the OID accruing during
the period and the denominator of which is the total remaining OID at the
beginning of the accrual period. For Senior Certificates issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the accrual period. For purposes of
calculating market discount under any of the above methods in the case of
instruments (such as the Senior Certificates) which provide for payments which
may be accelerated by reason of prepayments of other obligations securing such
instruments, the same prepayment assumption applicable to calculating the
accrual of OID should apply. Because the regulations described above have not
been issued, it is impossible to predict what effect those regulations might
have on the tax treatment of a Senior Certificate purchased at a discount or
premium in the secondary market.
A holder who acquired a Senior Certificate at a market discount also may be
required to defer, until the maturity date of such Senior Certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the Senior Certificate
in excess of the aggregate amount of interest (including OID) includible in such
holder's gross income for the taxable year with respect to such Senior
Certificate. The amount of such net interest expense deferred in a taxable year
may not exceed the amount of market discount accrued on the Senior Certificate
for the days during the taxable year on which the holder held the Senior
Certificate and, in general, would be deductible when such market discount is
includible in income. The amount of any remaining deferred deduction is to be
taken into account in the taxable year in which the Senior Certificate matures
or is disposed of in a taxable transaction. In the case of a disposition in
which gain or loss is not recognized in whole or in part, any remaining deferred
deduction will be allowed to the extent of gain recognized on the disposition.
This deferral rule does not apply if the Senior Certificateholder elects to
include such market discount in income currently as it accrues on all market
discount obligations acquired by such Senior Certificateholder in that taxable
year or thereafter.
Election to Treat All Interest as OID
The OID Regulations (as defined herein) permit a Certificateholder to elect
to accrue all interest, discount (including de minimis market or original issue
discount) and premium in income as interest, based
60
145
on a constant yield method for Senior Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Regular Certificate
with market discount, the Certificateholder would be deemed to have made an
election to include in income currently, market discount with respect to all
other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Senior Certificate that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "--Taxation of Regular
Certificates -- Original Issue Discount and Premium" herein. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Senior Certificate cannot be revoked without the consent of the IRS.
MULTIPLE CLASSES OF SENIOR CERTIFICATES
Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments on such obligation
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of Code
Sections 1271 through 1288, Code Section 1286 treats a stripped bond or a
stripped coupon as an obligation issued on the date that such a stripped
interest is purchased. If a Trust is created with two classes of Senior
Certificates, one class of Senior Certificates will represent the right to
principal and interest, or principal only, on all or a portion of the Mortgage
Loans (the "Stripped Bond Certificates"), while the second class of Senior
Certificates will represent the right to some or all of the interest on such
portion (the "Stripped Coupon Certificates").
Although not entirely clear, based on recent IRS guidance, a Stripped Bond
Certificate generally should be treated as a single debt instrument issued on
the day it is purchased for purposes of calculating any OID. Generally, if the
discount on a Stripped Bond Certificate is larger than a de minimis amount (as
calculated for purposes of the OID rules), a purchaser of such a Certificate
will be required to accrue the discount under the OID rules of the Code. See
"-- Single Class of Senior Certificates -- Original Issue Discount" above.
However, a purchaser of a Stripped Bond Certificate will be required to account
for any discount on the Certificate as market discount rather than OID if either
(i) the amount of OID with respect to the Certificate was treated as zero under
the OID de minimis rule when the Certificate was stripped or (ii) no more than
100 basis points (including any amount of servicing in excess of reasonable
servicing) is stripped off of the Trust's Mortgage Loans. See "-- Single Class
of Senior Certificates -- Market Discount" herein. Pursuant to Revenue Procedure
91-49, issued on August 8, 1991, purchasers of Stripped Bond Certificates using
an inconsistent method of accounting must change their method of accounting and
request the consent of the IRS to the change in their accounting method on a
statement attached to their first timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made on a loan-by-loan basis. However, based on the recent IRS guidance, it
appears that a Stripped Coupon Certificate should be treated as a single
installment obligation subject to the OID rules of the Code. As a result, all
payments on a Stripped Coupon Certificate would be included in the Certificate's
stated redemption price at maturity for purposes of calculating income on such
Certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Loans will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Senior Certificate, it appears that no loss may be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Loans, or if no prepayment
assumption is used, then when a Mortgage Loan is prepaid, the holder of such
61
146
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Loan.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners
Several Code sections provide beneficial treatment to certain taxpayers
that invest in mortgage loans of the type that will be included in a Trust. With
respect to these Code sections, no specific legal authority exists regarding
whether the character of the Senior Certificates for federal income tax purposes
will be the same as that of the underlying Mortgage Loans. While Code Section
1286 treats a stripped obligation as a separate obligation for purposes of the
Code provisions addressing original issue discount, it is not clear whether such
characterization would apply with regard to these other Code sections. Although
the issue is not free from doubt, based on policy considerations, each class of
Senior Certificates should be considered to represent "qualifying real property
loans" within the meaning of Code Section 593(d), "real estate assets" within
the meaning of Code Section 856(c)(5)(A) and "loans . . . secured by, an
interest in real property which is . . . residential real property" within the
meaning of Code Section 7701(a)(19)(C)(v), and interest income attributable to
Senior Certificates 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 underlying Mortgage Loans and
interest on such Mortgage Loans qualify, for such treatment. Prospective
purchasers to which such characterization of an investment in Senior
Certificates is material should consult their own tax advisors regarding the
characterization of the Senior Certificates and the income therefrom. Senior
Certificates will be "obligation[s] (including any participation or certificate
of beneficial ownership therein) which [are] principally secured, directly or
indirectly, by an interest in real property" within the meaning of Code Section
860G(a)(3).
Senior Certificates Representing Interests in Loans Other Than ARMs
OID on each Senior Certificate must be included in the owner's ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant yield to maturity method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
amount of OID required to be included in an owner's income in any taxable year
with respect to a Senior Certificate representing an interest in Mortgage Loans
other than adjustable rate mortgages ("ARMs") likely will be computed as
described below under "Accrual of Original Issue Discount." The following
discussion is based in part on Treasury regulations issued on January 27, 1994,
under Code Sections 1271 through 1273 and 1275 (the "OID Regulations") and in
part on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The OID
Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 (the "Proposed OID
Regulations") may be treated as authority for instruments issued before December
21, 1992. In applying these dates, the issue date of the Mortgage Loans should
be used, or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the date such Certificates are acquired. The holder of a
Certificate should be aware, however, that neither the Proposed OID Regulations
nor the OID Regulations adequately address certain issues relevant to prepayable
securities.
Under the Code, the Mortgage Loans underlying the Senior Certificates will
be treated as having been issued on the date they were originated with an amount
of OID equal to the excess of such Mortgage Loan's stated redemption price at
maturity over its issue price. The issue price of a Mortgage Loan is generally
the amount lent to the mortgagee, which may be adjusted to take into account
certain loan origination fees. The stated redemption price at maturity of a
Mortgage Loan is the sum of all payments to be made on such Mortgage Loan other
than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described below under "Accrual of Original Issue
Discount," will, unless otherwise specified in the related Prospectus
Supplement, utilize the original yield to maturity of the Senior Certificates
calculated
62
147
based on a reasonable assumed prepayment rate (the "Prepayment Assumption"), for
the Mortgage Loans underlying the Senior Certificates, and will take into
account events that occur during the calculation period. The 1986 Act requires
that the Prepayment Assumption be determined in the manner prescribed by
regulations that have not yet been issued. The legislative history of the 1986
Act (the "Legislative History") provides, however, that the regulations will
require that the Prepayment Assumption be the prepayment assumption that is used
in determining the offering price of such Certificate. No representation is made
that any Senior Certificate will prepay at the Prepayment Assumption or at any
other rate. The prepayment assumption contained in the Code literally only
applies to debt instruments collateralized by other debt instruments that are
subject to prepayment rather than direct ownership interests in such debt
instruments, such as the Senior Certificates represent. However, no other legal
authority provides guidance with regard to the proper method for accruing OID on
obligations that are subject to prepayment, and, until further guidance is
issued, the Servicer intends to calculate and report OID under the method
described below.
Accrual of Original Issue Discount
Generally, the owner of a Senior Certificate must include in gross income
the sum of the "daily portions," as defined below, of the OID on such Senior
Certificate for each day on which it owns such Senior Certificate, including the
date of purchase but excluding the date of disposition. In the case of an
original owner, the daily portions of OID with respect to each component
generally will be determined as set forth under the OID Regulations. A
calculation will be made by the Servicer or such other entity specified in the
related Prospectus Supplement of the portion of OID that accrues during each
successive monthly accrual period (or shorter period from the date of original
issue) that ends on the day in the calendar year corresponding to each of the
Distribution Dates on the Senior Certificates (or the day prior to each such
date). This will be done, in the case of each full month accrual period, by
adding (i) the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the respective
component under the Prepayment Assumption) of all remaining payments to be
received under the Prepayment Assumption on the respective component and (ii)
any payments received during such accrual period, and subtracting from that
total the "adjusted issue price" of the respective component at the beginning of
such accrual period. The adjusted issue price of a Senior Certificate at the
beginning of the first accrual period is its issue price; the adjusted issue
price of a Senior Certificate at the beginning of a subsequent accrual period is
the adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment made at the end of or during that accrual period. The OID
accruing during such accrual period will then be divided by the number of days
in the period to determine the daily portion of OID for each day in the period.
With respect to an initial accrual period shorter than a full monthly accrual
period, the daily portions of OID must be determined according to an appropriate
allocation under any reasonable method.
OID generally must be reported as ordinary gross income as it accrues under
a constant yield to maturity method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired 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 Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Loan, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loan (i.e., points) will be includible by such
Certificateholder. Other OID on the Mortgage Loans (e.g., that arising from a
"teaser" rate) would still need to be accrued.
Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Senior Certificates, which represent interests in ARM Loans. Additionally,
the IRS has not issued guidance under the Code's coupon stripping rules with
respect to such instruments. In the absence of any authority the Servicer or the
Trustee for the related Series of Certificates will report OID on Senior
Certificates attributable to ARM Loans ("Stripped ARM Obligations") to holders
in a manner it believes is consistent with the rules described above
63
148
under the heading "Senior Certificates Representing Interests in Loans Other
Than ARMs" and with the OID Regulations. In general, application of these rules
may require inclusion of income on a Stripped ARM Obligation in advance of the
receipt of cash attributable to such income. Further, the addition of interest
deferred by reason of negative amortization ("Deferred Interest") to the
principal balance of an ARM Loan may require the inclusion of such amount in the
income of the Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Certificate's principal balance will result
in additional income (including possibly OID income) to the Certificateholder
and the Stripped Coupon Certificateholder over the remaining life of such Senior
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
SALE OR EXCHANGE OF A SENIOR CERTIFICATE
Sale or exchange of a Senior Certificate prior to its maturity will result
in gain or loss equal to the difference, if any, between the amount received,
and the owner's adjusted basis in the Senior Certificate. Such adjusted basis
generally will equal the seller's purchase price for the Senior Certificate,
increased by the OID included in the seller's gross income with respect to the
Senior Certificate, and reduced by principal payments on the Senior Certificate
previously received by the seller. Such gain or loss will be capital gain or
loss to an owner for which a Senior Certificate is a "capital asset" within the
meaning of Code Section 1221, and will be long-term or short-term depending on
whether the Senior Certificate has been owned for the long-term capital gain
holding period (currently more than one year).
Senior Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Senior Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
NON-U.S. PERSONS -- SENIOR CERTIFICATES
Generally, to the extent that a Senior Certificate evidences ownership in
Mortgage Loans that are issued on or before July 18, 1984, interest or OID paid
by the person required to withhold tax under Code Section 1441 or 1442 to (i) an
owner that is not a U.S. Person (as defined below), or (ii) a Senior
Certificateholder holding on behalf of an owner that is not a U.S. Person, will
be subject to federal income tax, collected by withholding, at a rate of 30% or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued OID recognized by the owner on the sale or exchange of such a Senior
Certificate also will be subject to federal income tax at the same rate.
Generally, such payments would not be subject to withholding to the extent that
a Senior Certificate evidences ownership in Mortgage Loans issued after July 18,
1984, if (i) such Senior Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as the Trust
(the "Issuer")); (ii) such Senior Certificateholder is not a controlled foreign
corporation (within the meaning of Code Section 957) related to the Issuer; and
(iii) such Senior Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Senior
Certificateholder under penalties of perjury, certifying that such Senior
Certificateholder is not a U.S. Person and providing the name and address of
such Senior Certificateholder).
For purposes of this discussion, a "U.S. Person" means a citizen or
resident of the United States, a corporation or a partnership organized in or
under the laws of the United States, or any political subdivision thereof or an
estate or trust, the income of which, from sources outside the United States, is
includible in gross income for federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Servicer or the Trustee for the related Series of Certificates will
furnish or make available, within a reasonable time after the end of each
calendar year, to each Certificateholder at any time during such year, such
information as may be deemed necessary or desirable to assist Certificateholders
in preparing their
64
149
federal income tax returns, or to enable holders to make such information
available to owners or other financial intermediaries of holders that hold such
Certificates as nominees. If a holder, owner or other recipient of a payment on
behalf of an owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
TAX STATUS AS A REMIC
The Trust relating to a Series of Certificates may elect to be treated as a
REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however, "-- Residual Certificates -- Prohibited Transactions and Other
Taxes" below), if a Trust with respect to which a REMIC election is made fails
to comply with one or more of the ongoing requirements of the Code for REMIC
status during any taxable year, including the implementation of restrictions on
the purchase and transfer of the residual interest in a REMIC as described below
under "Residual Certificates", the Code provides that a Trust will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC for federal income tax purposes is uncertain. The
Trust might be entitled to treatment as a grantor trust under the rules
described in "Tax Status as a Grantor Trust" herein. In that case, no
entity-level tax would be imposed on the Trust. Alternatively, the Regular
Certificates may continue to be treated as debt instruments for federal income
tax purposes; but the Trust could be treated as a taxable mortgage pool (a
"TMP"). If the Trust is treated as a TMP, any residual income of the Trust
(i.e., income from the Mortgage Loans less interest and original issue discount
expense allocable to the Regular Certificates and any administrative expenses of
the Trust) would be subject to corporate income tax at the Trust level. On the
other hand, an entity with multiple classes of ownership interests may be
treated as a separate association taxable as a corporation under Treasury
Regulations, and the Regular Certificates may be treated as equity interests
therein. While 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 REMIC's income for the period in which the requirements for such status are
not satisfied. Each Trust that elects REMIC status will receive an opinion from
counsel to the Sponsor, generally to the effect that, under then existing law
and assuming compliance with all provisions of the related Pooling and Servicing
Agreement, such Trust will qualify as a REMIC and the related Certificates will
be considered to be regular interests ("Regular Certificates") or residual
interests ("Residual Certificates") in the REMIC.
The Prospectus Supplement for each Series of Certificates will indicate
whether the Trust will make a REMIC election and whether a Class of Certificates
will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates held by a thrift institution taxed as a
"mutual savings bank" or "domestic building and loan association" will represent
interests in "qualifying real property loans" within the meaning of Code Section
593(d)(1); (ii) Certificates held by a thrift institution taxed as a "domestic
building and loan association" will constitute assets described in Code Section
7701(a)(19)(C); (iii) Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(5)(A);
and (iv) interest on Certificates will be considered "interest on obligations
secured by mortgages on real property" within the meaning of Code Section
856(c)(3)(B). If less than 95% of the REMIC's assets are assets qualifying under
any of the foregoing Code sections, the Certificates will be qualifying assets
only to the extent that the REMIC's assets are qualifying assets. In addition,
payments on Mortgage Loans held pending distributions on the REMIC Certificates
will be treated as qualifying real property loans for purposes of Code Section
593(d)(1) and real estate assets for purposes of Code Section 856(c).
65
150
TIERED REMIC STRUCTURES
For certain series of Certificates, two separate elections may be made to
treat designated portions of the related Trust as REMICs (respectively, the
"Subsidiary REMIC" and the "Master REMIC") for federal income tax purposes.
Counsel to the Sponsor, upon the issuance of any such Series of Certificates,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement and any related
agreements, the Subsidiary REMIC and the Master REMIC will each qualify as a
REMIC and the REMIC Certificates issued by the Subsidiary REMIC and the Master
REMIC, respectively, will be considered to evidence ownership of Regular
Certificates or Residual Certificates in the related REMIC within the meaning of
the REMIC provisions.
Only REMIC Certificates issued by the Master REMIC will be offered
hereunder. The Subsidiary REMIC and the Master REMIC will be treated as one
REMIC solely for purposes of determining whether the REMIC Certificates will be
(i) "qualifying real property loans" under Section 593(d) of the Code, (ii)
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
(iii) "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code and (iv) whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code.
TAXATION OF REGULAR CERTIFICATES
General
Except as otherwise stated in this discussion, Regular Certificates will be
treated for federal income tax purposes as debt instruments issued by the REMIC
and not as ownership interests in the REMIC or its assets. Moreover, holders of
Regular Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to Regular
Certificates under an accrual method.
Original Issue Discount and Premium
The Regular Certificates may be issued with OID within the meaning of Code
Section 1273(a). Generally, such OID, if any, will equal the difference between
the "stated redemption price at maturity" of a Regular Certificate and its
"issue price." Holders of any class of Certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant interest method based on the
compounding of interest, in advance of receipt of the cash attributable to such
income. The following discussion is based in part on the OID Regulations and in
part on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The
holder of a Regular Certificate should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption relating to the Regular
Certificates and prescribe a method for adjusting the amount and rate of accrual
of such discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in the
manner prescribed by regulations that have not yet been issued. The Legislative
History provides, however, that Congress intended the regulations to require
that the Prepayment Assumption be the prepayment assumption that is used in
determining the initial offering price of such Regular Certificates. The
Prospectus Supplement for each Series of Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the Regular Certificates
will prepay at the Prepayment Assumption or at any other rate.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price of
a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). The issue price of a Regular
Certificate also includes the amount paid by an initial Regular
Certificateholder for accrued
66
151
interest that relates to a period prior to the issue date of the Regular
Certificate. The stated redemption price at maturity of a Regular Certificate
includes the original principal amount of the Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
"qualified stated interest." Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the Regular Certificate. Interest is
payable at a single fixed rate only if the rate appropriately takes into account
the length of the interval between payments. Distributions of interest on
Regular Certificates with respect to which deferred interest will accrue will
not constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon. Where the interval
between the issue date and the first Distribution Date on a Regular Certificate
is longer than the interval between subsequent Distribution Dates, the greater
of any original issue discount disregarding the rate in the first period and any
interest foregone during the first period is treated as the amount by which the
stated redemption price of the Regular Certificate exceeds its issue price for
purposes of the de minimis rule described below. The OID Regulations suggest
that all interest on a long first period Regular Certificate that is issued with
non-de minimis OID will be treated as OID. Where the interval between the issue
date and the first Distribution Date on a Regular Certificate is shorter than
the interval between subsequent Distribution Dates, interest due on the first
Distribution Date in excess of the amount that accrued during the first period
would be added to the Certificates stated redemption price at maturity. Regular
Certificateholders should consult their own tax advisors to determine the issue
price and stated redemption price at maturity of a Regular Certificate.
Under the de minimis rule, OID on a Regular Certificate will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Regular Certificate multiplied by the weighted average maturity
of the Regular Certificate. For this purpose, the weighted average maturity of
the Regular Certificate 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 Certificate and the denominator of which is the stated redemption
price at maturity of the Regular Certificate. Although currently unclear, it
appears that the schedule of such distributions should be determined in
accordance with the Prepayment Assumption. Certificateholders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the Regular Certificate is held as a capital
asset.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the OID that accrues on a Regular
Certificate for each day the Regular Certificateholder holds the Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a Regular Certificate, a calculation will be
made of the portion of the OID that accrues during each accrual period. This
will be done, in the case of each full accrual period, by (i) adding (a) the
present value at the end of the accrual period (determined by using as a
discount factor the original yield to maturity of the Regular Certificates as
calculated under the Prepayment Assumption) of all remaining payments to be
received on the Regular Certificate under the Prepayment Assumption, and (b) any
payments included in the stated redemption price at maturity received during
such accrual period, and (ii) subtracting from that total the "adjusted issue
price" of the Regular Certificates at the beginning of such accrual period. The
"adjusted issue price" of a Regular Certificate at the beginning of the first
accrual period is its issue price; the "adjusted issue price" of a Regular
Certificate at the beginning of a subsequent accrual period is the "adjusted
issue price" at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the amount of
any payment other than a payment of qualified stated interest made at the end of
or during that accrual period. The OID accrued during an accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the accrual period. The calculation of OID under
the method described above will cause the accrual of OID to either increase or
decrease (but never below zero) in a given accrual period to reflect the fact
that prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period the daily portions of OID must be determined according to an
appropriate allocation under any reasonable method.
67
152
A subsequent purchaser of a Regular Certificate issued with OID who
purchases the Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that Regular Certificate. In computing
the daily portions of OID for such a purchaser (as well as an initial purchaser
that purchases at a price higher than the adjusted issue price but less than the
stated redemption price at maturity), however, the daily portion is reduced by
the amount that would be the daily portion for such day (computed in accordance
with the rules set forth above) multiplied by a fraction, the numerator of which
is the amount, if any, by which the price paid by such holder for that Regular
Certificate exceeds the following amount: (a) the sum of the issue price plus
the aggregate amount of OID that would have been includible in the gross income
of an original holder of a Regular Certificate (who purchased the Regular
Certificate at its issue price), (b) less any prior payments included in the
stated redemption price at maturity, and the denominator of which is the sum of
the daily portions for that Regular Certificate for all days beginning on the
date after the purchase date and ending on the maturity date computed under the
Prepayment Assumption. A Certificateholder who pays an acquisition premium
instead may elect to accrue OID by treating the purchase as a purchase at
original issue.
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Interest is treated as payable at a variable rate and not as contingent interest
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 certain objective rates measured
by or based on lending rates for newly borrowed funds. The variable interest
generally will be qualified stated interest to the extent it is unconditionally
payable at least annually and, to the extent successive variable rates are used,
interest is not significantly accelerated or deferred.
The amount of OID with respect to a Regular Certificate bearing a variable
rate of interest will accrue in the manner described above under "Original Issue
Discount and Premium," by assuming generally that the index used for the
variable rate will remain fixed throughout the term of the Certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, it is anticipated that Regular Certificates
bearing an interest rate that is a weighted average of the net interest rates on
Mortgage Loans will be treated as variable rate certificates. In such case, the
weighted average rate used to compute the initial pass-through rate on the
Regular Certificates will be deemed to be the index in effect through the life
of the Regular Certificates. It is possible, however, that the IRS may treat
some or all of the interest on Regular Certificates with a weighted average rate
as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such
Regular Certificates. Additionally, if some or all of the Mortgage Loans are
subject to "teaser rates" (i.e., the initial rates on the Mortgage Loans are
less than subsequent rates on the Mortgage Loans) the interest paid on some or
all of the Regular Certificates may be subject to accrual using a constant yield
method notwithstanding the fact that such Certificates may not have been issued
with "true" non-de minimis original issue discount.
Election to Treat All Interest as OID
The OID Regulations permit a Certificateholder to elect to accrue all
interest, discount (including de minimis market or original issue discount) and
premium in income as interest, based on a constant yield method for Certificates
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Regular Certificate with market discount, the Certificateholder
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium with that such Certificateholder owns or acquires. See "-- Taxation of
Regular Certificates -- Premium" herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate
cannot be revoked without the consent of the IRS.
68
153
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount provisions of Code Sections 1276 through 1278. Under these provisions
and the OID Regulations "market discount" equals the excess, if any, of (i) the
Regular Certificate's stated principal amount or, in the case of a Regular
Certificate with OID, the adjusted issue price (determined for this purpose as
if the purchaser had purchased such Regular Certificate from an original holder)
over (ii) the price for such Regular Certificate paid by the purchaser. A
Certificateholder that purchases a Regular Certificate at a market discount,
will recognize gain upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a holder
generally will be required to allocate each such principal distribution first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A Certificateholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, such election will
apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies.
Market discount with respect to a Regular Certificate will be considered to
be zero if the amount allocable to the Regular Certificate is less than 0.25% of
the Regular Certificate's stated redemption price at maturity multiplied by the
Regular Certificate's weighted average maturity remaining after the date of
purchase. If market discount on a Regular Certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to the
remaining principal payments on the Regular Certificate and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made. Treasury regulations implementing the market discount rules have not yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. For Regular
Certificates issued with OID, the amount of market discount that accrues during
a period is equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the OID accruing during
the period and the denominator of which is the total remaining OID at the
beginning of the period. For Regular Certificates issued without OID, the amount
of market discount that accrues during a period is equal to the product of (i)
the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. For purposes of calculating
market discount under any of the above methods in the case of instruments (such
as the Regular Certificates) which provide for payments which may be accelerated
by reason of prepayments of other obligations securing such instruments, the
same Prepayment Assumption applicable to calculating the accrual of OID should
apply.
A holder of a Regular Certificate who acquires such Regular Certificate at
a market discount also may be required to defer, until the maturity date of such
Regular Certificate or its earlier disposition in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the Regular Certificate in excess of the aggregate amount of interest
(including OID) includible in such holder's gross income for the taxable year
69
154
with respect to such Regular Certificate. The amount of such net interest
expense deferred in a taxable year may not exceed the amount of market discount
accrued on the Regular Certificate for the days during the taxable year on which
the holder held the Regular Certificate and, in general, would be deductible
when such market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Regular Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the Regular
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Regular
Certificateholder in that taxable year or thereafter.
Premium
A purchaser of a Regular Certificate who purchases the Regular Certificate
at a cost (not including accrued qualified stated interest) greater than its
remaining stated redemption price at maturity will be considered to have
purchased the Regular Certificate at a premium, and may elect to amortize such
premium under a constant yield method. It is not clear whether the Prepayment
Assumption would be taken into account in determining the life of the Regular
Certificate for this purpose. However, the Legislative History states that the
same rules that apply to accrual of market discount (which rules require use of
a Prepayment Assumption in accruing market discount with respect to Regular
Certificates without regard to whether such Certificates have OID) will also
apply in amortizing bond premium under Code Section 171. The Code provides that
amortizable bond premium will be allocated among the interest payments on such
Regular Certificates and will be applied as an offset against such interest
payment.
Deferred Interest
Certain of the Regular Certificates may provide for the accrual of interest
when one or more ARM Loans are adding interest to their principal balance by
reason of negative amortization ("Deferred Interest"). Any Deferred Interest
that accrues with respect to a class of Regular Certificates will constitute
income to the holders of such Certificates prior to the time distributions of
cash with respect to such Deferred Interest are made. It is unclear under the
OID Regulations whether any of the interest on such Certificates will constitute
qualified stated interest or whether all or a portion of the interest payable on
the Certificate must be included in the stated redemption price at maturity of
the Certificate and accounted for as OID (which could accelerate such
inclusion). Interest on Regular Certificates must in any event be accounted for
under an accrual method by the holders of such Certificates, and therefore
applying the latter analysis may result only in a slight difference in the
timing of the inclusion in income of interest on such Regular Certificates.
Accrued Interest Certificates
Certain of the Regular Certificates may provide for payments of interest
based on a period that corresponds to the interval between Distribution Dates
but that ends prior to each such Distribution Date ("Payment Lag Certificates").
The period between the Closing Date for Payment Lag Certificates and their first
Distribution Date may or may not exceed such interval. Purchasers of Payment Lag
Certificates for which the period between the Closing Date and the first
Distribution Date does not exceed such interval could pay upon purchase of the
Regular Certificates accrued interest in excess of the accrued interest that
would be paid if the interest paid on the Distribution Date were interest
accrued from Distribution Date to Distribution Date. If a portion of the initial
purchase price of a Regular Certificate is allocable to interest that has
accrued prior to the issue date ("pre-issuance accrued interest") and the
Regular Certificate provides for a payment of stated interest on the first
payment date, within one year of the issue date, that equals or exceeds the
amount of the pre-issuance accrued interest, then the Regular Certificates issue
price may be computed by subtracting from the issue price the amount of
pre-issuance accrued interest, rather than as an amount payable on the Regular
Certificate. However, it is unclear under this method how the OID Regulations
treat interest on Payment Lag Certificates as described above. Therefore, in the
case of a Payment Lag Certificate, it is anticipated that accrued interest will
be included in the issue price and that interest payments made on the first
Distribution Date will be reported as interest to the extent such payments
represent interest for the
70
155
number of days which the Certificateholder holds such Payment Lag Certificate
during the first Accrual Period. Investors should consult their own tax advisors
concerning the treatment of Payment Lag Certificates for federal income tax
purposes.
Non-Interest Expenses of the REMIC
Under temporary Treasury regulations, if the REMIC is considered to be a
"single-class REMIC," a portion of the REMIC's servicing, administrative and
other non-interest expenses will be allocated as a separate item to those
Regular Certificateholders that are "pass-through interest holders."
Certificateholders that are pass-through interest holders should consult their
own tax advisors about the impact of these rules on an investment in the Regular
Certificates. See "-- Residual Certificates -- Non-Interest Expenses of the
REMIC" and "-- Residual Certificates -- Pass-Through of Miscellaneous Itemized
Deductions" below.
Sale, Exchange or Redemption of Regular Certificates
If a Regular Certificate is sold, exchanged, redeemed or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale, exchange or redemption and the seller's adjusted basis in
the Regular Certificate. Such adjusted basis generally will equal the cost of
the Regular Certificate to the seller, increased by any OID and market discount
included in the seller's gross income with respect to the Regular Certificate,
and reduced (but not below zero) by payments included in the stated redemption
price at maturity previously received by the seller and by any amortized
premium. Similarly, a Certificateholder who receives a payment which is part of
the stated redemption price at maturity of a Regular Certificate will recognize
gain equal to the excess, if any, of the amount of the payment over his adjusted
basis in the Regular Certificate. A holder of a Regular Certificate who receives
a final payment which is less than his adjusted basis in the Regular Certificate
will generally recognize a loss. Except as provided in the following paragraph
and as provided under "Market Discount" herein, any such gain or loss will be
capital gain or loss, provided that the Regular Certificate is held as a
"capital asset" (generally, property held for investment) within the meaning of
Code Section 1221.
Gain from the sale or other disposition of a Regular Certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess, if any, of (i) the amount that would have
been includible in such holder's income with respect to the Regular Certificate
had income accrued thereon at a rate equal to 110% of the AFR as defined in Code
Section 1274(d) determined as of the date of purchase of such Regular
Certificate, over (ii) the amount actually includible in such holder's income.
Regular Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Treatment of Realized Losses
Although not entirely clear, it appears that holders of Regular
Certificates that are corporations should in general be allowed to deduct as an
ordinary loss any loss sustained during the taxable year on account of any such
Certificates becoming wholly or partially worthless, and that, in general,
holders of Certificates that are not corporations should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of any such Certificates becoming wholly worthless. Although the matter is
unclear, non-corporate holders of Certificates may be allowed a bad debt
deduction at such time that the principal balance of any such Certificate is
reduced to reflect realized losses resulting from any liquidated Mortgage Loans.
The
71
156
IRS, however, could take the position that non-corporate holders will be allowed
a bad debt deduction to reflect realized losses only after all Mortgage Loans
remaining in the related Trust have been liquidated or the Certificates of the
related Series have been otherwise retired. Potential investors and
Certificateholders are urged to consult their own tax advisors regarding the
appropriate timing, amount and character of any loss sustained with respect to
such Certificates, including any loss resulting from the failure to recover
previously accrued interest or discount income. 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 Certificates.
Non-U.S. Persons -- Regular Certificates
Generally, payments of interest (including any payment with respect to
accrued original issue discount) on the Regular Certificates to a Regular
Certificateholder who is a non-U.S. Person not engaged in a trade or business
within the United States, will not be subject to federal withholding tax if such
Regular Certificateholder complies with certain identification requirements
(including delivery of a statement, signed by the Regular Certificateholder
under penalties of perjury, certifying that such Regular Certificateholder is a
foreign person and providing the name and address of such Regular
Certificateholder). If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued OID, such holder may be subject to a 30% withholding tax, subject to
reduction under any applicable tax treaty.
Information Reporting and Backup Withholding
The Servicer or the Trustee for the related Series of Certificates will
furnish or make available, within a reasonable time after the end of each
calendar year, to each Regular Certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold such Regular Certificates as nominees. If a
holder, owner or other recipient of a payment on behalf of an owner fails to
supply a certified taxpayer identification number or if the Secretary of the
Treasury determines that such person has not reported all interest and dividend
income required to be shown on its federal income tax return, 31% backup
withholding may be required with respect to any payments. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax liability.
RESIDUAL CERTIFICATES
Allocation of the Income or Loss of the REMIC to the Residual Certificates
A REMIC will not be subject to federal income tax except with respect to
income from prohibited transactions and certain other transactions. See
"Prohibited Transactions and Other Taxes" herein. Instead, each original holder
of a Residual Certificate will report on its federal income tax return, as
ordinary income, its share of the taxable income of the REMIC for each day
during the taxable year on which such holder owns any Residual Certificates. The
taxable income of the REMIC for each day will be determined by allocating the
taxable income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a holder's share of the taxable income of the REMIC for each day,
will be based on the portion of the outstanding Residual Certificates that such
holder owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the Residual Certificateholders
without regard to the timing or amounts of cash distributions by the REMIC. Some
or all of such income may not be offsetable by a Residual Certificateholder's
tax losses from other sources.
The taxable income of the REMIC will reflect a netting of (i) the income
from the Mortgage Loans and the REMIC's other assets, and (ii) the deductions
allowed to the REMIC for interest and original issue discount on the Regular
Certificates and, except as described below under "Non-Interest Expenses of the
REMIC," other expenses. For these purposes, all bad loans will be deductible as
business bad debts and the limitations on the deductibility of interest and
expenses related to the tax exempt income will apply.
72
157
The REMIC will be allowed a deduction for interest and OID on the Regular
Certificates. The amount and method of accrual of OID will be calculated for
this purpose in the same manner as described above with respect to Regular
Certificates except that the 0.25% per annum de minimis rule and adjustments for
subsequent holders described therein will not apply.
The REMIC will have a net loss for any calendar quarter in which its
deductions exceed its gross income. Such net loss would be allocated among the
Residual Certificateholders in the same manner as the REMIC's taxable income.
The amount of any net loss of the REMIC that may be taken into account by
the Residual Certificateholder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate, if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
reportable by the Residual Certificateholder and decreased by the amount of loss
of the REMIC reportable by the Residual Certificateholder. A cash distribution
from the REMIC also will reduce such adjusted basis (but not below zero). Any
loss that is disallowed on account of this limitation may be carried over
indefinitely with respect to the Residual Certificateholder only to offset any
income generated by the same REMIC. The ability of a Residual Certificateholder
to deduct net losses with respect to a Residual Certificate may be subject to
additional limitations under the Code, as to which Residual Certificateholders
should consult with their tax advisors.
Non-Interest Expenses of the REMIC
The REMIC's taxable income will be determined in the same manner as if the
REMIC were an individual. However, all or a portion of the REMIC's servicing,
administrative and other non-interest expenses will be allocated as a separate
item to Residual Certificateholders that are "pass-through interest holders."
Such a holder would be required to add an amount equal to its allocable share,
if any, of such expenses to its gross income and to treat the same amount as an
item of investment expense. Individuals are generally allowed a deduction for
such an expense item only as a miscellaneous itemized deduction subject to the
limitations under Code Section 67. That section allows such deduction only to
the extent that in the aggregate all such expenses exceed two percent of an
individual's adjusted gross income. The REMIC is required to report to each
pass-through interest holder and to the IRS such holder's allocable share, if
any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. Residual Certificateholders that are "pass-through interest holders"
should consult their own tax advisors about the impact of these rules on an
investment in the Residual Certificates. See "-- Pass-Through of Miscellaneous
Itemized Deductions" below.
Pass-Through of Miscellaneous Itemized Deductions
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interests. In the case of a "single class
REMIC", however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the holders of the
Regular Certificates and the holders of the Residual Interests on a daily basis
in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In the case of individuals (or trusts, estates,
or other persons who compute their income in the same manner as individuals) who
own an interest in a Regular Certificate directly or through a pass-through
entity which is required to pass miscellaneous itemized deductions through to
its owners or beneficiaries (e.g. a partnership, an S corporation, or a grantor
trust), such expenses will be deductible only to the extent that such expenses,
plus other "miscellaneous itemized deductions" of the individual, exceed 2% of
such individual's adjusted gross income. In addition, the personal exemptions
and itemized deductions of individuals with adjusted gross incomes above
particular levels are subject to certain limitations which reduce or eliminate
the benefit of such items. The reduction or disallowance of this deduction
coupled with the allocation of additional income may have a significant impact
on the yield of the Regular Certificate. Further, Certificateholders (other than
corporations) subject to the alternative minimum
73
158
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related Residual Interests in their entirety and
not to holders of the related Regular Certificates.
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC, a Residual Certificateholder will
have taxable income to the extent that any cash distribution to him from the
REMIC exceeds such adjusted basis on that date. Such income will be treated as
gain from the sale or exchange of the Residual Certificate.
UNLESS OTHERWISE SPECIFIED IN A RELATED PROSPECTUS SUPPLEMENT, NO RESIDUAL
CERTIFICATES WILL BE OFFERED PURSUANT TO THIS PROSPECTUS. TO THE EXTENT RESIDUAL
CERTIFICATES ARE OFFERED HEREUNDER, AT A LATER DATE, ADDITIONAL INFORMATION
RELEVANT TO THE RESIDUAL CERTIFICATES OFFERED WILL BE PROVIDED IN THE RELATED
PROSPECTUS SUPPLEMENT.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments, or the
disposition of an asset representing a temporary investment of payments on the
Mortgage Loans pending distributions on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a subsequent
purchaser could cause the REMIC to recognize gain, which would also be subject
to the 100 percent tax on prohibited transactions.
In addition, certain contributions to a REMIC made after the Closing Date
could result in the imposition of a tax on the REMIC equal to 100% of the value
of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related Prospectus Supplement, such tax would be
borne first by the Residual Certificateholders, to the extent of amounts
distributable to them, and then by the Servicer.
LIQUIDATION AND TERMINATION
If the REMIC 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'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 will recognize no gain or loss on the sale of its assets,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and Residual Certificates within the 90-day period.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the Residual Certificateholders will
be treated as the partners thereof; however, under Temporary Regulations if
there is at no time during the taxable year more than one Residual
Certificateholder, a REMIC shall not be subject to the rules of Subchapter C of
chapter 63 of the Code, relating to the treatment of Partnership items for a
taxable year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. In
addition, certain other
74
159
information will be furnished quarterly to each Residual Certificateholder who
held such Residual Certificate on any day in the previous calendar quarter.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described herein under
"Certain Federal Income Tax Consequences," potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section 4975
of the Code imposes essentially the same prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on Individual Retirement Accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
502(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that the
investments of ERISA Plans and Tax-Favored Plans (collectively, "Plans") be made
in accordance with the documents governing the Plan. In addition, Section 406 of
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan assets and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relations to
the Plans, unless a statutory or administrative exemption is available. Certain
Parties in Interest (or Disqualified Persons that participate in a prohibited
transaction may be subject to a penalty (or an excise tax) imposed pursuant to
Section 502(i) of ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption is available.
PLAN ASSET REGULATIONS
A Plan's investment in the Certificates may cause the Mortgage Loans
included in a Mortgage Pool to be deemed Plan assets. The U.S. Department of
Labor (the "DOL") has promulgated regulations (the "DOL Regulations") concerning
whether or not a Plan's assets would be deemed to include an interest in the
underlying assets of an entity (such as a Trust), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Certificate) in such entity. Because of the factual nature
of certain of the rules set forth in the DOL Regulations, an investing Plan's
assets either may be deemed to include an interest in the assets of a Trust or
may be deemed merely to include its interest in the Certificates. Therefore,
Plans should not acquire or hold Certificates in reliance upon the availability
of any exception under the DOL Regulations.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust and cause the Sponsor, the Servicer, any
Sub-Servicer, the Trustee, the obligor under any credit enhancement mechanism or
certain affiliates thereof, to be considered or become Parties in Interest or
Disqualified Persons with respect to an investing Plan. If so, the acquisition
or holding of Certificates by or on behalf of the investing Plan could also give
rise to a prohibited transaction under ERISA and the Code, unless
75
160
some statutory or administrative exemption is available. Certificates acquired
by a Plan would be assets of that Plan. Special caution should be exercised
before the assets of a Plan are used to acquire a Certificate in such
circumstances, especially if, with respect to such assets, the Sponsor, the
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism or an affiliate thereof either (i) has investment
discretion with respect to the investment of Plan assets; or (ii) has authority
or responsibility to give (or regularly gives) investment advice with respect to
Plan assets for a fee pursuant to an agreement or understanding that such advice
will serve as a primary basis for investment decisions with respect to such
assets.
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 (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets than any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Certificates by a Plan, as well as the operation of
the Trust, may constitute or involve a prohibited transaction under ERISA and
the Code.
PROHIBITED TRANSACTION CLASS EXEMPTION
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts
from the application of the prohibited transaction provisions of ERISA and
Section 4975 of the Code transactions involving a Plan in connection with the
operation of a "mortgage pool" and the purchase, sale and holding of "mortgage
pool pass-through certificates." A "mortgage pool" is defined as an investment
pool, consisting solely of interest bearing obligations secured by first or
second mortgages or deeds of trust on single-family residential property,
property acquired in foreclosure and undistributed cash. A "mortgage pool
pass-through certificate" is defined as a certificate which represents a
beneficial undivided interest in a mortgage pool which entitles the holder to
pass-through payments of principal and interest from the mortgage loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Sponsor and the
Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Sponsor; and (iii) the payments made to
and retained by the Sponsor in connection with the Trust, together with all
funds inuring to its benefit for administering the Trust, represent no more than
"adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Sponsor, the Servicer, the Trustee or, the Certificate
Insurer, if any, is a party in interest if the Plan does not pay more than fair
market value for such Certificates and the rights and interests evidenced by
such Certificates are not subordinated to the rights and interests evidenced by
other Certificates of the same pool. PTCE 83-1 also exempts from the prohibited
transaction rules and transactions in connection with the servicing and
operation of the Mortgage Pool, provided that any payments made to the Servicer
in connection with the servicing of the Trust are made in accordance with a
binding agreement, copies of which must be made available to prospective
investors.
In the case of any Plan with respect to which the Servicer, the Sponsor,
the Trustee or a Certificate Insurer, if any, is a fiduciary, PTCE 83-1 will
only apply if, in addition to the other requirements: (i) the initial sale,
exchange or transfer of Certificates is expressly approved by an independent
fiduciary who has authority to manage and control those plan assets being
invested in Certificates; (ii) the Plan pays no more for the Certificates than
would be paid in an arm's length transaction; (iii) no investment management,
advisory
76
161
or underwriting fee, sale commission, or similar compensation is paid to the
Servicer with regard to the sale, exchange or transfer of Certificates to the
Plan; (iv) the total value of the Certificates purchased by such Plan does not
exceed 25% of the amount issued; and (v) at least 50% of the aggregate amount of
Certificates is acquired by persons independent of the Sponsor, the Trustee, the
Servicer, and the Certificate Insurer, if any.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust is a "mortgage pool," that the Certificates constitute "mortgage pool
pass-through certificates," and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
exemption which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire a Certificates and the
circumstances under which such decision is made, including but not limited to
PTCE 90-1, regarding investments by insurance company pooled separate account
and PTCE 91-38, regarding investments by bank collective investment funds.
However, even if the conditions specified in the exemption or one or more of
these other exemptions are met, the scope of the relief provided might or might
not cover all acts which might be construed as prohibited transactions.
Any Plan fiduciary considering the purchase of a Certificate should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. Special caution ought to be
exercised before a Plan purchases a Certificate in such circumstances.
LEGAL INVESTMENT CONSIDERATIONS
SMMEA
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans or deeds of trust may
not be legally authorized to invest in the Certificates. No representation is
made herein as to whether the Certificates will constitute legal investments for
any entity under any applicable statue, law, rule, regulation or order.
Prospective purchasers are urged to consult with their counsel concerning the
status of the Certificates as legal investments for such purchasers prior to
investing in any Class of Certificates.
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Certificates Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository
77
162
institution to develop and monitor appropriate policies and strategies regarding
the investment, sale and trading of securities and restricts an institution's
ability to engage in certain types of transactions.
The Policy Statement provides that a depository institution must ascertain
and document prior to purchase and no less frequently than annually thereafter
that a non-high-risk mortgage security held for investment remains outside the
high-risk category. If an institution is unable to make these determinations
through internal analysis, it must use information derived from a source that is
independent of the party from whom the product is being purchased. The
institution is responsible for ensuring that the assumptions underlying the
analysis and resulting calculations are reasonable. Reliance on analyses and
documentation from a securities dealer or other outside party without internal
analyses by the institution is unacceptable.
A "high-risk mortgage security" is not suitable as an investment portfolio
holding for a depository institution. A high-risk mortgage security must be
reported in the trading account at market value or as an asset held for sale at
the lower of cost or market value and generally may only be acquired to reduce
an institution's interest rate risk. However, an institution with strong capital
and earnings and adequate liquidity that has a closely supervised trading
department is not precluded from acquiring high-risk mortgage securities for
trading purposes.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
GENERAL
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates, to purchase
Certificates representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors and comply with any other applicable
requirements.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplement will be
offered in Series, either directly by the Sponsor or through one or more
underwriters or underwriting syndicates ("Underwriters"). The Prospectus
Supplement for each Series will set forth the terms of the offering of such
Series and of each Class within such Series, including the name or names of the
Underwriters, the proceeds to the Sponsor, and either the initial public
offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell the Certificates will be
determined.
The Certificates in a Series may be acquired by Underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. It is anticipated that the
underwriting agreement pertaining to the sale of any Series of Certificates will
provide that the obligations of any Underwriters will be subject to certain
conditions precedent, and such Underwriters will be severally obligated to
purchase all of a Series of Certificates described in the related Prospectus
Supplement, if they are purchased and that in limited circumstances the Sponsor
will indemnify any Underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933, or will contribute to payments any
Underwriters may be required to make in respect thereof.
78
163
If Certificates of a Series are offered other than through Underwriters,
the related Prospectus Supplement will contain information regarding the nature
of such offering and any agreements to be entered into between the seller and
purchasers of Certificates of such Series.
The Sponsor anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, 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 Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates of each
Series, including certain federal income tax consequences with respect thereto,
will be passed upon by Andrews & Kurth L.L.P., Washington, D.C.
FINANCIAL INFORMATION
The Sponsor has determined that its financial statements are not material
to the offering made hereby.
A new Trust will be formed to own the Mortgage Loans and to issue each
Series of Certificates. Each such Trust will have no assets or obligations prior
to the issuance of the Certificates and will not engage in any activities other
than those described herein. Accordingly, no financial statements with respect
to such Trusts will be included in this Prospectus or any Prospectus Supplement.
RATING
Unless otherwise specified in the related Prospectus Supplement, it is a
condition to the issuance of the Certificates of each Series offered hereby that
they shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
related Prospectus Supplement (each, a "Rating Agency").
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders 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 mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates in extreme cases might fail to recoup their
underlying 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.
79
164
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following capitalized terms
shall have the meanings set forth on the pages indicated below:
1933 Act......................................................................... 2
1986 Act......................................................................... 62, 66
Accounts......................................................................... 29
Accrual Certificates............................................................. 32
Affiliated Originators........................................................... 8, 26
ALTA............................................................................. 27
Appraised Value.................................................................. 23
ARM Loans........................................................................ 20, 64
ARMs............................................................................. 62
Available Funds.................................................................. 31
Balloon Loans.................................................................... 17
Bankruptcy Bond.................................................................. 11, 38
Cede............................................................................. 15, 29
CERCLA........................................................................... 56
Certificate Account.............................................................. 31
Certificate Guaranty Insurance Policy............................................ 10, 36
Certificate Insurer.............................................................. 36
Certificate Principal Balance.................................................... 33
Certificate Register............................................................. 31
Certificateholders............................................................... 1, 28
Certificates..................................................................... 1, 5
Class............................................................................ 1, 5, 28
Closing Date..................................................................... 24
Code............................................................................. 13, 58
Collection Account............................................................... 44
Collection Period................................................................ 32
Combined Loan-to-Value Ratio..................................................... 23
Commission....................................................................... 2
Compensating Interest Payments................................................... 46
Cut-off Date..................................................................... 7
Deferred Interest................................................................ 64, 70
Definitive Certificates.......................................................... 15, 29
Deleted Mortgage Loan............................................................ 43
Deposit Date..................................................................... 44
Detailed Description............................................................. 22
Disqualified Persons............................................................. 75
Distribution Date................................................................ 1, 31
DOL.............................................................................. 76
DOL Regulations.................................................................. 76
DTC.............................................................................. 15, 29
EPA.............................................................................. 56
ERISA............................................................................ 14, 75
ERISA Plans...................................................................... 75
Event of Default................................................................. 49
Exchange Act..................................................................... 2
Forward Purchase Commitment...................................................... 8, 24
Garn-St. Germain Act............................................................. 55
Indirect Participant............................................................. 29
80
165
Insurance Proceeds............................................................... 32
Insured Amount................................................................... 10, 36
Interest Weighted Class.......................................................... 20
IRAs............................................................................. 75
IRS.............................................................................. 59
Issuer........................................................................... 64
Junior Loan...................................................................... 16
Legislative History.............................................................. 63
Liquidated Mortgage Loan......................................................... 46
Liquidation Proceeds............................................................. 32
Loan Purchase Price.............................................................. 43
Loan Schedule.................................................................... 41
Lockout periods.................................................................. 23
Master REMIC..................................................................... 66
Monthly Advance.................................................................. 45
Mortgage File.................................................................... 41
Mortgage Loans................................................................... 1, 6
Mortgage Note.................................................................... 6
Mortgage Pool.................................................................... 1, 6
Mortgage Pool Insurance Policy................................................... 10, 36
Mortgage Pool Insurer............................................................ 36
Mortgaged Properties............................................................. 22
Mortgaged Property............................................................... 7
Mortgagor........................................................................ 10, 16
Net Liquidation Proceeds......................................................... 32
Non-REMIC Certificates........................................................... 13
OID.............................................................................. 59
OID Regulations.................................................................. 62
Original Issue Discount and Premium.............................................. 68
Originators...................................................................... 1, 8, 26
Parent........................................................................... 25
Participants..................................................................... 29
Parties in Interest.............................................................. 75
Pass-Through Rate................................................................ 2, 32
Payment Lag Certificates......................................................... 70
Permitted Investments............................................................ 44
Plan Asset Regulations........................................................... 14
Plan(s).......................................................................... 14
Plans............................................................................ 75
Policy Statement................................................................. 78
Pool Balance..................................................................... 34
Pool Factor...................................................................... 34
Pooling and Servicing Agreement.................................................. 5, 28
Prepayment Assumption............................................................ 63
Principal Prepayment............................................................. 12
Principal Prepayments............................................................ 33
Principal Weighted Class......................................................... 20
Proposed OID Regulations......................................................... 63
PTCE 83-1........................................................................ 76
Purchase Account................................................................. 8, 24
Qualified Replacement Mortgage Loan.............................................. 43
Qualified Retirement Plans....................................................... 75
Rating Agency.................................................................... 12, 99
81
166
Regular Certificates............................................................. 13, 65
Relief Act....................................................................... 19
REMIC............................................................................ 1, 13, 57
REMIC Regulations................................................................ 58
REO Property..................................................................... 45
Reserve Account.................................................................. 10, 35
Residual Certificates............................................................ 13, 65
Riegle Act....................................................................... 19, 55
Senior Certificates.............................................................. 5, 28
Senior Lien...................................................................... 17
Series........................................................................... 1, 5
Servicer......................................................................... 5
Servicing Advance................................................................ 47
SMMEA............................................................................ 15, 16
Special Hazard Insurance Policy.................................................. 11, 37
Special Hazard Insurer........................................................... 37
Sponsor.......................................................................... 1, 5, 25
Sponsor's Guidelines............................................................. 26
Standard Hazard Insurance Policies............................................... 7
Stripped ARM Obligations......................................................... 64
Stripped Bond Certificates....................................................... 61
Stripped Coupon Certificates..................................................... 61
Sub-Servicer..................................................................... 5, 47
Subordinated Certificates........................................................ 5
Subordinated Classes............................................................. 28
Subsidiary REMIC................................................................. 66
Tax-Favored Plans................................................................ 75
Title V.......................................................................... 56
TMP.............................................................................. 65
Trust............................................................................ 1, 5
U.S. Person...................................................................... 65
Unaffiliated Originators......................................................... 8, 26
Underwriters..................................................................... 79
Voting Interests................................................................. 49
82
167
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses expected to be incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting compensation, are as follows:
SEC Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 365,555.81
Trustee's Fees and Expenses (including counsel fees) . . . . . . . . . . . . . . . 125,000.00
Printing and Engraving Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000.00
Blue Sky and Legal Investment Fees and Expenses . . . . . . . . . . . . . . . . . . 50,000.00
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000.00
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000.00
-------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,445,555.81
=============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation eliminates the
liability of the directors of the corporation to the fullest extent permitted
by California law and provides for indemnification of the officers and
directors in excess of that expressly provided by and to the full extent
permitted under California law.
Each Pooling and Servicing Agreement will provide that neither the
Registrant nor any of its directors, officers, employees or agents shall have
any liability to the Trust created thereunder or to any of the
Certificateholders, except with respect to liabilities resulting from willful
malfeasance, bad faith or gross negligence or from the reckless disregard of
obligations or duties arising under the related Pooling and Servicing
Agreement. Each such Pooling and Servicing Agreement will further provide
that, with the exceptions stated above, the Registrant and its directors,
officers, employees and agents are entitled to be indemnified and held harmless
by said Trust against any loss, liability or expense incurred in connection
with legal actions relating to such Pooling and Servicing Agreement or the
Certificates.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides, under certain circumstances, for
indemnification of the Registrant and other persons.
ITEM 16. EXHIBITS.
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement*
4.1 Form of Pooling and Servicing Agreement*
5.1 Opinion of Andrews & Kurth L.L.P. as to legality
8.1 Opinion of Andrews & Kurth L.L.P. as to tax matters
23.1 Consent of Andrews & Kurth L.L.P. (included in Exhibits 5.1 and 8.1)
24.1 Powers of Attorney (included on page II-3 of this Registration Statement)
99.1 Form of Prospectus Supplement (included in Part I of this Registration
Statement)
- ---------------------------
* Incorporated by reference to Amendment No. 1 to Registration
Statement on Form S-3 filed on December 1, 1995 (File No.
33-99458)
II-1
168
ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in
this Registration Statement;
provided, however, that paragraphs (i) and (ii) above do not apply if this
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment to those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
B. The undersigned Registrant undertakes that, for purposes of determining any
liability under the Act, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in this Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
C. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant as
specified in Item 15 above or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
169
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on August 14, 1996.
AAMES CAPITAL CORPORATION
By: /s/ Gregory J. Witherspoon
------------------------------------------
Gregory J. Witherspoon
Executive Vice President - Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated. Each person whose
signature appears below constitutes and appoints Gregory J. Witherspoon, Mark
E. Elbaum and Bobbie J. Burroughs and each of them, his or her true and lawful
attorney-in-fact and agent, acting together or alone, with full powers of
substitution and resubstitution, for them and in their name, place and stead,
to sign any or all amendments to this Registration Statement (including any
pre-effective or post-effective amendment), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, acting together or alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as they might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, acting together or alone, or other substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Gary K. Judis Chairman of the Board, President August 14, 1996
- -------------------------------------------- and Chief Executive Officer
Gary K. Judis (Principal Executive Officer)
/s/ Bobbie J. Burroughs Executive Vice President- August 14, 1996
------------------------------------------- Administration, Secretary and
Bobbie J. Burroughs Director
/s/ Gregory J. Witherspoon Executive Vice President-Finance, August 14, 1996
----------------------------------------- Chief Financial Officer and
Gregory J. Witherspoon Director (Principal Financial
Officer)
/s/ Mark E. Elbaum Senior Vice President-Finance August 14, 1996
------------------------------------------- (Principal Accounting Officer)
Mark E. Elbaum
II-3
170
EXHIBIT INDEX
Exhibits
--------
1.1 Form of Underwriting Agreement*
4.1 Form of Pooling and Servicing Agreement*
5.1 Opinion of Andrews & Kurth L.L.P. as to legality
8.1 Opinion of Andrews & Kurth L.L.P. as to tax matters
23.1 Consent of Andrews & Kurth L.L.P. (included in Exhibits 5.1 and 8.1)
24.1 Powers of Attorney (included on page II-3 of this Registration Statement)
99.1 Form of Prospectus Supplement (included in Part I of this Registration Statement)
-----------------------
* Incorporated by reference to Amendment No. 1 to Registration Statement
on Form S-3 filed on December 1, 1995 (File No. 33-99458)
II-4