Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-36242
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 8, 2001
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$355,000,000
ABFS MORTGAGE LOAN TRUST 2001-2
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2001-2
$275,000,000 6.34%(1) CLASS A-1 CERTIFICATES
$32,798,000 VARIABLE RATE(2) CLASS A-2 CERTIFICATES
$23,278,000 5.82% CLASS A-3 CERTIFICATES
$23,924,000 6.99%(1) CLASS A-4 CERTIFICATES
$35,500,000(3) 8.00% CLASS A-IO CERTIFICATES
[GRAPHIC OMITTED](R)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
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(1) THE PASS-THROUGH RATE FOR THE CLASS A-1 CERTIFICATES WILL INCREASE TO 6.84%
IF THE CLASS A-1 CERTIFICATES REMAIN OUTSTANDING AFTER THE CLEAN-UP CALL
DATE. THE PASS-THROUGH RATE FOR THE CLASS A-4 CERTIFICATES WILL INCREASE TO
7.49% IF THE CLASS A-4 CERTIFICATES REMAIN OUTSTANDING AFTER THE CLEAN-UP
CALL DATE.
(2) THE PASS-THROUGH RATE FOR THE CLASS A-2 CERTIFICATES WILL FLOAT, BASED ON
THE ONE-MONTH LIBOR RATE PLUS 0.14%, SUBJECT TO AN AVAILABLE FUNDS CAP.
(3) NOTIONAL AMOUNT. NO PRINCIPAL WILL BE PAID ON THIS CERTIFICATE.
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YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" STARTING ON PAGE S-5 OF THIS
PROSPECTUS SUPPLEMENT AND PAGE 4 OF THE ACCOMPANYING PROSPECTUS AND CONSIDER
THESE FACTORS BEFORE MAKING A DECISION TO INVEST IN THE CERTIFICATES.
The certificates represent interests in the trust fund only and are not
interests in or obligations of any other person.
Neither the certificates nor the underlying mortgage loans will be insured or
guaranteed by any governmental agency or instrumentality.
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THE TRUST FUND --
o The trust fund consists primarily of two pools of fixed-rate business and
consumer purpose home equity loans secured by first- or second-lien
mortgages on primarily residential real properties.
THE CERTIFICATES --
o The Class A-1 Certificates will be backed primarily by one of the two pools
of mortgage loans. The Class A-2, Class A-3 and Class A-4 Certificates will
be backed primarily by the other pool of mortgage loans. The Class A-IO
Certificates will be backed by both pools of mortgage loans in the trust
fund.
CREDIT ENHANCEMENT -
o The certificates will be unconditionally and irrevocably guaranteed as to
the timely distribution of interest and as to specified distributions of
principal pursuant to the terms of a financial guaranty insurance policy to
be issued by
[MBIA GRAPHIC OMITTED]
o The certificates will be cross-collateralized to a limited extent.
o Excess interest will be used in the early years of the transaction to
create and build over-collateralization.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The certificates offered by this prospectus supplement will be purchased by
Bear, Stearns & Co. Inc and Morgan Stanley & Co. Incorporated and offered from
time to time to the public in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. Proceeds to the depositor from the
sale of the certificates are anticipated to be approximately $360,511,041 before
the deduction of expenses payable by the depositor, estimated to be
approximately $500,000. The certificates will be available for delivery to
investors in book-entry form through the facilities of The Depository Trust
Company, Clearstream Luxembourg and the Euroclear System on or about June 28,
2001.
BEAR, STEARNS & CO. INC. MORGAN STANLEY DEAN WITTER
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 8, 2001
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates in two separate
documents that provide more detail in progression: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (2) this prospectus supplement, which describes
the specific terms of your series of certificates. IF THE ACCOMPANYING
PROSPECTUS CONTEMPLATES MULTIPLE OPTIONS, YOU SHOULD RELY ON THE INFORMATION IN
THIS PROSPECTUS SUPPLEMENT AS TO THE APPLICABLE OPTION.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Mortgage Pass-Through Certificates, Series 2001-2
in any state where the offer is not permitted.
For 90 days following the date of this prospectus supplement, all dealers
selling certificates will deliver a prospectus supplement and prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters of the certificates with respect to their unsold
allotments or subscriptions.
We cannot sell the certificates to you unless you have received both this
prospectus supplement and the accompanying prospectus.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
S-ii
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY.............................................1 Optional Purchase of Delinquent Mortgage Loans..58
RISK FACTORS........................................5 Servicer Reports................................58
TRANSACTION OVERVIEW................................9 Collection and Other Servicing Procedures.......59
Parties..........................................9 Hazard Insurance................................60
The Transaction..................................9 Realization Upon Defaulted Mortgage Loans.......61
THE MORTGAGE LOAN POOLS............................10 Removal and Resignation of the Servicer.........61
The Mortgage Loan Group I.......................11 Termination; Optional Clean-up Call.............63
The Mortgage Loan Group II......................19 THE POLICY.........................................64
THE ORIGINATORS, THE SELLER AND THE SERVICER.......26 Drawings Under the Policy.......................66
The Originators.................................26 THE CERTIFICATE INSURER............................66
Marketing Strategy..............................31 MBIA INFORMATION...................................67
Underwriting Procedures and Practices...........32 Financial Strength Ratings of MBIA..............69
The Servicer....................................34 Experts.........................................69
Delinquency and Loan Loss Experience............36 PREPAYMENT AND YIELD CONSIDERATIONS................69
THE TRUSTEE AND THE COLLATERAL AGENT...............37 Yield Sensitivity of the Class A-IO
DESCRIPTION OF THE CERTIFICATES....................38 Certificates ...................................75
Book-Entry Registration.........................39 MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.........77
Definitive Certificates.........................43 REMIC Elections.................................77
Sale of the Mortgage Loans......................43 Special Tax Attributes..........................77
Delivery of Mortgage Loan Documents.............44 Discount and Premium............................78
Representations and Warranties of the Seller....46 Sale or Redemption of the Class A Certificates..78
Distributions on the Mortgage Loans.............48 Class A-2 Available Funds Cap Carry-Forward
Pass-Through Rates..............................50 Amounts.........................................78
Calculation of LIBOR............................50 Other Matters...................................79
Over-collateralization Provisions...............51 STATE TAXES........................................79
Reserve Account.................................53 ERISA CONSIDERATIONS...............................80
Flow of Funds...................................53 LEGAL INVESTMENT...................................82
Reports to Certificateholders...................55 PLAN OF DISTRIBUTION...............................82
Amendment.......................................55 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..83
Control Rights of Certificate Insurer...........56 LEGAL MATTERS......................................84
SERVICING OF THE MORTGAGE LOANS....................56 RATINGS............................................84
Servicing Fees and Other Compensation and GLOSSARY...........................................84
Payment of Expenses.............................56
Periodic Advances and Servicer Advances.........57
Prepayment Interest Shortfalls..................58
Relief Act Shortfalls...........................58
PROSPECTUS
RISK FACTORS........................................4 ERISA CONSIDERATIONS..............................114
DESCRIPTION OF THE SECURITIES......................14 LEGAL MATTERS.....................................121
THE TRUST FUNDS....................................19 FINANCIAL INFORMATION.............................121
CREDIT ENHANCEMENT.................................39 AVAILABLE INFORMATION.............................122
SERVICING OF LOANS.................................44 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.122
THE AGREEMENTS.....................................53 RATINGS...........................................122
MATERIAL LEGAL ASPECTS OF THE LOANS................64 LEGAL INVESTMENT CONSIDERATIONS...................123
THE DEPOSITOR......................................78 PLAN OF DISTRIBUTION..............................124
USE OF PROCEEDS....................................78 GLOSSARY OF TERMS.................................125
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.........79
STATE TAX CONSIDERATIONS..........................109
FASIT SECURITIES..................................109
S-iii
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. You should read this entire prospectus
supplement and the accompanying prospectus carefully to understand all of the
terms of the offering of the certificates.
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THE CERTIFICATES
The ABFS Mortgage Loan Trust 2001-2 will issue the Mortgage Pass-Through
Certificates, Series 2001-2. Five classes of the certificates, the Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates and the Class A-IO Certificates, are being offered to you by this
prospectus supplement. The trust will also issue two subordinated classes of
certificates, the Class X and Class R Certificates, that will not be offered
under this prospectus supplement. The certificates will represent the entire
beneficial ownership interest in the trust. The trust is comprised of two
mortgage loan pools, each a mortgage loan group, the conforming mortgage loan
group, or Mortgage Loan Group I, and the non-conforming mortgage loan group, or
Mortgage Loan Group II. The Class A-1 Certificates are backed primarily by
Mortgage Loan Group I and the Class A-2, Class A-3 and Class A-4 Certificates
are backed primarily by Mortgage Loan Group II. The Class A-IO Certificates are
backed by both mortgage loan groups.
DISTRIBUTIONS
Distributions on the certificates will be on the 25th day of each month,
or, if such 25th day is not a business day, on the next business day, beginning
on July 25, 2001, to the holders of record on the preceding record date.
The record date for the Class A-1, Class A-3, Class A-4 and Class A-IO
Certificates will be the last business day of the month preceding the related
distribution date, or, in the case of the July 25, 2001 distribution date, the
closing date. The record date for the Class A-2 Certificates will be the
business day preceding each distribution date.
PAYMENTS OF INTEREST
On each distribution date, the certificates are entitled to receive current
interest.
o Current Interest. The current interest for a distribution date is the
interest which accrues on a class of certificates at the applicable
pass-through rate on the outstanding principal or notional balance of the
certificate during the accrual period.
o Accrual Period. The accrual period for the Class A-1, Class A-3, Class A-4
and Class A-IO Certificates is the calendar month preceding the
distribution date. The accrual period for the Class A-2 Certificates is the
period from, and including, the prior distribution date (or in the case of
the July 25, 2001 distribution date, the closing date) to, but excluding,
the current distribution date.
All computations of interest accrued on the Class A-1, Class A-3, Class A-4
and Class A-IO Certificates will be made on the basis of a 360-day year
S-1
consisting of twelve 30-day months. All computations of interest accrued on the
Class A-2 Certificates shall be made on the basis of a 360-day year and the
actual number of days elapsed in the accrual period.
Pass-through rate cap. The Class A-2 Certificates are subject to an
available funds cap on the pass-through rate.
Interest-only certificates. The Class A-IO Certificates do not have a
principal balance and are not eligible to receive payments of principal. For the
purpose of calculating interest payments, interest will accrue on a notional
amount initially equal to $35,500,000. With respect to each distribution date
occurring prior to January 2004, the notional amount of the Class A-IO
Certificates will equal the lesser of:
o $35,500,000, and
o the aggregate outstanding principal balance of the mortgage loans in both
mortgage loan groups as of the first day of the previous calendar month.
On and after the distribution date occurring in January 2004 the notional
balance will equal zero.
PAYMENTS OF PRINCIPAL
The holders of the Class A-1 Certificates, and the holders of the Class
A-2, Class A-3 and Class A-4 Certificates, in the aggregate, are entitled to
receive distributions of principal on each distribution date which generally
reflects the collections of principal on the mortgage loans in the mortgage loan
group relating to their class or classes during the preceding calendar month.
The Class A-2, Class A-3 and Class A-4 Certificates are "sequential pay"
classes which have been issued with respect to Mortgage Loan Group II.
In addition, in accordance with the over-collateralization features of the
transaction, holders of the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates may also receive extra distributions of principal from the excess
interest on that distribution date.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
certificates consists solely of:
o excess spread,
o limited cross-collateralization,
o over-collateralization, and
o the certificate insurance policy.
THE MORTGAGE LOANS
The mortgage loans to be included in the trust fund will be primarily
fixed-rate, closed-end, monthly pay, business purpose loans and consumer purpose
home equity loans secured by first or second mortgages or deeds of trust
primarily on residential real properties.
Mortgage Loan Group I, the conforming mortgage loan group, will include
mortgage loans that have an aggregate outstanding principal balance as of the
statistical calculation date of $192,981,763.22. As of the statistical
calculation date, each mortgage loan in Mortgage Loan Group I is secured by a
first lien on the related property and the original principal balance with
respect to each such mortgage loan was generally no more than
S-2
$275,000 for single-family properties, $351,950 for two-family properties,
$425,400 for three-family properties and $528,700 for four-family properties.
Mortgage Loan Group II, the non-conforming mortgage loan group, will
include mortgage loans that have an aggregate outstanding principal balance as
of the statistical calculation date of $54,387,667.83. Mortgage Loan Group II
may include mortgage loans that do not meet the restrictions applicable to
Mortgage Loan Group I.
On the closing date, the trust will purchase the mortgage loans. The
aggregate principal balance of the Mortgage Loan Group I mortgage loans will be
approximately $275,000,000 and the aggregate principal balance of the Mortgage
Loan Group II mortgage loans will be approximately $80,000,000.
SERVICING OF THE MORTGAGE LOANS
American Business Credit, Inc. will act as servicer and will be obligated
to service and administer the mortgage loans on behalf of the trust, for the
benefit of the certificate insurer and the holders of the certificates.
OPTIONAL TERMINATION OF THE TRUST
The servicer may, at its option, purchase the mortgage loans and terminate
the trust on any distribution date when the aggregate principal balance of the
mortgage loans in both mortgage groups is equal to or less than 10% of the
aggregate principal balances of the mortgage loans in both mortgage loan groups
as of the cut-off date. Such purchase of the mortgage loans would result in the
payment in full of the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates and retirement of the Class A-IO Certificates on such distribution
date. If the mortgage loans are not purchased on the first distribution date on
which the above option may be exercised, the interest rate payable on the Class
A-1 and Class A-4 Certificates will be increased by 0.50% per annum. The
certificate insurer must consent to the purchase of the mortgage loans if the
resulting amount available for payment on the certificates would result in a
draw under the certificate insurance policy.
ERISA CONSIDERATIONS
Subject to the conditions described under "ERISA Considerations" herein,
the certificates may be purchased by an employee benefit plan or other
retirement arrangement subject to ERISA or Section 4975 of the Internal Revenue
Code.
FEDERAL TAX ASPECTS
Dewey Ballantine LLP acted as tax counsel to the trust and is of the
opinion that:
o the trust will be treated as one or more real estate mortgage investment
conduits, or REMICs, for federal income tax purposes and
o the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-IO Certificates
will be regular interests in a REMIC and will be treated as debt
instruments of a REMIC for federal income tax purposes.
LEGAL INVESTMENT
The certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
S-3
RATINGS
In order to be issued, the certificates must be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's, taking into account the certificate insurance
policy issued with respect to the certificates. These ratings may be lowered,
qualified or withdrawn by the rating agencies.
S-4
RISK FACTORS
In addition to the risk factors discussed in the prospectus, prospective
certificateholders should consider, among other things, the following additional
factors in connection with the purchase of the certificates. Unless otherwise
noted, all percentages are based upon the mortgage loan groups that existed on a
statistical calculation date of May 17, 2001.
LESS STRINGENT UNDERWRITING STANDARDS AND THE RESULTANT POTENTIAL FOR
DELINQUENCIES ON THE MORTGAGE LOANS COULD LEAD TO LOSSES ON YOUR SECURITIES.
The mortgage loans were made, in part, to borrowers who, for one reason or
another, are not able, or do not wish, to obtain financing from traditional
sources such as commercial banks. These mortgage loans may be considered to
be of a riskier nature than mortgage loans made by traditional sources of
financing, so that the holders of the certificates may be deemed to be at
greater risk than if the mortgage loans were made to other types of
borrowers.
The underwriting standards used in the origination of the mortgage loans
held by the trust are generally less stringent than those of Fannie Mae or
Freddie Mac with respect to a borrower's credit history and in certain
other respects. Borrowers on the mortgage loans may have an impaired or
unsubstantiated credit history. As a result of this less stringent approach
to underwriting, the mortgage loans purchased by the trust may experience
higher rates of delinquencies, defaults and foreclosures than mortgage
loans underwritten in a manner which is more similar to the Fannie Mae and
Freddie Mac guidelines.
GEOGRAPHIC CONCENTRATION OF THE MORTGAGE LOANS IN PARTICULAR JURISDICTIONS MAY
RESULT IN GREATER LOSSES IF THOSE JURISDICTIONS EXPERIENCE ECONOMIC DOWNTURNS.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, may experience higher rates of loss and delinquency on
mortgage loans generally. Any concentration of the mortgage loans in such a
region may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
The mortgaged properties underlying the mortgage loans are located
primarily on the eastern seaboard of the United States. This may subject
the mortgage loans held by the trust to the risk that a downturn in the
economy in this region of the country would more greatly affect the
mortgage loan groups than if the mortgage loan groups were more
diversified.
In particular, the following percentages of mortgage loans in Mortgage Loan
Group I and Mortgage Loan Group II on the statistical calculation date were
secured by mortgaged properties located in the following states:
NEW YORK NEW JERSEY PENNSYLVANIA FLORIDA MASSACHUSETTS OHIO ILLINOIS GEORGIA
-------- ---------- ------------ ------- ------------- ---- -------- -------
Mortgage Loan
Group I 26.44% 9.49% 9.20% 7.20% 7.47% 6.00% 4.37% 3.27%
Mortgage Loan
Group II 28.72% 12.47% 8.76% 7.25% 4.53% 7.12% 5.22% 7.80%
S-5
Because of the relative geographic concentration of the mortgage loans
within the States of New York, New Jersey, Pennsylvania, Florida,
Massachusetts, Ohio, Illinois and Georgia, losses on the mortgage loans may
be higher than would be the case if the mortgage loans were more
geographically diversified. For example, certain of the mortgaged
properties may be more susceptible to certain types of special hazards,
such as earthquakes, hurricanes, floods, and other natural disasters and
major civil disturbances, than residential or commercial properties located
in other parts of the country. In addition, the economies of New York, New
Jersey, Pennsylvania, Florida, Massachusetts, Ohio, Illinois and Georgia
may be adversely affected to a greater degree than the economies of other
areas of the country by certain regional developments. If the New York, New
Jersey, Pennsylvania, Florida, Massachusetts, Ohio, Illinois and Georgia
residential or commercial real estate markets experience an overall decline
in property values after the dates of origination of the respective
mortgage loans, then the rates of delinquencies, foreclosures and losses on
the mortgage loans may increase and such increase may be substantial.
A PORTION OF THE MORTGAGE LOANS REQUIRE LARGE BALLOON PAYMENTS AT MATURITY;
THESE BALLOON LOANS MAY INVOLVE A GREATER RISK OF DEFAULT DUE TO THESE LARGE
PAYMENTS, WHICH COULD LEAD TO LOSSES ON YOUR CERTIFICATES.
Approximately 37.63% of the mortgage loans in Mortgage Loan Group I on the
statistical calculation date and 41.44% of the mortgage loans in Mortgage
Loan Group II on the statistical calculation date are not fully amortized
over their terms and instead require substantial balloon payments on their
maturity dates. Because the principal balances of these balloon loans do
not fully amortize over their term, these balloon loans may involve greater
risks of default than mortgage loans whose principal balance is fully
amortized over the term of the mortgage loan. The borrower's ability to pay
the balloon amount due at maturity of his or her balloon loan will depend
on the borrower's ability to obtain adequate refinancing or funds from
other sources to repay the balloon loan. The originators have only limited
historical default data with respect to their balloon loans and they do not
believe that their data is sufficient to predict the default experience of
the balloon loans.
Even assuming that the mortgaged properties provide adequate security for
the balloon loans, substantial delays and foreclosure costs could be
encountered in connection with the liquidation of defaulted mortgage loans
and corresponding delays in the receipt of proceeds by the holders of the
certificates could occur.
A PORTION OF THE MORTGAGE LOANS IN MORTGAGE LOAN GROUP II ARE SECURED BY
SUBORDINATE MORTGAGES; IN THE EVENT OF A DEFAULT, THESE MORTGAGE LOANS ARE MORE
LIKELY TO EXPERIENCE LOSSES.
Approximately 59.22% of the mortgage loans in Mortgage Loan Group II on the
statistical calculation date are secured by subordinate or junior mortgages
which are subordinate to the rights of the holder of the related senior
mortgages. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance
of the mortgage loan only to the extent that the claims, if
S-6
any, of each related senior mortgagee are satisfied in full, including any
related foreclosure costs. In addition, a holder of a junior mortgage may
not foreclose on the mortgaged property securing such mortgage unless it
either pays the entire amount of the senior mortgages to the mortgagees at
or prior to the foreclosure sale or undertakes the obligation to make
payments on each senior mortgage in the event of default thereunder. In
servicing business and consumer purpose home equity loans in its portfolio,
the servicer will generally satisfy or reinstate each such first mortgage
at or prior to the foreclosure sale only to the extent that it determines
any amount so paid will be recoverable from future payments and collections
on the mortgage loans or otherwise. The trust will have no source of funds
to satisfy any senior mortgage or make payments due to any senior
mortgagee.
An overall decline in the residential or commercial real estate markets
could adversely affect the values of the mortgaged properties and cause the
outstanding principal balances of the mortgage loans, together with the
primary senior financing thereon, to equal or exceed the value of the
mortgaged properties. This type of a decline would adversely affect the
position of a second mortgagee before having the same effect on the related
first mortgagee. A rise in interest rates over a period of time and the
general condition of the mortgaged property as well as other factors may
have the effect of reducing the value of the mortgaged property from the
appraised value at the time the mortgage loan was originated. If there is a
reduction in value of the mortgaged property, the ratio of the amount of
the mortgage loan to the value of the mortgaged property may increase over
what it was at the time the mortgage loan was originated. This type of
increase may reduce the likelihood of liquidation or other proceeds being
sufficient to satisfy the mortgage loan after satisfaction of any senior
liens.
PREPAYMENTS ON THE MORTGAGE LOANS COULD LEAD TO SHORTFALLS IN THE DISTRIBUTION
OF INTEREST ON YOUR CERTIFICATE.
The dates on which scheduled payments are due on the mortgage loans occur
throughout a month. When a principal prepayment in full is made on a mortgage
loan, the mortgagor is charged interest only up to the date of such prepayment,
instead of for a full month. However, such principal receipts will only be
passed through to the holders of the certificates once a month on the
distribution date which follows the calendar month in which such prepayment was
received by the servicer. The servicer is obligated to pay, without any right of
reimbursement, those shortfalls in interest collections payable on the
certificates that are attributable to the difference between the interest paid
by a mortgagor in connection with a prepayment in full and thirty days' interest
on such mortgage loan, but only to the extent of the servicing fees for such
mortgage loan for such calendar month.
If the servicer fails to make such distributions or the shortfall exceeds the
servicing fee, there will be less funds available for the distribution of
interest on the related class of certificates. Such shortfalls of interest, if
they result in the inability of the trust to pay the full amount of the current
interest on the related class of certificates, are not covered by the policy.
S-7
LIMITATIONS ON THE CLASS A-2 CERTIFICATE PASS-THROUGH RATE WILL AFFECT YOUR
YIELD TO MATURITY.
The rate at which interest accrues on the Class A-2 Certificates is subject
to a rate cap. The maximum rate is based on the weighted average of the
interest rates on the related mortgage loans, net of each mortgage loan's
proportionate share of specified fees and expenses and of interest due on
the Class A-IO Certificates. If the mortgage loans in the related mortgage
loan group with relatively higher interest rates prepay, the maximum rate
on the Class A-2 Certificates will be lower than otherwise would be the
case.
AN INCREASE IN LIBOR COULD RESULT IN SHORTFALLS IN THE PAYMENT OF INTEREST ON
THE CLASS A-2 CERTIFICATES.
The pass-through rate for the Class A-2 Certificates is based upon the
value of an adjustable index -- one-month LIBOR -- while the interest rates
on the mortgage loans in Mortgage Loan Group II are fixed. Consequently,
the interest which becomes due on these mortgage loans and is available for
payment to the certificateholders during any calendar month may be less
than the amount of interest that would accrue at one-month LIBOR plus the
margin on the Class A-2 Certificates during the accrual period, and will be
limited to such lower amount. While the Class A-2 Certificates do have a
"carry-forward" feature if the amount of interest paid is so limited, the
amount of any shortfall or carry-forward is not guaranteed by the
certificate insurance policy. Additionally, the ratings on the Class A-2
Certificates do not address the likelihood of the payment of this
carry-forward amount. Thus, the yield to investors on the Class A-2
Certificates could be permanently reduced.
OWNERS OF CLASS A-IO CERTIFICATES MAY NOT RECOVER THEIR INITIAL INVESTMENTS.
An investment in the Class A-IO Certificates is risky because the return of
the investment depends solely on the payments of interest by borrowers
under the mortgage loans. If the borrowers prepay their mortgage loans, no
further interest payments will be made. If borrowers prepay their mortgage
loans very fast, investors in the Class A-IO Certificates may not recover
their initial investments. In addition, the Class A-IO Certificates are not
entitled to any distributions after the December 2003 distribution date.
BECAUSE THE RATINGS OF THE CERTIFICATES ARE DEPENDENT UPON THE CREDITWORTHINESS
OF THE CERTIFICATE INSURER, A DOWNGRADE OF THE CERTIFICATE INSURER COULD CAUSE A
DOWNGRADE OF THE CERTIFICATES.
The ratings of the certificates will depend primarily on the creditworthiness of
the certificate insurer as the provider of the policy relating to the
certificates. Any reduction in the certificate insurer's financial strength and
claims-paying ability ratings could result in a reduction of the ratings on the
certificates.
Some of the terms used in this prospectus supplement are capitalized. These
capitalized terms have specified definitions, which are included at the end of
this prospectus supplement under the heading "Glossary."
S-8
TRANSACTION OVERVIEW
PARTIES
The Depositor. Bear Stearns Asset Backed Securities, Inc., a Delaware
corporation. The principal executive office of the depositor is located at 245
Park Avenue, New York, New York 10167, and its telephone number is (212)
272-2000.
The Seller. ABFS 2001-2, Inc., a Delaware corporation. The principal
executive office of the seller is at 103 Springer Building, 3411 Silverside
Road, Wilmington, Delaware 19810, and its telephone number is (302) 478-6161.
The Originators. American Business Credit, Inc., a Pennsylvania
corporation, HomeAmerican Credit, Inc. d/b/a Upland Mortgage, a Pennsylvania
corporation, and American Business Mortgage Services, Inc., a New Jersey
corporation, originated or purchased the mortgage loans. For a description of
the business of the originators, see "The Originators, the Seller and the
Servicer" herein.
The Servicer and the Subservicers. American Business Credit will act as
servicer of the mortgage loans, and Upland Mortgage and American Business
Mortgage Services, Inc. will act as subservicers with respect to different
portions of the mortgage loans. For a description of the business of the
servicer, see "The Originators, the Seller and the Servicer" herein.
The Trustee and the Collateral Agent. The Chase Manhattan Bank, a New York
banking corporation. The corporate trust office of the trustee is located at 450
West 33rd Street, 14th Floor, New York, New York 10001 and its telephone number
is (212) 946-3200. For a description of the trustee, see "The Trustee and
Collateral Agent" herein.
The Certificate Insurer. MBIA Insurance Corporation, a subsidiary of MBIA
Inc., a New York Stock Exchange listed company. The certificate insurer will
issue a financial guaranty insurance policy for the benefit of the holders of
the Class A Certificates. For a description of the business and selected
financial information of the certificate insurer, see "The Policy" and "The
Certificate Insurer" herein.
The Rating Agencies. Standard & Poor's, a division of the McGraw-Hill
Companies, Inc. and Moody's Investors Service, Inc. will issue ratings with
respect to the certificates.
THE TRANSACTION
Issuance of the Certificates. ABFS Mortgage Loan Trust 2001-2 will be
formed and the certificates will be issued pursuant to the terms of a Pooling
and Servicing Agreement, dated as of June 1, 2001 by and among the depositor,
the servicer and the trustee.
Sale and Servicing of the Mortgage Loans. The mortgage loans have been
originated or purchased by the originators pursuant to their respective
underwriting guidelines, as described herein under "The Originators, the Seller
and the Servicer." The originators will sell the mortgage loans to the seller,
and the seller will sell the mortgage loans to the depositor pursuant to an
Unaffiliated Seller's Agreement, dated as of June 1, 2001, among the
originators, the seller
S-9
and the depositor. The depositor will sell the mortgage loans to the trust
pursuant to the Pooling and Servicing Agreement. The servicer will service the
mortgage loans pursuant to the terms of the Pooling and Servicing Agreement.
Issuance of the Policy. The certificate insurer will issue the policy
pursuant to the terms of an Insurance and Reimbursement Agreement, dated as of
June 28, 2001, among the certificate insurer, the depositor, the seller, the
originators, the servicer and the trustee.
THE MORTGAGE LOAN POOLS
Difference between Statistical Calculation Date and Closing Date Pools. The
statistical information presented in this prospectus supplement concerning the
mortgage loans is based on the pools of mortgage loans that existed on a
statistical calculation date, in this case May 17, 2001. The principal balance
of Mortgage Loan Group I aggregated $192,981,763.22 as of the statistical
calculation date and Mortgage Loan Group II aggregated $54,387,667.83 as of the
statistical calculation date. The seller expects that the actual closing date
pools will represent approximately $275,000,000 in aggregate principal balance
of mortgage loans in Mortgage Loan Group I, as of the cut-off date and
approximately $80,000,000 in aggregate principal balance of mortgage loans in
Mortgage Loan Group II, as of the cut-off date. The additional mortgage loans
will represent mortgage loans acquired or to be acquired by the trust on or
prior to the closing date. On the closing date, in addition to the mortgage
loans included in the statistical information as of the statistical calculation
date, the seller expects to deliver a substantial amount of additional mortgage
loans that will have been originated after the statistical calculation date but
before the closing date. In addition, with respect to the mortgage loan groups
as of the statistical calculation date as to which statistical information is
presented herein, some amortization will occur prior to the closing date.
Moreover, certain mortgage loans included in the mortgage loan groups as of the
statistical calculation date may prepay in full, or may be determined not to
meet the eligibility requirements for the final mortgage loan groups, and may
not be included in the final mortgage loan groups. As a result of the foregoing,
the statistical distribution of characteristics as of the closing date for the
final mortgage loan groups will vary somewhat from the statistical distribution
of such characteristics as of the statistical calculation date as presented in
this prospectus supplement, although such variance should not be material.
The mortgage loans will be predominantly business or consumer purpose
residential home equity loans used to refinance an existing mortgage loan, to
consolidate debt, or to obtain cash proceeds in order to provide funds for
working capital for business, business expansion, equipment acquisition, or
personal acquisitions by borrowing against the mortgagor's equity in the related
mortgaged property. The mortgaged properties securing the mortgage loans consist
primarily of single-family residences -- which may be detached, part of a
multi-family dwelling, a condominium unit, a townhouse, a manufactured home or a
unit in a planned unit development -- and to a limited extent commercial
multiple purpose, or mixed use properties. The mortgaged properties may be
owner-occupied properties, which include second and vacation homes, non-owner
occupied investment properties or business purpose properties.
Approximately 89.09% of the mortgage loans in Mortgage Loan Group I and
92.52% of the mortgage loans in Mortgage Loan Group II have a prepayment
S-10
fee clause. Such prepayment fee clauses generally provide that the mortgagor
pay, upon prepayment, one or more of the following:
o a fee equal to a percentage, which is negotiated at origination, of the
outstanding principal balance of the mortgage loan; or
o a fee which is designed to allow the holder of the mortgage note to earn
interest on the mortgage loan as if the mortgage loan remained outstanding
until a designated point in time.
The following sections describe the statistical characteristics of the
mortgage loan groups. Unless otherwise noted, all statistical percentages in
this prospectus supplement are approximate and are measured by the aggregate
principal balance of the applicable mortgage loans in relation to the aggregate
principal balance of the mortgage loans in the applicable mortgage loan group,
in each case, as of the statistical calculation date.
The loan-to-value ratios and the combined loan-to-value ratios, or LTV's
and CLTV's, described herein were calculated based upon the appraised values of
the related mortgaged properties used for loan origination. No assurance can be
given that such appraised values of the mortgaged properties have remained or
will remain at the levels that existed on the dates of origination of the
related mortgage loans. If property values decline such that the outstanding
principal balances of the mortgage loans, together with the outstanding
principal balances of any first liens, become equal to or greater than the value
of the mortgaged properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those historically experienced by the servicer, as
set forth below under "The Originators, the Seller and the Servicer --
Delinquency and Loan Loss Experience," and in the mortgage lending industry
generally.
The Mortgage Loan Group I. As of the statistical calculation date, the
mortgage loans in Mortgage Loan Group I had the following characteristics:
o there were 2,122 mortgage loans under which the related mortgaged
properties are located in 30 states;
o the aggregate principal balance, after application of all payments due on
or before the statistical calculation date, was $192,981,763.22;
o the minimum current principal balance was $14,984.29, the maximum current
principal balance was $324,900.00 and the average current principal balance
was $90,943.34;
o the mortgage interest rates ranged from 8.990% to 14.990% per annum, and
the weighted average mortgage interest rate was approximately 11.116% per
annum;
o the original term to stated maturity ranged from 60 months to 360 months
and the weighted average original term to stated maturity was approximately
266 months;
o the remaining term to stated maturity ranged from 59 months to 360 months
and the weighted average remaining term to stated maturity was
approximately 266 months;
S-11
o approximately 62.37% of the mortgage loans by aggregate principal balance
require monthly payments of principal that will fully amortize these
mortgage loans by their respective maturity dates, and approximately 37.63%
of the mortgage loans by aggregate principal balance are balloon loans;
o the weighted average current LTV was approximately 77.66%;
o 100.00% of the mortgage loans by aggregate principal balance are secured by
first liens; and
o approximately 26.44%, 9.49%, 9.20%, 7.47%, 7.20%, 6.00%, 4.37%, 4.17% and
3.27% of the mortgage loans by aggregate principal balance are secured by
mortgaged properties located in the States of New York, New Jersey,
Pennsylvania, Massachusetts, Florida, Ohio, Illinois, Michigan and Georgia,
respectively.
The following tables set forth certain statistical information with respect
to the mortgage loans in Mortgage Loan Group I. Due to rounding, the percentages
shown may not precisely total 100.00%.
S-12
MORTGAGE LOAN GROUP I
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
CALCULATION
NUMBER OF AGGREGATE UNPAID DATE PRINCIPAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ----- -------------- ----------------- -------
New York................................... 413 $ 51,016,781.07 26.44%
New Jersey................................. 163 18,323,609.20 9.49
Pennsylvania............................... 259 17,758,365.72 9.20
Massachusetts.............................. 99 14,411,103.50 7.47
Florida.................................... 179 13,890,532.70 7.20
Ohio....................................... 171 11,575,042.55 6.00
Illinois................................... 98 8,424,318.30 4.37
Michigan................................... 104 8,048,540.01 4.17
Georgia.................................... 77 6,302,170.82 3.27
North Carolina............................. 80 5,876,709.09 3.05
Indiana.................................... 73 5,087,735.32 2.64
Virginia................................... 44 4,047,996.93 2.10
Other...................................... 362 28,218,858.01 14.62
-------------- ----------------- -------
TOTAL: 2,122 $192,981,763.22 100.00%
============== ================= =======
Number of States Represented: 30
o "Other" includes states with under 2.00% individual concentrations of the
Mortgage Loan Group I mortgage loans.
S-13
MORTGAGE LOAN GROUP I
DISTRIBUTION OF CURRENT LOAN-TO-VALUE RATIOS
% OF MORTGAGE GROUP
BY AGGREGATE
NUMBER OF STATISTICAL
MORTGAGE AGGREGATE UNPAID CALCULATION DATE
CURRENT LOAN-TO-VALUE RATIO RANGE (%) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------- ----- ----------------- -----------------
0.01 - 40.00.......................................... 152 $ 6,709,007.31 3.48%
40.01 - 50.00.......................................... 94 5,808,538.94 3.01
50.01 - 60.00.......................................... 133 8,828,528.00 4.57
60.01 - 70.00.......................................... 231 19,025,555.78 9.86
70.01 - 80.00.......................................... 634 60,490,944.62 31.35
80.01 - 90.00.......................................... 876 91,946,630.44 47.65
90.01 - 100.00.......................................... 2 172,558.13 0.09
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
o The minimum and maximum current loan-to-value ratios of the mortgage loans
in Mortgage Loan Group I as of the statistical calculation date are
approximately 8.62% and 92.76% respectively, and the weighted average
current loan-to-value ratio of the mortgage loans in Mortgage Loan Group I
as of the statistical calculation date is approximately 77.66%.
MORTGAGE LOAN GROUP I
DISTRIBUTION OF GROSS INTEREST RATES
% OF MORTGAGE
GROUP BY
AGGREGATE
NUMBER OF STATISTICAL
MORTGAGE AGGREGATE UNPAID CALCULATION DATE
RANGE OF GROSS INTEREST RATES (%) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ----- ----------------- -----------------
0.001 - 8.999.......................................... 4 $ 506,807.42 0.26%
9.000 - 9.999.......................................... 195 24,495,034.60 12.69
10.000 - 10.999.......................................... 811 81,068,791.45 42.01
11.000 - 11.999.......................................... 715 59,601,708.86 30.88
12.000 - 12.999.......................................... 297 21,588,629.86 11.19
13.000 - 13.999.......................................... 85 4,745,397.09 2.46
14.000 - 14.999.......................................... 15 975,393.94 0.51
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
o The weighted average gross interest rate of the mortgage loans in Mortgage
Loan Group I as of the statistical calculation date is approximately
11.116%.
S-14
MORTGAGE LOAN GROUP I
DISTRIBUTION OF ORIGINAL TERM TO MATURITY
(IN MONTHS)
% OF MORTGAGE GROUP
BY AGGREGATE
STATISTICAL
NUMBER OF AGGREGATE UNPAID CALCULATION DATE
RANGE OF ORIGINAL TERM (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- -------------- ----------------- -----------------
1 - 60.............................................. 7 $ 268,507.99 0.14%
61 - 120............................................... 122 6,599,288.11 3.42
121 - 180............................................... 623 47,504,848.55 24.62
181 - 240............................................... 717 61,607,927.17 31.92
241 - 300............................................... 54 6,246,154.40 3.24
301 - 360............................................... 599 70,755,037.00 36.66
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
o The weighted average original term to maturity of the mortgage loans in
Mortgage Loan Group I as of the statistical calculation date is
approximately 266 months.
MORTGAGE LOAN GROUP I
DISTRIBUTION OF REMAINING TERM TO MATURITY
(IN MONTHS)
% OF MORTGAGE
GROUP BY
AGGREGATE
NUMBER OF STATISTICAL
MORTGAGE AGGREGATE UNPAID CALCULATION DATE
RANGE OF REMAINING TERM (IN MONTHS) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ----- ----------------- -----------------
1 - 60........................................... 7 $ 268,507.99 0.14%
61 - 120........................................... 122 6,599,288.11 3.42
121 - 180........................................... 623 47,504,848.55 24.62
181 - 240........................................... 718 61,633,619.48 31.95
241 - 300........................................... 53 6,190,462.09 3.21
301 - 360........................................... 599 70,755,037.00 36.66
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
o The weighted average remaining term to maturity of the mortgage loans in
Mortgage Loan Group I as of the statistical calculation date is
approximately 266 months.
S-15
MORTGAGE LOAN GROUP I
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
% OF MORTGAGE GROUP
BY AGGREGATE
NUMBER OF STATISTICAL
MORTGAGE AGGREGATE UNPAID CALCULATION DATE
RANGE OF ORIGINAL PRINCIPAL BALANCES ($) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------------------------- ----- ----------------- -----------------
1 - 25,000................................... 75 $ 1,657,777.25 0.86%
25,001 - 50,000................................... 500 19,470,138.63 10.09
50,001 - 75,000................................... 550 34,355,424.16 17.80
75,001 - 100,000................................... 312 27,320,174.00 14.16
100,001 - 125,000................................... 181 20,251,970.22 10.49
125,001 - 150,000................................... 158 21,705,274.15 11.25
150,001 - 175,000................................... 120 19,442,738.32 10.07
175,001 - 200,000................................... 92 17,304,145.18 8.97
200,001 - 300,000................................... 129 29,924,080.66 15.51
300,001 and Greater................................. 5 1,550,040.65 0.80
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
o The average original principal balance of the mortgage loans in Mortgage
Loan Group I as of the statistical calculation date is $91,010.08
MORTGAGE LOAN GROUP I
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
% OF MORTGAGE GROUP
BY AGGREGATE
NUMBER OF STATISTICAL
MORTGAGE AGGREGATE UNPAID CALCULATION DATE
RANGE OF CURRENT PRINCIPAL BALANCES ($) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------------------------- ----- ----------------- -----------------
1 - 25,000........................................ 76 $ 1,682,635.36 0.87%
25,001 - 50,000........................................ 500 19,495,246.82 10.10
50,001 - 75,000........................................ 550 34,380,433.86 17.82
75,001 - 100,000........................................ 311 27,245,198.00 14.12
100,001 - 125,000........................................ 182 20,368,202.10 10.55
125,001 - 150,000........................................ 157 21,589,042.27 11.19
150,001 - 175,000........................................ 120 19,442,738.32 10.07
175,001 - 200,000........................................ 92 17,304,145.18 8.97
200,001 - 300,000........................................ 129 29,924,080.66 15.51
300,001 and Greater...................................... 5 1,550,040.65 0.80
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
o The average current principal balance of the mortgage loans in Mortgage
Loan Group I as of the statistical calculation date is $90,943.34
S-16
MORTGAGE LOAN GROUP I
DISTRIBUTION BY LIEN STATUS
% OF MORTGAGE
GROUP BY AGGREGATE
STATISTICAL
CALCULATION DATE
NUMBER OF AGGREGATE UNPAID PRINCIPAL
LIEN STATUS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
----------- -------------- ----------------- -------
First Lien............................................... 2,122 $192,981,763.22 100.00%
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
o Up to 2% of the final Mortgage Loan Group I is expected to consist of
second lien mortgage loans.
MORTGAGE LOAN GROUP I
DISTRIBUTION BY AMORTIZATION TYPE
% OF MORTGAGE
GROUP BY AGGREGATE
STATISTICAL
CALCULATION DATE
NUMBER OF AGGREGATE UNPAID PRINCIPAL
AMORTIZATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
----------------- -------------- ----------------- -------
Fully Amortizing......................................... 1,306 $120,364,149.92 62.37%
Balloon Loans............................................ 816 72,617,613.30 37.63
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
S-17
MORTGAGE LOAN GROUP I
DISTRIBUTION BY OCCUPANCY STATUS
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
NUMBER OF CALCULATION
MORTGAGE AGGREGATE UNPAID DATE PRINCIPAL
OCCUPANCY STATUS LOANS PRINCIPAL BALANCE BALANCE
- ---------------- ----- ----------------- -------
Owner Occupied........................................... 2,018 $185,898,126.28 96.33%
Non-Owner Occupied....................................... 92 6,282,628.76 3.26
Second Home.............................................. 12 801,008.18 0.42
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
MORTGAGE LOAN GROUP I
DISTRIBUTION BY PROPERTY TYPE
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
NUMBER OF AGGREGATE UNPAID CALCULATION DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
Single Family............................................ 1,655 $145,126,279.62 75.20%
2-4 Family............................................... 213 29,301,088.40 15.18
Townhouse................................................ 107 6,857,984.04 3.55
Condominium.............................................. 59 4,538,855.57 2.35
Planned Unit Development................................. 33 3,932,238.99 2.04
Manufactured Housing..................................... 55 3,225,316.60 1.67
----- --------------- ------
TOTAL: 2,122 $192,981,763.22 100.00%
===== =============== ======
S-18
The Mortgage Loan Group II. As of the statistical calculation date, the
mortgage loans in Mortgage Loan Group II had the following characteristics:
o there were 734 mortgage loans under which the related mortgaged
properties are located in 27 states;
o the aggregate principal balance, after application of all payments due
on or before the statistical calculation date, was $54,387,667.83;
o the minimum current principal balance was $12,583.37, the maximum
current principal balance was $654,135.38 and the average current
principal balance was $74,097.64;
o the mortgage interest rates ranged from 9.490% to 16.990% per annum,
and the weighted average mortgage interest rate was approximately
13.895% per annum;
o the original term to stated maturity ranged from 36 months to 360
months and the weighted average original term to stated maturity was
approximately 197 months;
o the remaining term to stated maturity ranged from 34 months to 360
months and the weighted average remaining term to stated maturity was
approximately 197 months;
o approximately 58.56% of the mortgage loans by aggregate principal
balance require monthly payments of principal that will fully amortize
these mortgage loans by their respective maturity dates, and
approximately 41.44% of the mortgage loans by aggregate principal
balance are balloon loans;
o the weighted average original CLTV was approximately 72.74%;
o approximately 40.78% of the mortgage loans by aggregate principal
balance are secured by first liens and approximately 59.22% of the
mortgage loans by aggregate principal balance are secured by second
liens; and
o approximately 28.72%, 12.47%, 8.76%, 7.80%, 7.25%, 7.12%, 5.22% and
4.53% of the mortgage loans by aggregate principal balance are secured
by mortgaged properties located in the States of New York, New Jersey,
Pennsylvania, Georgia, Florida, Ohio, Illinois and Massachusetts,
respectively.
The following tables set forth certain statistical information with respect
to the mortgage loans in Mortgage Loan Group II. Due to rounding, the
percentages shown may not precisely total 100.00%.
S-19
MORTGAGE LOAN GROUP II
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
AGGREGATE CALCULATION DATE
NUMBER OF UNPAID PRINCIPAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ----- -------------- ----------------- -------
New York.................................... 173 $15,619,672.24 28.72%
New Jersey.................................. 92 6,781,148.78 12.47
Pennsylvania................................ 76 4,765,213.87 8.76
Georgia..................................... 40 4,242,277.17 7.80
Florida..................................... 67 3,940,562.62 7.25
Ohio........................................ 67 3,871,296.41 7.12
Illinois.................................... 32 2,840,219.33 5.22
Massachusetts............................... 34 2,462,396.01 4.53
Virginia.................................... 22 1,834,646.97 3.37
Indiana..................................... 24 1,321,983.84 2.43
Connecticut................................. 18 1,320,430.89 2.43
Maryland.................................... 13 1,256,545.59 2.31
Other....................................... 76 4,131,274.11 7.60
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
Number of States Represented: 27
o "Other" includes states with under 2.00% individual concentrations of the
mortgage loans in Mortgage Loan Group II.
S-20
MORTGAGE LOAN GROUP II
DISTRIBUTION OF ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
% OF MORTGAGE
GROUP BY
AGGREGATE
NUMBER OF AGGREGATE STATISTICAL
MORTGAGE UNPAID CALCULATION DATE
ORIGINAL COMBINED LOAN-TO-VALUE RANGE (%) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------- ----- ----------------- -----------------
0.01 - 40.00........................................... 27 $ 1,309,120.66 2.41%
40.01 - 50.00........................................... 13 1,142,365.61 2.10
50.01 - 60.00........................................... 68 7,929,973.42 14.58
60.01 - 70.00........................................... 138 11,915,905.53 21.91
70.01 - 80.00........................................... 211 15,005,759.43 27.59
80.01 - 90.00........................................... 269 16,719,918.80 30.74
90.01 - 100.00........................................... 8 364,624.38 0.67
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
o The minimum and maximum original combined loan-to-value ratios of the
mortgage loans in Mortgage Loan Group II as of the statistical calculation
date are approximately 10.00% and 100.00% respectively, and the weighted
average original combined loan-to-value ratio of the mortgage loans in
Mortgage Loan Group II as of the statistical calculation date is
approximately 72.74%.
MORTGAGE LOAN GROUP II
DISTRIBUTION OF GROSS INTEREST RATES
% OF MORTGAGE
GROUP BY AGGREGATE
AGGREGATE STATISTICAL
NUMBER OF UNPAID CALCULATION DATE
RANGE OF GROSS INTEREST RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- -------------- ----------------- -----------------
0.001 - 9.999.......................................... 8 $ 2,109,008.50 3.88%
10.000 - 10.999.......................................... 28 4,791,121.47 8.81
11.000 - 11.999.......................................... 57 6,233,565.39 11.46
12.000 - 12.999.......................................... 127 6,677,248.17 12.28
13.000 - 13.999.......................................... 227 11,509,329.18 21.16
14.000 - 14.999.......................................... 48 2,461,407.45 4.53
15.000 - 15.999.......................................... 34 2,494,471.96 4.59
16.000 - 16.999.......................................... 205 18,111,515.71 33.30
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
o The weighted average gross interest rate of the mortgage loans in Mortgage
Loan Group II as of the statistical calculation date is approximately
13.895%.
S-21
MORTGAGE LOAN GROUP II
DISTRIBUTION OF ORIGINAL TERM TO MATURITY
(IN MONTHS)
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
NUMBER OF AGGREGATE CALCULATION DATE
MORTGAGE UNPAID PRINCIPAL
RANGE OF ORIGINAL TERM (IN MONTHS) LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------- ----- ----------------- -------
1 - 60............................................... 33 $ 1,421,126.80 2.61%
61 - 120............................................... 106 5,276,173.70 9.70
121 - 180............................................... 385 30,050,575.15 55.25
181 - 240............................................... 185 13,793,677.84 25.36
241 - 300............................................... 4 260,188.38 0.48
301 - 360............................................... 21 3,585,925.96 6.59
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
o The weighted average original term to maturity of the mortgage loans in
Mortgage Loan Group II as of the statistical calculation date is
approximately 197 months.
MORTGAGE LOAN GROUP II
DISTRIBUTION OF REMAINING TERM TO MATURITY
(IN MONTHS)
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
NUMBER OF AGGREGATE CALCULATION DATE
MORTGAGE UNPAID PRINCIPAL
RANGE OF REMAINING TERM (IN MONTHS) LOANS PRINCIPAL BALANCE BALANCE
- ----------------------------------- ----- ----------------- -------
1 - 60............................................... 33 $ 1,421,126.80 2.61%
61 - 120............................................... 106 5,276,173.70 9.70
121 - 180............................................... 385 30,050,575.15 55.25
181 - 240............................................... 185 13,793,677.84 25.36
241 - 300............................................... 4 260,188.38 0.48
301 - 360............................................... 21 3,585,925.96 6.59
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
o The weighted average remaining term to maturity of the mortgage loans in
Mortgage Loan Group II as of the statistical calculation date is
approximately 197 months.
S-22
MORTGAGE LOAN GROUP II
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
% OF MORTGAGE
GROUP BY AGGREGATE
STATISTICAL
NUMBER OF AGGREGATE CALCULATION DATE
MORTGAGE UNPAID PRINCIPAL
RANGE OF ORIGINAL PRINCIPAL BALANCES ($) LOANS PRINCIPAL BALANCE BALANCE
---------------------------------------- ----- ----------------- -------
1 - 25,000....................................... 123 $2,597,779.56 4.78%
25,001 - 50,000....................................... 282 10,349,249.02 19.03
50,001 - 75,000....................................... 134 8,290,533.76 15.24
75,001 - 100,000....................................... 65 5,701,121.56 10.48
100,001 - 125,000....................................... 27 3,050,416.86 5.61
125,001 - 150,000....................................... 27 3,716,917.33 6.83
150,001 - 175,000....................................... 18 2,936,449.53 5.40
175,001 - 200,000....................................... 5 971,032.52 1.79
200,001 - 300,000....................................... 27 7,143,475.92 13.13
300,001 - 400,000....................................... 20 6,717,689.66 12.35
400,001 - 500,000....................................... 5 2,258,866.73 4.15
600,001 and Greater..................................... 1 654,135.38 1.20
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
o The average original principal balance of the mortgage loans in Mortgage
Loan Group II as of the statistical calculation date is $74,174.57.
MORTGAGE LOAN GROUP II
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
% OF MORTGAGE GROUP
BY AGGREGATE
AGGREGATE STATISTICAL
NUMBER OF UNPAID CALCULATION DATE
MORTGAGE PRINCIPAL PRINCIPAL
RANGE OF CURRENT PRINCIPAL BALANCES ($) LOANS BALANCE BALANCE
--------------------------------------- ----- ------- -------
1 - 25,000....................................... 123 $2,597,779.56 4.78%
25,001 - 50,000....................................... 282 10,349,249.02 19.03
50,001 - 75,000....................................... 134 8,290,533.76 15.24
75,001 - 100,000....................................... 65 5,701,121.56 10.48
100,001 - 125,000....................................... 27 3,050,416.86 5.61
125,001 - 150,000....................................... 27 3,716,917.33 6.83
150,001 - 175,000....................................... 18 2,936,449.53 5.40
175,001 - 200,000....................................... 5 971,032.52 1.79
200,001 - 300,000....................................... 27 7,143,475.92 13.13
300,001 - 400,000....................................... 20 6,717,689.66 12.35
400,001 - 500,000....................................... 5 2,258,866.73 4.15
600,001 and Greater..................................... 1 654,135.38 1.20
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
o The average current principal balance of the mortgage loans in Mortgage
Loan Group II as of the statistical calculation date is $74,097.64
S-23
MORTGAGE LOAN GROUP II
DISTRIBUTION BY LIEN STATUS
% OF MORTGAGE
GROUP BY
AGGREGATE AGGREGATE
NUMBER OF UNPAID STATISTICAL
MORTGAGE PRINCIPAL CALCULATION DATE
LIEN STATUS LOANS BALANCE PRINCIPAL BALANCE
----------- ----- ------- -----------------
First Lien............................................... 154 $22,181,371.62 40.78%
Second Lien.............................................. 580 32,206,296.21 59.22
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
MORTGAGE LOAN GROUP II
DISTRIBUTION BY AMORTIZATION TYPE
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
AGGREGATE CALCULATION DATE
NUMBER OF UNPAID PRINCIPAL
AMORTIZATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
----------------- -------------- ----------------- -------
Fully Amortizing..................................... 464 $31,851,741.14 58.56%
Balloon Loans........................................ 270 22,535,926.69 41.44
--- -------------- ------
Total: 734 $54,387,667.83 100.00%
=== ============== ======
MORTGAGE LOAN GROUP II
DISTRIBUTION BY OCCUPANCY STATUS
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
AGGREGATE CALCULATION DATE
NUMBER OF UNPAID PRINCIPAL
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------- -------------- ----------------- -------
Owner Occupied........................................... 609 $41,821,014.71 76.89%
Non-Owner-Occupied....................................... 72 7,721,606.99 14.20
Other.................................................... 51 4,698,127.31 8.64
Second Home.............................................. 2 146,918.82 0.27
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
S-24
DISTRIBUTION BY PROPERTY TYPE
MORTGAGE LOAN GROUP II
% OF MORTGAGE
GROUP BY
AGGREGATE
STATISTICAL
AGGREGATE CALCULATION DATE
NUMBER OF UNPAID PRINCIPAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------- -------------- ----------------- -------
Single Family Detached............................. 481 $32,597,899.26 59.94%
Mixed Use.......................................... 89 8,651,462.13 15.91
2-4 Family......................................... 69 4,497,743.36 8.27
Commercial......................................... 20 2,935,762.73 5.40
Planned Unit Development........................... 23 2,257,112.41 4.15
Multi-Family (Greater than 4)...................... 7 1,119,416.95 2.06
Townhouse.......................................... 18 1,038,822.93 1.91
Condominium........................................ 22 917,596.33 1.69
Condominium Development............................ 4 345,166.73 0.63
Manufactured Housing............................... 1 26,685.00 0.05
--- -------------- ------
TOTAL: 734 $54,387,667.83 100.00%
=== ============== ======
S-25
THE ORIGINATORS, THE SELLER AND THE SERVICER
American Business Credit, the servicer and an originator, is a wholly-owned
subsidiary of American Business Financial Services, Inc. Upland Mortgage, an
originator and a subservicer, is a wholly-owned subsidiary of American Business
Credit. American Business Mortgage, an originator and a subservicer, is a
wholly-owned subsidiary of American Business Credit. ABFS 2001-2, Inc., the
seller, is owned by American Business Financial Services, Inc.
American Business Financial Services is a financial services holding
company operating, through its subsidiaries, primarily in the eastern half of
the United States. American Business Financial Services, through American
Business Credit, originates, sells and services loans to businesses secured by
real estate and other business assets, and, through Upland Mortgage and American
Business Mortgage, originates, sells and services non-conforming mortgage loans,
typically to credit impaired borrowers, secured by mortgages on single-family
residences. In addition, American Business Mortgage operates a bank alliance
program with several financial institutions pursuant to which Upland Mortgage
and American Business Mortgage will purchase home equity loans and first
mortgage loans that do not meet the underwriting guidelines of the selling
institution, but meet Upland Mortgage's or American Business Mortgage's
underwriting criteria.
The originators' customers currently consist primarily of two groups. The
first category of customers includes credit impaired borrowers who generally are
unable to obtain financing from banks or savings and loan associations that have
historically provided loans only to individuals with the most favorable credit
characteristics. These borrowers generally have impaired or unsubstantiated
credit characteristics and/or unverifiable income and respond favorably to the
originators' marketing efforts. The second category of customers includes
borrowers who would qualify for loans from traditional lending sources but elect
to utilize the originators' products and services. The originators' experience
has indicated that these borrowers are attracted to originators' loan products
as a result of its marketing efforts, the personalized service provided by the
originators' staff of lending officers and the timely response to loan requests.
Historically, both categories of customers have been willing to pay the
originators' origination fees and interest rates which are generally higher than
those charged by traditional lending sources. The originators also markets
mortgage loans to borrowers with favorable credit histories.
American Business Financial Services was incorporated in Delaware in 1985.
American Business Financial Services is a publicly traded company and its common
stock is listed on the Nasdaq National Market System under the symbol "ABFI."
The principal executive offices of American Business Financial Services and its
operating entities are located at Balapointe Office Centre, 111 Presidential
Boulevard, Suite 127, Bala Cynwyd, Pennsylvania 19004. Its telephone number at
such address is (610) 668-2440.
THE ORIGINATORS
The mortgage loans were or will be originated or purchased by the
originators directly in the ordinary course of their business. The originators
may originate or purchase loans in up to 47
S-26
states and the District of Columbia. The originators' primary source of loan
product is retail marketing, directly targeting small businesses and consumers
through various advertising media.
The business purpose mortgage loans were or will be originated by American
Business Credit, except for mortgage loans which are secured by properties
located in states where the originating or purchasing of mortgage loans requires
a mortgage banking license, in which case Upland Mortgage has or will originate
or purchase such mortgage loans. The consumer purpose mortgage loans were or
will be originated or purchased by Upland Mortgage and American Business
Mortgage.
American Business Credit. American Business Credit originates, services and
sells business purpose loans collateralized by real estate. American Business
Credit's operating subsidiaries include:
o Upland Mortgage, a consumer purpose residential mortgage company;
o American Business Mortgage, a residential mortgage company;
o Processing Service Center, Inc., a loan processor for first mortgage loans
and home equity loans generated by the bank alliance programs;
o American Business Leasing, Inc., a small-ticket equipment leasing company;
o Tiger Relocation Company, a holder of foreclosed real estate; and
o NJLQ Holdings, Inc., a holder of foreclosed liquor licenses in New Jersey.
American Business Credit was incorporated in 1988 pursuant to the laws of
the Commonwealth of Pennsylvania and maintains its corporate headquarters in
Bala Cynwyd, Pennsylvania.
American Business Credit currently originates business purpose loans on a
regular basis in Connecticut, Delaware, Florida, Georgia, Illinois, Indiana,
Kentucky, Maryland, Michigan, New Jersey, New York, North Carolina, Ohio,
Pennsylvania, Rhode Island, South Carolina, Vermont and Virginia through a
network of salespeople and its business loan web site, www.abceasyloan.com.
American Business Credit focuses its marketing efforts on small businesses who
do not meet all of the credit criteria of commercial banks and small businesses
that its research indicates may be predisposed to using its products and
services.
American Business Credit originates business purpose loans to corporations,
partnerships, sole proprietors and other business entities for various business
purposes, including, but not limited to, working capital, business expansion,
equipment acquisition and debt consolidation. American Business Credit does not
target any particular industries or trade groups and, in fact, takes precautions
against concentration of loans in any one industry group. All business purpose
loans generally are secured by a first or second mortgage lien on a principal
residence of the borrower or a guarantor of the borrower or some other parcel of
real property, such as office and apartment buildings and mixed use buildings,
owned by the borrower, a principal of the borrower, or a guarantor of the
borrower. In addition, in most cases, these loans
S-27
are further collateralized by personal guarantees, pledges of securities,
assignments of contract rights, life insurance and lease payments and liens on
business equipment and other business assets.
American Business Credit's business purpose loans generally ranged from
$15,000 to $500,000 and had an average loan size of approximately $90,000 for
the loans originated during the nine months ending March 31, 2001. Generally,
American Business Credit's business purpose loans (i) are made at fixed rates
and for terms ranging from five to 15 years; and (ii) charge origination fees
for these loans of 5.0% to 6.0% of the original principal balance. The weighted
average interest rate charged on the business purpose loans originated by
American Business Credit was 15.99% for fiscal year 2000. The business purpose
loans securitized during the past fiscal year had a weighted average
loan-to-value ratio, based solely upon the real estate collateral securing the
loans, of 60.9%. American Business Credit originated $106.2 million of business
purpose loans during fiscal year 2000 and $87.3 million during the nine months
ending March 31, 2001.
Generally, American Business Credit computes interest due on its
outstanding loans using the simple interest method. Where permitted by
applicable law, American Business Credit normally imposes a prepayment fee.
Although prepayment fees imposed vary based upon applicable state law, the
prepayment fees on American Business Credit's business purpose loan documents
can be a significant portion of the outstanding loan balance. American Business
Credit believes that prepayment terms tend to extend the average life of its
loans by discouraging prepayment and that this makes these loans more attractive
for securitization. Whether a prepayment fee is imposed and the amount of such
fee, if any, is negotiated between the individual borrower and American Business
Credit prior to closing of the loan. American Business Credit makes loans for
various business purposes including, but not limited to, working capital,
business expansion, equipment acquisition and debt-consolidation. American
Business Credit does not target any particular industries or trade groups.
During fiscal year 2001, American Business Credit launched an Internet loan
distribution channel under the name www.abceasyloan.com. The www.abceasyloan.com
web site provides borrowers with convenient access to the business loan
application process, 7 days a week, 24 hours a day. American Business Credit
believes that the addition of this distribution channel maximizes the efficiency
of the application process and could reduce its transaction costs in the future
with a greater volume of loan applications received via the web page. Throughout
the loan processing period, borrowers who submit applications online are
supported by American Business Credit's staff of highly trained loan officers.
HomeAmerican Credit, Inc. d/b/a Upland Mortgage. Upland Mortgage, American
Business Credit's home equity lending subsidiary, is a Pennsylvania corporation
and was incorporated in May 1991. Upland Mortgage originates home equity loans
primarily to credit-impaired borrowers through various channels including retail
marketing which includes telemarketing operations, direct mail, radio and
television advertisements as well as through Upland's interactive web site,
www.UplandMortgage.com. Home equity loans originated are generally securitized,
but some are sold to one of several third party lenders, at a premium and with
servicing released.
S-28
Upland Mortgage originates business loans on behalf of American Business
Credit in instances where state licensing laws require a mortgage license in
order to make such loans. In such circumstances, the credit criteria and
collateral requirements utilized by Upland Mortgage are identical to those
utilized by American Business Credit. As such, American Business Credit's
lending procedures and policies govern Upland Mortgage when it is originating
business purpose mortgage loans.
Home equity loan applications are obtained from potential borrowers over
the phone, in writing, in person or over the Internet through the web site. The
loan request is then processed and closed. The loan processing staff generally
provides its home equity borrowers with a loan approval within 24 hours and
closes its home equity loans within approximately ten to fifteen days of
obtaining a loan approval.
Home equity loans generally range from $10,000 to $250,000 and had an
average loan size of approximately $70,000 for those originated during fiscal
year 2000 and $80,000 for the nine months ending March 31, 2001. During fiscal
year 2000, Upland Mortgage and American Business Mortgage originated or
purchased $949.0 million of home equity loans and $786.5 million in the nine
months ending March 31, 2001. Generally, home equity loans are made at fixed
rates of interest and for terms ranging from five to 30 years and generally have
origination fees of approximately 2.0% of the aggregate loan amount. For fiscal
year 2000, the weighted average interest rate received on such loans was 11.28%
and 11.57% for the nine months ending March 31, 2001. The average loan-to-value
ratio was 78.9% for the loans originated during fiscal year 2000 and $78.7 for
the loans originated during the nine months ending March 31, 2001. Upland
Mortgage and American Business Mortgage try to maintain their interest rates and
other charges on home equity loans competitive with the lending rates of other
finance companies and banks. Where permitted by applicable law, a prepayment fee
may be negotiated with the borrower and is generally charged to the borrower on
the prepayment of a home equity loan except in the event the borrower refinances
a home equity loan with Upland Mortgage or American Business Mortgage.
During fiscal year 1999, Upland Mortgage launched an Internet loan
distribution channel under the name www.UplandMortgage.com. Through this
interactive web site, borrowers can examine available loan options, calculate
interest payments, and submit an application via the Internet. The Upland
Mortgage Internet platform provides borrowers with convenient access to the
mortgage loan application process, 7 days a week, 24 hours a day. Throughout the
loan processing period, borrowers who submit applications online are supported
by Upland Mortgage's staff of highly trained loan officers. During fiscal year
2000, Upland Mortgage continued to phase in advanced Internet technology through
its web site, www.UplandMortgage.com. In addition to the ability to take online
loan applications and utilize an automated rapid credit approval process, both
of which reduce time and manual effort required for loan approval, the site
features proprietary software, Easy Loan Advisor, which provides personalized
services and solutions to retail customers through interactive web dialog.
Upland Mortgage has applied to the U.S. Patent and Trademark Office to patent
this product.
American Business Mortgage Services, Inc. American Business Credit acquired
American Business Mortgage, a mortgage company based in Roseland, New Jersey, in
October 1997. Prior to January 1, 2001, American Business Mortgage emphasized
the origination of
S-29
conventional first mortgage loans and the sale of such loans in the secondary
market with servicing released. Effective January 1, 2001, American Business
Mortgage shifted its emphasis to home equity lending and other product
offerings. American Business Mortgage originates loans primarily in the eastern
region of the United States. American Business Mortgage originated $42.6 million
of conventional first mortgage loans during fiscal year 2000. American Business
Mortgage, was formerly known as New Jersey Mortgage and Investment Corp.
During fiscal year 2001, American Business Mortgage established a website
www.abmscorp.com to provide its business partners with an internet interface.
The website, among other things, provides brokers with 24 hours a day, 7 days a
week access to Easy Loan Advisor. This proprietary software permits brokers to
price and structure mortgage loans with American Business Mortgage on a fast and
efficient basis. Once a broker refers a deal to American Business Mortgage, its
experienced sales staff handles all aspects of the mortgage loan transaction.
The Bank Alliance Program is a vehicle through which both American Business
Mortgage and Upland Mortgage acquire nonconventional home equity loans. The
program targets traditional financial institutions, such as banks, which because
of their strict underwriting and credit guidelines have generally provided
mortgage financing only to the most credit-worthy borrowers. The Bank Alliance
Program consists of agreements with 31 financial institutions and provides
Upland Mortgage and American Business Mortgage with the opportunity to
underwrite, process and purchase loans generated by the branch networks of such
institutions which consist of over 1,500 branches located in various states
throughout the country.
This program allows these financial institutions to originate loans to
credit-impaired borrowers in order to achieve community reinvestment goals and
to generate fee income and subsequently sell such loans to American Business
Mortgage and Upland Mortgage. Following the purchase of the loans through this
program, American Business Mortgage and Upland Mortgage holds these loans as
available for sale until they are sold in connection with a future
securitization. In addition to using Processing Service Center, Inc. to process
loans for it in connection with the Bank Alliance Program, American Business
Mortgage processes loans for itself. Upland Mortgage purchased approximately
$53.4 million of loans pursuant to this program during fiscal year 2000 and
$64.2 million during the nine months ending March 31, 2001.
During fiscal year 2001, oversight and operation of the Bank Alliance
Program transitioned from Upland Mortgage to American Business Mortgage. It is
the intention of American Business Mortgage to expand the Bank Alliance Program
with financial institutions across the United States.
Prepayment fees are used by the originators. Historically, a significant
percentage of the business purpose loans originated by American Business Credit
contained prepayment fees and the home equity loans generated by Upland Mortgage
and American Business Mortgage charged prepayment fees on less than 50% of their
home equity loans. The originators currently charge prepayment fees on
substantially all of the business purpose loans, and have increased the
percentage of home equity loans originated with prepayment fees to approximately
85% of home equity loans originated. Of all mortgage loans generated by the
American Business Financial
S-30
Services subsidiaries, home equity loans comprise approximately 90% of all loans
and the remaining 10% are business purpose loans. The type of prepayment fee
obtained on a home equity loan is normally a fixed percentage of the outstanding
principal balance of the loan. A typical prepayment fee on a home equity loan
provides for a fee equal to 5% of the outstanding principal loan balance if paid
within the first three years after the loan's origination and 2% of the
outstanding principal loan balance if prepaid between three and five years after
the loan's origination and no prepayment fee if the loan is prepaid after five
years from the date of origination. In the case of business purpose loans, the
prepayment fee generally amounts to 8% of the outstanding principal loan
balance; provided, however, that no prepayment option is available until after
the 24th scheduled payment is made.
The ability to charge a prepayment fee is sometimes impacted by state law,
with respect to both home equity loans and business purpose loans. In the case
of home equity loans which have a "balloon" payment feature, whenever possible,
the originators use the Federal Alternative Mortgage Transactions Parity Act of
1982 to preempt state laws which limit or restrict prepayment fees. In states
that have overridden the Parity Act and in the case of some fully amortizing
home equity loans, state laws may restrict prepayment fees either by the amount
of the prepayment fee or the time period during which it can be imposed.
Similarly, in the case of business purpose loans, some states prohibit or limit
prepayment fees where the loan is below a specific dollar threshold or is
secured by residential real property. See "Material Legal Aspects of the Loans
- -- Enforceability of Prepayment and Late Payment Fees" in the accompanying
prospectus.
MARKETING STRATEGY
The originators concentrate their marketing efforts primarily on two
potential customer groups. One group, based on historical profiles, has a
tendency to select their loan products because of their personalized service and
timely response to loan requests. The other group is comprised of
credit-impaired borrowers who satisfy the originators' underwriting guidelines.
American Business Mortgage also markets conventional first mortgage loans to
borrowers with favorable credit histories.
American Business Credit's marketing efforts for business purpose loans
focus on its niche market of selected small businesses located in its market
area which generally includes the eastern half of the United States. American
Business Credit targets businesses which it believes would qualify for loans
from traditional lending sources, but would elect to use its products and
services. American Business Credit's experience indicates that these borrowers
are attracted to it as a result of its marketing efforts, the personalized
service provided by its staff of highly trained lending officers and its timely
response to loan applications. Historically, such customers have been willing to
pay American Business Credit's origination fees and interest rates which are
generally higher than those charged by traditional lending sources.
American Business Credit markets business purpose loans through various
forms of advertising, its business loan web site, www.abceasyloan.com and a
direct sales force. Advertising media used includes large direct mail campaigns
and newspaper and radio advertising. American Business Credit's commissioned
sales staff, which consists of full-time highly trained salespersons, is
responsible for converting advertising leads into loan applications.
S-31
American Business Credit utilizes a proprietary training program involving
extensive and on-going training of its lending officers. American Business
Credit's sales staff uses significant person-to-person contact to convert
advertising leads into loan applications and maintains contact with the borrower
throughout the application process.
Upland Mortgage markets home equity loans through telemarketing, radio and
television advertising, direct mail campaigns and through its web site,
www.UplandMortgage.com. During fiscal year 2001, Upland Mortgage, American
Business Mortgage, redirected its marketing mix to focus on targeted direct
mail, which it believes delivers more leads at a lower cost than broadcast
marketing channels. Upland Mortgage Group's integrated approach to media
advertising utilizes a combination of direct mail and Internet advertising is
intended to maximize the effect of its advertising campaigns.
Upland Mortgage's marketing efforts for home equity loans are strategically
located throughout the eastern region of the United States. Upland Mortgage
utilizes its branch offices in various eastern states to market its loans.
Upland Mortgage intends to open additional sales offices in the future. Loan
processing, underwriting, servicing and collection procedures are performed at
its centralized operating office located in Bala Cynwyd, Pennsylvania.
American Business Mortgage originates home equity loans through its network
of loan brokers and other business alliance programs. American Business
Mortgage's marketing efforts are concentrated in the mid-Atlantic region of the
United States. The loan broker network channel is also supported by American
Business Mortgage's website, www.abmscorp.com, which provides brokers with
unlimited access to proprietary software for pricing and structuring mortgage
loans with American Business Mortgage.
UNDERWRITING PROCEDURES AND PRACTICES
Summarized below are some of the policies and practices which are followed
in connection with the origination of business purpose loans, home equity loans
and conventional first mortgage loans. These policies and practices may be
altered, amended and supplemented as conditions warrant in the discretion of
management.
Loan underwriting standards are applied to evaluate prospective borrowers'
credit standing and redistribution ability as well as the value and adequacy of
the mortgaged property as collateral. Initially, the prospective borrower is
required to fill out a detailed application providing pertinent credit
information. As part of the description of the prospective borrower's financial
condition, the borrower is required to provide information concerning assets,
liabilities, income, credit, employment history and other demographic and
personal information. If the application demonstrates the prospective borrower's
ability to repay the debt as well as sufficient income and equity, loan
processing personnel generally obtain and review an independent credit bureau
report on the credit history of the borrower and verification of the borrower's
income. Once all applicable employment, credit and property information is
obtained, a determination is made as to whether sufficient unencumbered equity
in the property exists and whether the prospective borrower has sufficient
monthly income available to meet the prospective borrower's monthly obligations.
S-32
The following table outlines the key parameters of the major credit grades
of the originators' current underwriting guidelines.
- --------------------------------------------------------------------------------------------------------
"A" CREDIT GRADE "B" CREDIT GRADE
- --------------------------------------------------------------------------------------------------------
General Repayment Has good credit but might have Pays the majority of accounts on
some minor delinquency. time but has some 30 and/or 60
day delinquency.
- --------------------------------------------------------------------------------------------------------
Existing Mortgage Loans Current at application time and Current at application time and
a maximum of two 30 day a maximum of four 30 day
delinquencies in the past 12 delinquencies in the past 12
months. months.
- --------------------------------------------------------------------------------------------------------
Non-Mortgage Credit Major credit and installment Major credit and installment
debt should be current but may debt can exhibit some minor 30
exhibit some minor 30 day and/or 60 day delinquency.
delinquency. Minor credit may Minor credit may exhibit up to
exhibit some minor delinquency. 90 day delinquency.
- --------------------------------------------------------------------------------------------------------
Bankruptcy Filings Discharged more than 2 years Discharged more than 2 years
with reestablished credit. with reestablished credit.
- --------------------------------------------------------------------------------------------------------
Debt Service-to-Income Generally not to exceed 50%. Generally not to exceed 50%.
- --------------------------------------------------------------------------------------------------------
Owner Occupied: Generally 80% (exception to 90%) Generally 80% (exception to 85%)
Loan-to-value ratio for a 1-4 family dwelling for a 1-4 family dwelling
residence; 80% for a residence; 75% for a condominium.
condominium.
- --------------------------------------------------------------------------------------------------------
Non-Owner Occupied: Generally 80% for a 1-4 family Generally 70% for a 1-4 family
Loan-to-value ratio dwelling or condominium. dwelling or condominium.
- --------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
"C" CREDIT GRADE "D" CREDIT GRADE
- ---------------------------------------------------------------------------------------------------
General Repayment Marginal credit history which is Designed to provide a
offset by other positive borrower with poor credit
attributes. history an opportunity to
correct past credit problems
through lower monthly payments.
- ---------------------------------------------------------------------------------------------------
Existing Mortgage Loans Cannot exceed four 30-day Must be paid in full from
delinquencies or two 60 day loan proceeds and no more
delinquencies in the past 12 than 120 days delinquent.
months.
- ---------------------------------------------------------------------------------------------------
Non-Mortgage Credit Major credit and installment Major and minor credit
debt can exhibit some minor 30 delinquency is acceptable,
and/or 90 day delinquency. but must demonstrate some
Minor credit may exhibit more payment regularity.
serious delinquency.
- ---------------------------------------------------------------------------------------------------
Bankruptcy Filings Discharged more than 2 years Discharged prior to closing.
with reestablished credit.
- ---------------------------------------------------------------------------------------------------
Debt Service-to-Income Generally not to exceed 55%. Generally not to exceed 55%.
- ---------------------------------------------------------------------------------------------------
Owner Occupied: Generally 70% (exception to 85%) Generally 60% (exception to
Loan-to-value ratio for a 1-4 family dwelling 70%) for a 1-4 family
residence; 65% for a condominium. dwelling residence.
- ---------------------------------------------------------------------------------------------------
Non-Owner Occupied: Generally 60% for a 1-4 family N/A
Loan-to-value ratio dwelling or condominium.
- ---------------------------------------------------------------------------------------------------
S-33
Generally, business purpose loans collateralized by residential real estate
must have an overall loan-to-value ratio (based solely on the independent
appraised fair market value of the real estate collateral securing the loan) on
the properties collateralizing the loans of no greater than 75%. Business
purpose loans collateralized by commercial real estate must generally have an
overall loan-to-value ratio (based solely on the independent appraised fair
market value of the real estate collateral securing the loan) of no greater than
60% percent. In addition, in substantially all instances, American Business
Credit also receives additional collateral in the form of, among other things,
personal guarantees, pledges of securities, assignments of contract rights, life
insurance and lease payments and liens on business equipment and other business
assets, as available. The business purpose loans originated by American Business
Credit had an average loan-to-value ratio of 60.9% based solely on the real
estate collateral securing the loan for fiscal year 2000.
The maximum acceptable loan-to-value ratio for home equity loans held as
available for sale or securitization is generally 90%. The home equity loans
originated by the originators had an average loan-to-value ratio of 78.9% for
fiscal year 2000. Occasionally, exceptions to these maximum loan-to-value ratios
are made if other collateral is available or if there are other compensating
factors. From time to time, Upland Mortgage makes loans with loan-to-value
ratios in excess of 90% which may be sold with servicing released. Title
insurance is generally obtained in connection with all real estate secured
loans.
In determining whether the mortgaged property is adequate as collateral,
the originators appraise each property that is considered for financing. The
appraisal is completed by an independent qualified appraiser and generally
includes pictures of comparable properties and pictures of the property securing
the loan. With respect to business purpose loans, home equity loans and
conventional first mortgage loans, the appraisal is completed by an independent
qualified appraiser on a Fannie Mae form.
Any material decline in real estate values reduces the ability of borrowers
to use home equity to support borrowings and increases the loan-to-value ratios
of loans previously made, thereby weakening collateral coverage and increasing
the possibility of a loss in the event of borrower default. Further,
delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. As a result, the originators cannot assure that the
market value of the real estate underlying the loans will at any time be equal
to or in excess of the outstanding principal amount of those loans. Although the
originators have expanded the geographic area in which they originate loans, a
downturn in the economy generally or in a specific region of the country may
have an effect on the originators' originations.
THE SERVICER
American Business Credit will be responsible for servicing the mortgage
loans in accordance with its established servicing procedures and the terms of
the Pooling and Servicing Agreement. American Business Credit will contract with
Upland Mortgage and American Business Mortgage to act as subservicers with
respect to the servicing of the consumer purpose mortgage loans. Upland Mortgage
and American Business Mortgage follow the same servicing procedures described
below with respect to American Business Credit.
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The servicer employs a large staff of experienced collectors and
supervisors working in shifts to manage non-performing loans. In addition,
several in-house collection attorneys and paralegals work closely with these
collectors and their managers to optimize collection efforts. The goal of the
servicer's labor-intensive collections program is to emphasize delinquency
prevention.
In servicing business purpose loans and home equity loans, the servicer
typically sends an invoice to borrowers on a monthly basis advising them of the
required payment and its due date. The collection process begins immediately
after a borrower fails to make a monthly payment. When a loan becomes 45 to 60
days delinquent, it is transferred to a workout specialist in the collections
department. The workout specialist tries to reinstate a delinquent loan, seek a
payoff, or occasionally enter into a modification agreement with a borrower to
avoid foreclosure. All proposed workout arrangements are evaluated on a
case-by-case basis, based upon the borrower's past credit history, current
financial status, level of cooperation, future prospects and the reasons for the
delinquency. If the loan becomes delinquent 61 days or more and a satisfactory
workout arrangement with the borrower is not achieved or the borrower declares
bankruptcy, the matter is immediately referred to the servicer's attorneys for
collection. Due to this timing, the foreclosure process on most delinquent loans
is commenced before the loan is 100 days past due.
The servicer believes that it is one of very few servicing entities that
has an in-house legal staff dedicated to the collection of delinquent loans and
the handling of bankruptcy cases. As a result, the servicer believes its
delinquent loans are reviewed from a legal perspective earlier in the collection
process than is the case with loans made by traditional lenders. This allows
troublesome legal issues, if any, to be noted and, if possible, resolved
earlier. The servicer's in-house legal staff also attempts to find solutions for
delinquent loans, other than foreclosure. Every loan is analyzed to compare the
property value against the loan balance and solutions are presented to the
borrower based on the results of that analysis.
In those situations where foreclosures are handled by outside counsel, the
in-house legal staff manages outside counsel to ensure that the time period for
handling foreclosures meets or exceeds established industry standards. Frequent
contact between in-house and outside counsel insures that the process moves
quickly and efficiently in an attempt to achieve a timely and economical
resolution to contested matters. In managing these loans on a case by case basis
American Business Credit may advance funds to keep the first mortgage current or
may choose to pay off the senior mortgage. The servicer will also expend funds
to protect and preserve the property and to enhance the ability to sell a
recovered property.
Supporting American Business Credit's collection and accounting functions
is a network of computer hardware and software. American Business Credit's
current computer system produces mortgage loan invoices, payment reminders and
late notices. In addition to these collection functions, the computer provides
an in-depth customer contact system which enables American Business Credit's
collectors to manage each borrower's loan history by individually logging all
correspondence into the system's data base. The system also generates numerous
management reports detailing collection activity and accounting information.
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DELINQUENCY AND LOAN LOSS EXPERIENCE
The following tables set forth information relating to the delinquency and
loan loss experience on the mortgage loans included in American Business
Credit's, Upland Mortgage's and American Business Mortgage's servicing portfolio
for the periods shown. The delinquency and loan loss experience represents the
historical experience of American Business Credit, Upland Mortgage and American
Business Mortgage, and there can be no assurance that the future experience on
the mortgage loans in the trust will be the same as, or more favorable than,
that of the mortgage loans in American Business Credit's, Upland Mortgage's and
American Business Mortgage's overall servicing portfolio.
DELINQUENCY AND FORECLOSURE EXPERIENCE
(DOLLARS IN THOUSANDS)
At June 30, 1998 At June 30, 1999 At June 30, 2000 At March 31, 2001
---------------- ---------------- ---------------- -----------------
% of % of % of % of
Amount Amount Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
-------- -------- -------- -------- -------- -------- -------- --------
Servicing portfolio $ 450,935 100.00% $1,007,738 100.00% $1,799,584 100.00% $2,357,723 100.00%
60+ days past due loans:
61-90 days $ 1,950 0.43% $ 4,624 0.46% $ 7,416 0.41% $ 14,687 0.62%
more than 90 days $ 7,103 1.58% $ 23,958 2.38% $ 38,962 2.17% $ 57,128 2.42%
--------- ----- ---------- ----- ------ ----- ---------- -----
Total 60+ days past due loans $ 9,053 2.01% $ 28,582 2.84% $ 46,378 2.58% $ 71,815 3.05%
REO Properties $ 922 0.20% $ 9,948 0.99% $ 13,122 0.73% $ 26,113 1.11%
--------- ----- ---------- ----- ---------- ----- ---------- -----
Total 60+ days past due loans,
foreclosures pending and REO
Properties $ 9,975 2.21% $ 38,530 3.82% $ 59,500 3.31% $ 97,928 4.15%
========= ===== ========== ===== ========== ===== ========== =====
The preceding table was prepared using the following assumptions:
o the past due period is based on the actual number of days that a
payment is contractually past due; a loan as to which a monthly payment
was due 61-90 days prior to the reporting period is considered 61-90
days past due, etc.
o total past due loans includes pending foreclosures, and
o an REO property is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
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LOAN CHARGE-OFF EXPERIENCE
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended Quarter Ended
June 30, 1998 June 30, 1999 June 30, 2000 March 31, 2001
------------- ------------- ------------- --------------
Amount Amount Amount Amount
Serviced Serviced Serviced Serviced
-------- -------- -------- --------
Servicing portfolio.............................. $450,935 $1,007,738 $1,799,584 $2,357,723
Average outstanding.............................. $309,063 $729,337 $1,354,500 $2,078,654
Gross losses................................... 138 820 3,359 2,448
Loan recoveries................................ $0 $3 $40 $0
--------- --------- ---------- ----------
Net loan charge-offs........................... $ 138 $ 817 $ 3,319 $ 2,448
======== ========= ========= ==========
Net loan charge-offs as a
Percentage of servicing
Portfolio at period end..................... 0.03% 0.08% 0.18% 0.42%
===== ===== ===== =====
Net loan charge-offs as a
Percentage of average
Outstanding................................. 0.04% 0.11% 0.25% 0.47%
===== ===== ===== =====
The preceding table was prepared using the following assumptions:
o "average outstanding" presented is the arithmetic average of the
principal balances of the loans in the originators' servicing portfolio
outstanding at the opening and closing of business for such period; and
o "gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans; and
o "net loan charge-offs as a percentage of servicing portfolio at period
end" and "net loan charge-offs as a percentage of average outstanding"
for the quarter ended at March 31, 2001 are annualized amounts.
The above delinquency, foreclosure and loan charge-off statistics represent
the servicer's recent experience and indicate notable increases during fiscal
year 2000 and the quarter ended March 31, 2001. The servicer believes that this
trend is a result of the maturation of its servicing portfolio rather than a
change in the credit quality of the mortgage loans that have been originated
recently. Furthermore, the statistical data in the tables is based on all of the
mortgage loans in the servicing portfolio. The mortgage loans in the trust may
have characteristics which distinguish them from the majority of the mortgage
loans in the servicing portfolio. Accordingly, such data should not be
considered to reflect the credit quality of the mortgage loans included in the
trust, or as a basis of assessing the likelihood, amount or severity of losses
on the mortgage loans included in the trust.
THE TRUSTEE AND THE COLLATERAL AGENT
The Chase Manhattan Bank, a New York banking corporation, has an office at
450 West 33rd Street, 14th Floor, New York, New York 10001. The trustee will
perform administrative functions on behalf of the trust fund and for the benefit
of the certificateholders pursuant to the terms of the Pooling and Servicing
Agreement. The collateral agent/trustee's duties are limited solely to its
express obligations under the Pooling and Servicing Agreement.
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DESCRIPTION OF THE CERTIFICATES
On the closing date, the trust will be created and the depositor will cause
the trust to issue the certificates. The certificates will be issued in seven
classes, the Class A-1, Class A-2, Class A-3, Class A-4, Class A-IO, Class X and
Class R Certificates. Only the Class A-1, Class A-2, Class A-3, Class A-4 and
Class A-IO Certificates, collectively the "Class A Certificates" will be offered
under this prospectus supplement. The certificates will collectively represent
the entire undivided ownership interest in the trust fund created and held under
the Pooling and Servicing Agreement, subject to the limits and priority of
distribution provided for in that agreement.
The trust fund consists of,
o the mortgage loans, together with the mortgage files relating thereto
and all collections thereon and proceeds thereof collected after the
cut-off date,
o all rights of the depositor under the Unaffiliated Seller's Agreement,
o such assets as from time to time are identified as REO property and
collections thereon and proceeds thereof,
o cash that is deposited into the collection accounts, and invested in
accordance with the Pooling and Servicing Agreement,
o the trustee's rights with respect to the mortgage loans under all
insurance policies required to be maintained pursuant to the Pooling
and Servicing Agreement and any insurance proceeds,
o Liquidation Proceeds, and
o released mortgaged property proceeds.
In addition, the seller will cause the certificate insurer to issue the
policy under which it will guarantee distributions to the holders of the Class A
Certificates as described herein.
The Class A-1 Certificates are primarily payable from collections on
account of Mortgage Loan Group I, and the Class A-2, Class A-3 and Class A-4
Certificates are primarily payable from collections on account of Mortgage Loan
Group II, subject in each case to the cross-collateralization provisions of the
trust. The Class A-IO Certificates are payable from collections on account of
both mortgage loan groups.
The Class A Certificates will be issued and available only in book-entry
form, in denominations of $1,000 initial principal or notional balance and
integral multiples of $1,000 in excess thereof, except that one certificate of
each class may be issued in a different amount. Voting rights will be allocated
among holders of the Class A Certificates in accordance with their respective
percentage interests.
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BOOK-ENTRY REGISTRATION
The Class A Certificates are sometimes referred to in this prospectus
supplement as "book-entry certificates." No person acquiring an interest in the
book-entry certificates will be entitled to receive a definitive certificate
representing an obligation of the trust, except under the limited circumstances
described herein. Beneficial owners may elect to hold their interests through
DTC, in the United States, or Clearstream or the Euroclear System, in Europe.
Transfers within DTC, Clearstream or Euroclear, as the case may be, will be in
accordance with the usual rules and operating procedures of the relevant system.
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., which will be the "holder" of such certificates, as the
nominee of DTC or one of the relevant depositories. Cross-market transfers
between persons holding directly or indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through Clearstream or Euroclear,
on the other, will be effected in DTC through Citibank, N.A., the relevant
depositories of Clearstream or Euroclear, respectively, and each a participating
member of DTC. The interests of the beneficial owners of interests in the Class
A Certificates will be represented by book-entries on the records of DTC and
participating members thereof. All references herein to the Class A Certificates
reflect the rights of beneficial owners only as such rights may be exercised
through DTC and its participating organizations for so long as such certificates
are held by DTC.
The beneficial owners of the Class A Certificates may elect to hold their
certificates through DTC in the United States, or Clearstream or Euroclear if
they are participants in such systems, or indirectly through organizations which
are participants in such systems. The Class A Certificates will be issued in one
or more certificates which in the aggregate equal the outstanding principal or
notional balance of the related Class and will initially be registered in the
name of Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Clearstream's and Euroclear's names on the books of their respective
depositories which in turn will hold such positions in customers' securities
accounts in the depositories' names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream and The Chase Manhattan Bank will act as
depositary for Euroclear. Investors may hold such beneficial interests in the
book-entry certificates in minimum denominations representing principal or
notional amounts of $1,000. Except as described below, no beneficial owner will
be entitled to receive a physical or definitive certificates. Unless and until
definitive certificates are issued, it is anticipated that the only "holder" of
the Class A Certificates will be Cede & Co., as nominee of DTC. Beneficial
owners will not be "holders" or "certificateholders" as those terms are used in
the Pooling and Servicing Agreement. Beneficial owners are only permitted to
exercise their rights indirectly through participants and DTC.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for such
purpose. In turn, the financial intermediary's ownership of such book-entry
certificate will be recorded on the records of DTC or on the records of a
participating firm that acts as agent for the financial intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's financial intermediary is not a DTC participant and on the records of
Clearstream or Euroclear, as appropriate.
S-39
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, including the underwriters, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly through "indirect participants."
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of book-entry
certificates, such as the Class A Certificates, among participants on whose
behalf it acts with respect to the book-entry certificates and to receive and
transmit distributions of principal of and interest on the book-entry
certificates. Participants and indirect participants with which beneficial
owners have accounts with respect to the book-entry certificates similarly are
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective beneficial owners.
Beneficial owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, book-entry certificates may do so only through participants and indirect
participants. In addition, beneficial owners will receive all distributions of
principal and interest from the trustee, or a paying agent on behalf of the
trustee, through DTC participants. DTC will forward such distributions to its
participants, which thereafter will forward them to indirect participants or
beneficial owners. Beneficial owners will not be recognized by the trustee, the
servicer or any paying agent as holders of the Class A Certificates, and
beneficial owners will be permitted to exercise the rights of the holders of the
Class A Certificates only indirectly through DTC and its participants.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream participants and Euroclear participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, such cross-
S-40
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines.
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the relevant
depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving distribution in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream participants and Euroclear participants may not deliver
instructions directly to the European Depositories.
Clearstream Banking, societe anonyme (formerly Cedelbank) is incorporated
under the laws of Luxembourg as a professional depository. Clearstream holds
securities for its participant organizations and facilitates the clearance and
settlement of securities transactions between Clearstream participants through
electronic book-entry changes in accounts of Clearstream participants, thereby
eliminating the need for physical movement of securities. Transactions may be
settled in Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides to its Clearstream participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depository, Clearstream is subject to regulation by the Luxembourg
Monetary Institute. Clearstream participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Clearstream is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against distribution,
thereby eliminating the need for physical movement of securities and any risk
from lack of simultaneous transfers of securities and cash. Transactions may now
be settled in any of 31 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Euroclear Bank S.A/N.V. All operations are conducted by the
Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not Euroclear
Clearance. Euroclear Clearance establishes policy for Euroclear on behalf of
Euroclear participants. Euroclear participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
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.
S-41
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law.
The Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
distributions with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
securities to specific securities clearance accounts. The Euroclear operator
acts under the Terms and Conditions only on behalf of Euroclear participants,
and has no record of or relationship with persons holding through Euroclear
participants.
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of such distributions to the accounts of
the applicable DTC participants in accordance with DTC's normal procedures. Each
DTC participant will be responsible for disbursing such distribution to the
beneficial owners of the book-entry certificates that it represents and to each
financial intermediary for which it acts as agent. Each such financial
intermediary will be responsible for disbursing funds to the beneficial owners
of the book-entry certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry certificates
may experience some delay in their receipt of distributions, since such
distributions will be forwarded by the trustee to Cede & Co., as nominee of DTC.
Distributions with respect to certificates held through Clearstream or Euroclear
will be credited to the cash accounts of Clearstream participants or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of financial intermediaries, the
ability of a beneficial owner to pledge book-entry certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such book-entry certificates, may be limited due to the lack of
physical certificates for 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 market since certain potential investors may be
unwilling to purchase certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the trust provided by the trustee to Cede &
Co., as nominee of DTC, may be made available to beneficial owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
DTC, and to the financial intermediaries to whose DTC accounts the book-entry
certificates of such beneficial owners are credited.
DTC has advised the depositor and the servicer that it will take any action
permitted to be taken by a holder of the Class A Certificates under the Pooling
and Servicing Agreement only at the direction of one or more participants to
whose accounts with DTC the book-entry certificates are credited. Additionally,
DTC has advised the depositor that it will take such actions with respect to
specified percentages of voting rights only at the direction of and on behalf of
participants whose holdings of book-entry certificates evidence such specified
percentages of voting rights. DTC may take conflicting actions with respect to
percentages of voting rights to
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the extent that participants whose holdings of book-entry certificates evidence
such percentages of voting rights authorize divergent action.
None of the trust, the depositor, the servicer, the certificate insurer or
the trustee will have any responsibility for any aspect of the records relating
to or distributions made on account of beneficial ownership interests of the
book-entry certificates held by Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of certificates among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time. See "Risk Factors -- Book-Entry Registration" and "The Agreements --
Book-Entry Securities" in the accompanying prospectus.
DEFINITIVE CERTIFICATES
The Class A Certificates, which will be issued initially as book-entry
certificates, will be converted to definitive certificates and reissued to
beneficial owners or their nominees, rather than to DTC or its nominee, only if
(a) DTC or the servicer advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the book-entry certificates and DTC or the servicer is unable to
locate a qualified successor or (b) the trustee, at its option, elects to
terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all participants of the availability
through DTC of definitive certificates. Upon delivery of definitive
certificates, the trustee will reissue the book-entry certificates as definitive
certificates to beneficial owners. Distributions of principal of, and interest
on, the book-entry certificates will thereafter be made by the trustee, or a
paying agent on behalf of the trustee, directly to holders of definitive
certificates in accordance with the procedures set forth in the Pooling and
Servicing Agreement.
Definitive certificates will be transferable and exchangeable at the
offices of the trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the trustee may
require distribution of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
SALE OF THE MORTGAGE LOANS
Pursuant to the Unaffiliated Seller's Agreement, the originators will sell,
transfer, assign, set over and otherwise convey the mortgage loans, without
recourse, to the seller and the seller will sell, transfer, assign, set over and
otherwise convey the mortgage loans, including all principal outstanding as of,
and interest due and accruing after, the cut-off date, without recourse, to the
depositor on the closing date. Pursuant to the Pooling and Servicing Agreement,
the depositor will sell, transfer, assign, set over and otherwise convey without
recourse to the trust, all right, title and interest in and to each mortgage
loan, including all principal outstanding as of, and interest due after, the
cut-off date. Each such transfer will convey all right, title and interest in
and to (a) principal outstanding as of the cut-off date, and (b) interest due
and accrued on each
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such mortgage loan after the cut-off date; provided, however, that the
originators will not convey, and the originators reserve and retain all their
respective right, title and interest in and to (x) principal, including
principal prepayments in full and curtailments (i.e., partial prepayments),
received on each such mortgage loan on or prior to the cut-off date and (y)
interest due and accrued on each mortgage loan on or prior to the cut-off date.
DELIVERY OF MORTGAGE LOAN DOCUMENTS
In connection with the sale, transfer, assignment or pledge of the mortgage
loans to the trust, the depositor will cause to be delivered to the collateral
agent on behalf of the trustee, on the closing date, the following documents
with respect to each mortgage loan which constitute the mortgage file:
(a) the original mortgage note, endorsed without recourse in blank by
the related originator, including all intervening endorsements
showing a complete chain of endorsement;
(b) the related original mortgage with evidence of recording indicated
thereon or, in certain limited circumstances, a copy thereof
certified by the applicable recording office;
(c) the recorded mortgage assignment(s), or copies thereof certified
by the applicable recording office, if any, showing a complete
chain of assignment from the originator of the related mortgage
loan to the related originator -- which assignment may, at such
originator's option, be combined with the assignment referred to
in clause (d) below;
(d) a mortgage assignment in recordable form, which, if acceptable for
recording in the relevant jurisdiction, may be included in a
blanket assignment or assignments, of each mortgage from the
related originator to the trustee;
(e) originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of a
mortgage or mortgage note have been modified or such mortgage or
mortgage note has been assumed; and
(f) an original title insurance policy or (x) a copy of the title
insurance policy, or (y) a binder thereof or copy of such binder
together with a certificate from the originator that the original
mortgage has been delivered to the title insurance company that
issued such binder for recordation.
Pursuant to the Pooling and Servicing Agreement, the collateral agent, on
behalf of the trustee agrees to execute and deliver on or prior to the closing
date an acknowledgment of receipt of the original mortgage note, item (a) above,
with respect to each of the mortgage loans, with any exceptions noted. The
collateral agent, on behalf of the trustee, agrees, for the benefit of the
holders of the certificates and the certificate insurer, to review, or cause to
be reviewed, each mortgage file within thirty days after the closing date -- or,
with respect to any Qualified
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Substitute Mortgage Loan, within thirty days after the receipt by the collateral
agent thereof -- and to deliver a certification generally to the effect that, as
to each mortgage loan listed in the schedule of mortgage loans,
o all documents required to be delivered to it pursuant to the Pooling
and Servicing Agreement are in its possession;
o each such document has been reviewed by it and has not been mutilated,
damaged, torn or otherwise physically altered, appears regular on its
face and relates to such mortgage loan; and
o based on its examination and only as to the foregoing documents,
certain information set forth on the schedule of mortgage loans
accurately reflects the information set forth in the mortgage file
delivered on such date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of a mortgage file which is not
executed, has not been received or is unrelated to the mortgage loans, or that
any mortgage loan does not conform to the requirements above or to the
description thereof as set forth in the schedule of mortgage loans, the
collateral agent shall promptly so notify the trustee, the servicer, the seller
and the certificate insurer in writing with details thereof. The seller agrees
to use reasonable efforts to cause to be remedied a material defect in a
document constituting part of a mortgage file of which it is so notified by the
collateral agent. If, however, within forty-five days after the collateral
agent's notice of such defect, the seller has not caused the defect to be
remedied and the defect materially and adversely affects the value of, or the
interest of the holders of the Class A Certificates or the interests of the
certificate insurer in the mortgage loan, the seller or the related originator
will either (a) substitute in lieu of such mortgage loan a Qualified Substitute
Mortgage Loan and, if the then outstanding principal balance of such Qualified
Substitute Mortgage Loan is less than the principal balance of such mortgage
loan as of the date of such substitution plus accrued and unpaid interest
thereon, deliver to the servicer a substitution adjustment equal to the amount
of any such shortfall or (b) purchase such mortgage loan at a price equal to the
outstanding principal balance of such mortgage loan as of the date of purchase,
plus the greater of (x) all accrued and unpaid interest thereon and (y) thirty
days' interest thereon, computed at the related mortgage interest rate, net of
the servicing fee if the servicer is effecting the repurchase, plus the amount
of any unreimbursed servicing advances made by the servicer, which purchase
price shall be deposited in the distribution account on the next succeeding
servicer remittance date after deducting therefrom any amounts received in
respect of such repurchased mortgage loan or loans and being held in the
distribution account for future distribution to the extent such amounts have not
yet been applied to principal or interest on such mortgage loan. In addition,
the seller and the originators shall be obligated to indemnify the trust, the
trustee, the collateral agent, the holders of the Class A Certificates and the
certificate insurer for any third-party claims arising out of a breach by the
seller or the originators of representations or warranties regarding the
mortgage loans. The obligation of the seller and the originators to cure such
breach or to substitute or purchase any mortgage loan and to indemnify
constitute the sole remedies respecting a material breach of any such
representation or warranty to the holders of the Class A Certificates, the
trustee, the collateral agent, and the certificate insurer.
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REPRESENTATIONS AND WARRANTIES OF THE SELLER
The seller will represent, among other things, with respect to each
mortgage loan, as of the closing date, the following:
1. the information set forth in the schedule of mortgage loans with respect
to each mortgage loan is true and correct;
2. all of the original or certified documentation constituting the mortgage
files, including all material documents related thereto, has been or will be
delivered to the collateral agent, on behalf of the trustee, on the closing
date;
3. the mortgaged property consists of a single parcel of real property
separately assessed for tax purposes, upon which is erected a detached or an
attached one-family residence or a detached two- to six-family dwelling, or an
individual condominium unit, or a townhouse, or a manufactured dwelling, or an
individual unit in a planned unit development, or a commercial property, or a
mixed use or a multiple purpose property, or a mobile home. Such residence,
dwelling or unit is not,
o a unit in a cooperative apartment,
o a property constituting part of a syndication,
o a time share unit,
o a property held in trust, except to the extent such property is
mortgaged by a trustee duly qualified to serve as such in the relevant
jurisdiction,
o a log-constructed home, or
o a recreational vehicle;
4. each mortgage or deed of trust is a valid first or second lien on a fee
simple, or its equivalent under applicable state law, estate in the real
property securing the amount owed by the mortgagor under the mortgage note
subject only to,
o the lien of current real property taxes and assessments which are not
delinquent,
o any related first mortgage loan,
o covenants, conditions and restrictions, rights of way, easements and
other matters of public record as of the date of recording of such
mortgage, such exceptions appearing of record being acceptable to
mortgage lending institutions generally in the area wherein the
property subject to the mortgage is located or specifically reflected
in the appraisal obtained in connection with the origination of the
related mortgage loan obtained by the seller, and
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o other matters to which like properties are commonly subject which do
not materially interfere with the benefits of the security intended to
be provided by such mortgage;
5. to the best of the seller's knowledge none of the mortgage loans are
Section 32 loans subject to the Home Ownership and Equity Protection Act;
6. immediately prior to the transfer and assignment by the seller to the
depositor, the seller had good title to, and was the sole owner of each mortgage
loan, free of any interest of any other person, and the seller has transferred
all right, title and interest in each mortgage loan to the depositor;
7. each mortgage loan conforms, and all such mortgage loans in the
aggregate conform, to the description thereof set forth in this prospectus
supplement; and
8. all of the mortgage loans were originated in accordance with the
underwriting criteria set forth in this prospectus supplement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by any
of a certificateholder, the seller, the servicer, any subservicer, the
certificate insurer, the collateral agent or the trustee that any of the
representations and warranties contained in the Pooling and Servicing Agreement
have been breached in any material respect as of the date made, with the result
that the value of, or the interests of the holders of the Class A Certificates
in the related mortgage loan or the interests of the certificate insurer were
materially and adversely affected, notwithstanding that such representation and
warranty was made to the seller's or the originator's best knowledge and the
seller or the originator lacked knowledge of such breach, the party discovering
such breach is required to give prompt written notice to the other parties.
Subject to certain provisions of the Pooling and Servicing Agreement, within
sixty days of the earlier to occur of the seller's or an originator's discovery
or its receipt of notice of any such breach, the seller or the originators will,
o promptly cure such breach in all material respects,
o remove each mortgage loan which has given rise to the requirement for
action by the seller or the originators, substitute one or more
Qualified Substitute Mortgage Loans and, if the outstanding principal
balance of such Qualified Substitute Mortgage Loans as of the date of
such substitution is less than the outstanding principal balance, plus
accrued and unpaid interest thereon, of the replaced mortgage loans as
of the date of substitution, deliver to the trust as part of the
amounts remitted by the servicer on such distribution date the amount
of such shortfall, or
o purchase such mortgage loan at a price equal to the principal balance
of such mortgage loan as of the date of purchase plus the greater of
(x) all accrued and unpaid interest thereon and (y) thirty days'
interest thereon computed at the mortgage interest rate, net of the
servicing fee if American Business Credit is the servicer, plus the
amount of any unreimbursed servicing advances made by the servicer,
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and deposit such purchase price into the distribution account on the next
succeeding servicer remittance date after deducting therefrom any amounts
received in respect of such repurchased mortgage loan or mortgage loans and
being held in the distribution account for future distribution to the extent
such amounts have not yet been applied to principal or interest on such mortgage
loan.
In addition, the seller and the originators shall be obligated to indemnify
the depositor, the trustee, the collateral agent, the holders of the Class A
Certificates and the certificate insurer for any third-party claims arising out
of a breach by the seller or the originators of representations or warranties
regarding the mortgage loans. The obligation of the seller and the originators
to cure such breach or to substitute or purchase any mortgage loan and to
indemnify constitute the sole remedies respecting a material breach of any such
representation or warranty to the holders of the Class A Certificates, the
trustee, the collateral agent and the certificate insurer.
DISTRIBUTIONS ON THE MORTGAGE LOANS
The Pooling and Servicing Agreement provides that the servicer, for the
benefit of the holders of the Class A Certificates, shall establish and maintain
the collection account, which will generally be (x) an account maintained with a
depository institution or trust company whose long term unsecured debt
obligations are rated by each rating agency in one of its two highest rating
categories at the time of any deposit therein or (y) trust accounts maintained
with a depository institution acceptable to each rating agency and the
certificate insurer. The Pooling and Servicing Agreement permits the servicer to
direct any depository institution maintaining the collection account to invest
the funds in the collection account in one or more eligible investments that
mature, unless payable on demand, no later than the business day preceding the
date on which the servicer is required to transfer the servicer remittance
amount from the collection account to the distribution account, as described
below.
The servicer is obligated to deposit or cause to be deposited in the
collection account on each business day, amounts representing the following
distributions received and collections made by it after the cut-off date, other
than in respect of monthly distributions on the mortgage loans due and accrued
on each mortgage loan up to and including any due date occurring on or prior to
the cut-off date:
o all distributions on account of principal, including prepayments of
principal;
o all distributions on account of interest on the mortgage loans;
o all Net Liquidation Proceeds and all Insurance Proceeds to the extent
such Insurance Proceeds are not to be applied to the restoration of the
related mortgaged property or released to the related borrower in
accordance with the express requirements of law or in accordance with
prudent and customary servicing practices;
o all Net REO Proceeds;
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o all other amounts required to be deposited in the collection account
pursuant to the Pooling and Servicing Agreement; and
o any amounts required to be deposited in connection with net losses
realized on investments of funds in the collection account.
The trustee will be obligated to set up a distribution account with respect
to the certificates into which the servicer will deposit or cause to be
deposited the servicer remittance amount on the servicer remittance date which
shall be the 10th day of each month, or if such date is not a business day, then
the preceding business day.
The servicer remittance amount for a servicer remittance date is equal to
the sum, without duplication, of,
o all collections of principal and interest on the mortgage loans,
including principal prepayments, Net REO Proceeds and Liquidation
Proceeds, if any, collected by the servicer during the prior calendar
month;
o all Periodic Advances made by the servicer with respect to payments due
to be received on the mortgage loans on the related due date; and
o any other amounts required to be placed in the collection account by
the servicer pursuant to the Pooling and Servicing Agreement,
but excluding the following:
(a) amounts received on a particular mortgage loan, with respect to
which the servicer has previously made an unreimbursed Periodic
Advance, as late distributions of interest, or as Liquidation
Proceeds, to the extent of such unreimbursed Periodic Advance;
(b) amounts received on a particular mortgage loan with respect to which
the servicer has previously made an unreimbursed servicing advance,
to the extent of such unreimbursed servicing advance;
(c) for such servicer remittance date, the aggregate servicing fee;
(d) all net income from eligible investments that are held in the
collection account for the account of the servicer;
(e) all amounts actually recovered by the servicer in respect of late
fees, assumption fees, prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
(g) certain other amounts which are reimbursable to the servicer, as
provided in the Pooling and Servicing Agreement.
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The amounts described in clauses (a) through (g) above may be withdrawn by
the servicer from the collection account on or prior to each servicer remittance
date.
The Pooling and Servicing Agreement also establishes an account, the
"Supplemental Interest Account," which is held in trust by the Trustee. The
Supplemental Interest Account will hold certain amounts and other property
relating to the funding of Class A-2 Available Funds Cap Carry-Forward Amount,
if any, with respect to the Class A-2 Certificates. On each distribution date,
Class A-2 Available Funds Cap Carry-Forward Amount, if any, will be distributed
from the Supplemental Interest Account to the Class A-2 Certificateholders.
PASS-THROUGH RATES
The pass-through rates applicable to the Class A Certificates for any
distribution date are as follows:
Class A-1 Pass-Through Rate: For any distribution date which occurs on
or prior to the Clean-Up Call Date, 6.34%
per annum, and for any distribution date
thereafter 6.84% per annum.
Class A-2 Pass-Through Rate: The lesser of:
(1) LIBOR plus 0.14% per annum, or
(2) the Class A-2 Available Funds Cap Rate for
that distribution date.
Class A-3 Pass-Through Rate: 5.82% per annum.
Class A-4 Pass-Through Rate: For any distribution date which occurs on
or prior to the Clean-Up Call Date, 6.99%
per annum, and for any distribution date
thereafter 7.49% per annum.
Class A-IO Pass-Through Rate: 8.00% per annum.
If the Class A-2 Certificates have their pass-through rate limited by the
application of the Class A-2 Available Funds Cap Rate, the excess amount will be
carried forward, and will be payable as a subordinated item, as described under
"Flow of Funds" below.
CALCULATION OF LIBOR
On the second business day preceding each distribution date or, in the case
of the July 25, 2001 distribution date, on the second business day preceding the
closing date, the trustee will determine the London interbank offered rate for
one-month U.S. dollar deposits for the next accrual period for the Class A-2
Certificates on the basis of the offered rates of the reference banks for
one-month U.S. dollar deposits, as such rates appear on Telerate Page 3750, as
of 11:00 a.m., London time, on such day. 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; "Telerate Page 3750" means the display designated
as page 3750 on the Telerate Service, or such other page as may replace page
3750 on that service for the purpose of displaying
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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,
o with an established place of business in London,
o whose quotations appear on the Telerate Page 3750 on the day in
question,
o which have been designated as such by the trustee, and
o which do not control, are not controlled by, and or not under common
control with, the servicer or the trustee.
On each interest determination date, LIBOR for the accrual period for the
Class A-2 Certificates will be established by the trustee as follows:
(a) If on such interest determination date two or more reference banks
provide such offered quotations, LIBOR for the accrual period for the
Class A-2 Certificates shall be the arithmetic mean of such offered
quotations -- rounded upwards if necessary to the nearest whole
multiple of 1/16%.
(b) If on such interest determination date fewer than two reference banks
provide such offered quotations, LIBOR for the accrual period for the
Class A-2 Certificates shall be the higher of (x) LIBOR as determined
on the previous interest determination date or (y) the reserve interest
rate.
The "reserve interest rate" shall be the rate per annum that the trustee
determines to be either,
o the arithmetic mean -- rounded upwards if necessary to the nearest
whole multiple of 1/16% -- of the one-month U.S. dollar lending rates
which New York City banks selected by the trustee are quoting on the
relevant interest 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,
o the lowest one-month U.S. dollar lending rate which New York City banks
selected by the trustee are quoting on such interest determination date
to leading European banks.
The establishment of LIBOR on each interest determination date by the
trustee and the trustee's calculation of the rate of interest applicable to the
Class A-2 Certificates for the accrual period shall, in the absence of manifest
error, be final and binding.
OVER-COLLATERALIZATION PROVISIONS
Over-collateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each distribution date, the Excess
Interest, if any, with respect to a mortgage loan group that is not used to
cover any losses in that mortgage loan group during the
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prior Due Period will be applied on that distribution date as an accelerated
distribution of principal on the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, as appropriate for the related mortgage loan group, but only to
the limited extent hereafter described. The application of Excess Interest as a
distribution of principal has the effect of building over-collateralization, by
accelerating the amortization of the Class A-1, Class A-2, Class A-3 and Class
A-4 Certificates relative to the amortization of the mortgage loans in the
related mortgage loan group.
After the time at which the related targeted level of
over-collateralization is reached, if it is necessary to re-establish the
required level of over-collateralization, the Excess Interest will again be
applied as an accelerated distribution of principal on the related certificates.
Notwithstanding the foregoing, in the event certain tests set forth in the
Pooling and Servicing Agreement are violated, all available Excess Interest from
each mortgage loan group, will be used as a payment of principal to accelerate
the amortization of the related class of certificates. Initially, the
Over-collateralized Amount will be zero.
In the event that the required level of the Specified Over-collateralized
Amount with respect to a mortgage loan group is permitted to decrease or "step
down" on a distribution date in the future, the Pooling and Servicing Agreement
provides that a portion of the principal which would otherwise be paid to the
holders of the related classes of certificates on such distribution date shall
instead be paid in the priority set forth herein under "--Flow of Funds." This
has the effect of decelerating the amortization of the related class of
certificates relative to the amortization of such mortgage loan group, and of
reducing the related Over-collateralized Amount. Further, if, on any
distribution date, the related Excess Over-collateralized Amount is, or, after
taking into account all other distributions to be made on such distribution date
would be, greater than zero -- i.e., the Over-collateralized Amount is or would
be greater than the related Specified Over-collateralized Amount -- then certain
amounts relating to principal which would otherwise be paid to the holders of
the related classes of certificates on such distribution date shall instead be
paid in the priority set forth herein under "--Flow of Funds", in an amount
equal to the Over-collateralization Reduction Amount.
The Pooling and Servicing Agreement provides that, on any distribution
date, all amounts collected on account of principal -- other than any such
amount applied to the distribution of an Over-collateralization Reduction Amount
- -- with respect to each mortgage loan group during the prior calendar month will
be paid to the holders of the related classes of certificates on such
distribution date. In addition, the Pooling and Servicing Agreement provides
that the principal balance of any mortgage loan which becomes a Liquidated
Mortgage Loan shall then equal zero. The Pooling and Servicing Agreement does
not contain any rule which requires that the amount of any Liquidated Loan Loss
be paid to the holders of the related classes of certificates on the
distribution date which immediately follows the event of loss; i.e., the Pooling
and Servicing Agreement does not require the current recovery of losses.
However, the occurrence of a Liquidated Loan Loss will reduce the
Over-collateralized Amount with respect to the related mortgage loan group,
which, to the extent that such reduction causes the Over-collateralized Amount
to be less than the Specified Over-collateralized Amount applicable to the
related distribution date, will require the distribution of an
Over-collateralization Increase Amount on such distribution date, or, if
insufficient funds are available on such distribution date, on subsequent
distribution dates, until the Over-collateralized Amount equals the Specified
Over-
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collateralized Amount. The effect of the foregoing is to allocate losses to the
holders of the Class X Certificates by reducing, or eliminating entirely,
distributions of Excess Interest and Over-collateralization Reduction Amounts
which such holder would otherwise receive.
Over-collateralization and the Policy. The Pooling and Servicing Agreement
requires the trustee to make a claim for an Insured Distribution under the
policy not later than the third business day prior to any distribution date as
to which the trustee has determined that an Over-collateralization Deficit will
occur for the purpose of applying the proceeds of such Insured Distribution as a
distribution of principal to the holders of the Class A-1, Class A-2, Class A-3
and Class A-4 Certificates on such distribution date. The certificate insurer
has the option on any distribution date to make a distribution of principal,
including in respect of Liquidated Loan Losses, up to the amount that would have
been payable to the holders of the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates if sufficient funds were available therefor. However, investors in
the Class A-1 , Class A-2, Class A-3 and Class A-4 Certificates should realize
that, under extreme loss or delinquency scenarios, they may temporarily receive
no distributions of principal.
RESERVE ACCOUNT
All classes of certificates representing both Mortgage Loan Group I and
Mortgage Loan Group II will have the benefit of a reserve account. On each
distribution date, available Excess Interest from a mortgage loan group after
payment of the Over-collateralization Increase Amount for such mortgage loan
group and distribution date, if any, will be paid into the reserve account,
until the amount of funds on deposit therein equals the Specified Reserve
Amount. To the extent that the certificates related to a mortgage loan group are
retired, Excess Interest relating to the mortgage loans in that mortgage loan
group will be paid into the reserve account. If the amount on deposit in the
reserve account on any distribution date exceeds the Specified Reserve Amount
for such distribution date, the amount of such excess shall be applied pursuant
to clauses (g) through (k) as set forth herein under "--Flow of Funds." Funds
deposited in the reserve account on any distribution date, with respect to a
mortgage loan group, may be used, on the same date as such transfer is made, to
pay any Shortfall Amount in the other mortgage loan group existing on that date
after such funds are deposited into the reserve account in accordance with
clause (f) under "--Flow of Funds."
Funds on deposit in the reserve account will be used on any distribution
date to make payments with respect to any Shortfall Amount for either mortgage
loan group on that distribution date.
FLOW OF FUNDS
On each distribution date, the trustee, based solely on the information
received from the servicer in the servicer remittance report prior to such
distribution date, shall make distributions to the holders of the certificates
and reimbursement to the certificate insurer under the Insurance Agreement, to
the extent of funds on deposit in the distribution account for the related
mortgage loan group, including any Insured Distributions, any required transfer
from the reserve account and, on or after the date on which either the Class A-1
Certificates or the Class A-4 Certificates have been paid in full and at least
one class of certificates remains outstanding, the aggregate
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principal actually collected during the prior Due Period on the mortgage loan
group relating to such paid-in-full certificates, as follows:
(a) to the trustee, an amount equal to the fees then due to it with respect
to that mortgage loan group;
(b) to the certificate insurer the Premium Amount then due to it with
respect to that mortgage loan group;
(c) the Interest Distribution Amount for the related Class A Certificates
with respect to such mortgage loan group, including the pro rata
portion of the Interest Distribution Amount for the Class A-IO
Certificates apportioned to that mortgage loan group;
(d) the Reimbursement Amount owing to the certificate insurer with respect
to that mortgage loan group;
(e) the Principal Distribution Amount for that mortgage loan group, which
will be distributed (x) with respect to Mortgage Loan Group I, to the
holders of the Class A-1 Certificates, until the aggregate principal
balance of the Class A-1 Certificates is reduced to zero; and (y) with
respect to Mortgage Loan Group II, (i) to the holders of the Class A-2
Certificates, until the aggregate principal balance of the Class A-2
Certificates is reduced to zero, then (ii) to the holders of the Class
A-3 Certificates, until the aggregate principal balance of the Class
A-3 Certificates is reduced to zero, and then (iii) to the holders of
the Class A-4 Certificates, until the aggregate principal balance of
the Class A-4 Certificates is reduced to zero;
(f) to the reserve account, the amount necessary for the balance of such
account to equal the Specified Reserve Amount; provided, that if the
outstanding principal balance of the certificates related to such
mortgage loan group shall have been reduced to zero, then all Excess
Interest in respect of such mortgage loan group will be transferred to
the reserve account and applied in the manner described above under
"--Reserve Account";
(g) the amount of any Net Mortgage Loan Interest Shortfalls for the Class A
Certificates with respect to such mortgage loan group;
(h) to the trustee, an amount equal to the outstanding expenses due the
trustee pursuant to the Pooling and Servicing Agreement and not
otherwise paid or reimbursed by the servicer with respect to that
mortgage loan group;
(i) to the servicer for reimbursement of any nonrecoverable Periodic
Advances and servicing advances with respect to that mortgage loan
group;
(j) following the making by the trustee of all allocations, transfers and
disbursements described above, to the Supplemental Interest Account, as
a distribution on the
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Class X Certificates, the amount remaining on such distribution date in
the distribution account, if any; and
(k) then to the holders of the Class R Certificates, any further remaining
balance.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date the trustee will deliver to the depositor and
each holder of a Class A Certificate a written remittance report, provided to
the trustee and the certificate insurer by the servicer, containing information,
including, without limitation, the amount of the distribution on such
distribution date, the amount of such distribution allocable to principal and
allocable to interest, the aggregate outstanding principal or notional balance
of each class as of such distribution date, the amount of any Insured
Distribution included in such distribution on such distribution date and such
other information as required by the Pooling and Servicing Agreement.
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by the
depositor, the servicer and the trustee by written agreement, upon the prior
written consent of the certificate insurer, without notice to, or consent of,
the holder of the Class A Certificates, to cure any ambiguity, to correct or
supplement any provisions therein, to comply with any changes in the Code, or to
make any other provisions with respect to matters or questions arising under the
Pooling and Servicing Agreement which shall not be inconsistent with the
provisions of the Pooling and Servicing Agreement or effect a significant change
in the permitted activities of the trust; provided, that such action shall not,
as evidenced by (i) an opinion of counsel delivered to, but not obtained at the
expense of, the trustee or (ii) a letter from each rating agency confirming that
such amendment will not cause the reduction, qualification or withdrawal of the
then-current ratings of the Class A Certificates, adversely affect in any
material respect the interests of any holder of the Class A Certificates;
provided, further, that no such amendment shall reduce in any manner the amount
of, or delay the timing of, payments received on mortgage loans which are
required to be paid on any certificate without the consent of the holder of such
certificate, or change the rights or obligations of any other party to the
Pooling and Servicing Agreement without the consent of such party.
The Pooling and Servicing Agreement may be amended from time to time by the
depositor, the servicer and the trustee with the consent of the certificate
insurer, and the holders of the majority of the percentage interest of the Class
A Certificates for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the holders; provided,
however, that no such amendment shall reduce in any manner the amount of, or
delay the timing of, payments received on mortgage loans which are required to
be paid on any certificate without the consent of the holder of such certificate
or reduce the percentage of the Class A Certificates whose holders are required
to consent to any such amendment without the consent of the holders of 100% of
the Class A Certificates.
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The Unaffiliated Seller's Agreement and the Pooling and Servicing Agreement
contain substantially similar restrictions regarding amendment.
CONTROL RIGHTS OF CERTIFICATE INSURER
Unless it is in default under the Certificate Insurance Policy or certain
events of bankruptcy or insolvency have occurred with respect to the certificate
insurer, the certificate insurer will have the right to exercise all rights,
including voting rights, which the holders of the certificates are entitled to
exercise under the Pooling and Servicing Agreement and the other transaction
documents. In addition, the certificate insurer shall have the right to
participate in, to direct the enforcement or defense of, and at the certificate
insurer's sole option, to institute or assume the defense of, any action,
proceeding or investigation for any remedy available to the trustee with respect
to any matter that could adversely affect the trust, the trust fund or the
rights or obligations of the certificate insurer, under the Pooling and
Servicing Agreement and the other transaction documents, including (without
limitation) any insolvency or bankruptcy proceeding in respect of any
originator, the seller, the servicer, the depositor or any affiliate thereof.
Following written notice to the trustee, the certificate insurer shall have
exclusive right to determine, in its sole discretion, the actions necessary to
preserve and protect the trust and the trust fund. The certificate insurer shall
be entitled to reimbursement for all costs and expenses of the trustee in
connection with such action, proceeding or investigation, including (without
limitation) reasonable attorneys' fees and any judgment or settlement entered
into affecting the certificate insurer or the certificate insurer's interests.
SERVICING OF THE MORTGAGE LOANS
American Business Credit will act as the servicer of the mortgage loans.
Upland Mortgage and American Business Mortgage will act as subservicers with
respect to a portion of the mortgage loans. See "The Originators, the Seller and
the Servicer" herein. The servicer and the subservicers will be required to use
the same care as they customarily employ in servicing and administering mortgage
loans for their own account, in accordance with accepted mortgage servicing
practices of prudent lending institutions, and giving due consideration to the
reliance of the certificate insurer and the holders of the certificates on them.
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its activities as servicer under the Pooling and
Servicing Agreement, the servicer shall be entitled with respect to each
mortgage loan to the servicing fee, which shall be payable monthly from amounts
on deposit in the collection account. The servicing fee shall be an amount equal
to interest at one-twelfth of the servicing fee rate for such mortgage loan on
the outstanding principal balance of such mortgage loan. The servicing fee rate
with respect to each mortgage loan will be 0.50% per annum. In addition, the
servicer shall be entitled to receive, as additional servicing compensation, to
the extent permitted by applicable law and the related mortgage notes, any late
payment charges, assumption fees, prepayment fees or similar items. The servicer
shall also be entitled to withdraw from the collection account any net interest
or other income earned on deposits therein. The servicer shall pay all expenses
incurred by it in connection with its servicing activities under the Pooling and
Servicing Agreement and shall not
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be entitled to reimbursement therefor except as specifically provided in the
Pooling and Servicing Agreement.
PERIODIC ADVANCES AND SERVICER ADVANCES
Periodic Advances. The servicer is required to make Periodic Advances on
each servicer remittance date, subject to the servicer's determination that such
advance would be recoverable. Such Periodic Advances by the servicer are
reimbursable to the servicer subject to certain conditions and restrictions, and
are intended to provide both sufficient funds for the payment of interest to the
holders of the certificates, plus an additional amount intended to maintain a
specified level of over-collateralization and to pay the trustee's fees, and the
premium due the certificate insurer. Notwithstanding the servicer's good faith
determination that a Periodic Advance was recoverable when made, if such
Periodic Advance becomes a nonrecoverable advance, the servicer will be entitled
to reimbursement therefor from the trust fund. See "Description of the
Certificates -- Payments on the Mortgage Loans" herein.
Servicing Advances. The servicer is required to advance amounts with
respect to the mortgage loans, subject to the servicer's determination that such
advance would be recoverable and that a prudent mortgage lender would make a
like advance if it or an affiliate owned the related mortgage loan, constituting
"out-of-pocket" costs and expenses relating to,
o the preservation and restoration of the mortgaged property,
o enforcement proceedings, including foreclosures,
o expenditures relating to the purchase or maintenance of a first lien
not included in the trust fund on the mortgaged property, and
o certain other customary amounts described in the Pooling and Servicing
Agreement.
These servicing advances by the servicer are reimbursable to the servicer
subject to certain conditions and restrictions. In the event that,
notwithstanding the servicer's good faith determination at the time such
servicing advance was made, that it would be recoverable, such servicing advance
becomes a nonrecoverable advance, the servicer will be entitled to reimbursement
therefor from the trust fund.
Special Advances. On the closing date, from funds received from the sale of
the Certificates, the trustee is required to deposit amounts into an interest
reserve account with respect to mortgage loans which do not have an initial
interest payment due until June 2001 to cover interest shortfalls, if any, on
this first distribution date. Subject to certain terms and conditions in the
Pooling and Servicing Agreement, any funds remaining in the interest reserve
account following distributions on the distribution date in July 2001 shall be
released to the servicer. The servicer is also required to advance amounts to
the distribution account on the first servicer remittance date in July 2001 with
respect to mortgage loans which do not have an initial interest payment due
until July 2001.
Recovery of Advances. The servicer may recover Periodic Advances and
servicing advances to the extent permitted by the Pooling and Servicing
Agreement or, if not recovered
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from the mortgagor on whose behalf such servicing advance or Periodic Advance
was made, from late collections on the related mortgage loan, including
Liquidation Proceeds, Insurance Proceeds and such other amounts as may be
collected by the servicer from the mortgagor or otherwise relating to the
mortgage loan. In the event a Periodic Advance or a servicing advance becomes a
nonrecoverable advance, the servicer may be reimbursed for such advance from the
distribution account.
The servicer shall not be required to make any Periodic Advance or
servicing advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable servicing advance. A Periodic Advance or servicing advance is
"nonrecoverable" if in the good faith judgment of the servicer (as stated in an
officer's certificate of the servicer delivered to the trustee), such Periodic
Advance or servicing advance would not ultimately be recoverable.
PREPAYMENT INTEREST SHORTFALLS
Not later than the close of business on the 10th day of each month, the
servicer is required to remit to the trustee a payment of Compensating Interest
in respect of Prepayment Interest Shortfalls and shall not have the right to
reimbursement therefor. Insured Distributions do not cover Prepayment Interest
Shortfalls.
RELIEF ACT SHORTFALLS
The reduction, if any, in interest payable on the mortgage loans in the
applicable mortgage loan group attributable to the application of the Soldiers'
and Sailors' Civil Relief Act of 1940 will not reduce the amount of Current
Interest due to the holders of the certificates. However, in the event the full
amount of Current Interest is not available on any distribution date due to
Relief Act Shortfalls, in the applicable mortgage loan group the amount of such
shortfall will not be covered by the policy. Such shortfalls in Current Interest
will be paid from the Excess Interest, if any, as a priority item.
OPTIONAL PURCHASE OF DELINQUENT MORTGAGE LOANS
The seller, or any affiliate of the seller, has the option, but is not
obligated, to purchase from the trust any mortgage loan 180 days or more
delinquent subject to certain terms and conditions set forth in the Pooling and
Servicing Agreement. Any such purchase price shall equal the outstanding
principal balance thereof as of the date of purchase, plus all accrued and
unpaid interest on such principal balance, computed at the related mortgage
interest rate -- net of the related servicing fee, if American Business Credit
is the servicer -- plus the amount of any unreimbursed Periodic Advances and
servicing advances made by the servicer with respect to such mortgage loan in
accordance with the provisions specified in the Pooling and Servicing Agreement.
SERVICER REPORTS
On each servicer remittance date, the servicer is required to deliver to
the certificate insurer and the trustee and the collateral agent, a servicer
remittance report setting forth the information necessary for the trustee to
make the distributions set forth under "--Flow of Funds"
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herein and containing the information to be included in the written remittance
report for such distribution date delivered by the trustee.
The servicer is required to deliver to the certificate insurer, the
trustee, the collateral agent, and the rating agencies, not later than April
30th of each year, starting in 2002, an officer's certificate stating that,
o the servicer has fully complied with the servicing provisions of the
Pooling and Servicing Agreement,
o a review of the activities of the servicer during the preceding
calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officer's supervision, and
o to the best of such officer's knowledge, based on such review, the
servicer has fulfilled all its obligations under the Pooling and
Servicing Agreement for such year, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default
known to such officer and the nature and status thereof including the
steps being taken by the servicer to remedy such default.
Not later than April 30th of each year, starting in 2002, the servicer, at
its expense, is required to cause to be delivered to the certificate insurer,
the trustee, the collateral agent and the rating agencies from a firm of
independent certified public accountants, who may also render other services to
the servicer, a statement to the effect that such firm has examined certain
documents and records relating to the servicing of the mortgage loans during the
preceding calendar year, or such longer period from the closing date to the end
of the following calendar year, and that, on the basis of such examination
conducted substantially in compliance with generally accepted auditing standards
and the requirements of the Uniform Single Attestation Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for Freddie Mac, such
servicing has been conducted in compliance with the Pooling and Servicing
Agreement except for such significant exceptions or errors in records that, in
the opinion of such firm, generally accepted auditing standards and the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac require it to report, in which case such
exceptions and errors shall be so reported.
COLLECTION AND OTHER SERVICING PROCEDURES
The servicer will be responsible for making reasonable efforts to collect
all payments called for under the mortgage loans and will, consistent with the
Pooling and Servicing Agreement, follow such collection procedures as it follows
with respect to loans held for its own account which are comparable to the
mortgage loans. Consistent with the above, the servicer may, in its discretion,
waive any late payment charge and arrange with a mortgagor a schedule for the
liquidation of delinquencies, subject to the provisions of the Pooling and
Servicing Agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the servicer will be obligated to accelerate the maturity of the
mortgage loan, unless it reasonably
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believes it is unable to enforce that mortgage loan's "due-on-sale" clause under
applicable law. If it reasonably believes it may be restricted for any reason
from enforcing such a "due-on-sale" clause, the servicer may enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the mortgage note.
Any fee collected by the servicer for entering into an assumption agreement
will be retained by the servicer as additional servicing compensation. In
connection with any such assumption, the mortgage interest rate borne by the
mortgage note relating to each mortgage loan may not be decreased. For a
description of circumstances in which the servicer may be unable to enforce
"due-on-sale" clauses, see "Material Legal Aspects of the Loans -- Due-on-Sale
Clauses in Mortgage Loans" in the accompanying prospectus.
HAZARD INSURANCE
The servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum insurable
value of such mortgaged property or (b) the principal balance of such mortgage
loan plus the outstanding balance of any mortgage loan senior to such mortgage
loan, but in no event may such amount be less than is necessary to prevent the
borrower from becoming a coinsurer thereunder. As set forth above, all amounts
collected by the servicer under any hazard policy, except for amounts to be
applied to the restoration or repair of the mortgaged property or released to
the borrower in accordance with the servicer's normal servicing procedures, to
the extent they constitute Net Liquidation Proceeds or Insurance Proceeds, will
ultimately be deposited in the collection account. The ability of the servicer
to assure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard insurance
policy, or upon the extent to which information in this regard is furnished to
the servicer by a borrower. The Pooling and Servicing Agreement provides that
the servicer may satisfy its obligation to cause hazard policies to be
maintained by maintaining a blanket policy issued by an insurer acceptable to
the rating agencies and the certificate insurer, insuring against losses on the
mortgage loans. If such blanket policy contains a deductible clause, the
servicer is obligated to deposit in the distribution account the sums which
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the mortgage loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the terms thereof are dictated by respective state laws, and most
such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement, including earthquakes, landslides and
mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive.
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The hazard insurance policies covering the mortgaged properties typically
contain a co-insurance clause which in effect requires the insured at all times
to carry insurance of a specified percentage, generally 80% to 90%, of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (x) the
replacement cost of the improvements less physical depreciation or (y) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since residential and commercial properties, generally, have historically
appreciated in value over time, if the amount of hazard insurance maintained on
the improvements securing the mortgage loans were to decline as the principal
balances owing thereon decreased, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicer will foreclose upon, or otherwise comparably convert to
ownership, mortgaged properties securing such of the mortgage loans as come into
default when, in the opinion of the servicer, no satisfactory arrangements can
be made for the collection of delinquent payments. In connection with such
foreclosure or other conversion, the servicer will follow such practices as it
deems necessary or advisable and as are in keeping with the servicer's general
loan servicing activities and the Pooling and Servicing Agreement; provided,
that the servicer will not expend its own funds in connection with foreclosure
or other conversion, correction of a default on a senior mortgage or restoration
of any property unless the servicer believes such foreclosure, correction or
restoration will increase Net Liquidation Proceeds.
REMOVAL AND RESIGNATION OF THE SERVICER
The certificate insurer may, pursuant to the Pooling and Servicing
Agreement, remove the servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clauses (h) below and the
trustee shall, at the direction of the certificate insurer, or may, at the
direction of the majority holders of the certificates, with the consent of the
certificate insurer, in the case of any direction of the majority holders of the
certificates, remove the servicer upon the occurrence and continuation beyond
the applicable cure period of an event described in clause (a), (b), (c), (d),
(e) (f) (g) or (h) below. Each of the following constitutes a "servicer event of
default":
(a) any failure by the servicer to remit to the trustee any payment
required to be made by the servicer under the terms of the Pooling and
Servicing Agreement, other than servicing advances covered by clause
(b) below, which continues unremedied for one business day after the
date upon which written notice of such failure, requiring the same to
be remedied, shall have been given to the servicer and the certificate
insurer by the trustee or to the servicer and the trustee by the
certificate insurer or the holders of certificates evidencing
percentage interests of at least 25%; or
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(b) the failure by the servicer to make any required servicing advance
which failure continues unremedied for a period of thirty days after
the date on which written notice of such failure, requiring the same to
be remedied, shall have been given to the servicer by the trustee or to
the servicer and the trustee by any holder of a certificate or the
certificate insurer; or
(c) any failure on the part of the servicer duly to observe or perform in
any material respect any other of the covenants or agreements on the
part of the servicer contained in the Pooling and Servicing Agreement,
or the breach of any representation and warranty set forth in the
Pooling and Servicing Agreement to be true and correct, which continues
unremedied for a period of thirty days after the date on which written
notice of such failure or breach, as applicable, requiring the same to
be remedied, shall have been given to the servicer by the trustee, or
to the servicer and the trustee by any holder of a certificate or the
certificate insurer; or
(d) a decree or order of a court or agency or supervisory authority having
jurisdiction in an involuntary case under any present or future federal
or state bankruptcy, insolvency or similar law or for the appointment
of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall
have been entered against the servicer and such decree or order shall
have remained in force, undischarged or unstayed for a period of
forty-five days; or
(e) the servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or
relating to the servicer or of or relating to all or substantially all
of the servicer's property; or
(f) the servicer shall admit in writing its inability generally to pay its
debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors, or voluntarily suspend payment of its
obligations; or
(g) the delinquency or loss experience of the mortgage loans exceeds
certain levels specified in the Pooling and Servicing Agreement; or
(h) the certificate insurer shall notify the trustee of any "event of
default" under the Insurance and Indemnity Agreement.
Except to permit American Business Mortgage and Upland Mortgage to act as
subservicers, the servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the servicer, American Business Credit, if
American Business Credit is not the servicer, the certificate insurer, the
collateral agent, and the trustee, or upon the determination that the servicer's
duties thereunder are no longer permissible under applicable law and such
incapacity cannot be cured by the servicer without the incurrence, in the
reasonable judgment of
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the certificate insurer, of unreasonable expense. No such resignation shall
become effective until a successor has assumed the servicer's responsibilities
and obligations in accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the servicer, the trustee will be the
successor servicer. The trustee, as successor servicer, will be obligated to
make Periodic Advances and servicing advances and certain other advances unless
it determines reasonably and in good faith that such advances would not be
recoverable. If, however, the trustee is unwilling or unable to act as successor
servicer, or if the majority holders of the certificates, with the consent of
the certificate insurer, or the certificate insurer so requests, the trustee
(acting at the direction of the certificate insurer) shall appoint, or petition
a court of competent jurisdiction to appoint, in accordance with the provisions
of the Pooling and Servicing Agreement and subject to the approval of the
certificate insurer, any established mortgage loan servicing institution
acceptable to the certificate insurer having a net worth of not less than
$15,000,000 as the successor servicer in the assumption of all or any part of
the responsibilities, duties or liabilities of the servicer.
The trustee and any other successor servicer in such capacity is entitled
to the same reimbursement for advances and, unless otherwise agreed by the
certificate insurer, no more than the same servicing compensation as the
servicer. See "-- Servicing and Other Compensation and Payment of Expenses"
herein.
TERMINATION; OPTIONAL CLEAN-UP CALL
The Servicer may, at its option, purchase the mortgage loans and terminate
the trust on any distribution date when the aggregate principal balance of the
mortgage loans in both mortgage loan groups is equal to or less than 10% of the
aggregate principal balances of the mortgage loans in both mortgage loan groups
as of the cut-off date. Such purchase of the mortgage loans would result in the
payment in full of the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates and retirement of the Class A-IO Certificates on such distribution
date. If the mortgage loans are not purchased on the first distribution date on
which the above option may be exercised, the interest rate payable on the Class
A-1 and Class A-4 Certificates will be increased as described herein. The
certificate insurer must consent to the purchase of the mortgage loans if the
resulting amount available for payment on the certificates would result in a
draw under the certificate insurance policy.
The trust shall also terminate upon notice to the trustee of either: (i)
the later of the distribution to certificateholders of the final payment or
collection with respect to the last mortgage loan (or Periodic Advances of same
by the servicer), or the disposition of all funds with respect to the last
mortgage loan and the remittance of all funds due under the Pooling and
Servicing Agreement and the payment of all amounts due and payable to the
certificate insurer and the trustee or (ii) mutual consent of the servicer, the
certificate insurer and all certificateholders in writing; provided, however,
that in no event shall the trust established by the Pooling and Servicing
Agreement terminate later than twenty-one years after the death of the last
surviving lineal descendant of the person named therein.
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THE POLICY
MBIA Insurance Corporation (the "Certificate Insurer") will issue a
financial guaranty insurance policy (the "Certificate Insurance Policy") with
respect to the Class A Certificates. The Certificate Insurer, in consideration
of the payment of a premium and subject to the terms of the Certificate
Insurance Policy, thereby unconditionally and irrevocably guarantees to any
certificateholder that an amount equal to each full and complete Insured
Distribution will be received from the Certificate Insurer by the trustee or its
successors, as trustee for the certificateholders, on behalf of the
certificateholders, for distribution by the trustee to each certificateholder,
of that certificateholder's proportionate share of the Insured Distribution.
The Certificate Insurer's obligations under the Certificate Insurance
Policy, with respect to a particular Insured Distribution, will be discharged to
the extent funds equal to the applicable Insured Distribution are received by
the trustee, whether or not those funds are properly applied by the trustee.
Insured Distributions will be made only at the time set forth in the Certificate
Insurance Policy, and no accelerated Insured Distributions will be made
regardless of any acceleration of the Class A Certificates, unless the
acceleration is at the sole option of the Certificate Insurer.
The Certificate Insurance Policy does not cover shortfalls, if any,
attributable to the liability of the Trust, any REMIC or the trustee for
withholding taxes, if any (including interest and penalties in respect of any
liability for withholding taxes). In addition, the Certificate Insurance Policy
does not cover any Class A-2 Available Funds Cap Carry-Forward Amounts or Net
Mortgage Loan Interest Shortfalls, nor does the Certificate Insurance Policy
guarantee to the holders of the certificates any particular rate of principal
distribution.
The Certificate Insurer will pay any Insured Distribution that is a
Preference Amount on the business day following receipt on a business day by the
Certificate Insurer's fiscal agent of the following:
o a certificated copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to the Certificate Insurer that the
order is final and not subject to appeal;
o an assignment in a form that reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the certificateholder relating to or arising under the
Class A Certificates against the debtor which made the preference
payment or otherwise with respect to the preference payment; and
o appropriate instruments to effect the appointment of the Certificate
Insurer as agent for the certificateholder in any legal proceeding
related to the preference payment, which instruments are in a form
satisfactory to the Certificate Insurer;
provided that if the documents are received after 12:00 p.m., New York, New York
time, on that business day, they will be deemed to be received on the following
business day. Payments by
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the Certificate Insurer will be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the certificateholder and not to any certificateholder directly unless
the certificateholder has returned principal or interest paid on the Class A
Certificates to the receiver or trustee in bankruptcy, in which case that
payment will be disbursed to the certificateholder.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 p.m., New York, New York time,
on the later of the distribution date on which the related Deficiency Amount is
due or the third business day following receipt in New York, New York on a
business day by State Street Bank and Trust Company. N.A., as a fiscal agent for
the Certificate Insurer or any successor fiscal agent appointed by the
Certificate Insurer of a notice from the trustee specifying the Insured
Distribution which is due and owing on the applicable distribution date,
provided that if the notice is received after 12:00 p.m., New York, New York
time, on that business day, it will be deemed to be received on the following
business day. If any notice received by the Certificate Insurer's fiscal agent
is not in proper form or is otherwise insufficient for the purpose of making a
claim under the Certificate Insurance Policy, it will be deemed not to have been
received by the Certificate Insurer's fiscal agent for purposes of this
paragraph, and the Certificate Insurer or the fiscal agent, as the case may be,
will promptly so advise the trustee and the trustee may submit an amended
notice.
Insured Distributions due under a Policy, unless otherwise stated therein,
will be disbursed by the Certificate Insurer's fiscal agent to the trustee, on
behalf of the certificateholders, by wire transfer of immediately available
funds in the amount of the Insured Distribution less, in respect of Insured
Distributions related to Preference Amounts, any amount held by the trustee for
the payment of the Insured Distribution and legally available therefor.
The Certificate Insurance Policy expires and terminates in accordance with
its terms without any action on the part of the Certificate Insurer or any other
person on the date that is one year and one day following the date on which the
outstanding principal balance of the Class A-1, Class A-2, A-3 or Class A-4
Certificates, whichever is the latest, has been reduced to zero.
The fiscal agent is the agent of the Certificate Insurer only and the
fiscal agent will in no event be liable to certificateholders for any acts of
the fiscal agent or any failure of the Certificate Insurer to deposit, or cause
to be deposited, sufficient funds to make payments due under the Certificate
Insurance Policy.
The Certificate Insurance Policy is not cancelable. The Premium on the
Certificate Insurance Policy is not refundable for any reason including payment,
or provision being made for payment, prior to maturity of the Class A
Certificates.
THE CERTIFICATE INSURANCE POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND
WILL BE CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
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THE INSURANCE PROVIDED BY THE CERTIFICATE INSURANCE POLICY IS NOT COVERED
BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE
NEW YORK INSURANCE LAW.
DRAWINGS UNDER THE POLICY
Not later than three business days prior to each distribution date, the
trustee is required to determine, pursuant to the Pooling and Servicing
Agreement, for the next distribution date, the Net Available Amount to be on
deposit in each distribution account on that distribution date. If there is a
Deficiency Amount for a distribution date, the trustee is required to complete,
pursuant to the Pooling and Servicing Agreement, a telephone or telegraphic
notice, promptly confirmed in writing by telecopy substantially in the form of
Exhibit A to the policy, the original of which is subsequently delivered by
registered or certified mail, and submit the notice to the Certificate Insurer
no later than 12:00 noon New York City time on the third business day preceding
the distribution date as a claim for an Insured Distribution in an amount equal
to the Deficiency Amount.
THE CERTIFICATE INSURER
The following information has been obtained from MBIA Insurance
Corporation, the certificate insurer, for inclusion in this prospectus
supplement. No representation is made by the seller, the originators, the
servicer, the depositor, trustee or the underwriters or any of their affiliates
as to the accuracy or completeness of the information.
MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary
of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The
Company is not obligated to pay the debts of or claims against MBIA. MBIA is
domiciled in the State of New York and licensed, to do business in and subject
to regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. MBIA has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investment and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by MBIA, changes
in control and transactions among affiliates. Additionally, MBIA is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
MBIA does not accept any responsibility for the accuracy or completeness of
this Prospectus Supplement or any information or disclosure contained herein, or
omitted herefrom, other than with respect to the accuracy of the information
regarding the certificate insurer set forth under the heading "The Certificate
Insurer". Additionally, MBIA makes no representation regarding the certificates
or the advisability of investing in the certificates.
The Certificate Insurance Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
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MBIA INFORMATION
The following documents filed by the Company with the Securities and
Exchange Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended December
31, 2000.
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001.
(3) The report on Form 8-K filed by the Company on January 30, 2001.
Any documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus Supplement and prior
to the termination of the offering of the securities offered hereby shall be
deemed to be incorporated by reference in this Prospectus Supplement and to be a
part hereof. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Prospectus Supplement
shall be deemed to be modified or superseded for purposes of this Prospectus
Supplement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus Supplement.
The consolidated financial statements of MBIA, a wholly owned subsidiary of
the Company and its subsidiaries as of December 31, 2000 and December 31, 1999
and for each of the three years in the period ended December 31, 2000, prepared
in accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of the Company for the year ended December 31, 2000
and the consolidated financial statements of MBIA and its subsidiaries as of
March 31, 2001 and for the three month period ended March 31, 2001 and March 31,
2000 included in the Quarterly Report on Form 10-Q of the Company for the period
ended March 31, 2001, are hereby incorporated by reference into this Prospectus
Supplement and shall be deemed to be a part hereof. All financial statements of
MBIA and its subsidiaries included in documents filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the 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 such documents.
The Company files annual, quarterly and special reports, information
statements and other information with the SEC under File No. 1-9583. Copies of
the SEC filings (including (1) the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, (2) the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, and (3) the report on Form 8-K filed by
the Company on January 30, 2001) are available (i) over the Internet at the
SEC's web site at http://www.sec.gov; (ii) at the SEC's public reference rooms
in Washington D.C., New York, New York and Chicago, Illinois; (iii) over the
Internet at the
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Company's web site at http://www.mbia.com; and (iv) at no cost,
upon request to MBIA Insurance Corporation, 113 King Street, Armonk, New York
10504. The telephone number of MBIA is (914) 273-4545.
The tables below present selected financial information of the
certificate insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") as well as
generally accepted accounting principles ("GAAP"):
SAP
----------------------------------------
DECEMBER 31, MARCH 31,
2000 2001
------------------- ------------------
(Audited) (Unaudited)
(in millions)
Admitted Assets $7,627 $7,839
Liabilities 5,245 5,476
Capital and Surplus 2,382 2,363
GAAP
----------------------------------------
DECEMBER 31, MARCH 31,
2000 2001
------------------- ------------------
(Audited) (Unaudited)
(in millions)
Assets $8,450 $8,795
Liabilities 3,642 3,849
Shareholder's Equity 4,808 4,946
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FINANCIAL STRENGTH RATINGS OF MBIA
Moody's Investors Service, Inc. rates the financial strength of MBIA "Aaa."
Standard & Poor's Ratings Services Group, a division of The McGraw-Hill
companies, Inc. rates the financial strength of MBIA "AAA."
Fitch, Inc. rates the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings reflect
the respective rating agency's current assessment of the creditworthiness of
MBIA and its ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
securities, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the securities.
MBIA does not guaranty the market price of the securities nor does it guaranty
that the ratings on the securities will not be revised or withdrawn.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 2000 and December 31, 1999 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 2000,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and the yield to maturity on the Class A-IO
Certificates and, if purchased at other than par, the Class A-1, Class A-2,
Class A-3 or Class A-4 Certificates, will be directly related to the rate of
payment of principal of the mortgage loans, including for this purpose voluntary
prepayment in full of mortgage loans prior to stated maturity, liquidations due
to defaults, casualties and condemnations, and repurchases of or substitutions
for mortgage loans by American Business Credit or an affiliate of American
Business Credit as required or permitted under the Pooling and Servicing
Agreement or the Unaffiliated Seller's Agreement.
The actual rate of principal prepayments on the mortgage loan groups is
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 among mortgage loan groups at any
time because of specific factors relating to the mortgage loans in the
particular mortgage loan group, including, among other things, the age of the
mortgage loans, the geographic locations of the properties securing the loans
and the extent of
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the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates of certain mortgage loans at
the time of origination, such mortgage loans may be subject to higher prepayment
rates than if prevailing rates remain at or above those at the time such
mortgage loans were originated. Conversely, if prevailing interest rates rise
appreciably above the interest rates of certain mortgage loans at the time of
origination, such mortgage loans may experience a lower prepayment rate than if
prevailing rates remain at or below those at the time such mortgage loans were
originated. However, there can be no assurance that the mortgage loans will
conform to the prepayment experience of conventional mortgage loans or to any
past prepayment experience or any published prepayment forecast. No assurance
can be given as to the level of prepayments that the mortgage loans in the trust
fund will experience.
As indicated above, the yield to maturity on the Class A-IO Certificates
and, if purchased at other than par, the Class A-1, Class A-2, Class A-3 or
Class A-4 Certificates, will be affected by the rate of the payment of principal
on the mortgage loans. If the actual rate of payments on the mortgage loans is
slower than the rate anticipated by an investor who purchases the Class A-1,
Class A-2, Class A-3 or Class A-4 Certificates at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the mortgage loans is faster than the rate
anticipated by an investor who purchases the Class A-IO Certificate or who
purchases the Class A-1, Class A-2, Class A-3 or Class A-4 Certificates at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield. In particular, the yield on the Class A-IO Certificates will
be particularly sensitive to the prepayment rate on the mortgage loans and if
the rate of prepayments on the mortgage loans is significantly faster than
anticipated it is possible that holders of the Class A-IO Certificates will not
recover their initial investment.
The Pooling and Servicing Agreement provides that none of the certificate
insurer, the trustee, the collateral agent, the seller, the depositor, the
originators or the servicer will be liable to any holder for any loss or damage
incurred by such holder as a result of any difference in the rate of return
received by such holder as compared to the related pass-through rate, with
respect to any holder of certificates upon reinvestment of the funds received in
connection with any premature repayment of principal on the certificates,
including any such repayment resulting from any prepayment by the mortgagor, any
liquidation of such mortgage loan, or any repurchase of or substitution for any
mortgage loan by the depositor or the servicer.
The final stated maturity date is expected to be December 25, 2031 for the
Class A-1 and Class A-4 Certificates. The final stated maturity date for the
Class A-2 and Class A-3 Certificates is expected to be October 25, 2014 and July
25, 2016, respectively. Class A-IO Certificates will in no event receive
distributions after the 30th distribution date. The final stated maturity date
for the Class A-1 and Class A-4 Certificates was calculated using the assumption
that the final stated maturity date would be the distribution date in the sixth
month following the latest possible maturity date of any mortgage loan. The
final stated maturity date for the Class A-2 and Class A-4 Certificates was
calculated using the assumption that no losses or delinquencies occur on the
mortgage loans, that none are prepaid, that the targeted
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overcollateralized amount is $0 and certain other assumptions contained in this
prospectus supplement. The weighted average life of the certificates is likely
to be shorter than would be the case if payments actually made on the mortgage
loans conformed to the foregoing assumptions, and the final distribution date
with respect to the certificates could occur significantly earlier than the
final stated maturity date because:
o prepayments, including, for this purpose, prepayments attributable to
foreclosure, liquidation, repurchase and the like, on mortgage loans
are likely to occur;
o the over-collateralization provisions of the transaction result in the
application of Excess Interest to the distribution of principal; and
o the servicer may, at its option as described herein, call the
certificates when the aggregate outstanding principal balance of the
mortgage loans in both mortgage loan groups is equal to or less than
10% of the aggregate original principal balance of the mortgage loans
in both mortgage loan groups as of the cut-off date.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security is scheduled to be repaid to an investor. The weighted average life of
the certificates will be influenced by the rate at which principal of the
related mortgage loans is paid, which may be in the form of scheduled
amortization or prepayments -- for this purpose, the term "prepayment " includes
liquidations due to default.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment model used in the tables below,
Home Equity Prepayment, or HEP, is a prepayment assumption which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a mortgage loan group for the life of such mortgage loans. For
example, 23% HEP assumes a constant prepayment rate of 2.3% per annum of the
then outstanding principal balance of the mortgage loans in the first month of
the life of the mortgage loans and an additional 2.3% per annum in each month
thereafter up to and including the tenth month. Beginning in the tenth month and
in each month thereafter during the life of the mortgage loans, 23% HEP assumes
a constant prepayment rate of 23% per annum. As used in the table below, 0%
prepayment assumption assumes prepayment rates equal to 0% of the prepayment
assumption, i.e., no prepayments on the mortgage loans having the
characteristics described below. The prepayment assumption does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the mortgage
loans in the trust fund.
The following tables, addressing the weighted average lives of the
certificates, have been prepared on the basis of the following modeling
assumptions:
o the mortgage loans prepay at the indicated percentage of the prepayment
assumption,
o payments on the certificates are received in cash on the 25th day of
each month commencing in July 2001,
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o no defaults or delinquencies in, or modifications, waivers or
amendments respecting the payments by the mortgagors of principal and
interest on the mortgage loans occur,
o scheduled payments are assumed to be received on the first day of each
month commencing in June 2001, and prepayments represent payments in
full of individual mortgage loans and are assumed to be received on the
last day of each month, commencing in June 2001, and include thirty
days' interest thereon,
o one-month LIBOR remains constant at 3.990%,
o the certificates are purchased on June 28, 2001,
o the servicer's optional clean-up call is exercised,
o the Specified Over-collateralized Amount is as set forth in the Pooling
and Servicing Agreement, and
o the mortgage loans in Mortgage Loan Group I consist of 6 mortgage loans
having the following characteristics:
Original
Mortgage Net Mortgage Amortizing Remaining Balloon Term
Principal Interest Interest Term Amortizing Term to Maturity
Balance ($) Rate (%) Rate (%) (in months) (in months) (in months)
----------- -------- -------- ----------- ----------- -----------
103,455,000.00 11.229 10.729 347 347 214
7,755,000.00 10.926 10.426 113 113 n/a
18,727,500.00 11.061 10.561 179 179 n/a
44,165,000.00 11.200 10.700 239 238 n/a
770,000.00 10.627 10.127 294 293 n/a
100,127,500.00 10.991 10.491 360 359 n/a
o the mortgage loans in Mortgage Loan Group II consist of 6 mortgage
loans having the following characteristics:
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Original
Mortgage Net Mortgage Amortizing Remaining Balloon Term
Principal Interest Interest Term Amortizing Term to Maturity
Balance ($) Rate (%) Rate (%) (in months) (in months) (in months)
----------- -------- -------- ----------- ----------- -----------
33,160,000.00 13.757 13.257 320 319 181
5,288,000.00 14.979 14.479 100 100 n/a
22,096,000.00 15.193 14.693 180 179 n/a
13,944,000.00 12.901 12.401 238 236 n/a
240,000.00 13.384 12.884 300 299 n/a
5,272,000.00 10.883 10.383 360 360 n/a
- ---------------
The foregoing modeling assumptions are assumptions and are not necessarily
indicative of actual performance.
Based upon the foregoing modeling assumptions, the tables below indicate
the weighted average life and earliest retirement date of the certificates
assuming that the related mortgage loans prepay according to the indicated
percentages of the prepayment assumption.
WEIGHTED AVERAGE LIVES
Class A-1 Certificates: To Maturity
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
-------------------------- ----------------------------------------- ----------------------------
0% 16.16 4/25/31
15 5.34 7/25/24
20 4.18 1/25/20
23 3.69 4/25/19
30 2.86 10/25/15
35 2.45 8/25/13
Class A-1 Certificates: To Call
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
-------------------------- ----------------------------------------- ----------------------------
0% 15.96 11/25/27
15 5.01 2/25/14
20 3.88 4/25/11
23 3.41 1/25/10
30 2.65 1/25/08
35 2.28 1/25/07
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Class A-2 Certificates: To Maturity
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
-------------------------- ----------------------------------------- ----------------------------
0% 6.73 12/25/13
15 1.37 4/25/04
20 1.11 9/25/03
23 1.00 6/25/03
30 0.83 1/25/03
35 0.75 11/25/02
Class A-2 Certificates: To Call
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
-------------------------- ----------------------------------------- ----------------------------
0% 6.73 12/25/13
15 1.37 4/25/04
20 1.11 9/25/03
23 1.00 6/25/03
30 0.83 1/25/03
35 0.75 11/25/02
Class A-3 Certificates: To Maturity
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
-------------------------- ----------------------------------------- ----------------------------
0% 14.42 7/25/16
15 4.40 10/25/07
20 3.41 5/25/06
23 3.00 10/25/05
30 2.33 10/25/04
35 2.00 4/25/04
Class A-3 Certificates: To Call
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
-------------------------- ----------------------------------------- ----------------------------
0% 14.42 7/25/16
15 4.40 10/25/07
20 3.41 5/25/06
23 3.00 10/25/05
30 2.33 10/25/04
35 2.00 4/25/04
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Class A-4 Certificates: To Maturity
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
-------------------------- ----------------------------------------- ----------------------------
0% 17.27 10/25/30
15 10.36 6/25/19
20 8.41 9/25/16
23 7.48 7/25/16
30 5.79 2/25/15
35 4.93 3/25/13
Class A-4 Certificates: To Call
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
-------------------------- ----------------------------------------- ----------------------------
0% 17.18 11/25/27
15 9.86 2/25/14
20 7.69 4/25/11
23 6.74 1/25/10
30 5.19 1/25/08
35 4.41 1/25/07
The preceding tables were prepared using the following assumptions:
o the weighted average life of the certificates is determined by (a)
multiplying the amount of each principal distribution used to retire the
certificates by the number of years from the closing date to the date on
which such principal distribution is received; (b) adding the results; and
(c) dividing the sum by the original principal balance of the certificates,
o in the "To Call" table above, the certificates are called due to the
exercise by the servicer of its clean-up call option to repurchase the
mortgage loans on the first distribution date on which the aggregate
outstanding principal balance of all the then outstanding mortgage loans is
equal to or less than 10% of the aggregate original principal balances of
the mortgage loans as of the cut-off date, and
o in the "To Maturity" table above no exercise of the servicer's clean-up
call repurchase option ever occurs.
----------------------
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of HEP.
YIELD SENSITIVITY OF THE CLASS A-IO CERTIFICATES
Distributions on the Class A-IO Certificates will be calculated on a
notional balance which with respect to each distribution date occurring prior to
the January 2004 distribution date,
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is equal to the lesser of (x) $35,500,000 and (y) the aggregate outstanding
principal balance of the mortgage loans as of the first day of the related Due
Period; and on and after the distribution date occurring in January 2004, is
equal to $0. Investors should note that the Class A-IO Certificates are only
entitled to distributions through the distribution date in December 2003. In
addition, if, at any time prior to November 1, 2003, the aggregate outstanding
principal balance of the mortgage loans is reduced to $35,500,000, the yield to
investors in the Class A-IO Certificates will be extremely sensitive to the rate
and timing of principal payments on the mortgage loans (including prepayments,
defaults and liquidations), which rate may fluctuate significantly over time.
Further, if the aggregate outstanding principal balance of the mortgage loans is
reduced to that level prior to that date, the Clean-up Call Date will occur and
the servicer will be entitled to effect an optional termination of the trust.
Upon any such termination, the Class A-IO Certificates will receive no further
distributions. Investors in the Class A-IO Certificates should fully consider
the risk that an extremely rapid rate of prepayments on the Mortgage Loans could
result in the failure of such investors to fully recover their initial
investments.
If the actual prepayment rate on the mortgage loans were to exceed certain
rates, then assuming the mortgage loans behave in conformity with all other
modeling assumptions, initial investors in the Class A-IO Certificates would not
fully recover their initial investment. 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. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase any Class A-IO
Certificates.
In preparing the table below, the Constant Prepayment Rate prepayment model
was used. CPR represents an assumed constant rate of repayment of loans
outstanding as of the beginning of each month expressed as a per annum
percentage. The prepayment assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any mortgage loans, including the mortgage loans in the trust
fund.
CLASS A-IO YIELDS
PREPAYMENT
ASSUMPTION
(CPR) YIELD
--------------- ---------------
20% 5.75%
40% 5.75%
60% 5.75%
63% 0.24%
70% (18.11)%
The pre-tax yields described above were calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flow to
be paid on the Class A-IO Certificates, would cause the discounted present value
of such assumed stream of cash flow on the Closing Date to equal the assumed
purchase price (which is equal to 18.01220% of the initial notional amount plus
accrued interest), and converting such monthly rate to a corporate bond
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equivalent rate. The assumed stream of cash flow to be paid on the Class A-IO
Certificates was calculated using the modeling assumptions set forth above the
"Weighted Average Lives" tables and applying thereto the indicated level of CPR.
The calculations represented by the above table do not take into account the
interest rate at which funds received by holders of the Class A-IO Certificates
may be reinvested and consequently does not purport to reflect the return on any
investment in the Class A-IO Certificates when such reinvestment rates are
considered. There is no assurances that prepayments will occur or, if they do
occur, that they will occur at any percentage of CPR.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
Investors may wish to review the following discussion of the material
anticipated federal income tax consequences of the purchase, ownership and
disposition of the offered Certificates together with the information in the
section entitled, "Material Federal Income Tax Considerations" in the
accompanying prospectus.
The discussion in this section and in the prospectus is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below and in the prospectus does not purport to deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors may wish to consult their own
tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the offered
Certificates. References in this section and in the "ERISA Considerations"
section to the code and sections are to the Internal Revenue Code.
REMIC ELECTIONS
The trustee will cause one or more REMIC elections to be made with respect
to specified assets of the trust. Dewey Ballantine LLP, tax counsel, will advise
that, in its opinion, for federal income tax purposes, assuming the REMIC
elections are timely made and compliance with the pooling and servicing
agreement, the trust will be treated as one or more REMICs for federal income
tax purposes. Each of the Class A Certificates will be a regular interest in a
REMIC. The right of a holder of a Class A-2 Certificate to receive payments of
any Class A-2 Available Funds Cap Carry-Forward Amount will have the
characteristics described below.
For federal income tax purposes, regular interests in a REMIC are treated
as debt instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
Class A Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to the Class A
Certificates under an accrual method. See "Material Federal Income Tax
Considerations - Taxation of the REMIC and its Holders" in the prospectus.
SPECIAL TAX ATTRIBUTES
The Class A Certificates possess special tax attributes by virtue of the
REMIC provisions of the code. See "Material Federal Income Tax Considerations -
Taxation of the REMIC and its Holders - General" in the prospectus.
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DISCOUNT AND PREMIUM
It is not anticipated that the Class A Certificates (other than the Class
A-IO Certificates) will be issued with any original issue discount ("OID") other
than possibly OID within a de minimis exception and that accordingly the
provisions of Sections 1271 through 1273 and 1275 generally will not apply to
the Class A Certificates (other than the Class A-IO Certificates). OID will be
considered de minimis if it is less than 0.25% of the principal amount of a
Class A Certificate multiplied by its expected weighted average life. The Class
A-IO Certificates will be issued OID. Because rules regarding the accrual of
income on prepayable debt instruments such as the Class A Certificates have not
yet been issued by the Internal Revenue Service, the proper treatment regarding
possible OID and the accrual of income on the Class A Certificates is not clear.
See "Material Federal Income Tax Considerations - Taxation of Debt Securities"
in the prospectus. The prepayment assumption that will be used in determining
the rate of accrual of the OID, if any, on the Class A Certificates is 23% HEP.
No representation is made that any of the mortgage loans will prepay at this
rate or any other rate. A subsequent purchaser who buys a Class A Certificate
for more than its remaining stated redemption price at maturity may be subject
to the "market premium" rules of the code. A subsequent purchaser who buys a
Class A Certificate with more than a de minimus amount of "market discount" will
be subject to the "market discount" rules of the code. See "Material Federal
Income Tax Considerations - Taxation of Debt Securities" in the prospectus.
SALE OR REDEMPTION OF THE CLASS A CERTIFICATES
If a Class A Certificate is sold or retired, the seller will recognize gain
or loss equal to the difference between the amount realized on the sale and such
holder's adjusted basis in the Class A Certificate. The adjusted basis of a
Class A Certificate generally will equal the cost of the Certificate to the
seller, increased by any original issue discount or market discount included in
the seller's gross income on the Certificate and reduced by distributions on the
Certificate previously received by the seller of amounts included in the stated
redemption price at maturity and by any premium that has reduced the seller's
interest income on the Certificate.
CLASS A-2 AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNTS
The holders of the Class A-2 Certificates and the related rights to receive
Class A-2 Available Funds Cap Carry-Forward Amounts will be treated for tax
purposes as owning two separate investments: (i) the Class A-2 Certificates
without the right to receive Class A-2 Available Funds Cap Carry-Forward Amounts
and (ii) the right to receive the Class A-2 Available Funds Cap Carry-Forward
Amounts. The holders of the Class A-2 Certificates must allocate the purchase
price of their certificates between these two investments based on their
relative fair market values. The purchase price allocated to the first
investment will be the issue price of the Class A-2 Certificates for calculating
accruals of original issue discount. See "Material Federal Income Tax
Considerations--Discount and Premium" in the prospectus.
The Trust intends to treat the Class A-2 Available Funds Cap Carry-Forward
Amounts as a notional principal contract for federal income tax purposes.
Treasury Regulations under Section 446 of the Code relating to notional
principal contracts (the "Notional Principal Contract Regulations") provide that
taxpayers, regardless of their method of accounting, generally must
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recognize the ratable daily portion of a periodic payment for the taxable year
to which that portion relates. Any Class A-2 Available Funds Cap Carry-Forward
Amounts will be periodic payments. Income with respect to periodic payments
under a notional principal contract for a taxable year should constitute
ordinary income. The purchase price allocated to the right to receive the
related Class A-2 Available Funds Cap Carry-Forward Amounts will be treated as a
nonperiodic payment under the Notional Principal Contract Regulations. Such a
nonperiodic payment may be amortized using several methods, including the level
payment method described in the Notional Principal Contract Regulations.
Alternative federal income tax characterization of the Class A-2 Available
Funds Cap Carry-Forward Amounts is possible, including treatment of the Class
A-2 Available Funds Cap Carry-Forward Amounts as indebtedness or an interest in
a partnership. The amount, timing and character of the income and deductions for
a Class A-2 Certificateholder of Class A-2 Available Funds Cap Carry-Forward
Amounts would differ if the Class A-2 Available Funds Cap Carry-Forward Amounts
were held to constitute indebtedness or an interest in a partnership. Because
the Trust will treat the Class A-2 Available Funds Cap Carry-Forward Amounts as
a notional principal contract, the servicer will not attempt to satisfy the tax
reporting requirements that would apply under these alternative
characterizations of the Class A-2 Available Funds Cap Carry-Forward Amounts.
Investors that are foreign persons should consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of the
purchase, ownership and disposition of the Class A-2 Available Funds Cap
Carry-Forward Amounts.
The right to receive the Class A-2 Available Funds Cap Carry-Forward
Amounts will not constitute: (i) a "real estate asset" within the meaning of
Section 856(c)(5)(B) of the Internal Revenue Code (the "Code") if held by a real
estate investment trust; (ii) a "qualified mortgage" within the meaning of
Section 860G(a)(3) of the Code or a "permitted investment" within the meaning of
Section 860G(a)(5) of the Code if held by a REMIC; or (iii) assets described in
Section 7701(a)(19)(C)(xi) of the Code if held by a thrift. Moreover, other
special rules may apply to certain investors, including dealers in securities
and dealers in notional principal contracts.
OTHER MATTERS
For a discussion of information reporting, backup withholding and taxation
of foreign investors in the Certificates, see "Material Federal Income Tax
Considerations - Miscellaneous Tax Aspects - Backup Withholding" and "Tax
Treatment of Foreign Investors" in the prospectus.
The Economic Growth and Tax Relief Reconciliation Act of 2001 made certain
changes to the rules setting forth backup withholding rates. Prospective
investors are encouraged to consult their own tax advisors regarding the backup
withholding rules.
STATE TAXES
The depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates and Class A-2
Available Funds Cap Carry-
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Forward Amounts under the tax laws of any state. Investors considering an
investment in the Class A Certificates and Class A-2 Available Funds Cap
Carry-Forward Amounts may wish to consult their own tax advisors regarding these
tax consequences.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"),
impose requirements on employee benefit plans subject to ERISA, and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities and Keogh plans, as well as on collective investment
funds, separate accounts and other entities in which such plans, accounts or
arrangements are invested (collectively, the "Plans") and on persons who bear
certain relationships to such Plans. See "ERISA Considerations" in the
accompanying prospectus.
The U.S. Department of Labor (the "DOL") has granted to Bear, Stearns & Co.
Inc., one of the Underwriters, an administrative exemption (Prohibited
Transaction Exemption ("PTE") 90-30, Exemption Application No. D-8207, 55 Fed.
Reg. 21461 (1990)) (the "Exemption") from certain of the prohibited transaction
rules of ERISA with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates representing interests in
asset-backed pass-through trusts that consist of certain receivables, loans and
other obligations that meet the conditions and requirements of the Exemption.
The DOL has also granted to Morgan Stanley & Co. Incorporated, one of the
Underwriters, a similar administrative exemption (Prohibited Transaction
Exemption ("PTE") 90-24, Exemption Application No. D-8019, 55 Fed. Reg. 20548
(1990)). The receivables covered by the Exemption include secured residential,
commercial, and home equity loans such as the mortgage loans in the Trust Fund.
The Exemption was amended by PTE 2000-58, Exemption Application No. D-10829,65
Fed. Reg. 67765 (2000) to extend exemptive relief to certificates, including
subordinated certificates, rated in the four highest generic rating categories
in certain designated transactions, and to non-subordinated certificates rated
in the two highest generic rating categories issued by investment pools
containing residential and home equity mortgage loans for which the
loan-to-value ratio is greater than 100% and less than 125%, provided the
conditions of the Exemption are met. The Exemption will apply to the
acquisition, holding and resale of the Class A Certificates by a Plan, provided
that specific conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption, as amended,
to apply to the Class A Certificates are the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A 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 Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the four highest
generic rating categories from either Standard & Poor's, Moody's or Fitch,
Inc. (each, a "Rating Agency");
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(3) The trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(4) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Class A Certificates represents not
more than reasonable compensation for underwriting the Class A
Certificates. The sum of all payments made to and retained by the depositor
pursuant to the sale of the Class A Certificates to the trust fund
represents not more than the fair market value of such mortgage loans. The
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
Pooling and Servicing Agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(5) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest prohibited transactions that may arise when a
Plan fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which the fiduciary (or its affiliate) is an obligor only if,
among other requirements, (i) in the case of the acquisition of Class A
Certificates in connection with the initial issuance, at least fifty (50)
percent of each class of Class A Certificates and at least fifty (50) percent of
the aggregate interests in the trust fund are acquired by persons independent of
the Restricted Group (as defined below), (ii) the Plan's investment in Class A
Certificates does not exceed twenty-five (25) percent of each class of Class A
Certificates outstanding at the time of the acquisition, (iii) immediately after
the acquisition, no more than twenty-five (25) percent of the assets of any Plan
for which the fiduciary has discretionary authority or renders investment advice
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity, and (iv) the fiduciary or
its affiliate is an obligor with respect to obligations representing no more
than five (5) percent of the fair market value of the obligations in the trust.
The Exemption does not apply to Plans sponsored by the depositor, any
underwriter, the trustee, the servicer, any obligor with respect to mortgage
loans included in the trust fund constituting more than five percent of the
aggregate unamortized principal balance of the assets in the trust fund, or any
affiliate of such parties (the "Restricted Group").
The depositor believes that the Exemption will apply to the acquisition and
holding by Plans of the Class A Certificates sold by the Underwriters and that
all conditions of the Exemption other than those within the control of the
investors have been met. In addition, as of the date hereof, there is no obligor
with respect to mortgage loans included in the trust fund constituting more than
five percent of the aggregate unamortized principal balance of the assets of the
trust fund.
The rating of a certificate may change. If a class of certificates no
longer has a rating of at least AA- or its equivalent, then certificates of that
class will no longer be eligible for relief under the Exemption, and
consequently may not be purchased by or sold to a Plan (although a
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Plan that had purchased the certificates when it had a permitted rating would
not be required by the Exemption to dispose of it).
Employee benefit plans that are governmental plans (as defined in section
3(32) of ERISA) and certain church plans (as defined in section 3(33) of ERISA)
are not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class A Certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws.
Any Plan fiduciary who proposes to cause a Plan to purchase Class A
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
Class A Certificates. Assets of a Plan or individual retirement account should
not be invested in the Class A Certificates unless it is clear that the assets
of the trust fund will not be plan assets or unless it is clear that the
Exemption or another applicable prohibited transaction exemption will apply and
exempt all potential prohibited transactions.
LEGAL INVESTMENT
The certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
June 8, 2001 between the depositor and Bear, Stearns & Co. Inc., as
representative of the underwriters, the depositor has agreed to sell to the
underwriters and the underwriters have agreed to purchase from the depositor the
Class A Certificates. The depositor is obligated to sell, and the underwriters
are obligated to purchase, all of the certificates offered hereby if any are
purchased.
In the underwriting agreement, the underwriters have agreed to purchase the
entire principal amount of the Class A Certificates in the following amounts:
Principal Principal Principal Principal Notional
Amount of Amount of Amount of Amount of Amount of
Class A-1 Class A-2 Class A-3 Class A-4 Class A-IO
Underwriter Certificates Certificates Certificates Certificates Certificates
- ------------------------------------ ------------ ------------ ------------ ------------ ------------
Bear, Stearns & Co. Inc. $247,500,000 $29,518,200 $20,950,200 $21,531,600 $35,500,000
Morgan Stanley & Co. Incorporated $27,500,000 $3,279,800 $2,327,800 $2,392,400 0
------------ ----------- ----------- ----------- -----------
Total $275,000,000 $32,798,000 $23,278,000 $23,924,000 $35,500,000
============ =========== =========== =========== ===========
The underwriters have advised the depositor that they propose to offer the
Class A Certificates purchased by the underwriters for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The underwriters may effect such transactions by selling such
certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
underwriters or purchasers of the
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Class A Certificates for whom they may act as agent. Any dealers that
participate with the underwriters in the distribution of the Class A
Certificates purchased by the underwriters may be deemed to be underwriters, and
any discounts or commissions received by them or the underwriters and any profit
on the resale of Class A Certificates by them or the underwriters may be deemed
to be underwriting discounts or commissions under the Securities Act of 1933.
In connection with the offering of the Class A Certificates, the
underwriters and their affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Class A Certificates. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such person may bid for or purchase
the Class A Certificates for the purpose of stabilizing its market price. Any of
the transactions described in this paragraph may result in the maintenance of
the price of the Class A Certificates at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are taken, may be discontinued at any time
without notice.
The depositor has been advised by the underwriters that the underwriters
presently intend to make a market in the Class A Certificates, as permitted by
applicable laws and regulations. The underwriters are not obligated to make a
market in the Class A Certificates and any market making may be discontinued at
any time at the sole discretion of the underwriters. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the Class A
Certificates.
For further information regarding any offer or sale of the Class A
Certificates pursuant to this prospectus supplement and the accompanying
prospectus, see "Plan of Distribution" in the accompanying prospectus.
The Underwriting Agreement provides that the depositor will indemnify the
underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" certain information already on file with it. This means that we can
disclose important information to you by referring you to those documents. Such
information is considered part of this prospectus supplement, and later
information that is filed will automatically update and supersede this
information. We incorporate by reference all of the documents listed in the
accompanying prospectus under the heading "Incorporation of Information by
Reference" and the consolidated financial statements of MBIA Insurance
Corporation and subsidiaries included in, or as exhibits to, the Annual Report
on Form 10-K, as amended, for the year ended December 31, 2000 as described
under "The Certificate Insurer" each of which has been filed by MBIA Insurance
Corporation.
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this
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prospectus supplement or the accompanying prospectus is accurate as of any date
other than the date on the cover page of this prospectus supplement or the
accompanying prospectus.
LEGAL MATTERS
Material legal matters in connection with the certificates will be passed
upon for the originators and the servicer by Blank Rome Comisky & McCauley LLP,
Philadelphia, Pennsylvania, for the depositor and the underwriters by Morgan
Lewis & Bockius LLP, New York, New York, and for the seller by Dewey Ballantine
LLP, New York, New York.
RATINGS
It is a condition to the original issuance of the Class A Certificates that
they will receive ratings of "AAA" by Standard & Poor's and "Aaa" by Moody's.
The ratings assigned to the Class A Certificates will take into account the
claims-paying ability of the certificate insurer. The ratings on the Class A
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the mortgage loans, or the anticipated yields in
light of prepayments. Further, the ratings on the Class A-IO Certificates do not
address whether investors will recoup their initial investment. Explanations of
the significance of such ratings may be obtained from Moody's Investors Service,
Inc., 99 Church Street, New York, New York 10007 and Standard & Poor's, a
division of the McGraw Hill Companies, Inc., 55 Water Street, New York, New York
10041. Such ratings will be the views only of such rating agencies. There is no
assurance that any such ratings will continue for any period of time or that
such ratings will not be revised or withdrawn. Any such revision or withdrawal
of such ratings may have an adverse effect on the market price of the Class A
Certificates. Additionally, the ratings on the Class A-2 Certificates do not
address the likelihood of the payment of the Class A-2 Available Funds Cap
Carry-Forward Amount.
GLOSSARY
The following terms have the meanings given below when used in this
prospectus supplement.
Available Amount for either mortgage loan group and any distribution date
is the amount on deposit in the distribution account relating to that mortgage
loan group on that distribution date exclusive of the amount of any Insured
Distribution and the servicing fee, and after making any required transfer from
the Reserve Account to the distribution account with respect to that mortgage
loan group on that distribution date.
Class A-1 Carry-Forward Amount for any distribution date is the sum of (a)
the amount, if any, by which (x) the Class A-1 Interest Distribution Amount as
of the immediately preceding distribution date exceeded (y) the amount of
interest actually paid to the holders of the Class A-1 Certificates on such
immediately preceding distribution date and (b) thirty days' interest on the
amount described in clause (a), calculated at an interest rate equal to the
Class A-1 Pass-through Rate.
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Class A-1 Current Interest for any distribution date is the sum of the
interest that accrued on the Class A-1 Certificates at the Class A-1
Pass-through Rate on the aggregate outstanding principal balance of such class
during the related accrual period.
Class A-1 Interest Distribution Amount for any distribution date will be an
amount equal to the sum of the Class A-1 Current Interest on such distribution
date, less the amount of any Class A-1 Mortgage Loan Interest Shortfalls
relating to such distribution date, plus the Class A-1 Carry-Forward Amount,
less any amounts paid by the certificate insurer in respect of such Class A-1
Carry-Forward Amount, in each case, as of such distribution date.
Class A-1 Mortgage Loan Interest Shortfalls for any distribution date will
be the aggregate of the Mortgage Loan Interest Shortfalls in Mortgage Loan Group
I, if any, for such distribution date, to the extent such Mortgage Loan Interest
Shortfalls are not paid by the servicer as Compensating Interest.
Class A-1 Pass-through Rate with respect to any distribution date, the per
annum rate equal to 6.34%; provided, that, on any distribution date after the
Clean-Up Call Date, such rate will be 6.84%.
Class A-2 Available Funds Cap Carry-Forward Amount is, with respect to the
Class A-2 Certificates and any distribution date, the sum of
(a) the excess of (x) the Class A-2 Current Interest calculated at the
Class A-2 Formula Pass-through Rate over (y) the Class A-2 Current
Interest calculated at the Class A-2 Available Funds Cap Rate, in each
case as of such distribution date,
(b) the amount of any Class A-2 Available Funds Cap Carry-Forward Amount
remaining unpaid from any previous distribution date, with interest
thereon at the Class A-2 Formula Pass-through Rate.
Class A-2 Available Funds Cap Rate is a per annum rate equal to, with
respect to any Due Period, the Net Weighted Average Mortgage Interest Rate for
the mortgage loans in Mortgage Loan Group II for such Due Period, minus the
product of (x) the Class A-IO Pass-through Rate and (y) a fraction, the
numerator of which is the Class A-IO Notional Amount on such distribution date
and the denominator of which is the aggregate outstanding principal balance of
the mortgage loans in Mortgage Loan Group I and Mortgage Loan Group II as of
such date.
Class A-2 Carry-Forward Amount as of any distribution date, is the sum of
(a) the amount, if any, by which (x) the Class A-2 Interest Distribution Amount
as of the immediately preceding distribution date exceeded (y) the amount of
interest actually paid to the holders of the Class A-2 Certificates on such
immediately preceding distribution date and (b) thirty days' interest on the
amount described in clause (a), calculated at an interest rate equal to the
Class A-2 Formula Pass-through Rate.
Class A-2 Current Interest for any distribution date is the sum of the
interest that accrued on the Class A-2 Certificates at the Class A-2
Pass-through Rate on the aggregate outstanding principal balance of such class
during the related accrual period.
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Class A-2 Pass-through Rate with respect to any distribution date, is the
per annum rate equal to the lesser of (x) the Class A-2 Formula Pass-Through
Rate and (y) the Class A-2 Available Funds Cap Rate for such distribution date.
Class A-2 Formula Pass-through Rate is a per annum rate equal to LIBOR plus
0.14%.
Class A-2 Interest Distribution Amount for any distribution date will be an
amount equal to the sum of the Class A-2 Current Interest on such distribution
date, less the amount of any Class A-2 Mortgage Loan Interest Shortfalls
relating to such distribution date plus the Class A-2 Carry-Forward Amount less
any amounts paid by the certificate insurer in respect of such Class A-2 Carry-
Forward Amount, in each case, as of such distribution date.
Class A-2 Mortgage Loan Interest Shortfalls for any distribution date will
be the Class A-2 Certificates' pro rata portion of any Mortgage Loan Interest
Shortfalls in Mortgage Loan Group II, if any, for such distribution date, to the
extent such Mortgage Loan Interest Shortfalls are not paid by the servicer as
Compensating Interest.
Class A-3 Carry-Forward Amount for any distribution date is the sum of (a)
the amount, if any, by which (x) the Class A-3 Interest Distribution Amount as
of the immediately preceding distribution date exceeded (y) the amount of
interest actually paid to the holders of the Class A-3 Certificates on such
immediately preceding distribution date and (b) thirty days' interest on the
amount described in clause (a), calculated at an interest rate equal to the
Class A-3 Pass-through Rate.
Class A-3 Current Interest for any distribution date is the sum of the
interest that accrued on the Class A-3 Certificates at the Class A-3
Pass-through Rate on the aggregate outstanding principal balance of such class
during the related accrual period.
Class A-3 Interest Distribution Amount for any distribution date will be an
amount equal to the sum of the Class A-3 Current Interest on such distribution
date, less the pro rata portion of any Mortgage Loan Interest Shortfalls in
Mortgage Loan Group II, if any, for such distribution date, plus the Class A-3
Carry-Forward Amount, less any amounts paid by the certificate insurer in
respect of such Class A-3 Carry-Forward Amount, in each case, as of such
distribution date.
Class A-3 Mortgage Loan Interest Shortfalls for any distribution date will
be the Class A-3 Certificates' pro rata portion of the Mortgage Loan Interest
Shortfalls in Mortgage Loan Group II, if any, for such distribution date, to the
extent such Mortgage Loan Interest Shortfalls are not paid by the servicer as
Compensating Interest.
Class A-3 Pass-through Rate with respect to any distribution date, the per
annum rate equal to 5.82%.
Class A-4 Carry-Forward Amount for any distribution date is the sum of (a)
the amount, if any, by which (x) the Class A-4 Interest Distribution Amount as
of the immediately preceding distribution date exceeded (y) the amount of
interest actually paid to the holders of the Class A-4 Certificates on such
immediately preceding distribution date and (b) thirty days' interest on the
amount described in clause (a), calculated at an interest rate equal to the
Class A-4 Pass-through Rate.
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Class A-4 Current Interest for any distribution date is the sum of the
interest that accrued on the Class A-4 Certificates at the Class A-4
Pass-through Rate on the aggregate outstanding principal balance of such class
during the related accrual period.
Class A-4 Interest Distribution Amount for any distribution date will be an
amount equal to the sum of the Class A-4 Current Interest on such distribution
date, less the Class A-4 Certificates' pro rata portion of any Mortgage Loan
Interest Shortfalls in Mortgage Loan Group II, if any, for such distribution
date, plus the Class A-4 Carry-Forward Amount, less any amounts paid by the
certificate insurer in respect of such Class A-4 Carry-Forward Amount, in each
case, as of such distribution date.
Class A-4 Mortgage Loan Interest Shortfalls for any distribution date will
be the Class A-4 Certificates' pro rata portion of the Mortgage Loan Interest
Shortfalls in Mortgage Loan Group II, if any, for such distribution date, to the
extent such Mortgage Loan Interest Shortfalls are not paid by the servicer as
Compensating Interest.
Class A-4 Pass-through Rate with respect to any distribution date, the per
annum rate equal to 6.99%; provided, that, on any distribution date after the
Clean-Up Call Date, such rate will be 7.49%.
Class A-IO Carry-Forward Amount for any distribution date is the sum of (a)
the amount, if any, by which (x) the Class A-IO Interest Distribution Amount as
of the immediately preceding distribution date exceeded (y) the amount actually
paid to the holders of the Class A-IO Certificates on such immediately preceding
distribution date and (b) thirty days' interest on the amount described in
clause (a), calculated at an interest rate equal to the Class A-IO Pass-through
Rate.
Class A-IO Current Interest for any distribution date is the sum of the
interest that accrued on the certificates at the Class A-IO Pass-through Rate on
the notional balance of such class during the related accrual period.
Class A-IO Interest Distribution Amount for any distribution date will be
an amount equal to the sum of the Class A-IO Current Interest on such
distribution date, less the pro rata portion of any Net Mortgage Loan Interest
Shortfalls relating to such distribution date that are allocable to the Class
A-IO Certificates, on the basis of accrued interest thereon, plus any Class A-IO
Carry-Forward Amount less any amounts paid by the certificate insurer in respect
of such Class A-IO Carry-Forward Amounts, in each case as of such distribution
date.
Class A-IO Mortgage Loan Interest Shortfalls for any distribution date will
be the Class A-IO Certificates' pro rata portion of the Mortgage Loan Interest
Shortfalls in Mortgage Loan Group I and Mortgage Loan Group II, if any, for such
distribution date, to the extent such Mortgage Loan Interest Shortfalls are not
paid by the servicer as Compensating Interest.
Class A-IO Notional Amount means an amount with respect to each
distribution date occurring prior to the January 2004 distribution date, equal
to the lesser of (x) $35,500,000 and (y) the aggregate outstanding principal
balance of the mortgage loans as of the first day of the related Due Period; and
on and after the distribution date occurring in January 2004, an amount equal to
$0.
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Class A-IO Pass-through Rate means a fixed rate equal to 8.00% per annum.
Clean-Up Call Date means the first distribution date on which the aggregate
outstanding principal balance of the mortgage loans in both mortgage loan groups
is equal to or less than 10% of the aggregate original principal balance of the
mortgage loans in both mortgage loan groups as of the Cut-off Date.
Compensating Interest means an amount equal to the lesser of (a) the
aggregate of the Prepayment Interest Shortfalls for the related distribution
date resulting from principal prepayments in full during the related due period
and (b) the aggregate of the servicing fees received by the servicer in the
related due period; provided, however, that Compensating Interest with respect
to any mortgage loan and any distribution date shall not exceed the servicing
fees due in respect of such mortgage loan on such distribution date.
Cut-Off Date means the close of business on June 1, 2001.
Deficiency Amount means, for either mortgage loan group and any
distribution date, the excess, if any, of Required Distributions for that
mortgage loan group over the Available Amount for that mortgage loan group.
Due for Distribution means, the distribution date on which Insured Amounts
are due.
Due Period means, with respect to each distribution date, the calendar
month preceding that distribution date.
Excess Interest for each mortgage loan group and any distribution date is
equal to the excess of (x) the Net Available Amount for such mortgage loan group
and distribution date over (y) the sum of
o the Interest Distribution Amount for such mortgage loan group and such
distribution date;
o the Principal Distribution Amount for such mortgage loan group and such
distribution date -- calculated for this purpose without regard to any
Over-collateralization Increase Amount or portion thereof included
therein;
o any Premium Amount, Reimbursement Amount or other amount owed to the
certificate insurer relating to such mortgage loan group; and
o the trustee's fees for such mortgage loan group and such distribution
date.
Excess Over-collateralized Amount means, with respect to a mortgage loan
group and a distribution date, the excess, if any, of (a) the
Over-collateralized Amount for such mortgage loan group that would apply on such
distribution date after taking into account all distributions that would be made
on such distribution date if the related Over-collateralization Reduction
Amounts were not deducted from the Principal Distribution Amount over (b) the
Specified Over-collateralized Amount.
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Foreclosure Profits as to any servicer remittance date, are the excess, if
any, of (x) Net Liquidation Proceeds in respect of each mortgage loan that
became a Liquidated Mortgage Loan during the month immediately preceding the
month of such servicer remittance date over (y) the sum of such unpaid principal
balance of each such Liquidated Mortgage Loan plus accrued and unpaid interest
on the unpaid principal balance from the due date to which interest was last
paid by the mortgagor.
Insurance Proceeds are proceeds paid by any insurer other than the
certificate insurer pursuant to any insurance policy covering a mortgage loan to
the extent such proceeds are not applied to the restoration of the related
mortgaged property or released to the related mortgagor. "Insurance Proceeds" do
not include "Insured Distributions."
Insured Amounts means, with respect to any distribution date, any
Deficiency Amount for such distribution date.
Insured Distributions shall mean, the aggregate amount actually paid by the
certificate insurer to the trustee in respect of (i) Insured Amounts for a
distribution date and (ii) Preference Amounts for any given business day.
Interest Distribution Amount means (i) with respect to Mortgage Loan Group
I, the Class A-1 Interest Distribution Amount and Mortgage Loan Group I's pro
rata portion of the Class A-IO Interest Distribution Amount, and (ii) with
respect to Mortgage Loan Group II, the Class A-2 Interest Distribution Amount,
the Class A-3 Interest Distribution Amount, the Class A-4 Interest Distribution
Amount and Mortgage Loan Group II's pro rata portion of the Class A-IO Interest
Distribution Amount.
Liquidated Loan Loss as to any Liquidated Mortgage Loan is the excess, if
any, of (x) the unpaid principal balance of such Liquidated Mortgage Loan plus
accrued and unpaid interest on such unpaid principal balance from the due date
to which interest was last paid by the mortgagor over (y) the Net Liquidation
Proceeds.
Liquidated Mortgage Loan is a mortgage loan that is being liquidated by the
servicer in connection with (x) the taking of all or a part of a Mortgaged
Property by exercise of the power of eminent domain or condemnation or (y) the
liquidation of a defaulted mortgage loan through a sale, foreclosure sale, REO
disposition or otherwise.
Liquidation Expenses as to any Liquidated Mortgage Loan are all expenses
incurred by the servicer in connection with the liquidation of such mortgage
loan, including, without duplication, unreimbursed expenses for real property
taxes and unreimbursed servicing advances. In no event may Liquidation Expenses
with respect to a Liquidated Mortgage Loan exceed the related Liquidation
Proceeds.
Liquidation Proceeds are amounts, other than Insurance Proceeds, received
by the servicer in connection with (x) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(y) the liquidation of a defaulted mortgage loan through a sale, foreclosure
sale, REO disposition or otherwise.
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Mortgage Loan Interest Shortfalls means Relief Act Shortfalls and
Prepayment Interest Shortfalls.
Net Available Amount for either mortgage loan group and any distribution
date is the amount on deposit in the distribution account relating to that
mortgage loan group, exclusive of the amount of any Insured Distribution and the
servicing fee on that distribution date, before taking into account any transfer
from the Reserve Account to the distribution account.
Net Foreclosure Profits as to any servicer remittance date, are the excess,
if any, of (x) the aggregate Foreclosure Profits with respect to such servicer
remittance date over (y) the aggregate Liquidated Loan Losses with respect to
such servicer remittance date.
Net Liquidation Proceeds as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the servicer.
Net Mortgage Loan Interest Shortfalls for any distribution date will be the
aggregate of the Class A-1 Mortgage Loan Interest Shortfalls, Class A-2 Mortgage
Loan Interest Shortfalls, Class A-3 Mortgage Loan Interest Shortfalls, Class A-4
Mortgage Loan Interest Shortfalls, and Class A-IO Mortgage Loan Interest
Shortfalls, if any, for such distribution date.
Net REO Proceeds as to any REO property, are REO Proceeds net of any
related expenses of the servicer.
Net Weighted Average Mortgage Interest Rate means, with respect to any Due
Period and mortgage loan group, the weighted average interest rates on the
mortgage loans (weighted by principal balances) in such mortgage loan group, as
of the first day of such Due Period, less the rate at which each of the
servicing fee, the trustee fee, and the Premium Amount is then calculated.
Over-collateralization Deficit for any distribution date, is the amount by
which the aggregate outstanding principal balance of the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificates, as applicable with respect to the related
mortgage loan group, after taking into account the payment of the Principal
Distribution Amount (except any amounts in respect of the Over-collateralization
Deficit), exceeds the aggregate principal balance of the mortgage loans in the
related mortgage loan group determined as of the last day of the preceding
calendar month.
Over-collateralization Increase Amount for any mortgage loan group and any
distribution date is the amount of Excess Interest to be applied as an
accelerated distribution of the principal balance of the related classes of
certificates until the level of over-collateralization for such pool and such
mortgage loan group reaches the Specified Over-collateralized Amount. Such
distribution is limited to the extent of the Excess Interest for the related
mortgage loan group.
Over-collateralization Reduction Amount with respect to any mortgage loan
group and any distribution date, is the lesser of (a) the Excess
Over-collateralized Amount for such mortgage loan group and such distribution
date and (b) the Principal Distribution Amount for such mortgage loan group and
such distribution date (without regard to clause (b)(10) of the definition of
Principal Distribution Amount).
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Over-collateralized Amount means, with respect to any mortgage loan group
and any distribution date, the excess, if any, of (a) the aggregate principal
balances of the mortgage loans in such mortgage loan group as of the close of
business on the last day of the preceding calendar month over (b) the aggregate
principal balance of the related classes of certificates as of such distribution
date -- following the making of all distributions on such distribution date,
other than with respect to any Over-collateralization Increase Amount for such
distribution date.
Periodic Advances means advances made by the servicer on each distribution
date with respect to delinquent payments of interest on the mortgage loans, at a
rate equal to the interest rate on the related mortgage note, less the servicing
fee rate.
Preference Amount means any amount previously distributed to a
certificateholder on the Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code (11 U.S.C.), as amended from time to time in
accordance with a final, nonappealable order of a court having competent
jurisdiction.
Premium Amount means the premium payable to the certificate insurer on each
distribution date pursuant to the policy.
Prepayment Interest Shortfall means, with respect to any distribution date,
an amount equal to the excess, if any, of (a) thirty days' interest on the
outstanding principal balance of such mortgage loans at a per annum rate equal
to the related mortgage interest rate -- or at such lower rate as may be in
effect for such mortgage loan because of application of the Soldiers' and
Sailors' Civil Relief Act of 1940, any reduction as a result of a bankruptcy
proceeding and/or any reduction by a court of the monthly payment due on such
mortgage loan -- minus the rate at which the servicing fee is calculated, over
(b) the amount of interest actually remitted by the related mortgagor in
connection with such principal prepayment in full, less the servicing fee for
such mortgage loan in such month.
Principal Distribution Amount for either mortgage loan group and any
distribution date will be the lesser of:
(a) the excess of (x) the sum, as of such distribution date, of (A) the
Available Amount for such mortgage loan group and (B) any Insured Distribution
for such mortgage loan group over (y) the sum of the Interest Distribution
Amount, the trustee's fees, the Premium Amount and the Reimbursement Amount in
each case with respect to such mortgage loan group; and
(b) the sum, without duplication, of:
(1) all principal in respect of the mortgage loans in such mortgage
loan group actually collected during the related due period plus,
if the outstanding principal balance of the certificates related
to the other mortgage loan group have been reduced to zero, all
principal in respect of the mortgage loans in such other mortgage
loan group actually collected during the related due period;
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(2) the principal balance of each mortgage loan that either was
repurchased by the seller or purchased by the servicer on the
related servicer remittance date from such mortgage loan group,
to the extent such principal balance is actually received by the
trustee;
(3) any substitution adjustments delivered by the seller on the
related servicer remittance date in connection with a
substitution of a mortgage loan in such mortgage loan group, to
the extent such substitution adjustments are actually received by
the trustee;
(4) the Net Liquidation Proceeds actually collected by the servicer
of all mortgage loans in such mortgage loan group during the
prior calendar month -- to the extent such Net Liquidation
Proceeds relate to principal;
(5) the proceeds received by the trustee upon the exercise by the
servicer of its option to repurchase the mortgage loans in such
mortgage loan group on or after the Clean-up Call Date;
(6) the amount of any Over-collateralization Deficit with respect to
such mortgage loan group for such distribution date;
(7) the proceeds received by the trustee on any termination of the
trust -- to the extent such proceeds relate to principal --
allocable to such mortgage loan group;
(8) the amount of any Over-collateralization Increase Amount with
respect to such mortgage loan group for such distribution date,
to the extent of any Excess Interest for such mortgage loan group
available for such purpose; and
(9) if the certificate insurer shall so elect, an amount of principal
-- including Liquidated Loan Losses -- that would have been
payable pursuant to clauses (1) through (8) above if sufficient
funds were available therefor;
minus
-----
(10) the amount of any Over-collateralization Reduction Amount for
such mortgage loan group for such distribution date.
In no event will the Principal Distribution Amount with respect to any
distribution date be (x) less than zero or (y) greater than the then outstanding
aggregate principal balance of the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, as appropriate.
Qualified Substitute Mortgage Loan means any mortgage loan or mortgage
loans substituted for a deleted mortgage loan and which, among other things,
o relates or relate to a detached one-family residence or to the same
type of residential dwelling or commercial property as the deleted
mortgage loan and, has or have the
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same or a better lien priority as the deleted mortgage loan and has or
have the same occupancy status as the deleted mortgage loan or is or
are owner-occupied mortgaged property or properties,
o matures or mature no later than, and not more than one year earlier
than, the deleted mortgage loan,
o has or have a LTV or LTVs at the time of such substitution no higher
than the LTV of the deleted mortgage loan,
o has or have a CLTV or CLTVs at the time of such substitution no higher
than the CLTV of the deleted mortgage loan,
o has or have a principal balance or principal balances, after
application of all payments received on or prior to the date of
substitution, not substantially less and not more than the principal
balance of the deleted mortgage loan as of such date,
o has or have a mortgage interest rate of at least the same interest rate
as the deleted mortgage loan and
o complies or comply, as of the date of substitution, with each
representation and warranty set forth in the Unaffiliated Seller's
Agreement.
Reimbursement Amount means, with respect to each mortgage loan group and
distribution date, the amount of all Insured Distributions and other amounts due
to the certificate insurer for such mortgage loan group and pursuant to the
Insurance Agreement which have not been previously paid, together with interest
thereon at the rate specified in the insurance agreement.
Relief Act Shortfalls are interest shortfalls resulting from the
application of the Soldier's and Sailors' Civil Relief Act of 1940.
Required Distributions means, with respect to (1) any distribution date
occurring prior to the distribution date on December 25, 2031, the sum of (x)
the Interest Distribution Amount for all Class A Certificates -- net of any Net
Mortgage Loan Interest Shortfalls and Class A-2 Available Funds Cap
Carry-Forward Amounts-- and (y) the sum of the Over-collateralization Deficit(s)
with respect to both mortgage loan groups, and (2) the final scheduled
distribution date on December 25, 2031, the sum of (x) the amount set forth in
clause (1)(x) above and (y) the aggregate outstanding principal balance, if any,
of the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates, after giving
effect to all other distributions of principal on the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificates on that distribution date.
REO Proceeds are monies received in respect of any REO property, including,
without limitation, proceeds from the rental of the related mortgaged property.
Shortfall Amount means, with respect to any mortgage loan group and
distribution date, the sum, without duplication, of:
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(a) the excess, if any, of the sum of the amounts described in clauses (a),
(b), (c) and (d) under "Flow of Funds" over the Net Available Amount
for such mortgage loan group and distribution date;
(b) with respect to any distribution date prior to the final scheduled
maturity date on December 25, 2031, the aggregate amount of Liquidated
Loan Losses incurred during the prior Due Period for such mortgage loan
group, to the extent not paid as part of the related Principal
Distribution Amount for such distribution date;
(c) with respect to any distribution date prior to the final scheduled
maturity date on December 25, 2031, any Over-collateralization Deficit
for such mortgage loan group and distribution date, to the extent not
paid as part of the related Principal Distribution Amount for such
distribution date; and
(d) with respect to the final scheduled maturity date on December 25, 2031,
the outstanding principal balance, if any, of the Class A-1
Certificates and the aggregate outstanding principal balance, if any,
of the Class A-2, Class A-3 and Class A-4 Certificates, as applicable,
to the extent not otherwise paid on that distribution date.
Specified Over-collateralized Amount with respect to any distribution date
will be the amount of over-collateralization which the certificate insurer
requires with respect to such distribution date and which amount may step up or
step down as determined in the Insurance and Reimbursement Agreement.
Specified Reserve Amount means, with respect to any distribution date, the
sum, without duplication, of (a) any Shortfall Amount in respect of such
distribution date and (b) the excess, if any, of (x) the Specified
Over-collateralized Amount for both mortgage loan groups together for such
distribution date over (y) the aggregate Over-collateralized Amount for both
mortgage loan groups for such distribution date.
Unaffiliated Seller's Agreement means the Unaffiliated Seller's Agreement,
dated as of June 1, 2001, among and between the depositor, the seller, and the
originators.
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PROSPECTUS
MORTGAGE-BACKED/ASSET-BACKED SECURITIES (ISSUABLE IN SERIES)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
THE SECURITIES
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
- --------------------------------------------------------------------------------
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust fund or debt obligations
secured by assets of the related trust fund.
o Each series of securities will consist of one or more classes of
mortgage-backed or asset-backed certificates or notes.
o Each class of securities will represent the entitlement to a specified portion
of interest payments and a specified portion of principal payments on the trust
assets.
o A series may include classes of securities that are senior in right of payment
to other classes. Classes of securities may be entitled to receive distributions
of principal, interest or both prior to other classes or before or after
specified events.
o No market will exist for the securities of any series before they are issued.
In addition, even after the securities of a series have been issued and sold,
there can be no assurance that a resale market for them will develop.
Offers of the securities will be made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, each trust fund will consist
primarily of assets from one of the following categories:
o mortgage loans secured by senior or junior liens on one- to four-family
residential properties;
o closed-end and/or revolving home equity loans secured by senior or
junior liens on one- to four-family residential or mixed-use
properties;
o home improvement installment sales contracts and loan agreements that
are either unsecured or secured by senior or junior liens on one- to
four-family residential or mixed-use properties or by purchase money
security interests in the related home improvements;
o installment sales contracts and installment loan agreements secured by
senior or junior liens on manufactured homes or by mortgages on the
related real estate;
o mortgage-backed securities issued or guaranteed by Ginnie Mae, Freddie
Mac or Fannie Mae; and o private label mortgage-backed or asset-backed
securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
JUNE 8, 2001
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
Although the accompanying prospectus supplement cannot contradict the
information contained in this prospectus, insofar as the prospectus supplement
contains specific information about a particular series of securities that
differs from the more general information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
Each prospectus supplement generally will include the following information with
respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home equity loans, home
improvement contracts, manufactured housing contracts, mortgage backed
securities and/or private securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans,
home equity loans, home improvement contracts, manufactured housing
contracts, mortgage backed securities and/or private securities and
information concerning any servicer;
o the terms of any credit enhancement with respect to particular classes
of the securities;
o information concerning other trust fund assets, including any reserve
fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to each
class of securities, and the timing and order of priority of principal
payments;
o information about any REMIC or FASIT tax elections for some or all of
the trust fund assets; and
o particulars of the plan of distribution for the securities.
2
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The Table of Contents included in the accompanying
prospectus supplement lists the pages on which these captions are located.
There is also a Glossary of Terms beginning on page 125 where you will find
definitions of certain capitalized terms used in this prospectus.
If you require additional information, the mailing address of our principal
executive offices is Bear Stearns Asset Backed Asset Securities, Inc., 245 Park
Avenue, New York, New York 10167 and our telephone number is (212) 272-4095. For
other means of acquiring additional information about us or a series of
securities, see "Incorporation of Certain Information by Reference" beginning on
page 122 of this prospectus.
3
RISK FACTORS
You should consider carefully the following information, together with the
information set forth under "Risk Factors" in the accompanying prospectus
supplement, since it identifies the principal risk factors associated with an
investment in the securities.
YOU MAY HAVE DIFFICULTY SELLING YOUR
SECURITIES OR OBTAINING YOUR DESIRED
PRICE.................................. No market will exist for the
securities before they are issued. In
addition, we cannot give you any
assurance that a resale market will
develop following the issuance and
sale of any series of the securities.
Even if a resale market does develop,
you may not be able to sell your
securities when you wish or at the
price you want.
ONLY THE ASSETS OF THE RELATED TRUST
FUND ARE AVAILABLE TO PAY YOUR
SECURITIES ............................ The securities of each series will be
payable solely from the assets of the
related trust fund, including any
applicable credit enhancement, and
will not have a claim against the
assets of any other trust. In the
case of securities that are in the
form of notes, the related indenture
will require that noteholders proceed
only against the assets of the
related trust fund. We cannot give
you any assurance that the market
value of the assets in any trust fund
will be equal to or greater than the
total principal amount of the related
securities then outstanding, plus
accrued interest. Moreover, if the
assets of a trust fund are ever sold,
the sale proceeds will be applied
first to reimburse any related
trustee, servicer and credit
enhancement provider for their unpaid
fees and expenses before any
remaining amounts are distributed to
securityholders.
In addition, at the times specified
in the related prospectus supplement,
assets of the trust fund and the
related security accounts may be
released to the depositor, the
servicer, the credit enhancement
provider or other persons, if
o all payments then due on the
related securities have been
made, and
o any other payments specified in
the related prospectus
supplement have been made.
Once released, such assets will no
longer be available to make payments
to securityholders.
4
You will have no recourse against the
depositor or any other person if any
required distribution on the
securities is not made or for any
other default. The only obligations
of the depositor with respect to a
trust fund or the related securities
would result from a breach of the
representations and warranties that
the depositor may make concerning the
trust assets. However, because of the
depositor's very limited assets, even
if the depositor should be required
to repurchase a loan from a
particular trust fund because of the
breach of a representation or
warranty, its sole source of funds
for the repurchase would be:
o funds obtained from enforcing
any similar obligation of the
originator of the loan, or
o monies from any reserve fund
established to pay for loan
repurchases.
CREDIT ENHANCEMENT MAY BE
INSUFFICIENT TO PROVIDE AGAINST
PARTICULAR RISKS ...................... Although credit enhancement is
intended to reduce the effect of
delinquent payments or loan losses on
particular classes of securities, the
amount of any credit enhancement is
subject to the limits described in
the related prospectus supplement. In
addition, the amount of credit
enhancement may decline or be
depleted before the related
securities are paid in full. As a
result, securityholders may suffer
losses.
PRINCIPAL PAYMENTS ON THE LOANS MAY
ADVERSELY AFFECT THE AVERAGE LIFE OF,
AND RATE OF RETURN ON, YOUR
SECURITIES ............................ You may be unable to reinvest the
principal payments on your securities
at a rate of return equal to the rate
on your securities. The timing of
principal payments on the securities
of a series will be affected by a
number of factors, including the
following:
o the extent of prepayments on the
underlying loans in the trust
fund or, if the trust fund
contains underlying securities,
on the loans backing the
underlying securities;
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related
prospectus supplement;
5
o if any party has an option to
terminate the related trust
early, the effect of the
exercise of the option;
o the rate and timing of defaults
and losses on the assets in the
related trust fund;
o repurchases of assets in the
related trust fund as a result
of material breaches of
representations and warranties
made by the depositor or a
seller; and
o in the case of a trust fund that
contains revolving credit line
loans, any provisions for
non-amortization, early
amortization or scheduled
amortization periods described
in the related prospectus
supplement.
All the above factors may affect the
yield to maturity of the securities.
THE INTEREST ACCRUAL PERIOD MAY
REDUCE THE EFFECTIVE YIELD ON
YOUR SECURITIES ....................... Interest payable on the securities on
any given distribution date will
include all interest accrued during
the related interest accrual period.
Each prospectus supplement will
specify the interest accrual period
for the related securities. If
interest accrues during the calendar
month before the related distribution
date, your effective yield will be
less than it would be if the interest
accrual period ended the day before
the distribution date. As a result,
your effective yield at par may be
less than the indicated coupon rate.
LOANS WITH BALLOON PAYMENTS MAY INCREASE
YOUR RISK OF LOSS........................ Certain underlying loans may not be
fully amortizing over their terms to
maturity and may require a
substantial principal payment (a
"balloon" payment) at their stated
maturity. Loans of this type involve
greater risk than fully amortizing
loans since the borrower generally
must be able to refinance the loan or
sell the related property prior to
the loan's maturity date. The
borrower's ability to do so will
depend on such factors as the level
of available mortgage rates at the
time of sale or refinancing, the
relative strength of the local
housing market, the borrower's equity
in the property, the borrower's
general financial condition and tax
laws.
6
ADJUSTABLE RATE LOANS MAY BE
UNDERWRITTEN TO LESS STRINGENT STANDARDS
THAN FIXED RATE LOANS.................... A trust fund may include adjustable
rate loans that were underwritten on
the assumption that the borrowers
would be able to make higher monthly
payments in a relatively short period
of time. In fact, however, the
borrowers' income may not be
sufficient to meet their loan
payments as payment amounts increase,
thus increasing the risk of default.
JUNIOR LIEN LOANS GENERALLY ARE RISKIER
THAN SENIOR LIEN LOANS................... If the mortgage or home equity loans
in a trust fund are primarily in a
junior lien position, any proceeds
from liquidations, insurance
recoveries or condemnations must be
used first to satisfy the claims of
the related senior lien loans (and
related foreclosure expenses) before
being available to satisfy the junior
lien loans. In addition, a junior
mortgage lender may only foreclose
subject to the related senior
mortgage. As a result, the junior
mortgage lender must either pay the
related senior mortgage lender in
full, at or before the foreclosure
sale, or agree to make the regular
payments on the senior mortgage. The
trust will not have a source of funds
to satisfy any senior mortgages or to
continue making payments on them. As
a result, the trust's ability, as a
practical matter, to foreclose on any
junior mortgage loan will be quite
limited.
A DECLINE IN PROPERTY VALUES COULD
REDUCE THE AMOUNT AND DELAY THE TIMING
OF RECOVERIES ON DEFAULTED MORTGAGE
LOANS ................................. The following factors, among others,
could adversely affect property
values in such a way that the
outstanding balance of the related
loans, together with any senior
financing on the same properties,
would equal or exceed those values:
o an overall decline in the
residential real estate markets
where the properties are
located;
o failure of borrowers to maintain
their properties adequately; and
o natural disasters that may not
be covered by hazard insurance,
such as earthquakes and floods.
7
If property values decline, actual
rates of delinquencies, foreclosures
and losses on the underlying loans
could be higher than those currently
experienced by the mortgage lending
industry in general.
SOME MORTGAGED PROPERTIES MAY NOT BE
OWNER OCCUPIED........................... The mortgaged properties in the trust
fund may not be owner occupied. Rates
of delinquencies, foreclosures and
losses on mortgage loans secured by
non-owner occupied properties may be
higher than those on mortgage loans
secured by the borrower's primary
residence.
HOME IMPROVEMENT CONTRACTS AND OTHER
LOANS MAY NOT HAVE SUFFICIENT SECURITY... A trust fund may include home
improvement contracts that are not
secured by an interest in real estate
or otherwise. A trust fund may also
include mortgage or home equity loans
with original loan-to-value ratios
(or combined loan-to-value ratios in
the case of junior loans) greater
than 100%. In these cases, the trust
fund could be treated as a general
unsecured creditor for the unsecured
portion of these loans. If a loan of
this type goes into default, the
trust fund will have recourse only
against the borrower's assets
generally for the unsecured portion
of the loan, along with the
borrower's other general unsecured
creditors. In a bankruptcy
proceeding, the unsecured portion of
the loan may be discharged, even if
the value of the borrower's assets
available to the trust fund would be
insufficient to pay the remaining
amounts owing on the loan.
HOME IMPROVEMENT CONTRACTS WILL NOT BE
TAMPED.................................. The depositor will ensure that a
UCC-1 financing statement is filed
that identifies as collateral the
home improvement contracts included
in a trust fund. However, unless the
related prospectus supplement
provides otherwise, the home
improvement contracts themselves will
not be stamped or marked to reflect
their assignment to the trust fund.
Thus, if as a result of negligence,
fraud or otherwise, a subsequent
purchaser were able to take physical
possession of the contracts without
notice of the assignment to the trust
fund, the interests of the related
securityholders in those contracts
could be defeated.
8
IF AMOUNTS IN ANY PRE-FUNDING ACCOUNT
ARE NOT USED TO
PURCHASE TRUST ASSETS, YOU WILL
RECEIVE A PREPAYMENT ON THE
RELATED SECURITIES....................... The related prospectus supplement may
provide that the depositor or seller
will deposit a specified amount in a
pre-funding account on the date the
securities are issued. In this case,
the deposited funds may be used only
to acquire additional assets for the
trust during a specified period after
the initial issuance of the
securities. Any amounts remaining in
the account at the end of that period
will be distributed as a prepayment
of principal to the holders of the
related securities. The resulting
prepayment could adversely affect the
yield to maturity on those
securities.
BANKRUPTCY LAWS MAY RESULT IN ADVERSE
CLAIMS AGAINST TRUST FUND ASSETS......... The federal bankruptcy code and state
debtor relief laws may adversely
affect the ability of the trust fund,
as a secured lender, to realize upon
its security. For example, in a
federal bankruptcy proceeding, a
lender may not foreclose on mortgaged
property without the bankruptcy
court's permission. Similarly, the
debtor may propose a rehabilitation
plan, in the case of mortgaged
property that is not his principal
residence, that would reduce the
amount of the lender's secured
indebtedness to the value of the
property as of the commencement of
the bankruptcy. As a result, the
lender would be treated as a general
unsecured creditor for the reduced
amount, the amount of the monthly
payments due on the loan could be
reduced, and the interest rate and
loan payment schedule could be
changed.
Any such actions could result in
delays in receiving payments on the
loans underlying the securities and
result in the reduction of total
payments.
ENVIRONMENTAL RISKS MAY ADVERSELY AFFECT
TRUST FUND ASSETS........................ Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances,
these laws and regulations impose
obligations on owners or operators of
residential properties such as those
that secure the loans. Failure to
comply with these laws and
regulations can
9
result in fines and penalties that
could be assessed against the trust
fund as owner of the related
property.
In some states, a lien on the
property due to contamination has
priority over the lien of an existing
mortgage. Further, a mortgage lender
may be held liable as an "owner" or
"operator" for costs associated with
the release of petroleum from an
underground storage tank under
certain circumstances. If the trust
fund is considered the owner or
operator of a property, it will
suffer losses as a result of any
liability imposed for environmental
hazards on the property.
CONSUMER PROTECTION LAWS MAY ADVERSELY
AFFECT TRUST FUND ASSETS................. The loans and contracts in each trust
fund also may be subject to federal
laws relating to loan origination and
underwriting. These laws
o require certain disclosures to
the borrowers regarding the
terms of the loans;
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status,
national origin, receipt of
public assistance or the
exercise of any right under the
consumer credit protection act,
in the extension of credit;
o regulate the use and reporting
of information related to the
borrower's credit experience;
and
o require additional application
disclosures, limit changes that
may be made to the loan
documents without the borrower's
consent and restrict a lender's
ability to declare a default or
to suspend or reduce a
borrower's credit limit to
certain enumerated events.
Loans may also be subject to federal
laws that impose additional
disclosure requirements on creditors
with respect to non-purchase money
mortgage loans with high interest
rates or high up-front fees and
charges. These laws can impose
specific liabilities upon creditors
that fail to comply and may affect
the enforceability of the related
loans. In addition, the trust fund,
as assignee of the creditor, would
generally be subject to all claims
and defenses that the borrower could
assert against the creditor,
including the right to rescind the
loan.
10
Home improvement contracts may be
subject to federal laws that protect
the borrower from defective or
incomplete work by a contractor.
These laws permit the borrower to
withhold payment if the work does not
meet the quality and durability
standards agreed to between the
borrower and the contractor. These
laws have the effect of subjecting
the trust fund, as assignee of the
creditor, to all claims and defenses
which the borrower in a sale
transaction could assert against the
seller of defective goods.
If certain provisions of these
federal laws are violated, the
servicer may be unable to collect all
or part of the principal or interest
on the loans. The trust fund also
could be subject to damages and
administrative enforcement.
SUBORDINATE SECURITIES ARE SUBJECT TO
ADDITIONAL RISK.......................... If you invest in any class of
subordinate securities, your rights
as an investor to receive payments
otherwise due you will be subordinate
to the rights of the servicer and the
holders of the related senior
securities. As a result, before
investing in any subordinate
securities, you must be prepared to
bear the risk that payments on your
securities may be delayed and that
you might not recover all of your
initial investment.
ANY CREDIT SUPPORT PROVIDED BY FINANCIAL
INSTRUMENTS MAY BE INSUFFICIENT TO
PROTECT AGAINST PARTICULAR RISKS......... As described under "Credit
Enhancement--Financial Instruments"
in this prospectus, a trust fund may
include financial instruments to
protect against certain risks or to
provide certain cash flow
characteristics for particular
classes of the securities of a
series. If you invest in one of these
classes and the issuer of the
financial instruments fails to
perform its obligations, the yield to
maturity, market price and liquidity
of your securities could be
materially adversely affected. In
addition, if the issuer of the
related financial instruments
experiences a credit rating
downgrade, the market price and
liquidity of your securities could be
reduced. Finally, if the financial
instruments are intended to provide
an approximate or partial hedge for
certain risks or cashflow
characteristics, the yield to
maturity, market price and liquidity
of your securities could be adversely
affected to the extent that the
financial instrument does not provide
a perfect hedge.
11
REMIC RESIDUAL SECURITIES ARE SUBJECT TO
ADDITIONAL RISK.......................... If you invest in any class of
securities that represent the
"residual interest" in a real estate
mortgage investment conduit (REMIC),
you will be required to report as
ordinary income your pro rata share
of the REMIC's taxable income,
whether or not you actually received
any cash. Thus, as the holder of a
REMIC residual interest security, you
could have taxable income and tax
liabilities in a year that are in
excess of your ability to deduct
servicing fees and any other REMIC
expenses. In addition, because of
their special tax treatment, your
after-tax yield on a REMIC residual
interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of REMIC residual interest
securities are also restricted.
FASIT OWNERSHIP SECURITIES ARE SUBJECT
TO ADDITIONAL RISK....................... If you are a fully taxable domestic
corporation that invests in any class
of securities representing the
"ownership interest" in a financial
asset securitization investment trust
(FASIT), you will be required to
report as ordinary income your pro
rata share of the FASIT's taxable
income, whether or not you actually
received any cash. Thus, as the
holder of a FASIT ownership interest
security, you could have taxable
income and tax liabilities in a year
that are in excess of your ability to
deduct servicing fees and any other
FASIT expenses. In addition, because
of their special tax treatment, your
after-tax yield on a FASIT ownership
interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of FASIT ownership interest
securities are also restricted.
BOOK-ENTRY REGISTRATION MAY LIMIT YOUR
ABILITY TO SELL SECURITIES AND DELAY
YOUR RECEIPT OF PAYMENTS................. Limit on Liquidity of Securities.
Securities issued in book-entry form
may have only limited liquidity in
the resale market, since investors
may be unwilling to purchase
securities for which they cannot
obtain physical instruments.
Limit on Ability to Transfer or
Pledge. Transactions in book-entry
securities can be effected only
through The Depository Trust Company,
its participating organizations, its
indirect participants and certain
banks. As a result, your
12
ability to transfer or pledge
securities issued in book-entry form
may be limited.
Delays in Distributions. You may
experience some delay in the receipt
of distributions on book-entry
securities since the distributions
will be forwarded by the trustee to
DTC for DTC to credit to the accounts
of its participants. In turn, these
participants will credit the
distributions to your account either
directly or indirectly through
indirect participants.
RATINGS OF THE SECURITIES DO NOT ADDRESS
ALL INVESTMENT RISKS AND MUST BE VIEWED
WITH CAUTION............................. Any class of securities issued under
this prospectus and the accompanying
prospectus supplement will be rated
in one of the four highest rating
categories of a nationally recognized
rating agency. A rating is based on
the adequacy of the value of the
trust fund assets and any credit
enhancement for that class and
reflects the rating agency's
assessment of the likelihood that
holders of the class of securities
will receive the payments to which
they are entitled. A rating is not an
assessment of the likelihood that
principal prepayments on the
underlying loans will be made, the
degree to which the rate of
prepayments might differ from that
originally anticipated or the
likelihood of an early termination of
the securities. You should not view a
rating as a recommendation to
purchase, hold or sell securities
because it does not address the
market price or suitability of the
securities for any particular
investor.
There is no assurance that any rating
will remain in effect for any given
period or that the rating agency will
not lower or withdraw the rating in
the future. The rating agency could
lower or withdraw its rating due to:
o any decrease in the adequacy of
the value of the trust fund
assets or any related credit
enhancement, or
o an adverse change in the
financial or other condition of
a credit enhancement provider.
13
DESCRIPTION OF THE SECURITIES
GENERAL
Bear Stearns Asset Backed Securities, Inc., as depositor, will establish a
trust fund for each series of its securities. A particular series of
certificates will consist of mortgage-backed or asset-backed certificates or
notes or both certificates and notes.
Each series of certificates will be issued under a pooling and servicing
agreement or a trust agreement among the depositor, the trustee and, if the
trust fund includes loans, the related servicer. A form of pooling and servicing
agreement has been filed as an exhibit to the registration statement of which
this prospectus forms a part.
Each series of notes will be issued under an indenture between the related
trust fund and the trustee named in the prospectus supplement for that series. A
form of indenture has been filed as an exhibit to the registration statement of
which this prospectus forms a part. If the trust fund includes loans, the trust
fund and the servicer of the loans will also enter into a servicing agreement.
Each seller named in the related prospectus supplement, from which the
depositor will have purchased assets to be included in the trust fund, may agree
to reimburse the depositor for certain fees and expenses that the depositor
incurs in connection with the offering of the securities.
The following summaries describe the material provisions which may appear
in each pooling and servicing agreement or trust agreement, in the case of a
series of certificates, and in each indenture and servicing agreement, in the
case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the pooling and servicing agreement or
trust agreement, in the case of a series of certificates, and of the indenture
and servicing agreement, in the case of a series of notes, which materially
differs from the description contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the prospectus supplement and the
governing agreements for that series.
Each series of securities will consist of one or more classes which may be
compound interest securities, variable interest securities, planned balance
(PAC) securities, zero coupon securities, principal only securities, interest
only securities or participating securities. A series may also include one or
more classes of subordinated securities. The securities of each series will be
issued only in fully registered form, without coupons, in the authorized
denominations for each class specified in the related prospectus supplement.
Upon satisfaction of any conditions applicable to a particular class as
described in the related prospectus supplement, the transfer of the securities
may be registered, and the securities may be exchanged, at the office of the
trustee without the payment of any service charge, other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
14
Unless otherwise provided in the related prospectus supplement, payments of
principal of and interest on a series of securities will be made on each
distribution date specified in the prospectus supplement by check mailed to
holders of that series, registered as such at the close of business on the
record date specified in the prospectus supplement that is applicable to that
distribution date, at their addresses appearing on the security register.
However, payments may be made by wire transfer (at the expense of the holder
requesting payment by wire transfer) in circumstances described in the
prospectus supplement. However, final payments of principal in retirement of
each security will be made only upon presentation and surrender of the security
at the office of the related trustee. Notice of the final payment on a security
will be mailed to each holder before the distribution date on which the final
principal payment is expected to be made.
Payments of principal of and interest on the securities will be made by the
trustee, or a paying agent on behalf of the trustee, as specified in the related
prospectus supplement. Unless otherwise provided in the related prospectus
supplement, the following amounts will be deposited directly into the collection
account established for a particular series of securities with the trustee (or
with the servicer in the name of the trustee):
o all payments with respect to the primary assets for that series (see,
"--The Primary Assets and Their Valuation" below), together with
reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the prospectus supplement as rating that series and
deposited in each reserve fund for the series established in the name
of the trustee; and
o amounts available pursuant to any other credit enhancement for the
series.
If provided in the related prospectus supplement, the deposits may be net
of certain amounts payable to the servicer and any other person specified in the
prospectus supplement. These amounts thereafter will be deposited into the
separate distribution account established for the series and will be available
to make payments on the related securities on the next distribution date. See
"The Trust Funds--Collection and Distribution Accounts" in this prospectus.
THE PRIMARY ASSETS AND THEIR VALUATION
The primary assets of each trust fund may include one or more pools of the
following:
o Residential Loans,
o Home Equity Loans,
o Home Improvement Contracts,
o Manufactured Housing Contracts,
o Agency Securities, and
15
o Private Label Securities.
When we use the term "loans" in this prospectus, we include Residential
Loans, Home Equity Loans, Home Improvement Contracts and Manufactured Housing
Contracts. The residential or mixed-use properties that secure the loans are
collectively referred to in this prospectus as the "mortgaged properties."
If specified in the related prospectus supplement for a series of notes,
each primary asset included in the related trust fund will be assigned an
initial Asset Value. Unless otherwise specified in the related prospectus
supplement, the initial Asset Value of the primary assets of the trust fund will
be at least equal to the principal amount of the related notes on the date of
issuance.
PAYMENTS OF INTEREST
The securities of each class that by their terms are entitled to receive
interest will bear interest (calculated, unless otherwise specified in the
related prospectus supplement, on the basis of a 360-day year of twelve 30-day
months) from the date and at the rate specified in the prospectus supplement, or
will be entitled to receive interest payment amounts calculated in the method
described in the prospectus supplement. Interest on the interest-bearing
securities of a series will be payable on the distribution date specified in the
related prospectus supplement. The rate of interest on securities of a series
may be variable or may change with changes in the annual interest rates of the
loans (or underlying loans) included in the related trust fund and/or as
prepayments occur with respect to the loans (or underlying loans). Principal
only securities may not be entitled to receive any interest distributions or may
be entitled to receive only nominal interest distributions. Any interest on zero
coupon securities that is not paid on the related distribution date will accrue
and be added to principal on that date.
Interest payable on the securities on a distribution date will include all
interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding that distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made to
the holders of the securities on which principal is then payable, to the extent
set forth in the prospectus supplement. The payments will be made in a total
amount determined as specified in the prospectus supplement and will be
allocated among the respective classes of the series in the manner, at the times
and in the priority (which may include allocation by random lot) set forth in
the prospectus supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of a
series of notes is the date no later than which the total principal balance of
the class will be fully paid, and the final scheduled distribution date with
respect to each class of a series of certificates is the date on
16
which the principal balance of the class is expected to be reduced to zero, in
each case calculated on the basis of the assumptions applicable to that series
described in the related prospectus supplement. The final scheduled distribution
date for each class of a series will be specified in the related prospectus
supplement.
Since payments on the primary assets of each trust fund will be used to
make distributions that reduce the outstanding principal amount of the related
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, unless otherwise specified in the related prospectus supplement,
the actual final distribution date of any certificate may occur later than its
final scheduled distribution date as a result of delinquencies, defaults and
liquidations of the primary assets of the related trust fund. No assurance can
be given as to the actual prepayment experience with respect to any series. See
"--Weighted Average Lives of the Securities" below.
SPECIAL REDEMPTION
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
the securities may be subject to special redemption, in whole or in part, on the
special redemption date specified in the related prospectus supplement if, as a
consequence of prepayments on the loans (or underlying loans) or low yields then
available for reinvestment, the entity specified in the prospectus supplement
determines, based on assumptions set forth in the applicable agreement, that the
available interest amount that will have accrued on the securities through the
designated interest accrual date specified in the related prospectus supplement
is less than the amount of interest that will have accrued on the securities to
that date. In this event and as further described in the related prospectus
supplement, the trustee will redeem a principal amount of outstanding securities
of the series sufficient to cause the available interest amount to equal the
amount of interest that will have accrued through the designated interest
accrual date for the securities outstanding immediately after the redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The depositor or the servicer or any other entity that may be designated in
the related prospectus supplement will have the option, on any distribution
date, to purchase one or more classes of certificates of any series or redeem,
in whole or in part, one or more classes of notes of any series under the
circumstances, if any, specified in the related prospectus supplement.
Alternatively, if the prospectus supplement for a series of certificates so
provides, the depositor, the servicer or another entity designated in the
prospectus supplement will have the option to cause an early termination of the
related trust fund by repurchasing all of the primary assets from the trust fund
on or after a date specified in the prospectus supplement, or on or after such
time as the total outstanding principal amount of the certificates or primary
assets (as specified in the prospectus supplement) is equal to or less than the
amount or percentage specified in the prospectus supplement. Notice of the
redemption, purchase or termination must be given by the depositor or the
trustee prior to the related date. The redemption, purchase or repurchase price
will be set forth in the prospectus supplement. If specified in the prospectus
supplement, in the event that a REMIC election has been made, the trustee shall
receive a satisfactory opinion of
17
counsel that the optional redemption, purchase or termination will be conducted
so as to constitute a "qualified liquidation" under Section 860F of the Internal
Revenue Code of 1986, as amended.
In addition, the prospectus supplement may provide other circumstances
under which holders of securities of a series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related primary assets.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of the
security will be repaid to the investor. Unless otherwise specified in the
related prospectus supplement, the weighted average life of the securities of a
class will be influenced by the rate at which the amount financed under the
loans (or underlying loans relating to the Agency Securities or Private Label
Securities, as applicable), included in the trust fund for a series is paid,
whether in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The prospectus supplement for each series of
securities will describe the prepayment standard or model, if any, that is used
and may contain tables setting forth the projected weighted average life of each
class of securities of the series and the percentage of the original principal
amount of each class of securities of the series that would be outstanding on
specified distribution dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund will conform to any level of any
prepayment standard or model specified in the related prospectus supplement. The
rate of principal prepayments on pools of loans may be influenced by a variety
of factors, including job-related factors such as transfers, layoffs or
promotions and personal factors such as divorce, disability or prolonged
illness. Economic conditions, either generally or within a particular geographic
area or industry, also may affect the rate of principal prepayments. Demographic
and social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
others. The deductibility of mortgage interest payments, servicing decisions and
other factors also can affect the rate of principal prepayments. As a result,
there can be no assurance as to the rate or timing of principal prepayments of
the loans (or underlying loans) either from time to time or over the lives of
the loans (or underlying loans).
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the loans (or
underlying loans) for a series, the loans are
18
likely to prepay at rates higher than if prevailing interest rates remain at or
above the interest rates borne by the loans. In this regard, it should be noted
that the loans (or underlying loans) for a series may have different interest
rates. In addition, the weighted average life of a class of securities may be
affected by the varying maturities of the loans (or underlying loans). If any
loans (or underlying loans) for a series have actual terms to stated maturity
that are less than those that were assumed in calculating the final scheduled
distribution date of the related securities, one or more classes of the series
may be fully paid prior to their respective final scheduled distribution date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate established by the rating agencies named in the
related prospectus supplement.
THE TRUST FUNDS
GENERAL
The notes of each series will be secured by the pledge of the assets of the
related trust fund, and the certificates of each series will represent interests
in the assets of the related trust fund. The trust fund of each series will
include assets purchased by the depositor from the seller composed of:
o the primary assets of the trust fund;
o amounts available from the reinvestment of payments on the primary
assets at any Assumed Reinvestment Rate that may be established by the
rating agencies specified in the related prospectus supplement;
o any credit enhancement in the form of an irrevocable letter of credit,
surety bond, insurance policy or other form of credit support;
o REO property consisting of any mortgaged property or home improvement
that secured a loan but which is acquired by foreclosure or deed in
lieu of foreclosure or repossession; and
o the amount, if any, initially deposited into the collection account or
distribution account(s) for the series as specified in the related
prospectus supplement.
The securities will be non-recourse obligations of the related trust fund.
Unless the prospectus supplement indicates otherwise, the assets of the trust
fund specified in the related prospectus supplement will serve as collateral
only for that series of securities. Holders of a series of notes may only
proceed against the collateral securing that series in the case of a default
with respect to the notes and may not proceed against any assets of the
depositor or the related trust fund not pledged to secure the notes.
The primary assets for a series will be sold by the seller to the depositor
or purchased by the depositor in the open market or in privately negotiated
transactions (which may include transactions with affiliates) and will be
transferred by the depositor to the related trust fund. Loans relating to a
series will be serviced by the servicer (which may be the seller) that is
19
specified in the related prospectus supplement. The servicer will service the
loans pursuant to a pooling and servicing agreement with respect to a series of
certificates, or a servicing agreement between the trust fund and servicer with
respect to a series of notes.
If the prospectus supplement so provides, a trust fund relating to a series
of securities may be a business trust formed under the laws of the state
specified in the prospectus supplement pursuant to a trust agreement between the
depositor and the trustee.
Each trust fund, prior to the initial offering of the related series of
securities, will have no assets or liabilities. No trust fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related primary assets and other assets
contemplated in this prospectus and in the related prospectus
supplement, and the proceeds thereof,
o to issue the related securities,
o to make payments and distributions on the securities, and
o to perform certain related activities.
No trust fund is expected to have any source of capital other than its assets
and any related credit enhancement.
Primary assets included in the trust fund for a series may consist of any
combination of loans, Agency Securities and Private Label Securities, as and to
the extent the related prospectus supplement specifies.
THE LOANS
General. Loans in each trust fund may consist of Residential Loans, Home
Equity Loans, Home Improvement Contracts or Manufactured Housing Contracts. If
specified in the related prospectus supplement, the loans in the related trust
fund may include cooperative apartment loans secured by security interests in
shares issued by private, non-profit, cooperative housing corporations and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. As more fully
described in the related prospectus supplement, the loans may be either
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the FHA or VA. The loans will have been originated in accordance
with the underwriting criteria specified in the related prospectus supplement.
In general, the loans in a pool will have monthly payments due on the first
day of each month. However, as described in the related prospectus supplement,
the loans in a pool may have payments due more or less frequently than monthly.
In addition, payments may be due on any day during a month. The payment terms of
the loans to be included in a trust fund will be described in the related
prospectus supplement and may include any of the following features, all as
described in this prospectus or in the related prospectus supplement:
20
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to an index that
will be specified in the related prospectus supplement,
- a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations. As
specified in the related prospectus supplement, the loans may provide for
payments in level monthly installments, for balloon payments, or for
payments that are allocated to principal and interest according to the "sum
of the digits" or "Rule of 78s" methods. Accrued interest may be deferred
and added to the principal of a loan for the periods and under the
circumstances as may be specified in the related prospectus supplement.
Loans may provide for the payment of interest at a rate lower than the
specified loan rate for a period of time or for the life of the loan, and
the amount of any difference may be contributed from funds supplied by the
seller of the property or another source.
o Principal may be
- payable on a level debt service basis to fully amortize the loan
over its term,
- calculated on the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity or on an
interest rate that is different from the loan rate, or
- nonamortizing during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a balloon payment. Principal may include interest
that has been deferred and added to the principal balance of the loan.
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time or
- change from period to period.
21
Loans may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of monthly
payments.
Prepayments of principal may be conditioned on payment of a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for particular lockout periods. Some
loans may permit prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection with any
subsequent prepayment. Other loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The loans may
include "due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or transfers of the related
property. Other loans may be assumable by persons meeting the then applicable
underwriting standards of the related seller.
A trust fund may contain buydown loans that include provisions for a third
party to subsidize partially the monthly payments of the borrowers on those
loans during the early years of those loans, the difference to be made up from a
buydown fund contributed by that third party at the time of origination of the
loan. A buydown fund will be in an amount equal either to the discounted value
or full aggregate amount of future payment subsidies. The underlying assumption
of buydown plans is that the income of the borrower will increase during the
buydown period as a result of normal increases in compensation and inflation, so
that the borrower will be able to meet the full loan payments at the end of the
buydown period. If assumption of increased income is not fulfilled, the
possibility of defaults on buydown loans is increased. The related prospectus
supplement will contain information with respect to any buydown loan concerning
limitations on the interest rate paid by the borrower initially, on annual
increases in the interest rate and on the length of the buydown period.
When we use the term "mortgaged property" in this prospectus, we mean the
real property which secures repayment of the related loan. Home Improvement
Contracts and Manufactured Housing Contracts may, and the other loans will, be
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on a mortgaged property. In the case of Home Equity Loans, the
related liens may be subordinated to one or more senior liens on the related
mortgaged properties as described in the prospectus supplement. As specified in
the related prospectus supplement, home improvement contracts and manufactured
housing contracts may be unsecured or secured by purchase money security
interests in the financed home improvements and the financed manufactured homes.
When we use the term "properties" in this prospectus supplement, we mean the
related mortgaged properties, home improvements and manufactured homes. The
properties relating to the loans will consist primarily of single-family
properties, meaning detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments and other dwelling units, or mixed-use properties. Any
mixed-use property will not exceed three stories and its primary use will be for
one- to four-family residential occupancy, with the remainder of its space for
retail, professional or other commercial uses. Any non-residential use will be
in compliance with local zoning laws and regulations. Properties may include
vacation and second homes, investment properties and leasehold interests. In the
case of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the related loan by a time period specified in the related
prospectus supplement. The properties may be
22
located in any one of the fifty states, the District of Columbia, Guam, Puerto
Rico or any other territory of the United States.
Loans with specified loan-to-value ratios and/or principal balances may be
covered wholly or partially by primary mortgage guaranty insurance policies. The
existence, extent and duration of any coverage provided by primary mortgage
guaranty insurance policies will be described in the related prospectus
supplement.
Home Equity Loans. The primary assets for a series may consist, in whole or
in part, of, closed-end home equity loans, revolving credit line home equity
loans or certain balances forming a part of the revolving credit line loans,
secured by mortgages creating senior or junior liens primarily on one- to
four-family residential or mixed-use properties. The full principal amount of a
closed-end loan is advanced at origination of the loan and generally is
repayable in equal (or substantially equal) installments of an amount sufficient
to fully amortize the loan at its stated maturity. Unless otherwise described in
the related prospectus supplement, the original terms to stated maturity of
closed-end loans will not exceed 360 months. Principal amounts of a revolving
credit line loan may be drawn down (up to the maximum amount set forth in the
related prospectus supplement) or repaid from time to time, but may be subject
to a minimum periodic payment. Except to the extent provided in the related
prospectus supplement, the trust fund will not include any amounts borrowed
under a revolving credit line loan after the cut-off date designated in the
prospectus supplement. As more fully described in the related prospectus
supplement, interest on each revolving credit line loan, excluding introductory
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily principal balance of that loan. Under
certain circumstances, a borrower under either a revolving credit line loan or a
closed-end loan may choose an interest-only payment option. In this case only
the amount of interest that accrues on the loan during the billing cycle must be
paid. An interest-only payment option may be available for a specified period
before the borrower must begin making at least the minimum monthly payment of a
specified percentage of the average outstanding balance of the loan.
The rate of prepayment on Home Equity Loans cannot be predicted. Home
Equity Loans have been originated in significant volume only during the past few
years and the depositor is not aware of any publicly available studies or
statistics on the rate of their prepayment. The prepayment experience of the
related trust fund may be affected by a wide variety of factors, including
general economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility and the frequency and amount of
any future draws on any revolving credit line loans. Other factors that might be
expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying first mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
junior mortgage loans as shorter-term financing for a variety of purposes,
including home improvement, education expenses and purchases of consumer
durables such as automobiles. Accordingly, Home Equity Loans may experience a
higher rate of prepayment than traditional fixed-rate first mortgage loans. On
the other hand, because Home Equity Loans such as the revolving credit line
loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgage loans. Any future
limitations on the right of borrowers to deduct interest payments on Home Equity
Loans for federal income tax
23
purposes may further increase the rate of prepayments of the Home Equity Loans.
Moreover, the enforcement of a "due-on-sale" provision (as described below) will
have the same effect as a prepayment of the related Home Equity Loans. See
"Material Legal Aspects of the Loans--Due-on-Sale Clauses in Mortgage Loans" in
this prospectus.
Collections on revolving credit line loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is as
little as the minimum monthly payment for that month or, during the
interest-only period for certain revolving credit line loans (and, in
more limited circumstances, closed-end loans with respect to which an
interest-only payment option has been selected), the interest, fees and
charges for that month.
o A borrower may make a payment that is as much as the entire principal
balance plus accrued interest and related fees and charges during a
month.
o A borrower may fail to make the required periodic payment.
o Collections on the mortgage loans may vary due to seasonal purchasing
and the payment habits of borrowers.
Each single family property will be located on land owned in fee simple by
the borrower or on land leased by the borrower for a term at least ten years
(unless otherwise provided in the related prospectus supplement) greater than
the term of the related loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. Unless otherwise specified in the related prospectus supplement,
mortgages on cooperative dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of loans secured by single family
properties that are owner-occupied will be disclosed in the related prospectus
supplement. Unless otherwise specified in the prospectus supplement, the sole
basis for a representation that a given percentage of the loans are secured by
single family property that is owner-occupied will be either
o a representation by the borrower at origination of the loan either that
the underlying mortgaged property will be used by the borrower for a
period of at least six months every year or that the borrower intends
to use the mortgaged property as a primary residence, or
o a finding that the address of the underlying mortgaged property is the
borrower's mailing address as reflected in the servicer's records.
To the extent specified in the related prospectus supplement, single family
properties may include non-owner occupied investment properties and vacation and
second homes.
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Home Improvement Contracts. The primary assets for a series may consist, in
whole or in part, of home improvement installment sales contracts and
installment loan agreements originated by home improvement contractors in the
ordinary course of business. As specified in the related prospectus supplement,
the Home Improvement Contracts will be either unsecured or secured by senior or
junior mortgages primarily on single family properties, or by purchase money
security interests in the related home improvements. Unless otherwise specified
in the applicable prospectus supplement, the Home Improvement Contracts will be
fully amortizing and may have fixed interest rates or adjustable interest rates
and may provide for other payment characteristics as described below and in the
related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the home
improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Manufactured Housing Contracts. The trust fund assets for a series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business. As specified in the related
prospectus supplement, the Manufactured Housing Contracts will be secured by
manufactured homes, located in any of the fifty states or the District of
Columbia or by mortgages on the real estate on which the manufactured homes are
located.
The manufactured homes securing the Manufactured Housing Contracts will
consist of manufactured homes within the meaning of 42 United States Code,
Section 5402(6), or manufactured homes meeting those other standards as shall be
described in the related prospectus supplement. Section 5402(6) defines a
"manufactured home" as "a structure, transportable in one or more sections,
which, in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning and
electrical systems contained therein; except that the term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Manufactured homes, unlike mortgaged properties, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home or home improvement may be lower than the
principal amount outstanding under the related contract.
Additional Information. The selection criteria applicable to the loans will
be specified in the related prospectus supplement. These include, but are not
limited to, the combined loan-to-value ratios or loan-to-value ratios, as
applicable, original terms to maturity and delinquency information.
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The loans for a series of securities may include loans that do not amortize
their entire principal balance by their stated maturity in accordance with their
terms but require a balloon payment of the remaining principal balance at
maturity, as specified in the related prospectus supplement. As further
described in the related prospectus supplement, the loans for a series of
securities may include loans that do not have a specified stated maturity.
The loans will be either conventional contracts or contracts insured by the
Federal Housing Administration (FHA) or partially guaranteed by the Veterans
Administration (VA). Loans designated in the related prospectus supplement as
insured by the FHA will be insured under various FHA programs as authorized
under the United States Housing Act of 1937, as amended.. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
loans relating to a series of securities may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time or origination
of such loan.
The insurance premiums for loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development (HUD) and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted loan to HUD. With respect to
a defaulted FHA-insured loan, the servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the servicer or HUD,
that default was caused by circumstances beyond the borrower's control, the
servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
borrower. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the servicer in partial or full satisfaction of
amounts due under the loan (which payments are to be repaid by the borrower to
HUD) or by accepting assignment of the loan from the servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the loan and HUD must have rejected any request for relief from the
borrower before the servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The servicer of each FHA-insured loan will be obligated
to purchase any such debenture issued in satisfaction of a loan upon default for
an amount equal to the principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted loan adjusted to reimburse the
servicer for certain costs and expenses and to deduct certain amounts received
or retained by the servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
26
conveyance to HUD, the servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to the date of foreclosure but in general only to the extent it was allowed
pursuant to a forbearance plan approved by HUD. When entitlement to insurance
benefits results from assignment of the loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA-insured loan,
bears interest from a date 30 days after the borrower's first uncorrected
failure to perform any obligation to make any payment due under the loan and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related prospectus supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended. The Serviceman's Readjustment Act permits a veteran (or
in certain instances, the spouse of a veteran) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program has
no mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to its guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed loan, the servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranteed amount is submitted to the VA after liquidation of the related
mortgaged property.
The amount payable under a VA guaranty will be the percentage of the
VA-insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
The prospectus supplement for each series will provide information with
respect to the loans that are primary assets of the related trust fund as of the
cut-off date, including, among other things, and to the extent relevant:
o the aggregate unpaid principal balance of the loans;
27
o the range and weighted average interest rates on the loans and, in the
case of adjustable rate loans, the range and weighted average of the
current interest rates and the lifetime interest rate caps, if any;
o the range and average principal balance of the loans;
o the weighted average original and remaining terms to stated maturity of
the loans and the range of original and remaining terms to stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the loans, as applicable;
o the percentage (by principal balance as of the cut-off date) of loans
that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the loans;
o the percentage (by principal balance as of the cut-off date) of loans
that are secured by mortgaged properties or home improvements or that
are unsecured;
o the geographic distribution of any mortgaged properties securing the
loans;
o for loans that are secured by single family properties, the percentage
(by principal balance as of the cut-off date) secured by shares
relating to cooperative dwelling units, condominium units, investment
property and vacation or second homes;
o the lien priority of the loans;
o the delinquency status and year of origination of the loans;
o whether the loans are closed-end loans and/or revolving credit line
loans; and
o in the case of revolving credit line loans, the general payments and
credit line terms of those loans and other pertinent features.
The prospectus supplement will also specify any other limitations on the
types or characteristics of the loans in the trust fund for the related series
of securities.
If information of the nature described above respecting the loans is not
known to the depositor at the time the securities are initially offered, more
general or approximate information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series of securities and to be filed with the SEC
within 15 days after the initial issuance of the securities.
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PRIVATE LABEL SECURITIES
General. Primary assets for a series may consist, in whole or in part, of
Private Label Securities or PLS (i.e., private mortgage-backed asset-backed
securities) that include:
o pass-through certificates representing beneficial interests in
underlying loans of a type that would otherwise be eligible to be loans
held directly by the trust fund, or
o collateralized obligations secured by underlying loans of a type that
would otherwise be eligible to be loans held directly by the trust
fund.
The Private Label Securities will previously have been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering from a
person that is not an affiliate of the Private Label Securities at the
time of sale (nor its affiliate at any time during the three preceding
months) and a period of two years has elapsed since the date the
Private Label Securities were acquired from the issuer or its
affiliate, whichever is later.
Although individual underlying loans may be insured or guaranteed by the
United States or one of its agencies or instrumentalities, they need not be, and
the Private Label Securities themselves may be, but need not be, insured or
guaranteed.
The Private Label Securities will have been issued pursuant to a pooling
and servicing agreement, a trust agreement or similar agreement. The
seller/servicer of the underlying loans will have entered into a PLS agreement
with the PLS trustee. The PLS trustee, its agent or a custodian will take
possession of the underlying loans. The underlying loans will be serviced by the
PLS servicer directly or by one or more sub-servicers subject to the supervision
of the PLS servicer.
The issuer Private Label Securities will be
o a financial institution or other entity engaged generally in the
business of lending,
o a public agency or instrumentality of a state, local or federal
government, or
o a limited purpose corporation organized for the purpose of, among other
things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in trusts.
If specified in the prospectus supplement, the PLS issuer may be an affiliate of
the depositor. The obligations of the PLS issuer generally will be limited to
certain representations and warranties that it makes with respect to the assets
it conveys to the related trust. Unless otherwise specified in the related
prospectus supplement, the PLS issuer will not have guaranteed
29
any of the assets conveyed to the related trust or any of the Private Label
Securities issued under the PLS agreement.
Distributions of principal and interest will be made on the Private Label
Securities on the dates specified in the related prospectus supplement. The
Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase the underlying loans after a certain date or under other
circumstances specified in the related prospectus supplement.
The loans underlying the Private Label Securities may be fixed rate, level
payment, fully amortizing loans or adjustable rate loans or loans having balloon
or other irregular payment features. The underlying loans will be secured by
mortgages on mortgaged properties.
Credit Support Relating to Private Label Securities. Credit support in the
form of reserve funds, subordination of other private securities issued under
the PLS agreement, guarantees, cash collateral accounts, security policies or
other types of credit support may be provided with respect to the underlying
loans or with respect to the Private Label Securities themselves. The type,
characteristics and amount of credit support will be a function of the
characteristics of the underlying loans and other factors and will be based on
the requirements of the nationally recognized statistical rating organization
that rated the Private Label Securities.
Additional Information. If the primary assets of a trust fund include
Private Label Securities, the related prospectus supplement will specify the
items listed below, to the extent relevant and to the extent information is
reasonably available to the depositor and the depositor reasonably believes the
information to be reliable:
o the total approximate principal amount and type of the Private Label
Securities to be included in the trust fund,
o the maximum original term to stated maturity of the Private Label
Securities,
o the weighted average term to stated maturity of the Private Label
Securities,
o the pass-through or certificate rate or range of rates of the Private
Label Securities,
o the PLS issuer, the PLS servicer (if other than the PLS issuer) and the
PLS trustee,
o certain characteristics of any credit support such as reserve funds,
security policies or guarantees relating to the underlying loans or to
the Private Label Securities themselves;
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the
Private Label Securities, and
o the terms on which underlying loans may be substituted for those
originally underlying the Private Label Securities.
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In addition, the related prospectus supplement will provide information about
the loans underlying the Private Label Securities, including
o the payment features of the underlying loans (i.e., whether closed-end
loans or revolving credit line loans, whether fixed rate or adjustable
rate, whether level payment or balloon payment loans),
o the approximate aggregate principal balance, if known, of the
underlying loans insured guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
underlying loans,
o the minimum and maximum stated maturities of the underlying loans at
origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the underlying loans.
The above disclosure may be on an approximate basis and will be as of the
date specified in the related prospectus supplement. If information of the
nature described above for the Private Label Securities is not known to the
depositor at the time the securities are initially offered, more general or
approximate information of a similar nature will be provided in the prospectus
supplement and the additional information, if available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related series of securities and to be filed with the SEC within 15 days
of the initial issuance of the securities.
AGENCY SECURITIES
Ginnie Mae. The Government National Mortgage Association (Ginnie Mae) is a
wholly-owned corporate instrumentality of HUD. Section 306(g) of Title II of the
National Housing Act of 1934, as amended, authorizes Ginnie Mae to, among other
things, guarantee the timely payment of principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the FHA under the National Housing Act of 1934 or Title V of the National
Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United
States Code.
Section 306 (g) of the National Housing Act of 1934 provides that "the full
faith and credit of the United States is pledged to the payment of all amounts
which may be required to be paid under any guarantee under this subsection." In
order to meet its obligations under any guarantee under Section 306 (g) of the
National Housing Act, Ginnie Mae may, under Section 306(d) of the National
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable Ginnie Mae, with no limitations as to amount, to
perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae certificate held in a trust fund
for a series of securities will be a "fully modified pass-through"
mortgaged-backed certificate issued and serviced by a mortgage banking company
or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. Each Ginnie Mae
31
certificate may be a GNMA I certificate or a GNMA II certificate. The mortgage
loans underlying the Ginnie Mae certificates will consist of FHA loans and/or VA
loans. Each mortgage loan of this type is secured by a one- to four-family
residential property or a manufactured home. Ginnie Mae will approve the
issuance of each Ginnie Mae certificate in accordance with a guaranty agreement
between Ginnie Mae and the issuer and servicer of the Ginnie Mae certificate.
Pursuant to its guaranty agreement, a Ginnie Mae servicer will be required to
advance its own funds in order to make timely payments of all amounts due on
each of the related Ginnie Mae certificates, even if the payments received by
the Ginnie Mae servicer on the FHA loans or VA loans underlying each of those
Ginnie Mae certificates are less than the amounts due on those Ginnie Mae
certificates.
The full and timely payment of principal of and interest on each Ginnie Mae
certificate will be guaranteed by Ginnie Mae, which obligation is backed by the
full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 40 years (but may have original
maturities of substantially less than 40 years). Each Ginnie Mae certificate
will provide for the payment by or on behalf of the Ginnie Mae servicer to the
registered holder of the Ginnie Mae certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA loan or VA loan underlying the Ginnie Mae certificate, less the applicable
servicing and guarantee fee which together equal the difference between the
interest on the FHA loans or VA loans and the pass-through rate on the Ginnie
Mae certificate. In addition, each payment will include proportionate
pass-through payments of any prepayments of principal on the FHA loans or VA
loans underlying the Ginnie Mae certificate and liquidation proceeds in the
event of a foreclosure or other disposition of any the related FHA loans or VA
loans.
If a Ginnie Mae servicer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of a Ginnie Mae certificate. In
the event no payment is made by a Ginnie Mae servicer and the Ginnie Mae
servicer fails to notify and request Ginnie Mae to make the payment, the holder
of the related Ginnie Mae certificate will have recourse only against Ginnie Mae
to obtain the payment. The trustee or its nominee, as registered holder of the
Ginnie Mae certificates held in a trust fund, will have the right to proceed
directly against Ginnie Mae under the terms of the guaranty agreements relating
to the Ginnie Mae certificates for any amounts that are not paid when due.
Except for pools of mortgage loans secured by manufactured homes, all
mortgage loans underlying a particular Ginnie Mae certificate must have the same
interest rate over the term of the loan. The interest rate on a GNMA I
certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the GNMA I certificate, less one-half
percentage point per year of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II certificate may have annual
interest rates that vary from each other by up to one percentage point. The
interest rate on each GNMA II certificate will be between one-half percentage
point and one and one-half percentage points lower than the highest interest
rate on the mortgage loans included in the pool of mortgage loans
32
underlying the GNMA II certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each Ginnie Mae certificate will be
comprised of interest due as specified on a Ginnie Mae certificate plus the
scheduled principal payments on the FHA loans or VA loans underlying the Ginnie
Mae certificate due on the first day of the month in which the scheduled monthly
installments on the Ginnie Mae certificate is due. Regular monthly installments
on each Ginnie Mae certificate, are required to be paid to the trustee
identified in the related prospectus supplement as registered holder by the 15th
day of each month in the case of a GNMA I certificate, and are required to be
mailed to the trustee by the 20th day of each month in the case of a GNMA II
certificate. Any principal prepayments on any FHA loans or VA loans underlying a
Ginnie Mae certificate held in a trust fund or any other early recovery of
principal on a loan will be passed through to the trustee identified in the
related prospectus supplement as the registered holder of the Ginnie Mae
certificate.
Ginnie Mae certificates may be backed by graduated payment mortgage loans
or by "buydown" mortgage loans for which funds will have been provided, and
deposited into escrow accounts, for application to the payment of a portion of
the borrowers' monthly payments during the early years of those mortgage loans.
Payments due the registered holders of Ginnie Mae certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of the mortgage loans, will be less than the amount
of stated interest on the mortgage loans. The interest not so paid will be added
to the principal of the graduated payment mortgage loans and, together with
interest on that interest, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer/servicer will be the same irrespective of
whether the Ginnie Mae certificates are backed by graduated payment mortgage
loans or "buydown" mortgage loans. No statistics comparable to the FHA's
prepayment experience on level payment, non-buydown loans are available in
inspect of graduated payment or buydown mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders. Fannie Mae acquires funds to purchase mortgage
loans from many capital market investors that may not ordinarily invest in
mortgages. In so doing, it expands the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
Fannie Mae Certificates. Fannie Mae certificates are either guaranteed
mortgage pass-through certificates or stripped mortgage-backed securities. The
following discussion of
33
Fannie Mae certificates applies equally to both types of Fannie Mae
certificates, except as otherwise indicated. Each Fannie Mae certificate to be
included in the trust fund for a series of securities will represent a
fractional undivided interest in a pool of mortgage loans formed by Fannie Mae.
Each pool formed by Fannie Mae will consist of mortgage loans of one of the
following types:
o fixed-rate level installment conventional mortgage loans,
o fixed-rate level installment mortgage loans that are insured by FHA or
partially guaranteed by the VA,
o adjustable rate conventional mortgage loans, or
o adjustable rate mortgage loans that are insured by the FHA or partially
guaranteed by the VA.
Each mortgage loan must meet the applicable standards set forth under the Fannie
Mae purchase program and will be secured by a first lien on a one- to
four-family residential property.
Each Fannie Mae certificate will be issued pursuant to a trust indenture.
Original maturities of substantially all of the conventional, level payment
mortgage loans underlying a Fannie Mae certificate are expected to be between
either eight to 15 years or 20 to 40 years. The original maturities of
substantially all of the fixed rate level payment FHA loans or VA loans are
expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual interest
rates that vary by as much as two percentage points from one another. The rate
of interest payable on a Fannie Mae guaranteed mortgage-backed certificate and
the series pass-through rate payable with respect to a Fannie Mae stripped
mortgage-backed security is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and Fannie Mae's guaranty fee. Under a
regular servicing option pursuant to which the mortgagee or other servicer
assumes the entire risk of foreclosure losses, the annual interest rates on the
mortgage loans underlying a Fannie Mae certificate will be between 50 basis
points and 250 basis points greater than the annual pass-through rate, in the
case of a Fannie Mae guaranteed mortgage-backed certificate, or the series
pass-through rate in the case of a Fannie Mae stripped mortgage-backed security.
Under a special servicing option pursuant to which Fannie Mae assumes the entire
risk for foreclosure losses, the annual interest rates on the mortgage loans
underlying a Fannie Mae certificate will generally be between 55 basis points
and 255 basis points greater than the annual pass-through rate, in the case of a
Fannie Mae guaranteed mortgage-backed certificate, or the series pass-through
rate in the case of a Fannie Mae stripped mortgage-backed security.
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute on a timely basis amounts representing the holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated
34
mortgage loan, whether or not the principal amount is actually recovered. The
obligations of Fannie Mae under its guarantees are obligations solely of Fannie
Mae and are not backed by, or entitled to, the full faith and credit of the
United States. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on those mortgage loans.
Fannie Mae stripped mortgage-backed securities are issued in series of two
or more classes, with each class representing a specified undivided fractional
interest in principal distributions and interest distributions, adjusted to the
series pass-through rate, on the underlying pool of mortgage loans. The
fractional interests of each class in principal and interest distributions are
not identical, but the classes in the aggregate represent 100% of the principal
distributions and interest distributions, adjusted to the series pass-through
rate, on the respective pool. Because of the difference between the fractional
interests in principal and interest of each class, the effective rate of
interest on the principal of each class of Fannie Mae stripped mortgage-backed
securities may be significantly higher or lower than the series pass-through
rate and/or the weighted average interest rate of the underlying mortgage loans.
Unless otherwise specified by Fannie Mae, Fannie Mae certificates
evidencing interests in pools of mortgages formed on or after May 1, 1985 will
be available in book-entry form only. Distributions of principal and interest on
each Fannie Mae certificate will be made by Fannie Mae on the 25th day of each
month to the persons in whose name the Fannie Mae certificate is entered in the
books of the Federal Reserve Banks, or registered on the Fannie Mae certificate
register in the case of fully registered Fannie Mae certificates as of the close
of business on the last day of the preceding month. With respect to Fannie Mae
certificates issued in book-entry form, distributions on the Fannie Mae
certificates will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions on the Fannie Mae certificates will be made by
check.
Freddie Mac. The Federal Home Loan Mortgage Corporation (Freddie Mac) is a
shareholder-owned, United States government-sponsored enterprise created
pursuant to the Federal Home loan Mortgage Corporation Act, Title III of the
Emergency Home Finance Act of 1970, as amended. The common stock of Freddie Mac
is owned by the Federal Home loan Banks. Freddie Mac was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of Freddie Mac currently consists of the purchase of first lien
conventional mortgage loans FHA loans, VA loans or participation interests in
those mortgage loans and the sale of the loans or participations so purchased in
the form of mortgage securities, primarily Freddie Mac certificates. Freddie Mac
is confined to purchasing, so far as practicable, mortgage loans that it deems
to be of the quality, type and class which meet generally the purchase standards
imposed by private institutional mortgage investors.
Freddie Mac Certificates. Each Freddie Mac certificate included in a trust
fund for a series will represent an undivided interest in a pool of mortgage
loans that may consist of first
35
lien conventional loans, FHA loans or VA loans. Freddie Mac certificates are
sold under the terms of a mortgage participation certificate agreement. A
Freddie Mac certificate may be issued under either Freddie Mac's Cash Program or
Guarantor Program. Typically, mortgage loans underlying the Freddie Mac
certificates held by a trust fund will consist of mortgage loans with original
terms to maturity of from ten to 40 years. Each of those mortgage loans must
meet the applicable standards set forth in the law governing Freddie Mac. A
Freddie Mac certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac certificate group. Under the guarantor program,
any Freddie Mac certificate group may include only whole loans or participation
interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac certificate group represented by a Freddie Mac
certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac certificate ultimate receipt by a holder of
all principal on the underlying mortgage loans, without any offset or deduction,
to the extent of that holder's pro rata share. However, Freddie Mac does not
guarantee, except if and to the extent specified in the prospectus supplement
for a series, the timely payment of scheduled principal. Under Freddie Mac's
Gold PC Program, Freddie Mac guarantees the timely payment of principal based on
the difference between the pool factor published in the month preceding the
month of distribution and the pool factor published in the related month of
distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (x) 30
days following foreclosure sale, (y) 30 days following payment of the claim by
any mortgage insurer, or (z) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home loan Bank and do not constitute debts or obligations of the United
States or any Federal Home loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy its obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
36
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or by the party that sold
the related mortgage loans to Freddie Mac. Freddie Mac is required to remit each
registered Freddie Mac certificateholder's pro rata share of principal payments
on the underlying mortgage loans, interest at the Freddie Mac pass-through rate
and any other sums like prepayment fees, within 60 days of the date on which
those payments are deemed to have been received by Freddie Mac.
Under Freddie Mac's Cash Program, with respect to pools formed prior to
June 1, 1987, there is no limitation on be amount by which interest rates on the
mortgage loans underlying a Freddie Mac certificate may exceed the pass-through
rate on the Freddie Mac certificate. With respect to Freddie Mac certificates
issued on or after June 1, 1987, the maximum interest rate on the mortgage loans
underlying the Freddie Mac certificates may exceed the pass-through rate of the
Freddie Mac certificates by 50 to 100 basis points. Under that program, Freddie
Mac purchases group of whole mortgage loans from sellers at specified
percentages of their unpaid principal balances, adjusted for accrued or prepaid
interest, which when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield expressed as a percentage
required by Freddie Mac. The required yield, which includes a minimum servicing
fee retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations in
a Freddie Mac certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac certificate
group based upon their yield to Freddie Mac rather than on the interest rate on
the underlying mortgage loans.
Under Freddie Mac's Guarantor Program, the pass-through rate on a Freddie
Mac certificate is established based upon the lowest interest rate on the
underlying mortgage loans, minus a minimum servicing fee and the amount of
Freddie Mac's management and guaranty income as agreed upon between the seller
and Freddie Mac. For Freddie Mac certificate group formed under the Guarantor
Program with certificate numbers beginning with 18-012, the range between the
lowest and the highest annual interest rates on the mortgage loans in a Freddie
Mac certificate group may not exceed two percentage points.
Freddie Mac certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the Freddie Mac certificates. Subsequent remittances will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to Freddie Mac certificates sold by Freddie Mac
on or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders of Freddie Mac certificates in accordance with
the holders' instructions.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described in this
prospectus and in the related
37
prospectus supplement. Each Agency Security of this type will represent an
undivided interest in all or part of either the principal distributions or the
interest distributions, or in some specified portion of the principal and
interest distributions, on particular Freddie Mac, Fannie Mae, Ginnie Mae or
other government agency or government-sponsored agency certificates. The
underlying securities will be held under a trust agreement by Freddie Mac,
Fannie Mae, Ginnie Mae or another government agency or government-sponsored
agency, each as trustee, or by another trustee named in the related prospectus
supplement. Freddie Mac, Fannie Mae, Ginnie Mae or another government agency or
government-sponsored agency will guarantee each stripped agency security to the
same extent as the applicable entity guarantees the underlying securities
backing the stripped Agency Security, unless otherwise specified in the related
prospectus supplement.
Other Agency Securities. If specified in the related prospectus supplement,
a trust fund may include other mortgage pass-through certificates issued or
guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac or other government agencies
or government-sponsored agencies. The characteristics of any other mortgage
pass-through certificates issued or guaranteed by Ginnie Mae, Fannie Mae,
Freddie Mac or other government agencies or government-sponsored agencies will
be described in that prospectus supplement. If so specified, a combination of
different types of Agency Securities may be held in a trust fund.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate collection account will be established by the trustee, or by the
servicer in the name of the trustee, for each series of securities for receipt
of
o the amount of any cash specified in the related prospectus supplement
to be initially deposited by the depositor in the collection account,
o all amounts received with respect to the primary assets of the related
trust fund, and
o unless otherwise specified in the related prospectus supplement, income
earned on the foregoing amounts.
As provided in the related prospectus supplement, certain amounts on deposit in
the collection account and certain amounts available under any credit
enhancement for the securities of that series will be deposited into the
applicable distribution account for distribution to the holders of the related
securities. The trustee will establish a separate distribution account for each
series of securities. Unless otherwise specified in the related prospectus
supplement, the trustee will invest the funds in the collection account and the
distribution account in eligible investments including, among other investments,
obligations of the United States and certain of its agencies, federal funds,
certificates of deposit, commercial paper, demand and time deposits and banker's
acceptances, certain repurchase agreements of United States government
securities and certain guaranteed investment contracts, in each case acceptable
to the rating agencies named in the prospectus supplement. With certain
exceptions, all such eligible investments must mature, in the case of funds in
the collection account, not later than the day preceding the date when the funds
are due to be deposited into the distribution account or otherwise distributed
and, in the
38
case of funds in the distribution account, not later than the day preceding the
next distribution date for the related series of securities.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related prospectus supplement.
If specified in the related prospectus supplement, a trust fund will
include one or more pre-funding accounts that are segregated trust accounts
established and maintained with the trustee for the related series. If specified
in the prospectus supplement, a portion of the proceeds of the sale of the
securities equal to the pre-funded amount will be deposited into the pre-funding
account on the closing date and may be used to purchase additional primary
assets during the pre-funding period specified in the prospectus supplement. In
no case will the pre-funded amount exceed 50% of the total principal amount of
the related securities, and in no case will the pre-funding period exceed one
year. The primary assets to be purchased generally will be selected on the basis
of the same criteria as those used to select the initial primary assets of the
trust fund, and the same representations and warranties will be made with
respect to them. If any pre-funded amount remains on deposit in the pre-funding
account at the end of the pre-funding period, the remaining amount will be
applied in the manner specified in the related prospectus supplement to prepay
the notes and/or the certificates of that series.
If a pre-funding account is established, one or more capitalized interest
accounts that are segregated trust accounts may be established and maintained
with the trustee for the related series. On the closing date for the series, a
portion of the proceeds of the sale of the related securities will be deposited
into the capitalized interest account and used to fund the excess, if any, of
o the sum of
o the amount of interest accrued on the securities of the series, and
o if specified in the related prospectus supplement, certain fees or
expenses during the pre-funding period,
over
o the amount of interest available from the primary assets in the trust
fund.
Any amounts on deposit in the capitalized interest account at the end
of the pre-funding period that are not necessary for these purposes will be
distributed to the person specified in the related prospectus supplement.
CREDIT ENHANCEMENT
If so provided in the prospectus supplement relating to a series of
securities, simultaneously with the depositor's assignment of the primary assets
to the trustee, the depositor will obtain from an institution or by other means
acceptable to the rating agencies named in the prospectus supplement one or more
types of credit enhancement in favor of the trustee on behalf
39
of the holders of the related series or designated classes of the series. The
credit enhancement will support the payment of principal of and interest on the
securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in the prospectus supplement. Credit enhancement
for a series may include one or more of the forms described below or any other
form as may be specified in the related prospectus supplement. If so specified
in the related prospectus supplement, the credit enhancement may be structured
so as to protect against losses relating to more than one trust fund.
SUBORDINATED SECURITIES
If specified in the related prospectus supplement, credit enhancement for a
series may consist of one or more classes of subordinated securities. The rights
of the holders of subordinated securities to receive distributions on any
distribution date will be subordinate in right and priority to the rights of
holders of senior securities of the same series, but only to the extent
described in the related prospectus supplement.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or on specified
classes will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of:
o maintaining timely payments or providing additional protection against
losses on the trust fund assets;
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made in
respect of those assets or principal payment rate on those assets.
Arrangements may include agreements under which securityholders are entitled to
receive amounts deposited in various accounts held by the trustee upon the terms
specified in the related prospectus supplement. A copy of any arrangement
instrument for a series will be filed with the SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC following issuance of the securities
of the related series.
OVER-COLLATERALIZATION
If so provided in the prospectus supplement for a series of securities, a
portion of the interest payment on each loan included in the trust fund may be
applied as an additional distribution in respect of principal to reduce the
principal balance of a class or classes of
40
securities and, thus, accelerate the rate of payment of principal on that class
or those classes of securities.
OTHER INSURANCE POLICIES
If specified in the related prospectus supplement, credit enhancement for a
series may consist of pool insurance policies, special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets, as described below and in the related prospectus supplement.
Pool Insurance Policy. If so specified in the related prospectus
supplement, the depositor will obtain a pool insurance policy for the loans in
the related trust fund. The pool insurance policy will cover any loss (subject
to the limitations described in the prospectus supplement) by reason of default,
but will not cover the portion of the principal balance of any loan that is
required to be covered by any primary mortgage insurance policy. The amount and
terms of any pool insurance coverage will be set forth in the related prospectus
supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to property securing a defaulted or foreclosed loan (title
to which has been acquired by the insured) and to the extent the damage is not
covered by a standard hazard insurance policy (or any flood insurance policy, if
applicable) required to be maintained with respect to the property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of
o the cost of repair or replacement of the property, and
o upon transfer of the property to the special hazard insurer, the unpaid
principal balance of the loan at the time of acquisition of the
property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement and certain expenses incurred
by the servicer with respect to the property.
If the unpaid principal balance of the loan plus accrued interest and
certain expenses is paid by the special hazard insurer, the amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the related property. Any amount
paid as the cost of repair of the property will reduce coverage by that amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the property with the proceeds described in the first bullet
of the second previous paragraph is expected to satisfy the condition under any
pool insurance policy that the property be restored before a claim under the
pool insurance policy may be validly presented with respect to the defaulted
loan secured by the property. The payment described in the second bullet of the
second previous paragraph will render unnecessary presentation of a claim in
respect of the loan under any pool insurance policy. Therefore, so long as a
pool insurance
41
policy remains in effect, the payment by the special hazard insurer of the cost
of repair or of the unpaid principal balance of the related loan plus accrued
interest and certain expenses will not affect the total amount in respect of
insurance proceeds paid to holders of the securities, but will affect the
relative amounts of coverage remaining under the special hazard insurance policy
and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the property securing the related loan at an
amount less than the then-outstanding principal balance of the loan. The amount
of the secured debt could be reduced to that value, and the holder of the loan
thus would become an unsecured creditor to the extent the principal balance of
the loan exceeds the value assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Material Legal Aspects of the Loans" in this
prospectus. If the related prospectus supplement so provides, the depositor or
other entity specified in the prospectus supplement will obtain a bankruptcy
bond or similar insurance contract covering losses resulting from proceedings
with respect to borrowers under the Federal Bankruptcy Code. The bankruptcy bond
will cover certain losses resulting from a reduction by a bankruptcy court of
scheduled payments of principal of and interest on a loan or a reduction by the
court of the principal amount of a loan and will cover certain unpaid interest
on the amount of any principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the prospectus supplement for all loans in the trust fund for the related
series. The amount will be reduced by payments made under the bankruptcy bond in
respect of the loans, unless otherwise specified in the related prospectus
supplement, and will not be restored.
RESERVE FUNDS
If the prospectus supplement relating to a series of securities so
specifies, the depositor will deposit into one or more reserve funds cash, a
letter or letters of credit, cash collateral accounts, eligible investments, or
other instruments meeting the criteria of the rating agencies in the amount
specified in the prospectus supplement. Each reserve fund will be established by
the trustee as part of the trust fund for that series or for the benefit of the
credit enhancement provider for that series. In the alternative or in addition
to the initial deposit by the depositor, a reserve fund for a series may be
funded over time through application of all or a portion of the excess cash flow
from the primary assets for the series, to the extent described in the related
prospectus supplement. If applicable, the initial amount of the reserve fund and
the reserve fund maintenance requirements for a series of securities will be
described in the related prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee to
make payments on the securities of the related series, to pay expenses, to
reimburse any credit enhancement provider for the series or for any other
purpose, in the manner and to the extent specified in the related prospectus
supplement.
Amounts deposited into a reserve fund will be invested by the trustee in
eligible investments maturing no later than the day specified in the related
prospectus supplement.
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CROSS-COLLATERALIZATION
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
trust fund prior to distributions to subordinated securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within that trust fund. Cross-collateralization may be provided by
o the allocation of a portion of excess amounts generated by one or more
asset groups within the same trust fund to one or more other asset
groups within the same trust fund, or
o the allocation of losses with respect to one or more asset groups to
one or more other asset groups within the same trust fund.
Excess amounts will be applied and/or losses will be allocated to the class or
classes of subordinated securities of the related series then outstanding having
the lowest rating assigned by any rating agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related prospectus supplement. The prospectus supplement for a series which
includes a cross-collateralization feature will describe the manner and
conditions for applying the cross-collateralization feature.
If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support described in this prospectus may apply
concurrently to two or more related trust funds. If applicable, the related
prospectus supplement will identify the trust funds to which credit support
relates and the manner of determining the amount of coverage the credit support
provides to the identified trust funds.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If provided in the prospectus supplement relating to a series of
securities, the depositor will enter into a minimum principal payment agreement
with an entity meeting the criteria of the rating agencies named in the
prospectus supplement under which the entity will provide certain payments on
the securities of the series in the event that aggregate scheduled principal
payments and/or prepayments on the primary assets for the series are not
sufficient to make payments on the securities of the series as provided in the
prospectus supplement.
DEPOSIT AGREEMENT
If specified in a prospectus supplement, the depositor and the trustee for
a series of securities will enter into a deposit agreement with the entity
specified in the prospectus supplement on or before the sale of the related
series of securities. The deposit agreement is intended to accumulate available
cash for investment so that the cash, together with income thereon, can be
applied to future distributions on one or more classes of securities. The
related prospectus supplement will describe the terms of any deposit agreement.
43
FINANCIAL INSTRUMENTS
If provided in the related prospectus supplement, the trust fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the loans and Private Label
Securities from fixed to floating payments, or from floating to fixed,
or from floating based on a particular index to floating based on
another index;
o to provide payments if any index rises above or falls below specified
levels; or
o to provide protection against interest rate changes, certain types of
losses or other payment shortfalls to one or more classes of the
related series.
If a trust fund includes financial instruments of this type, the instruments may
be structured to be exempt from the registration requirements of the Securities
Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
SERVICING OF LOANS
GENERAL
Under the pooling and servicing agreement or the servicing agreement for a
series of securities, the servicer will provide customary servicing functions
with respect to the loans comprising the primary assets of the related trust
fund.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The servicer will make reasonable efforts to collect all payments required
to be made under the loans and will, consistent with the terms of the related
governing agreement for a series and any applicable credit enhancement, follow
such collection procedures as it follows with respect to comparable loans held
in its own portfolio. Consistent with the above, the servicer has the discretion
to
o waive any assumption fee, late payment charge, or other charge in
connection with a loan, and
o to the extent provided in the related agreement, arrange with a
borrower a schedule for the liquidation of delinquencies by extending
the due dates for scheduled payments on the loan.
If the related prospectus supplement so provides, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
with respect to loans in which borrower payments for taxes, assessments,
mortgage and hazard insurance policy premiums and other comparable items will be
deposited. In the case of loans that do not require such payments under the
related loan documents, the servicer will not be required to establish any
escrow or
44
impound account for those loans. The servicer will make withdrawals from the
escrow accounts to effect timely payment of taxes, assessments and mortgage and
hazard insurance, to refund to borrowers amounts determined to be overages, to
pay interest to borrowers on balances in the escrow accounts to the extent
required by law, to repair or otherwise protect the related property and to
clear and terminate the escrow accounts. The servicer will be responsible for
the administration of the escrow accounts and generally will make advances to
the escrow accounts when a deficiency exists.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless the related prospectus supplement specifies otherwise, the trustee
or the servicer will establish a separate collection account in the name of the
trustee. Unless the related prospectus supplement provides otherwise, the
collection account will be
o an account maintained at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit are
rated by each rating agency named in the prospectus supplement at
levels satisfactory to the rating agency; or
o an account the deposits in which are insured to the maximum extent
available by the Federal Deposit Insurance Corporation or an account
secured in a manner meeting requirements established by each rating
agency named in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the funds
held in the collection account may be invested in eligible investments. If so
specified in the related prospectus supplement, the servicer will be entitled to
receive as additional compensation any interest or other income earned on funds
in the collection account.
Unless otherwise specified in the related prospectus supplement, the
servicer, the depositor, the trustee or the seller, as appropriate, will deposit
into the collection account for each series, on the business day following the
closing date, all scheduled payments of principal and interest on the primary
assets due after the related cut-off date but received by the servicer on or
before the closing date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
the servicer (other than, unless otherwise provided in the related prospectus
supplement, in respect of principal of and interest on the related primary
assets due on or before the cut-off date):
o all payments in respect of principal, including prepayments, on the
primary assets;
o all payments in respect of interest on the primary assets after
deducting, at the discretion of the servicer (but only to the extent of
the amount permitted to be withdrawn or withheld from the collection
account in accordance with the related agreement), related servicing
fees payable to the servicer;
o all Liquidation Proceeds after deducting, at the discretion of the
servicer (but only to the extent of the amount permitted to be
withdrawn from the collection account in accordance with the related
agreement), the servicing fee, if any, in respect of the related
primary asset;
45
o all Insurance Proceeds;
o all amounts required to be deposited into the collection account from
any reserve fund for the series pursuant to the related agreement;
o all advances of cash made by the servicer in respect of delinquent
scheduled payments on a loan and for any other purpose as required
pursuant to the related agreement; and
o all repurchase prices of any primary assets repurchased by the
depositor, the servicer or the seller pursuant to the related
agreement.
Unless otherwise specified in the related prospectus supplement, the
servicer is permitted, from time to time, to make withdrawals from the
collection account for each series for the following purposes:
o to reimburse itself for advances that it made in connection with that
series under the related agreement; provided that the servicer's right
to reimburse itself is limited to amounts received on or in respect of
particular loans (including, for this purpose, Liquidation Proceeds and
proceeds of insurance policies covering the related loans and Mortgaged
Properties ("Insurance Proceeds")) that represent late recoveries of
scheduled payments with respect to which the Advance was made;
o to the extent provided in the related agreement, to reimburse itself
for any advances that it made in connection with the series which the
servicer determines in good faith to be nonrecoverable from amounts
representing late recoveries of scheduled payments respecting which the
advance was made or from Liquidation Proceeds or Insurance Proceeds;
o to reimburse itself from Liquidation Proceeds for liquidation expenses
and for amounts expended by it in good faith in connection with the
restoration of damaged property and, in the event deposited into the
collection account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the principal
balance of the related loan, together with accrued and unpaid interest
thereon to the due date for the loan next succeeding the date of its
receipt of the Liquidation Proceeds, to pay to itself out of the excess
the amount of any unpaid servicing fee and any assumption fees, late
payment charges, or other charges on the related loan;
o in the event the servicer has elected not to pay itself the servicing
fee out of the interest component of any scheduled payment, late
payment or other recovery with respect to a particular loan prior to
the deposit of the scheduled payment, late payment or recovery into the
collection account, to pay to itself the servicing fee, as adjusted
pursuant to the related agreement, from any scheduled payment, late
payment or other recovery to the extent permitted by the related
agreement;
46
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related agreement;
o to pay to the applicable person with respect to each primary asset or
related real property that has been repurchased or removed from the
trust fund by the depositor, the servicer or the seller pursuant to the
related agreement, all amounts received thereon and not distributed as
of the date on which the related repurchase price was determined;
o to make payments to the trustee of the series for deposit into the
related distribution account or for remittance to the holders of the
series in the amounts and in the manner provided for in the related
agreement; and
o to clear and terminate the collection account pursuant to the related
agreement.
In addition, if the servicer deposits into the collection account for a
series any amount not required to be deposited therein, the servicer may, at any
time, withdraw the amount from the collection account.
ADVANCES AND LIMITATIONS ON ADVANCES
The related prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
on loans. If specified in the related prospectus supplement, the servicer will
be obligated to make advances. Its obligation to make advances may be limited in
amount, or may not be activated until a certain portion of a specified reserve
fund is depleted. Advances are intended to provide liquidity and, except to the
extent specified in the related prospectus supplement, not to guarantee or
insure against losses. Accordingly, any funds advanced are recoverable by the
servicer out of amounts received on particular loans that represent late
recoveries of scheduled payments, Insurance Proceeds or Liquidation Proceeds
respecting which an advance was made. If an advance is made and subsequently
determined to be nonrecoverable from late collections, Insurance Proceeds or
Liquidation Proceeds from the related loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account(s), as the case may be, or from a specified reserve fund, as applicable,
to the extent specified in the related prospectus supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related prospectus supplement, the servicer will be required to maintain
(or to cause the borrower under each loan to maintain) a standard hazard
insurance policy providing the standard form of fire insurance coverage with
extended coverage for certain other hazards as is customary in the state in
which the related property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to, or destruction of, the related
property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions in each
policy. Because the
47
standard hazard insurance policies relating to the loans will be underwritten by
different hazard insurers and will cover properties located in various states,
the policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit enhancement will adversely affect distributions to
holders. When a property securing a loan is located in a flood area identified
by HUD pursuant to the Flood Disaster Protection Act of 1973, as amended, the
servicer will be required to cause flood insurance to be maintained with respect
to the property, to the extent available.
The standard hazard insurance policies covering properties typically will
contain a "coinsurance" clause, which in effect will require that the insured at
all times carry hazard insurance of a specified percentage (generally 80% to
90%) of the full replacement value of the property, including any improvements
on the property, in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, the coinsurance clause
will provide that the hazard insurer's liability in the event of partial loss
will not exceed the greater of
o the actual cash value (i.e., replacement cost less physical
depreciation) of the property, including the improvements, if any,
damaged or destroyed, and
o such proportion of the loss, without deduction for depreciation, as the
amount of insurance carried bears to the specified percentage of the
full replacement cost of the property and improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the loans declines as their principal balances decrease, and since the
value of the properties will fluctuate over time, the effect of this requirement
in the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damage to the affected property.
Unless otherwise specified in the related prospectus supplement, coverage
will be in an amount at least equal to the greater of
o the amount necessary to avoid the enforcement of any co-insurance
clause contained in the policy, and
o the outstanding principal balance of the related loan.
Unless otherwise specified in the related prospectus supplement, the servicer
will also maintain on REO property a standard hazard insurance policy in an
amount that is at least equal to the maximum insurable value of the REO
property. No earthquake or other additional insurance will be required of any
borrower or will be maintained on REO property other than pursuant to such
48
applicable laws and regulations as shall at any time be in force and shall
require the additional insurance.
Any amounts collected by the servicer under insurance policies (other than
amounts to be applied to the restoration or repair of the property, released to
the borrower in accordance with normal servicing procedures or used to reimburse
the servicer for amounts to which it is entitled to reimbursement) will be
deposited into the collection account. In the event that the servicer obtains
and maintains a blanket policy insuring against hazard losses on all of the
loans, written by an insurer then acceptable to each rating agency named in the
prospectus supplement, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each loan or related REO property. This blanket policy may contain a deductible
clause, in which case the servicer will be required, in the event that there has
been a loss that would have been covered by the policy absent the deductible
clause, to deposit into the collection account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
REALIZATION UPON DEFAULTED LOANS
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the properties
securing the related loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, the servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in its
servicing activities with respect to comparable loans that it services. However,
the servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the property unless it determines that
o the restoration or foreclosure will increase the Liquidation Proceeds
of the related loan available to the holders after reimbursement to
itself for its expenses, and
o its expenses will be recoverable either through Liquidation Proceeds or
Insurance Proceeds.
However, in the case of a trust fund for which a REMIC election has been made,
the servicer will be required to liquidate any REO property by the end of the
third calendar year after the trust fund acquires beneficial ownership of the
REO property. While the holder of an REO property can often maximize its
recovery by providing financing to a new purchaser, the trust fund will have no
ability to do so and neither the servicer nor the depositor will be required to
do so.
The servicer may arrange with the borrower on a defaulted loan a change in
the terms of the loan to the extent provided in the related prospectus
supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meets the other conditions set forth in the
related prospectus supplement.
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ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related prospectus supplement for a
series, when any property is about to be conveyed by the borrower, the servicer
will, to the extent it has knowledge of the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if enforcement of the clause would result in loss of coverage
under any primary mortgage insurance policy. In that event, the servicer is
authorized to accept from or enter into an assumption agreement with the person
to whom the property has been or is about to be conveyed. Under the assumption,
the transferee of the property becomes liable under the loan and the original
borrower is released from liability and the transferee is substituted as the
borrower and becomes liable under the loan. Any fee collected in connection with
an assumption will be retained by the servicer as additional servicing
compensation. The terms of a loan may not be changed in connection with an
assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related prospectus supplement, the
servicer will be entitled to a periodic servicing fee in an amount to be
determined as specified in the related prospectus supplement. The servicing fee
may be fixed or variable, as specified in the related prospectus supplement. In
addition, unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to additional servicing compensation in the form of
assumption fees, late payment charges and similar items, and excess proceeds
following disposition of property in connection with defaulted loans.
Unless otherwise specified in the related prospectus supplement, the
servicer will pay certain expenses incurred in connection with the servicing of
the loans, including, without limitation, the payment of the fees and expenses
of each trustee and independent accountants, payment of security policy and
insurance policy premiums, if applicable, and the cost of any credit
enhancement, and payment of expenses incurred in preparation of reports to
holders.
When a borrower makes a principal prepayment in full between due dates on
the related loan, the borrower generally will be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related prospectus supplement, in order that one or more classes of the
securities of a series will not be adversely affected by any resulting shortfall
in interest, the amount of the servicing fee may be reduced to the extent
necessary to include in the servicer's remittance to the applicable trustee for
deposit into the related distribution account an amount equal to one month's
interest on the related loan (less the servicing fee). If the total amount of
these shortfalls in a month exceeds the servicing fee for that month, a
shortfall to holders may occur.
Unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to reimbursement for certain expenses that it incurs
in connection with the liquidation of defaulted loans. The related holders will
suffer no loss by reason of the servicer's expenses to the extent the expenses
are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if
50
coverage under the policies has been exhausted, the related holders will suffer
a loss to the extent that Liquidation Proceeds, after reimbursement of the
servicer's expenses, are less than the principal balance of and unpaid interest
on the related loan that would be distributable to holders. In addition, the
servicer will be entitled to reimbursement of its expenses in connection with
the restoration of REO property This right of reimbursement is prior to the
rights of the holders to receive any related Insurance Proceeds, Liquidation
Proceeds or amounts derived from other credit enhancement. The servicer
generally is also entitled to reimbursement from the collection account for
advances.
Unless otherwise specified in the related prospectus supplement, the rights
of the servicer to receive funds from the collection account for a series,
whether as the servicing fee or other compensation, or for the reimbursement of
advances, expenses or otherwise, are not subordinate to the rights of holders of
securities of the series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related prospectus supplement, the applicable
governing agreement will provide that, each year, a firm of independent public
accountants will furnish a statement to the trustee to the effect that the firm
has examined certain documents and records relating to the servicing of the
loans by the servicer and that, on the basis of the examination, the firm is of
the opinion that the servicing has been conducted in compliance with the
agreement, except for such exceptions as the firm believes to be immaterial and
any other exceptions set forth in the statement.
If so specified in the related prospectus supplement, the applicable
agreement will also provide for delivery to the trustee of an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its obligations under the agreement throughout the preceding calendar
year.
CERTAIN MATTERS REGARDING THE SERVICER
The servicer for each series will be identified in the related prospectus
supplement. The servicer may be an affiliate of the depositor and may have other
business relationships with the depositor and its affiliates.
If an event of default occurs under either a servicing agreement or a
pooling and servicing agreement, the servicer may be replaced by the trustee or
a successor servicer. Unless otherwise specified in the related prospectus
supplement, the events of default and the rights of a trustee upon a default
under the agreement for the related series will be substantially similar to
those described under "The Agreements--Events of Default; Rights upon Event of
Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the prospectus supplement, the servicer does
not have the right to assign its rights and delegate its duties and obligations
under the related agreement unless the successor servicer accepting such
assignment or delegation
o services similar loans in the ordinary course of its business;
51
o is reasonably satisfactory to the trustee;
o has a net worth of not less than the amount specified in the prospectus
supplement;
o would not cause the rating of the related securities by a rating agency
named in the prospectus supplement, as such rating is in effect
immediately prior to the assignment, sale or transfer, to be qualified,
downgraded or withdrawn as a result of the assignment, sale or
transfer; and
o executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, that contains an
assumption by the successor servicer of the due and punctual
performance and observance of each covenant and condition required to
be performed or observed by the servicer under the agreement from and
after the date of the agreement.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the related
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above. In this instance, however, the assigning
servicer will remain liable for the servicing obligations under the agreement.
Any entity into which the servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the servicer's obligations under the agreement provided that the successor or
surviving entity meets the requirements for a successor servicer set forth
above.
Except to the extent otherwise provided, each agreement will provide that
neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the related trust fund, the depositor or
the holders for any action taken or for failing to take any action in good faith
pursuant to the related agreement, or for errors in judgment. However, neither
the servicer nor any such person will be protected against any breach of
warranty or representations made under the agreement, or the failure to perform
its obligations in compliance with any standard of care set forth in the
agreement, or liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of reckless disregard of their obligations and duties under the
agreement. Each agreement will further provide that the servicer and any
director, officer, employee or agent of the servicer is entitled to
indemnification from the related trust fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the agreement or the securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of duties under the agreement or by reason of reckless disregard
of those obligations and duties. In addition, the agreement will provide that
the servicer is not under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its servicing responsibilities under the
agreement that, in its opinion, may involve it in any expense or liability. The
servicer may, in its discretion, undertake any such action that it may deem
necessary or desirable with respect to the agreement and the rights and duties
of the parties thereto and the interests of the holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
may be expenses, costs, and liabilities of the trust fund and the servicer may
be entitled to be reimbursed therefor out of the collection account.
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THE AGREEMENTS
The following summaries describe the material provisions of the pooling and
servicing agreement or trust agreement, in the case of a series of certificates,
and the indenture and servicing agreement, in the case of a series of notes. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the agreements applicable to
the particular series of securities. Where particular provisions or terms used
in the agreements are referred to, the provisions or terms are as specified in
the agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the securities of a series, the
depositor will transfer, convey and assign to the related trust fund all right,
title and interest of the depositor in the primary assets and other property to
be transferred to the trust fund. This assignment will include all principal and
interest due on or with respect to the primary assets after the cut-off date
(except for any retained interests). The trustee will, concurrently with the
assignment, execute and deliver the securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
prospectus supplement, the depositor will deliver to the trustee (or, if
specified in the prospectus supplement, a custodian on behalf of the trustee),
as to each Residential Loan and Home Equity Loan, the related note endorsed
without recourse to the order of the trustee or in blank, the original mortgage,
deed of trust or other security instrument with evidence of recording indicated
thereon (except for any mortgage not returned from the public recording office,
in which case a copy of the mortgage will be delivered, together with a
certificate that the original of the mortgage was delivered to such recording
office), and an assignment of the mortgage in recordable form. The trustee or,
if so specified in the related prospectus supplement, the custodian will hold
these documents in trust for the benefit of the holders.
If so specified in the related prospectus supplement, at the time of
issuance of the securities, the depositor will cause assignments to the trustee
of the mortgages relating to the loans to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the trustee, recording is not required to protect the
trustee's interest in the related loans. If specified in the prospectus
supplement, the depositor will cause the assignments to be recorded within the
time after issuance of the securities as is specified in the related prospectus
supplement. In this event, the prospectus supplement will specify whether the
agreement requires the depositor to repurchase from the trustee any loan the
related mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the prospectus supplement, the
enforcement of the repurchase obligation would constitute the sole remedy
available to the holders or the trustee for the failure of a mortgage to be
recorded.
Assignment of Home Improvement Contracts. Unless otherwise specified in the
related prospectus supplement, the depositor will deliver to the trustee or the
custodian each original Home Improvement Contract and copies of related
documents and instruments and, except in the case of unsecured Home Improvement
Contracts, the security interest in the related home improvements. In order to
give notice of the right, title and interest of holders to the Home
53
Improvement Contracts, the depositor will cause a UCC-1 financing statement to
be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all Home Improvement Contracts as collateral.
Unless otherwise specified in the related prospectus supplement, the Home
Improvement Contracts will not be stamped or otherwise marked to reflect their
assignment to the trust fund. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Home Improvement Contracts without notice of the assignment, the interest of
holders in the Home Improvement Contracts could be defeated. See "Material Legal
Aspects of the Loans--The Home Improvement Contracts" in this prospectus.
Assignment of Manufactured Housing Contracts. If specified in the related
prospectus supplement, the depositor or the seller will deliver to the trustee
the original contract as to each Manufactured Housing Contract and copies of
documents and instruments related to each contract and, other than in the case
of unsecured contracts, the security interest in the property securing that
contract. In order to give notice of the right, title and interest of
securityholders to the contracts, if specified in the related prospectus
supplement, the depositor or the seller will cause a UCC-1 financing statement
to be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all contracts as collateral. If so specified in
the related prospectus supplement, the contracts will not be stamped or
otherwise marked to reflect their assignment to the trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
interest of securityholders in the contracts could be defeated. See "Material
Legal Aspects of the Loans -- The Contracts."
Loan Schedule. Each loan will be identified in a schedule appearing as an
exhibit to the related and will specify with respect to each loan:
o the original principal amount,
o its unpaid principal balance as of the cut-off date,
o the current interest rate,
o the current scheduled payment of principal and interest,
o the maturity date, if any, of the related note, and
o if the loan is an adjustable rate loan, the lifetime rate cap, if any,
and the current index.
Assignment of Agency and Private Label Securities. The depositor will cause
the Agency and Private Label Securities to be registered in the name of the
trustee (or its nominee or correspondent). The trustee (or its nominee or
correspondent) will take possession of any certificated Agency or Private Label
Securities. Unless otherwise specified in the related prospectus supplement, the
trustee will not be in possession of, or be assignee of record of, any loans
underlying the Agency or Private Label Securities. See "The Trust Funds--Private
Label Securities" in this prospectus. Each Agency and Private Label Security
will be identified in a
54
schedule appearing as an exhibit to the related agreement, which will specify
the original principal amount, principal balance as of the cut-off date, annual
pass-through rate or interest rate and maturity date for each Agency and Private
Label Security conveyed to the related trust fund. In the agreement, the
depositor will represent and warrant to the trustee that:
o the information contained in the Agency or Private Label Securities
schedule is true and correct in all material respects,
o immediately prior to the conveyance of the Agency or Private Label
Securities, the depositor had good title and was the sole owner of the
Agency or Private Label Securities (subject to any retained interest),
o there has been no other sale of the Agency or Private Label Securities,
and
o there is no existing lien, charge, security interest or other
encumbrance on the Agency or Private Label Securities (other than any
retained interest).
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related prospectus supplement, if any document in the
file relating to the primary assets delivered by the depositor to the trustee
(or custodian) is found by the trustee, within 90 days of the execution of the
related agreement (or promptly after the trustee's receipt of any document
permitted to be delivered after the closing date), to be defective in any
material respect and the depositor or seller does not cure such defect within 90
days (or within any other period specified in the related prospectus supplement)
the depositor or seller will, not later than 90 days (or within such any period
specified in the related prospectus supplement), after the trustee's notice to
the depositor or the seller, as the case may be, of the defect, repurchase from
the trustee the related primary asset or any property acquired in respect of the
asset. Unless otherwise specified in the related prospectus supplement, the
repurchase shall be effected at a price equal to the sum of:
o the lesser of
o the principal balance of the primary asset, and
o the trust fund's federal income tax basis in the primary asset;
plus
o accrued and unpaid interest to the date of the next scheduled payment
on the primary asset at the rate set forth in the related agreement.
However, the purchase price shall not be limited to the trust fund's federal
income tax basis in the asset, if the repurchase at a price equal to the
principal balance of the repurchased primary asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related prospectus supplement, the depositor or seller,
as the case may be, may, rather than repurchase the primary asset as described
above, remove the non-conforming primary asset from the trust fund and
substitute in its place one or more other
55
qualifying substitute primary assets. If no REMIC election is made with respect
to the trust fund, the substitution must be effected within 120 days of the date
of initial issuance of the securities. If a REMIC election is made with respect
to the trust fund the trustee must have received after a specified time period a
satisfactory opinion of counsel that the substitution will not cause the trust
fund to lose its status as a REMIC or otherwise subject the trust fund to a
prohibited transaction tax.
Unless otherwise specified in the related prospectus supplement, any
qualifying substitute primary asset will, on the date of substitution, meet the
following criteria:
o it has a principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of the principal
balance of the deleted primary asset (the amount of any shortfall to be
deposited to the collection account in the month of substitution for
distribution to holders),
o it has an interest rate not less than (and not more than 2% greater
than) the interest rate of the deleted primary asset,
o it has a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the deleted primary asset; and
o it complies with all of the representations and warranties set forth in
the applicable agreement as of the date of substitution.
Unless otherwise provided in the related prospectus supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the holders or the trustee for a material defect in the
documentation for a primary asset.
The depositor or another entity will make representations and warranties
with respect to primary assets for each series. If the depositor or the other
entity cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related prospectus
supplement after notification by the trustee of such breach, and if the breach
is of a nature that materially and adversely affects the value of the primary
asset, the depositor or the other entity will be obligated to repurchase the
affected primary asset or, if provided in the prospectus supplement, provide a
qualifying substitute primary asset, subject to the same conditions and
limitations on purchases and substitutions as described above.
The depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of the non-conforming primary
assets. See "Risk Factors--Only the assets of the related trust fund are
available to pay your certificates" in this prospectus.
No holder of securities of a series, solely by virtue of the holder's
status as a holder, will have any right under the applicable agreement to
institute any proceeding with respect to agreement, unless holder previously has
given to the trustee for the series written notice of default and unless the
holders of securities evidencing not less than 51% of the aggregate voting
rights of the securities of the series have made written request upon the
trustee to institute the
56
proceeding in its own name as trustee thereunder and have offered to the trustee
reasonable indemnity, and the trustee for 60 days has neglected or refused to
institute the proceeding.
REPORTS TO HOLDERS
The applicable trustee or other entity specified in the related prospectus
supplement will prepare and forward to each holder on each distribution date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
o the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
o the amount of interest distributed to holders of the related securities
and the current interest on the securities;
o the amount of any overdue accrued interest included in such
distribution, any remaining overdue accrued interest with respect to
the securities, or any current shortfall in amounts to be distributed
as accrued interest to holders of the securities;
o the amount of any overdue payments of scheduled principal included in
the distribution, any remaining overdue principal amounts with respect
to the securities, any current shortfall in receipt of scheduled
principal payments on the related primary assets, or any realized
losses or Liquidation Proceeds to be allocated as reductions in the
outstanding principal balances of the securities;
o the amount received under any related credit enhancement, and the
remaining amount available under the credit enhancement;
o the amount of any delinquencies with respect to payments on the related
primary assets;
o the book value of any REO property acquired by the related trust fund;
and
o other information specified in the related agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable trustee, unless otherwise specified in the related
prospectus supplement, will furnish to each holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses under the first
and second bullets above and under the last clause of the fourth bullet
above for the calendar year, and
o the information specified in the related agreement to enable holders to
prepare their tax returns including, without limitation, the amount of
any original issue discount accrued on the securities.
57
Information in the distribution date statements and annual statements
provided to the holders will not have been examined and reported upon by an
independent public accountant. However, the servicer will provide to the trustee
a report by independent public accountants with respect to its servicing of the
loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the prospectus supplement, the related series of
securities (or one or more classes of the series) will be issued in book-entry
form. In that event, owners of beneficial interests in those securities will not
be considered holders and will not receive such reports directly from the
trustee. The trustee will forward reports only to the entity or its nominee that
is the registered holder of the global certificate that evidences the book-entry
securities. Beneficial owners will receive reports from the participants and
indirect participants of the applicable book-entry system in accordance with the
policies and procedures of the participants and indirect participants.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related prospectus supplement, "events of default" under the
pooling and servicing agreement for each series of certificates include:
o any failure by the servicer to deposit amounts in the collection
account and distribution account(s) to enable the trustee to distribute
to holders of securities of the series any required payment, provided
that this failure continues unremedied for the number of days specified
in the related prospectus supplement after the giving of written notice
to the servicer by the trustee, or to the servicer and the trustee by
holders having not less than 25% of the total voting rights of the
series;
o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the agreement
provided that this failure continues unremedied for the number of days
specified in the related prospectus supplement after the giving of
written to the servicer by the trustee, or to the servicer and the
trustee by the holders having not less than 25% of the total voting
rights of the of the series; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
the servicer indicating its insolvency, reorganization or inability to
pay its obligations.
So long as an event of default remains unremedied under the applicable
agreement for a series of securities relating to the servicing of loans, unless
otherwise specified in the related prospectus supplement, the trustee or holders
of securities of the series having not less than 51% of the total voting rights
of the series may terminate all of the rights and obligations of the servicer as
servicer under the applicable agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the agreement,
which rights the servicer will retain under all circumstances), whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the agreement and will be entitled to reasonable
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servicing compensation not to exceed the applicable servicing fee, together with
other servicing compensation in the form of assumption fees, late payment
charges or otherwise as provided in the agreement.
In the event that the trustee is unwilling or unable so to act, it may
select (or petition a court of competent jurisdiction to appoint) a finance
institution, bank or loan servicing institution with a net worth specified in
the related prospectus supplement to act as successor servicer under the
provisions of the agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
as set forth in the related prospectus supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise,
as provided in the agreement.
During the continuance of any event of default of a servicer under an
agreement for a series of securities, the trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the holders of securities of the series, and, unless otherwise
specified in the related prospectus supplement, holders of securities having not
less than 51% of the total voting rights of the series may direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred upon the trustee. However,
the trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the holders have offered the
trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the trustee as a result. The trustee may
decline to follow any such direction if it determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting holders.
Indenture. Unless otherwise specified in the related prospectus supplement,
"events of default" under the indenture for each series of notes include:
o a default for thirty (30) days or more in the payment of any principal
of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture, provided that the failure continues for a period
of sixty (60) days after notice is given in accordance with the
procedures described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust fund
in the indenture or in any certificate or other writing delivered
pursuant to it or in connection with it with respect to or affecting
such series having been incorrect in a material respect as of the time
made, provided that the breach is not cured within sixty (60) days
after notice is given in accordance with the procedures described in
the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust fund; and
o any other event of default specified with respect to notes of that
series.
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If an event of default with respect to the then-outstanding notes of any
series occurs and is continuing, either the indenture trustee or the holders of
a majority of the total amount of those notes may declare the principal amount
of all the notes of the series (or, if the notes of that series are zero coupon
securities, such portion of the principal amount as may be specified in the
related prospectus supplement) to be due and payable immediately. Under certain
circumstances of this type the declaration may be rescinded and annulled by the
holders of a majority of the total amount of those notes.
If, following an event of default with respect to any series of notes, the
related notes have been declared to be due and payable, the indenture trustee
may, in its discretion, and notwithstanding such acceleration, elect to maintain
possession of the collateral securing the notes and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the notes as they would have
become due if there had not been a declaration. In addition, the indenture
trustee may not sell or otherwise liquidate the collateral securing the notes of
a series following an event of default (other than a default in the payment of
any principal of or interest on any note of the series for thirty (30) days or
more), unless:
o the holders of 100% of the total amount of the then-outstanding notes
of the series consent to the sale; or
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the outstanding
notes of the series at the date of sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
such payments would have become due if the notes had not been declared
due and payable, and the indenture trustee obtains the consent of the
holders of 66 2/3% of the total amount of the then-outstanding notes of
the series.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
more in the payment of principal of or interest on the notes of a series, the
indenture provides that the indenture trustee will have a prior lien on the
proceeds of any liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an event of default of this type, the amount available for
distribution to the noteholders may be less than would otherwise be the case.
However, the indenture trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the event of default.
Unless otherwise specified in the related prospectus supplement, in the
event that the principal of the notes of a series is declared due and payable as
described above, holders of the notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those notes less the amount of the discount that remains unamortized.
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Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default shall occur and be continuing
with respect to a series of notes, the indenture trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of notes of the series, unless the
holders offer security or indemnity satisfactory to the indenture trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
amount of the then-outstanding notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred on
the indenture trustee with respect to those notes, and the holders of a majority
of the amount of the amount of the then- outstanding notes of the series may, in
certain cases, waive any default with respect to the notes, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all affected holders of the outstanding notes.
THE TRUSTEES
The identity of the commercial bank, savings and loan association or trust
company named as the trustee or indenture trustee, as the case may be, for each
series of securities will be set forth in the related prospectus supplement.
Entities serving as trustee may have normal banking relationships with the
depositor or the servicer. In addition, for the purpose of meeting the legal
requirements of certain local jurisdictions, each trustee will have the power to
appoint co-trustees or separate trustees. In the event of an appointment, all
rights, powers, duties and obligations conferred or imposed upon the trustee by
the related agreement will be conferred or imposed upon that trustee and each
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
trustee shall be incompetent or unqualified to perform certain acts, singly upon
the separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the trustee. The
trustee may also appoint agents to perform any of its responsibilities, which
agents will have any or all of the rights, powers, duties and obligations of the
trustee conferred on them by their appointment; provided, however, that the
trustee will continue to be responsible for its duties and obligations under the
agreement.
DUTIES OF TRUSTEES
No trustee will make any representations as to the validity or sufficiency
of the related agreement, the securities or of any primary asset or related
documents. If no event of default (as defined in the related agreement) has
occurred, the applicable trustee will be required to perform only those duties
specifically required of it under the agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the trustee will be required to examine them to determine whether they
are in the form required by the related agreement. However, the trustee will not
be responsible for the accuracy or content of any documents furnished to it by
the holders or the servicer under the agreement.
Each trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that no trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction
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of the related holders in an event of default. No trustee will be required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the related agreement, or in the exercise
of any of its rights or powers, if it has reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
RESIGNATION OF TRUSTEES
Each trustee may, upon written notice to the depositor, resign at any time,
in which event the depositor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. Each trustee may also be
removed at any time
o if the trustee ceases to be eligible to continue as such under the
related agreement, or
o if the trustee becomes insolvent, or
o the holders of securities having more than over 50% of the total voting
rights of the securities in the trust fund give written notice to the
trustee and to the depositor.
Any resignation or removal of a trustee and appointment of a successor trustee
will not become effective until the successor trustee accepts its appointment.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the prospectus supplement, the Agreement for
each series of securities may be amended by the depositor, the servicer (with
respect to a series relating to loans), and the trustee, without notice to or
consent of the holders, for the following purposes:
o to cure any ambiguity,
o to correct any defective provisions or to correct or supplement any
provision in the agreement,
o to add to the duties of the depositor, the applicable trustee or the
servicer,
o to add any other provisions with respect to matters or questions
arising under the agreement or related credit enhancement,
o to add or amend any provisions of the agreement as required by any
rating agency named in the prospectus supplement in order to maintain
or improve the rating of the securities (it being understood that none
of the depositor, the seller, the servicer or any trustee is obligated
to maintain or improve the rating), or
o to comply with any requirements imposed by the Code.
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In no event, however, shall any amendment (other than an amendment to comply
with Code requirements) adversely affect in any material respect the interests
of any holders of the series, as evidenced by an opinion of counsel delivered to
the trustee. Unless otherwise specified in the prospectus supplement, an
amendment shall be deemed not to adversely affect in any material respect the
interests of any holder if the trustee receives written confirmation from each
rating agency named in the prospectus supplement that the amendment will not
cause the rating agency to reduce its then-current rating.
Unless otherwise specified in the prospectus supplement, each agreement for
a series may also be amended by the applicable trustee, the servicer, if
applicable, and the depositor with the consent of the holders possessing not
less than 66 2/3% of the total outstanding principal amount of the securities of
the series (or, if only certain classes are affected by the amendment, 66 2/3%
of the total outstanding principal amount of each affected class), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the agreement, or modifying in any manner the rights of
holders of the series. In no event, however, shall any amendment
o reduce the amount or delay the timing of payments on any security
without the consent of the holder of the security, or
o reduce the percentage of the total outstanding principal amount of
securities of each class, the holders of which are required to consent
to any such amendment, without the consent of the holders of 100% of
the total outstanding principal amount of each affected class.
VOTING RIGHTS
The prospectus supplement will set forth the method of determining
allocation of voting rights with respect to the related series of securities.
LIST OF HOLDERS
Upon written request of three or more holders of record of a series for
purposes of communicating with other holders with respect to their rights under
the agreement (which request is accompanied by a copy of the communication such
holders propose to transmit), the trustee will afford them access during
business hours to the most recent list of holders of that series held by the
trustee.
No agreement will provide for the holding of any annual or other meeting of
holders.
BOOK-ENTRY SECURITIES
If specified in the related prospectus supplement for a series of
securities, the securities (or one or more of the securities) may be issued in
book-entry form. In that event, beneficial owners of those securities will not
be considered "Holders" under the agreements and may exercise the rights of
holders only indirectly through the participants in the applicable book-entry
system.
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REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
trust fund may be performed by a REMIC administrator, which may be an affiliate
of the depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the pooling and servicing agreement or trust agreement for a series will
terminate upon the distribution to holders of all amounts distributable to them
under the agreement in the circumstances described in the related prospectus
supplement. See "Description of the Securities--Optional Redemption, Purchase or
Termination" in this prospectus.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the notes of that series or, with certain limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
notes of the series.
In addition to such discharge with certain limitations, if so specified
with respect to the notes of any series, the indenture will provide that the
related trust fund will be discharged from any and all obligations in respect of
the notes of that series (except for certain obligations relating to temporary
notes and exchange of notes, registration of the transfer or exchange of those
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the indenture
trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America that, through the payment of interest
and principal in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and each installment of interest on the notes
on the final scheduled distribution date for the notes and any installment of
interest on the notes in accordance with the terms of the indenture and the
notes. In the event of any such defeasance and discharge of notes of a series,
holders of notes of that series would be able to look only to such money and/or
direct obligations for payment of principal of and interest on, if any, their
notes until maturity.
MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion contains general summaries of material legal
matters mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because the
legal matters are determined primarily by applicable state law and because state
laws may differ substantially, the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all states
in which the properties securing the loans may be situated.
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MORTGAGES
The Residential Loans and Home Equity Loans for a series will, and the Home
Improvement Contracts for a series may, be secured by mortgages or deeds of
trust or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. We refer to
Residential Loans, Home Equity Loans and Home Improvement Contracts that are
secured by mortgages as "mortgage loans." The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by that instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens pursuant to the laws of the jurisdiction in which the mortgaged
property is located. Priority with respect to the instruments depends on their
terms, the knowledge of the parties to the mortgage and generally on the order
of recording with the applicable state, county or municipal office. There are
two parties to a mortgage: the mortgagor, who is the borrower/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, there are three parties
because title to the property is held by a land trustee under a land trust
agreement of which the borrower/property owner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. A deed of trust transaction normally has
three parties: the trustor, who is the borrower/property owner; the beneficiary,
who is the lender; and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust generally is accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, foreclosure also may be
accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the
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borrower-trustor and to any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee in some states
must provide notice to any other individual having an interest in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower or any person having a
junior encumbrance on the real estate may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised its rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances, a court
of equity may relieve the mortgagor from an entirely technical default where the
default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, and sometimes requires up
to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, a
public sale is conducted by the referee or other designated officer or by the
trustee. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished. The lender may purchase the property
for a lesser amount in order to preserve its right against the borrower to seek
a deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the
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borrower in some states to remain in possession during the redemption period,
the lender will assume the burdens of ownership, including obtaining hazard
insurance, paying taxes and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage guaranty insurance proceeds.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the loans. The failure to comply with these laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs.
Liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of hazardous substances, and could
exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous substances,
or arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are releases
or threatened releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against the property. Under CERCLA, the
clean-up lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by the current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (SWDA) provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
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A regulation promulgated by the U.S. Environmental Protection Agency (EPA)
in April 1992 attempted to clarify the activities in which lenders could engage
both prior to and subsequent to foreclosure of a security interest without
forfeiting the secured creditor exemption under CERCLA. The rule was struck down
in 1994 by the United States Court of Appeals for the District of Columbia
Circuit in Kelley ex rel State of Michigan v. Environmental Protection Agency,
15 F.3d 1100 (D.C. Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied sub nom.
Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA regulation
promulgated in 1995 clarifies the activities in which lenders may engage without
forfeiting the secured creditor exemption under the underground storage tank
provisions of SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and SWDA to provide additional clarification regarding the scope of the lender
liability exemptions under the two statutes. Among other things, ACA specifies
the circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, ACA states that a lender who holds indicia of ownership
primarily to protect a security interest in a facility will be considered to
participate in management only if, while the borrower is still in possession of
the facility encumbered by the security interest, the lender
o exercises decision-making control over environmental compliance related
to the facility such that the lender has undertaken responsibility for
hazardous substance handling or disposal practices related to the
facility or
o exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested responsibility
for (a) overall management of the facility encompassing daily
decision-making with respect to environmental compliance or (b) overall
or substantially all of the operational functions (as distinguished
from financial or administrative functions) of the facility other than
the function of environmental compliance.
ACA also specifies certain activities that are not considered to be
"participation in management," including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
ACA also specifies that a lender who did not participate in management of a
facility prior to foreclosure will not be considered an "owner or operator,"
even if the lender forecloses on the facility and after foreclosure sells or
liquidates the facility, maintains business activities, winds up operations,
undertakes an appropriate response action, or takes any other measure to
preserve, protect, or prepare the facility prior to sale or disposition, if the
lender seeks to sell or otherwise divest the facility at the earliest
practicable, commercially reasonable time, on commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements.
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ACA specifically addresses the potential liability of lenders who hold
mortgages or similar conventional security interests in real property, such as
the trust fund does in connection with the mortgage loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, these persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
loans would be imposed on the related trust fund, and thus occasion a loss to
the holders, therefore depends on the specific factual and legal circumstances
at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the primary assets included in
the trust fund for a series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the related trust fund (and
therefore of the security holders), as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to be
sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure the default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
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The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in such order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security. However, in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the foreclosure sale.
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In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the Federal Bankruptcy Code, the Soldiers'
and Sailors' Relief Act of 1940 and state laws affording relief to debtors, may
interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
Federal Bankruptcy Code, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a rehabilitation plan under
chapter 13 of the Federal Bankruptcy Code to cure a monetary default with
respect to a loan on his residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon its
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a chapter 11 case under the Federal Bankruptcy Code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Federal Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders that originate loans and that fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the loans.
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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 preempts state constitutional, statutory and case law that prohibits
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain exceptions. As a
result, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act,
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. Freddie Mac has taken the position in its published mortgage
servicing standards that, out of a total of eleven "window period states," five
states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under the Federal Bankruptcy Code, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from bankruptcy proceedings.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his default
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from
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temporary financial disability. In other cases, courts have limited the right of
a lender to realize upon its security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately maintain
the property or the borrower's execution of secondary financing affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under security agreements receive notices
in addition to the statutorily-prescribed minimums. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that,
in cases involving the sale by a trustee under a deed of trust or by a mortgagee
under a mortgage having a power of sale, there is insufficient state action to
afford constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. Similar federal statutes were in effect with respect to mortgage
loans made during the first three months of 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting a
state law before April 1, 1983 or by certifying that the voters of such state
have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS AND THE MANUFACTURED HOUSING CONTRACTS
General
The Home Improvement Contracts and Manufactured Housing Contracts, other
than those that are unsecured or secured by mortgages on real estate, generally
are "chattel paper" or constitute "purchase money security interests," each as
defined in the Uniform Commercial Code (UCC) in effect in the applicable
jurisdiction. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a custodian or may retain possession of the
contracts as custodian for the trustee. In addition, the
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depositor will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
Unless otherwise specified in the related prospectus supplement, the contracts
will not be stamped or otherwise marked to reflect their assignment from the
depositor to the trustee. Therefore, if through negligence, fraud or otherwise,
a subsequent purchaser were able to take physical possession of the contracts
without notice of such assignment, the trustee's interest in the contracts could
be defeated.
Security Interests in Home Improvements
A Home Improvement Contract that is secured by the related home
improvements grants to the originator of the contract a purchase money security
interest in the related home improvements to secure all or part of the purchase
price of the home improvements and related services. A financing statement
generally is not required to be filed to perfect a purchase money security
interest in consumer goods. Purchase money security interests of this type are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the home improvement must generally be perfected by a timely fixture filing. In
general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose their characterization,
upon incorporation of the materials into the related property, will not be
secured by a purchase money security interest in the home improvement being
financed.
Enforcement of Security Interest in Home Improvements
So long as the home improvement has not become subject to real estate law,
a creditor can repossess a home improvement securing a Home Improvement Contract
by voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a Home Improvement Contract must give the debtor a number of days'
notice, which varies from ten to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower will have no assets from which to pay a judgment.
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Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Security Interests in the Manufactured Homes
The manufactured homes securing the Manufactured Housing Contracts may be
located in all 50 states and the District of Columbia. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
The security interests of the trustee in the manufactured homes will not be
noted on the certificates of title or by delivery of the required documents and
payment of fees to the applicable state motor vehicle authorities unless the
related prospectus supplement so requires. With respect to each transaction, a
decision will be made as to whether or not the security interests of the trustee
in the manufactured homes will be noted on the certificates of title and the
required documents and fees will be delivered to the applicable state motor
vehicle authorities based upon, among other things, the practices and procedures
of the related originator and servicer and after consultation with the
applicable rating agency or rating agencies. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. As manufactured homes have
become large and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured homes,
under particular circumstances, may become governed by real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the manufactured home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws, the
secured party must file either a "fixture filing" under the provisions of the
UCC or a real estate mortgage under the real estate laws of the state where the
home is located. These filings must be made in the real estate records office of
the county where the manufactured home is located. If so specified in the
related prospectus supplement, the Manufactured Housing Contracts may contain
provisions prohibiting the borrower from permanently attaching the manufactured
home to its site. So long as the borrower does not violate this agreement, a
security interest in the manufactured home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site, the
related lender may be required to perfect a security interest in the
manufactured home under applicable real estate laws.
In the event that the owner of a manufactured home moves it to a state
other than the state in which the manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and, after
expiration of the four months, only if and after the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and not re-register a security interest in that state, the
security interest in the manufactured home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a manufactured home. Accordingly, the secured party must surrender
possession if it holds the certificate of title to the manufactured home or, in
the case of manufactured homes registered in states which provide for notation
of lien on the
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certificate of title, notice of surrender would be given to the secured party
noted on the certificate of title. In states which do not require a certificate
of title for registration of a manufactured home, re-registration could defeat
perfection.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer the contract free of notice
of claims by the related debtor. The effect of this rule is to subject the
assignee of the contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that, subject to the following conditions, state usury
limitations shall not apply to any contract that is secured by a first lien on
certain kinds of consumer goods. The Home Improvement Contracts or Manufactured
Housing Contracts would be covered if they satisfy certain conditions, among
other things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period prior to instituting any action
leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The loans may also consist of installment sales contracts. Under an
installment sales contract the seller/lender retains legal title to the property
and enters into an agreement with the purchaser/borrower for the payment of the
purchase price, plus interest, over the term of the contract. Only after full
performance by the purchaser/borrower of the contract is the seller/lender
obligated to convey title to the property to the borrower. As with mortgage or
deed of trust financing, during the effective period of the installment sales
contract, the borrower is
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generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance policy premiums
associated with the property.
The method of enforcing the rights of the seller/lender under an
installment sales contract varies on a state-by-state basis depending upon the
extent to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to the terms. The terms of installment
sales contracts generally provide that upon a default by the borrower, the
borrower loses his right to occupy the property, the entire indebtedness is
accelerated, and the borrower's equitable interest in the property is forfeited.
The seller/lender in such a situation does not have to foreclose in order to
obtain title to the property, although in some cases a quiet title action is in
order if the borrower has filed the installment sales contract in local land
records and an ejectment action may be necessary to recover possession. In a few
states, particularly in cases of borrower default during the early years of an
installment sales contract, the courts will permit ejectment of the buyer and a
forfeiture of his interest in the property. However, most state legislatures
have enacted provisions by analogy to mortgage law protecting borrowers under
installment sales contracts from the harsh consequences of forfeiture. Under
these statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the installment sales contract may be reinstated
upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
installment sales contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an installment sales
contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service,
o are entitled to have their interest rates reduced and capped at 6% per
year, on obligations (including loans) incurred prior to the
commencement of military service for the duration of military service,
and
o may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on such obligations entered
into prior to military service for the duration of military service,
and
o may have the maturity of their obligations incurred prior to military
service extended, the payments lowered and the payment schedule
readjusted for a period of time after the completion of military
service.
However, these benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with his obligations is
not materially impaired by military service, the court may apply equitable
principles accordingly.
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If a borrower's obligation to repay amounts otherwise due on a loan included in
a trust fund for a series is relieved pursuant to the Relief Act, none of the
trust fund, the servicer, the depositor or the trustee will be required to
advance such amounts, and any related loss may reduce the amounts available to
be paid to the holders of the related securities. Unless otherwise specified in
the related prospectus supplement, any shortfalls in interest collections on
loans (or underlying loans), included in a trust fund for a series resulting
from application of the Relief Act will be allocated to each class of securities
of the series that is entitled to receive interest in respect of the loans (or
underlying loans) in proportion to the interest that each class of securities
would have otherwise been entitled to receive in respect of the loans (or
underlying loans) had the interest shortfall not occurred.
THE DEPOSITOR
The depositor, Bear Stearns Asset Backed Securities, Inc., was incorporated
in the state of Delaware in June 1995, and is a wholly-owned subsidiary of The
Bear Stearns Companies Inc. The depositor's principal executive offices are
located at 245 Park Avenue, New York, New York 10167. Its telephone number is
(212) 272-4095.
The depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts,
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments. The depositor securities must be
collateralized or otherwise secured or backed by, or otherwise represent an
interest in, among other things, receivables or pass-through certificates or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by senior or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness. The depositor
may purchase, acquire, own, hold, transfer, convey, service, sell, pledge,
assign, finance and otherwise deal with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the depositor's Certificate of Incorporation limits
the depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to depositor securities, and
to any activities incidental to and necessary or convenient for the
accomplishment of those purposes.
USE OF PROCEEDS
The depositor will apply all or substantially all of the net proceeds from
the sale of each of the related trust fund series of securities for one or more
of the following purposes:
o to purchase the primary assets of the related trust fund,
o to repay indebtedness incurred to obtain funds to acquire the primary
assets of the related trust fund,
o to establish any reserve funds described in the related prospectus
supplement, and
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o to pay costs of structuring and issuing the securities, including the
costs of obtaining any credit enhancement.
If specified in the related prospectus supplement, the purchase of the
primary assets for a series may be effected by delivering the securities to the
seller in exchange for the primary assets.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of the material federal income tax consequences of
the purchase, ownership, and disposition of the securities is based on the
opinion of Brown & Wood LLP, Morgan, Lewis & Bockius LLP or other tax counsel
designated in the prospectus supplement, as special counsel to the depositor.
This summary is based upon the provisions of the Internal Revenue Code, the
regulations promulgated thereunder, including, where applicable, proposed
regulations, and the judicial and administrative rulings and decisions now in
effect, all of which are subject to change or possible differing
interpretations. The statutory provisions, regulations, and interpretations on
which this interpretation is based are subject to change either prospectively or
retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the securities.
The federal income tax consequences to security holders will vary depending
on whether
o the securities of a series are classified as indebtedness;
o an election is made to treat the trust fund relating to a particular
series of securities as a real estate mortgage investment conduit or
REMIC under the Code;
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series;
o an election is made to treat the trust fund relating to a particular
series of certificates as a partnership; or
o an election is made to treat the trust fund relating to a particular
series of securities as a financial asset securitization investment
trust or FASIT under the Code.
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The prospectus supplement for each series of securities will specify how the
securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided in
the related prospectus supplement, if the securities are regular interests in a
REMIC or represent interests in a grantor trust, in the opinion of tax counsel:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and
o securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of section 856(c)(4)(A) of the Code
and interest on securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real property"
within the meaning of section 856(c)(3)(B) of the Code.
Interest and Acquisition Discount. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the securities that are REMIC regular interests will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the holder's normal accounting method. Interest (other than
original issue discount) on securities (other than securities that are REMIC
regular interests) which are characterized as indebtedness for federal income
tax purposes will be includible in income by holders thereof in accordance with
their usual methods of accounting. When we refer to "debt securities" in this
section, we mean securities characterized as debt for federal income tax
purposes and securities that are REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (i.e., debt
securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other debt
securities issued at a discount may, be issued with "original issue discount" or
OID. The following discussion is based in part on the OID Regulations. A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or
80
wholesalers). If less than a substantial amount of a particular class of debt
securities is sold for cash on or prior to the closing date, the issue price for
that class will be treated as the fair market value of that class on the closing
date. The issue price of a debt security also includes the amount paid by an
initial debt security holder for accrued interest that relates to a period prior
to the issue date of the debt security. The stated redemption price at maturity
of a debt security includes the original principal amount of the debt security,
but generally will not include distributions of interest if the distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
de minimis rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the de
minimis rule described below. In the case of a debt security with a long first
period that has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the debt security will
generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a debt security.
Under the de minimis rule, OID on a debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, holders may elect to accrue all de minimis
OID as
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well as market discount under a constant yield method. See "--Election to
Treat All Interest as Original Issue Discount" below.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on
the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, trustee intends to base its computation on
section 1272(a)(6) of the Code and the OID Regulations as described in this
prospectus. However, because no regulatory guidance currently exists under
section 1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the "daily portions" of OID. The amount of OID includible in income by a
holder will be computed by allocating to each day during an accrual period a pro
rata portion of the original issue discount that accrued during the accrual
period. In the case of a debt security that is not a REMIC regular interest
security and the principal payments on which are not subject to acceleration
resulting from prepayments on the loans, the amount of OID includible in income
of a holder for an accrual period (generally the period over which interest
accrues on the debt instrument) will equal the product of the yield to maturity
of the debt security and the adjusted issue price of the debt security, reduced
by any payments of qualified stated interest. The adjusted issue price is the
sum of the debt security's issue price plus prior accruals of OID, reduced by
the total payments made with respect to the debt security in all prior periods,
other than qualified stated interest payments.
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Certain classes of the debt securities may be "pay-through securities,"
which are debt instruments that are subject to acceleration due to prepayments
on other debt obligations securing those instruments. The amount of OID to be
included in the income of a holder of a pay-through security is computed by
taking into account the prepayment rate assumed in pricing the debt instrument.
The amount of OID that will accrue during an accrual period on a pay-through
security is the excess, if any, of the
o sum of
(a) the present value of all payments remaining to be made on the
pay-through security as of the close of the accrual period and
(b) the payments during the accrual period of amounts included in the
stated redemption price of the pay-through security,
over
o the adjusted issue price of the pay-through security at the beginning
of the accrual period.
The present value of the remaining payments is to be determined on the basis of
three factors:
o the original yield to maturity of the pay-through security (determined
on the basis of compounding at the end of each accrual period and
properly adjusted for the length of the accrual period),
o events that have occurred before the end of the accrual period and
o the assumption that the remaining payments will be made in accordance
with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder of a pay-through security to take into account
prepayments with respect to the loans at a rate that exceeds the prepayment
assumption, and to decrease (but not below zero for any period) the portions of
OID required to be included in income by a holder of a pay-through security to
take into account prepayments with respect to the loans at a rate that is slower
than the prepayment assumption. Although OID will be reported to holders of
pay-through securities based on the prepayment assumption, no representation is
made to holders that loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of securities that
are REMIC regular interests in a manner that it believes to be appropriate, to
take account of realized losses on the loans, although the OID Regulations do
not provide for such adjustments. If the IRS were to require that OID be accrued
without such adjustments, the rate of accrual of OID for a class of securities
that are REMIC regular interests could increase.
Certain classes of securities may represent more than one class of REMIC
regular interests. Unless otherwise provided in the related prospectus
supplement, the applicable trustee
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intends, based on the OID Regulations, to calculate OID on such securities as
if, solely for the purposes of computing OID, the separate regular interests
were a single debt instrument.
A subsequent holder of a debt security will also be required to include OID
in gross income, but a holder who purchases the debt security for an amount that
exceeds its adjusted issue price will be entitled (as will an initial holder who
pays more than a debt security's issue price) to offset such OID by comparable
economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
Interest Weighted Securities. An "interest weighted security" is a security
that is a REMIC regular interest or a "stripped" security (as discussed under
"--Tax Status as a Grantor Trust; General" below) the payments on which consist
solely or primarily of a specified portion of the interest payments on qualified
mortgages held by the REMIC or on loans underlying pass-through securities. It
is not clear how income should be accrued with respect to interest weighted
securities. The trustee intends to take the position that all of the income
derived from an interest weighted security should be treated as OID and that the
amount and rate of accrual of such OID should be calculated by treating the
interest weighted security as a compound interest security. However, in the case
of interest weighted securities that are entitled to some payments of principal
and are REMIC regular interests, the IRS could assert that income derived from
the interest weighted security should be calculated as if the security were a
security purchased at a premium equal to the excess of the price paid by the
holder for the security over its stated principal amount, if any. Under this
approach, a holder would be entitled to amortize such premium only if it has in
effect an election under section 171 of the Code with respect to all taxable
debt instruments held by such holder, as described below. Alternatively, the IRS
could assert that an interest weighted security should be taxable under the
rules governing bonds issued with contingent payments. This treatment may be
more likely in the case of interest weighted securities that are stripped
securities as described below. See "--Tax Status as a Grantor Trust--Discount or
Premium on Pass-Through Securities" below.
Variable Rate Debt Securities. In the opinion of tax counsel, in the case
of debt securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that the yield to maturity
of the debt securities and, in the case of pay-through securities, the present
value of all payments remaining to be made on the debt securities, should be
calculated as if the interest index remained at its value as of the issue date
of the securities. Because the proper method of adjusting accruals of OID on a
variable rate debt security is
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uncertain, holders of variable rate debt securities should consult their own tax
advisers regarding the appropriate treatment of such securities for federal
income tax purposes.
Market Discount. In the opinion of tax counsel, a purchaser of a security
may be subject to the market discount rules of sections 1276 through 1278 of the
Code. A holder that acquires a debt security with more than a prescribed de
minimis amount of "market discount" (generally, the excess of the principal
amount of the debt security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the debt
security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (or, in the case of a
pass-through security, as set forth below, the loans underlying the
security) not originally issued with OID, stated interest payable in
the relevant period to total stated interest remaining to be paid at
the beginning of the period or (b) in the case of securities (or, in
the case of a pass-through security, as described below, the loans
underlying the security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the debt security (or, in the case of a pass-through security, the loans),
the excess of interest paid or accrued to purchase or carry the security (or, in
the case of a pass-through security, as described below, the underlying loans)
with market discount over interest received on the security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the security (or, in the case of a
pass-through security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of tax counsel, a holder who purchases a debt
security (other than an interest weighted security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the security at a premium, which it may
elect to amortize as an offset to interest income on the security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of The Tax Reform Act of 1986 indicates that
premium is to be accrued in the same manner as market discount. Accordingly, it
appears that the accrual of premium on a class of pay-through securities will be
calculated using the prepayment assumption used in pricing the class. If a
holder makes an election to amortize premium on a debt security, the election
will
85
apply to all taxable debt instruments (including all REMIC regular interests and
all pass-through certificates representing ownership interests in a trust
holding debt obligations) held by the holder at the beginning of the taxable
year in which the election is made, and to all taxable debt instruments acquired
thereafter by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to section 1272(a)(6) of the
Code. Absent further guidance from the IRS, the trustee intends to account for
amortizable bond premium in the manner described above. Prospective purchasers
of the debt securities should consult their tax advisors regarding the possible
application of the amortizable bond premium regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium as
interest, based on a constant yield method for debt securities acquired on or
after April 4, 1994. If such an election were to be made with respect to a debt
security with market discount, the holder of the debt security would be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such holder of
the debt security acquires during the year of the election or thereafter.
Similarly, the holder of a debt security that makes this election for a debt
security that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having amortizable
bond premium that the holder owns or acquires. The election to accrue interest,
discount and premium on a constant yield method with respect to a debt security
is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of tax counsel, if a REMIC election is made with
respect to a series of securities, then the arrangement by which the securities
of that series are issued will be treated as a REMIC as long as all of the
provisions of the applicable governing agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "regular interests" or "residual interests" in a REMIC, as
specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a series of securities, in the opinion of
tax counsel:
o securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the
meaning of Section 7701(a)(19)(C)(xi) of the Code (assuming that at
least 95% of the REMIC's assets consist of cash, government securities,
"loans secured by an interest in real property," and other types of
assets described in Code Section 7701(a)(19)(C)); and
o securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and income with respect to
86
the securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the
meaning of Section 856(c)(3)(B) of the Code (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying
assets).
If less than 95% of the REMIC's assets consist of assets described in the
immediately preceding bullets, then a security will qualify for the tax
treatment described in the previous sentence in the proportion that such REMIC's
assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of tax counsel, all of the expenses of a
REMIC will be taken into account by holders of the residual interest securities.
In the case of a "single class REMIC," however, the expenses will be allocated
under Treasury regulations among the holders of the REMIC regular interest
securities and the holders of the REMIC residual interest securities on a daily
basis in proportion to the relative amounts of income accruing to each holder on
that day. In the case of a holder of a REMIC regular interest security who is an
individual or a "pass-through interest holder" (including certain pass-through
entities but not including real estate investment trusts), the expenses will be
deductible only to the extent that the expenses, plus other "miscellaneous
itemized deductions" of the holder, exceed 2% of the holder's adjusted gross
income. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation for taxable years beginning after 1990)
will be reduced by the lesser of
o 3% of the excess of adjusted gross income over the applicable amount,
or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
This reduction is scheduled to be phased-out over a five-year period beginning
in 2006. The reduction or disallowance of this deduction may have a significant
impact on the yield of the REMIC regular interest security to the holder. In
general terms, a single class REMIC is one that either
o would qualify, under existing Treasury regulations, as a grantor trust
if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax
purposes), or
o is similar to such a trust and is structured with the principal purpose
of avoiding the single class REMIC rules.
Unless otherwise specified in the related prospectus supplement, the expenses of
the REMIC will be allocated to holders of the related REMIC residual interest
securities.
87
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of tax counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of the REMIC residual interests. As described above,
the REMIC regular interests are generally taxable as debt of the REMIC.
Qualification as a REMIC requires ongoing compliance with certain conditions.
Although a REMIC is not generally subject to federal income tax, the Code
provides that failure to comply with one or more of the ongoing requirements of
the Code for REMIC status during any taxable year, including the implementation
of restrictions on the purchase and transfer of the residual interests in a
REMIC as described below under "--Taxation of Owners of Residual Interest
Securities", would cause the trust not to be treated as a REMIC for that year
and thereafter. In this event, the entity may be taxable as a separate
corporation and the related certificates may not be accorded the status or given
the tax treatment described below.
Calculation of REMIC Income. In the opinion of tax counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets, and
o deductions, including stated interest and original issue discount
accrued on the REMIC regular interest securities, amortization of any
premium with respect to loans, and servicing fees and other expenses of
the REMIC.
A holder of a REMIC residual interest security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the loans or other administrative expenses of the REMIC for a given
taxable year, to the extent that these expenses, when aggregated with the
holder's other miscellaneous itemized deductions for that year, do not exceed 2%
of the holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the startup
day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of pay-through securities
accrue OID (i.e., under the constant yield method taking into account the
prepayment assumption). The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without
88
regard to the de minimis rules. See "--Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the prepayment assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a cash
flow investment;
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the startup day. The holders of REMIC residual interest securities will
generally be responsible for the payment of any taxes imposed on the REMIC.
However, to the extent not paid by the holders of the REMIC residual interest
securities or otherwise, taxes will be paid out of the trust fund and will be
allocated pro rata to all outstanding classes of securities of the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of tax counsel, the holder of a certificate representing a
REMIC residual interest will take into account the "daily portion" of the
taxable income or net loss of the REMIC for each day during the taxable year on
which the holder held the residual interest security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for that quarter, and by
allocating that amount among the holders (on that day) of the residual interest
securities in proportion to their respective holdings on that day.
In the opinion of tax counsel, the holder of a residual interest security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash
89
distributions from the REMIC attributable to income or loss. The reporting of
taxable income without corresponding distributions could occur, for example, if
the loans held by the REMIC were issued or acquired at a discount, since
mortgage prepayments cause recognition of discount income, while the
corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC regular interests securities issued without any
discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) The taxable
income of a REMIC may also be greater in earlier years as a result of the fact
that interest expense deductions, as a percentage of outstanding principal on
the REMIC regular interest securities, will typically increase over time as
lower yielding securities are paid, whereas interest income with respect to
loans will generally remain constant over time as a percentage of loan
principal.
In any event, because the holder of a REMIC residual interest security is
taxed on the net income of the REMIC, the taxable income derived from the
residual interest security in a given taxable year will not be equal to the
taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pretax yield. Therefore,
the after-tax yield on a residual interest security may be less than that of a
corporate bond or stripped instrument.
Limitation on Losses. In the opinion of tax counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which the loss
arises. A holder's basis in a REMIC residual interest security will initially
equal the holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased (but
not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income generated by the
same REMIC. The ability of holders of residual interest securities to deduct net
losses may be subject to additional limitations under the Code. Holders should
consult their tax advisers with respect to such additional limitations.
Distributions. In the opinion of tax counsel, distributions on a REMIC
residual interest security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of the residual interest security. If the amount of the payment
exceeds the holder's adjusted basis in the residual interest security, however,
the holder will recognize gain (treated as gain from the sale of the residual
interest security) to the extent of the excess.
Sale or Exchange. In the opinion of tax counsel, the holder of a residual
interest security will recognize gain or loss on the sale or exchange of the
residual interest security equal to the difference, if any, between the amount
realized and the holder's adjusted basis in the residual interest security at
the time of sale or exchange. A holder's adjusted basis in a residual interest
security generally equals the cost of the residual interest security increased
by the taxable income of the REMIC that was included in the income of the holder
and decreased by distributions received thereon by the holder and amounts of the
REMIC net loss allocated to the holder. Except to the extent provided in
regulations which have not yet been issued, any loss upon disposition of a
residual interest security will be disallowed if the selling holder acquires any
residual interest in a REMIC or similar mortgage pool within six months before
or after
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disposition. In that event, the loss will be used to increase the residual
interest security holder's adjusted basis in the newly acquired asset.
Excess Inclusions. In the opinion of tax counsel, the portion of the REMIC
taxable income of a holder of a residual interest security consisting of "excess
inclusion" income may not be offset by other deductions or losses, including net
operating losses, on the holder's federal income tax return. Further, if the
holder of a residual interest security is an organization subject to the tax on
unrelated business income imposed by Section 511 of the Code, the holder's
excess inclusion income will be treated as unrelated business taxable income of
the holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund, or
certain cooperatives were to own a residual interest security, a portion of
dividends (or other distributions) paid by the real estate investment trust (or
other entity) would be treated as excess inclusion income. If a residual
interest security is owned by a foreign person, excess inclusion income is
subject to tax at a rate of 30%, which may not be reduced by treaty, is not
eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "--Tax Treatment of Foreign Investors" below. The
Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 thrift institutions to use net operating losses and other
allowable deductions to offset their excess inclusion income from residual
interest securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to residual interest securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder.
o First, alternative minimum taxable income for the residual holder is
determined without regard to the special rule that taxable income
cannot be less than excess inclusions.
o Second, the residual holder's alternative minimum taxable income for a
tax year cannot be less than excess inclusions for the year.
o Third, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions.
These rules are effective for tax years beginning after December 31, 1986,
unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of
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o REMIC taxable income for the quarterly period allocable to a residual
interest security,
over
o the daily accruals for such quarterly period of (i) 120% of the long
term applicable federal rate on the startup day multiplied by (ii) the
adjusted issue price of the residual interest security at the beginning
of the quarterly period.
The adjusted issue price of a residual interest security at the beginning of
each calendar quarter will equal its issue price (calculated in a manner
analogous to the determination of the issue price of a regular interest
security), increased by the aggregate of the daily accruals for prior calendar
quarters, and decreased (but not below zero) by the amount of loss allocated to
a holder and the amount of distributions made on the residual interest security
before the beginning of the quarter. The long-term federal rate, which is
announced monthly by the Treasury Department, is an interest rate that is based
on the average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, transfers of residual interest securities may
be disregarded in certain circumstances. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "disqualified
organization" including the United States, any State or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity exempt
from the tax imposed by sections 1 through 1399 of the Code, if the entity is
not subject to tax on its unrelated business income. Accordingly, the applicable
pooling and servicing agreement will prohibit disqualified organizations from
owning a residual interest security. In addition, no transfer of a residual
interest security will be permitted unless the proposed transferee shall have
furnished to the trustee an affidavit representing and warranting that it is
neither a disqualified organization nor an agent or nominee acting on behalf of
a disqualified organization.
If a residual interest security is transferred to a disqualified
organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the residual
interest security at the time of the transfer. In addition, if a disqualified
organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
residual interest security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a residual interest security is a
"noneconomic residual interest" as described below, the transfer of a residual
interest security to a U.S. Person will be disregarded for all federal tax
purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. Such a purpose exists if the transferor, at the
time of
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the transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC (i.e., the transferor had "improper knowledge"). However, a safe harbor
exists under which a transferor is presumed to lack such knowledge provided that
the following two conditions are met:
o the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found
that the transferee had historically paid its debts as they became due
and found no significant evidence to indicate that the transferee will
not continue to pay its debts as they become due; and
o the transferee represents to the transferor that it understands that,
as the holder of the noneconomic residual interest, it may incur tax
liabilities in excess of any cash flows generated by the interest and
that it intends to pay taxes associated with holding the residual
interest as they become due.
A residual interest security is a "noneconomic residual interest" unless,
at the time of the transfer:
o the present value of the expected future distributions on the residual
interest security at least equals the product of the present value of
the anticipated excess inclusions and the highest rate of tax for the
year in which the transfer occurs; and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
If a transfer of a residual interest security is disregarded, the
transferor would be liable for any federal income tax imposed upon taxable
income derived by the transferee from the REMIC. A similar type of limitation
exists with respect to certain transfers of residual interests by foreign
persons to U.S. Persons. See "--Tax Treatment of Foreign Investors" below.
New proposed Treasury regulations issued on February 4, 2000 would add a
third condition to the safe harbor under which transfers of noneconomic residual
interests would not be disregarded for federal income tax purposes. Under the
new proposed regulations, a transfer of a noneconomic residual interest will
qualify under this safe harbor only if the present value of the anticipated tax
liabilities associated with holding the residual interest does not exceed the
present value of the sum of:
o any consideration given to the transferee to acquire the interest;
o future distributions on the interest; and
o any anticipated tax savings associated with holding the interest as the
REMIC generates losses. For purposes of this calculation, the present
value generally is calculated using a discount rate equal to the
applicable federal rate. The new proposed regulations have a proposed
effective date of February 4, 2000.
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A recently issued revenue procedure provides that, during the period in
which the IRS and Treasury consider comments on the new proposed regulations, a
transferor will be presumed to lack improper knowledge if:
o both conditions specified in the fourth preceding paragraph are met,
are satisfied; and
o either (x) the safe harbor specified in the immediately preceding
paragraph is satisfied or (y) the following three conditions are
satisfied:
o for financial reporting purposes, the transferee's gross assets
exceed $100 million and its net assets exceed $10 million for the
current year and prior two fiscal years, excluding certain related
party obligations;
o the transferee is an eligible corporation (i.e., a U.S. branch of a
domestic C corporation (other than a tax-exempt corporation, a RIC,
a REIT, a REMIC or cooperative)) that will not be subject to net tax
by a foreign country or U.S. possession in respect of the residual
interest security and agrees in writing that any subsequent transfer
of the residual interest will be to an eligible corporation and will
satisfy the requirements for the transferor of such subsequent
transfer to be presumed to lack improper knowledge; and
o the facts and circumstances known to the transferor, including any
payment actually made to the transferee, must not reasonably
indicate that the taxes associated with the residual interest will
not be paid. Prospective investors should consult their own tax
advisors as to the applicability and effect of the new proposed
regulations and the Revenue Procedure.
Mark-to-Market Rules. Prospective purchasers of a REMIC residual interest
security should be aware that the IRS recently issued final mark-to-market
regulations which provide that a REMIC residual interest security acquired after
January 3, 1995 cannot be marked-to-market. Prospective purchasers of a REMIC
residual interest security should consult their tax advisors regarding the
possible application of the mark-to-market regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related prospectus supplement, if a
REMIC election is not made and the trust fund is not structured as a
partnership, then, in the opinion of tax counsel, the trust fund relating to a
series of securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation. We refer to the securities of a series of
this type as
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"pass-through securities". In some series there will be no separation of the
principal and interest payments on the loans. In these circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the loans. In the case of "stripped securities", sale of the securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the loans.
In the opinion of tax counsel, each holder must report on its federal
income tax return its share of the gross income derived from the loans (not
reduced by the amount payable as trust expense fees to the applicable trustee
and the servicer and similar fees), at the same time and in the same manner as
the items would have been reported under the holder's tax accounting method had
it held its interest in the loans directly, received directly its share of the
amounts received with respect to the loans, and paid directly its share of the
trust expense fees. In the case of pass-through securities other than stripped
securities, income will consist of a pro rata share of all of the income derived
from all of the loans and, in the case of stripped securities, income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the holder owns an interest. The holder of a security
will generally be entitled to deduct trust expense fees under section 162 or
section 212 of the Code to the extent that such fees represent "reasonable"
compensation for the services rendered by the applicable trustee and the
servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, trust expense fees (to
the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing the holder's regular tax liability
only to the extent that the fees, when added to other miscellaneous itemized
deductions, exceed 2% of adjusted gross income and may not be deductible to any
extent in computing the holder's alternative minimum tax liability. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced by
the lesser of:
o 3% of the excess of adjusted gross income over the applicable amount,
or
o 80% of the amount of itemized deductions otherwise allowable for that
taxable year.
This reduction is scheduled to be phased-out over a five-year period
beginning in 2006.
Discount or Premium on Pass-Through Securities. In the opinion of tax
counsel, the holder's purchase price of a pass-through security is to be
allocated among the loans in proportion to their fair market values, determined
as of the time of purchase of the securities. In the typical case, the trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the loans that it represents, since the securities,
unless otherwise specified in the related prospectus supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a pass-through security allocated to a
loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the loan allocable to the security, the interest in the
loan allocable to the pass-through security will be deemed to have been acquired
at a discount or premium, respectively.
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The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a stripped security, a holder of the security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a loan could arise, for example, by virtue of the financing
of points by the originator of the loan, or by virtue of the charging of points
by the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of pass-through securities, market discount is calculated with
respect to the loans underlying the security, rather than with respect to the
security itself. A holder that acquires an interest in a loan originated after
July 18, 1984 with more than a de minimis amount of market discount (generally,
the excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities --Market
Discount" and "--Premium" above.
In the case of market discount on a pass-through security attributable to
loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A stripped security may represent a right to receive
only a portion of the interest payments on the loans, a right to receive only
principal payments on the loans, or a right to receive certain payments of both
interest and principal. Ratio stripped securities may represent a right to
receive differing percentages of both the interest and principal on each loan.
Pursuant to section 1286 of the Code, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of computing OID,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated under
the stripped bond rules. If the excess servicing fee is less than 100 basis
points (i.e., 1% interest on the loan's principal balance) or the securities are
initially sold with a de minimis discount (assuming no prepayment assumption is
required), any non-de minimis discount arising from a subsequent transfer of the
securities should be treated as market discount. The IRS appears to require that
reasonable servicing fees be calculated on a loan by loan basis, which could
result in some loans being treated as having more than 100 basis points of
interest stripped off.
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The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and OID rules are to apply to stripped securities and
other pass-through securities. Under the cash flow bond method described above
for pay-through securities, a prepayment assumption is used and periodic
recalculations are made that take into account with respect to each accrual
period the effect of prepayments during such period. However, the Tax Reform Act
of 1986 does not, absent Treasury regulations, appear specifically to cover
instruments such as stripped securities, which technically represent ownership
interests in the underlying loans, rather than being debt instruments "secured
by" those loans. Nevertheless, it is believed that the cash flow bond method is
a reasonable method of reporting income for such securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related prospectus supplement. In applying the calculation to pass-through
securities, the trustee will treat all payments to be received by a holder with
respect to the underlying loans as payments on a single installment obligation.
The IRS could, however, assert that OID must be calculated separately for each
loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than the
prepayment assumption, the use of the cash flow bond method may accelerate the
holder's recognition of income. If, however, the loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate the holder's recognition of income.
In the case of a stripped security that is an interest weighted security,
the applicable trustee intends, absent contrary authority, to report income to
holders as OID, in the manner described above for interest weighted securities.
Possible Alternative Characterizations. The characterizations of the
stripped securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in certain series, each non-interest weighted security is composed of
an unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments;
o the non-interest weighted securities are subject to the contingent
payment provisions of the regulations; or
o each interest weighted stripped security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the stripped securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of stripped securities, there is
no specific legal authority existing regarding whether the character of the
securities, for federal income tax purposes, will be the same as the loans. The
IRS could take the position that the loans' character
97
is not carried over to the securities in such circumstances. Pass-through
securities will be, and, although the matter is not free from doubt, stripped
securities should be considered to represent:
o "real estate assets" within the meaning of section 856(c)(4)(A) of the
Code; and
o "loans secured by an interest in real property" within the meaning of
section 7701(a)(19)(C)(v) of the Code.
Interest income attributable to pass-through securities and stripped securities
should be considered to represent "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of section
856(c)(3)(B) of the Code. Reserves or funds underlying the securities may cause
a proportionate reduction in the above-described qualifying status categories of
securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to any trust fund as to which
a partnership election is made, in the opinion of tax counsel, a holder's tax
basis in a security is the price the holder pays for the security, increased by
amounts of OID or market discount included in income, and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a security, measured by the difference between the amount realized and the
security's basis as so adjusted, will generally be capital gain or loss,
assuming that the security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a security held by a bank, thrift, or similar institution
described in section 582 of the Code, however, gain or loss realized on the sale
or exchange of a REMIC regular interest security will be taxable as ordinary
income or loss. In addition, gain from the disposition of a regular interest
security that might otherwise be capital gain will be treated as ordinary income
to the extent of the excess, if any, of:
o the amount that would have been includible in the holder's income if
the yield on the regular interest security had equaled 110% of the
applicable federal rate as of the beginning of such holder's holding
period,
over
o the amount of ordinary income actually recognized by the holder with
respect to the regular interest security.
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MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to any
trust fund as to which a partnership election is made, a holder, other than a
holder of a REMIC residual interest security, may, under certain circumstances,
be subject to "backup withholding" at a rate of 31% with respect to
distributions or the proceeds of a sale of certificates to or through brokers
that represent interest or original issue discount on the securities. This
withholding generally applies if the holder of a security:
o fails to furnish the applicable trustee with its taxpayer
identification number;
o furnishes the applicable trustee an incorrect taxpayer identification
number;
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under certain circumstances, fails to provide the applicable trustee or
such holder's securities broker with a certified statement, signed
under penalty of perjury, that the taxpayer identification number
provided is its correct number and that the holder is not subject to
backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain nonresident alien individuals, foreign
partnerships or foreign corporations. Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The applicable trustee will report to the holders and to the servicer for
each calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to any trust fund as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a security (other than a residual interest security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation,
in the opinion of tax counsel, interest will normally qualify as portfolio
interest, and will be exempt from federal income tax. However, interest will not
qualify as portfolio interest where:
o the recipient is a holder, directly or by attribution, of 10% or more
of the capital or profits interest in the issuer, or
o the recipient is a controlled foreign corporation to which the issuer
is a related person.
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For interest to qualify for the portfolio interest exemption from U.S.
withholding tax, the holder must generally complete a Form W-8BEN indicating
that the holder is a non-U.S. Person. The Form W-8BEN, or in certain
circumstances other documentation, must be provided to the person otherwise
required to withhold U.S. tax. If a foreign holder is a partnership or other
type of pass-through entity that is not treated for U.S. withholding tax
purposes as the beneficial owner of the income with respect to the security, the
holder generally must receive the Form W-8BEN as described in the previous
sentence from the holder's partners or other beneficial owners of the income
with respect to the security and may be required to provide the forms, and
certain additional information, to the person through whom the holder holds the
security. The forms provided by the holder or its interestholders regarding
status as a non-U.S. Person must generally be passed through the ownership chain
to the person otherwise required to withhold tax in order for the exemption to
apply. These provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer to withhold at a 30% rate
(unless such rate were reduced or eliminated by an applicable tax treaty) on,
among other things, interest and other fixed or determinable, annual or periodic
income paid to nonresident alien individuals, foreign partnerships or foreign
corporations. Holders of pass-through securities and stripped securities,
including ratio strip securities, however, may be subject to withholding to the
extent that the loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and appropriate documentation is provided to the person
otherwise required to withhold. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of REMIC residual interest securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, the
holder of a residual interest security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the residual interest security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Regulations could, for example, require withholding prior to
the distribution of cash in the case of residual interest securities that do not
have significant value. Under the REMIC Regulations, if a residual interest
security has tax avoidance potential, a transfer of a residual interest security
to a nonresident alien individual, foreign partnership or foreign corporation
will be disregarded for all federal tax purposes. A residual interest security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a nonresident alien individual, foreign partnership
or foreign corporation transfers a residual interest security to a U.S. Person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded and the transferor
continues to be treated as the
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owner of the residual interest security for purposes of the withholding tax
provisions of the Code. See "--Excess Inclusions" above.
TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Tax counsel is of the opinion that a trust fund structured as a partnership
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the trust agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates has
been structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, in the opinion of tax counsel, the trust fund would be subject to
corporate income tax on its taxable income. The trust fund's taxable income
would include all its income, possibly reduced by its interest expense on the
notes. Any such corporate income tax could materially reduce cash available to
make payments on the notes and distributions on the certificates, and holders of
certificates could be liable for any such tax that is unpaid by the trust fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The trust fund will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal income tax purposes. As a result, tax counsel is, (except as
otherwise provided in the related prospectus supplement,) of the opinion that
the notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not "indexed securities" or "strip notes." Moreover, the discussion assumes that
the interest formula for the notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the notes (i.e., any
excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of tax counsel, the notes
will not be considered issued with OID. The stated interest on the notes will be
taxable to a noteholder as ordinary interest income when received or accrued in
accordance with the noteholder's method of tax accounting. Under the OID
Regulations, a holder of a note issued with a de minimis amount of OID must
include the OID in income, on a pro rata basis, as principal payments are made
on the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser
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who buys a note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
A holder of a note that is a "short-term note" (i.e., it has a fixed
maturity date of not more than one year from the issue date) may be subject to
special rules. An accrual basis holder of a short-term note (and certain cash
method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a short-term note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the short-term note). However, a cash basis holder of a
short-term note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the short-term note until the taxable disposition of the
short-term note. A cash basis taxpayer may elect under section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
short-term note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a short-term note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of tax counsel, if a noteholder
sells a note, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the note. The adjusted tax basis of a note to a particular noteholder
will equal the holder's cost for the note, increased by any market discount,
acquisition discount, OID and gain previously included by the noteholder in
income with respect to the note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by the noteholder with respect to the note. Any such gain or loss will
be capital gain or loss if the note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. In the opinion of tax counsel, interest payments made (or
accrued) to a noteholder who is a "foreign person" (i.e., nonresident alien,
foreign corporation or other non-U.S. Person) generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person:
o is not actually or constructively a "10 percent shareholder" of the
trust fund or the seller (including a holder of 10% of the outstanding
certificates) or a "controlled foreign corporation" with respect to
which the trust fund or the seller is a "related person" within the
meaning of the Code; and
o provides the trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes with an appropriate
statement (on Form W-8BEN), signed under penalties of perjury,
certifying that the beneficial owner of the note is a foreign person
and providing the foreign person's name and address.
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If a foreign holder is a partnership or other type of pass-through entity that
is not treated for U.S. withholding tax purposes as the beneficial owner of the
income with respect to the certificate, the holder generally must receive the
Form W-8BEN as described in the previous sentence from the holder's partners or
other beneficial owners of the income with respect to the certificate and may be
required to provide the forms, and certain additional information, to the person
through whom the holder holds the certificates. The forms provided by the holder
or its interestholders regarding status as a non-U.S. Person must generally be
passed through the ownership chain to the person otherwise required to withhold
tax in order for the exemption to apply. If a note is held through a securities
clearing organization or certain other financial institutions, the foreign
person that owns the note should furnish such organization or institution with a
Form W-8BEN or a similar form. The organization or institution may then be
required to forward the Form W-8BEN to the withholding agent. If interest is not
portfolio interest and is not effectively connected with the conduct of a U.S.
trade or business, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt noteholder fail to
provide the required certification, the trust fund will be required to withhold
31% of the amount otherwise payable to the holder, and remit the withheld amount
to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of tax counsel, the IRS successfully asserted that one or more of the notes did
not represent debt for federal income tax purposes, the notes might be treated
as equity interests in the trust fund. If so treated, the trust fund might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on notes recharacterized as equity). Alternatively, and
most likely in the view of tax counsel, the trust fund might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) may be "unrelated business taxable
income," income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual holders
might be subject to certain limitations on their ability to deduct their share
of the trust fund's expenses.
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TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the certificates, the notes, the trust
fund and the servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the certificates are denominated in U.S. dollars, none of the certificates is
an indexed security or a stripped certificate, and that a series of securities
includes a single class of certificates. If these conditions are not satisfied
with respect to any given series of certificates, additional tax considerations
with respect to such certificates will be disclosed in the applicable prospectus
supplement.
Partnership Taxation. If the trust fund is a partnership, in the opinion of
tax counsel, the trust fund will not be subject to federal income tax. Rather,
in the opinion of tax counsel, each certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of loans. The trust fund's deductions will
consist primarily of interest accruing with respect to the notes, servicing and
other fees, and losses or deductions upon collection or disposition of loans.
In the opinion of tax counsel, the tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury regulations and the
partnership agreement (here, the trust agreement and related documents). The
trust agreement will provide, in general, that the certificateholders will be
allocated taxable income of the trust fund for each month equal to the sum of:
o the interest that accrues on the certificates in accordance with their
terms for such month, including interest accruing at the pass-through
rate for that month and interest on amounts previously due on the
certificates but not yet distributed;
o any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the certificates
over their initial issue price;
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o prepayment premium payable to the certificateholders for that month;
and
o any other amounts of income payable to the certificateholders for that
month.
This allocation will be reduced by any amortization by the trust fund of
premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor. Based on the economic arrangement
of the parties, in the opinion of tax counsel, this approach for allocating
trust fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to certificateholders. Moreover, in the opinion
of tax counsel, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
In the opinion of tax counsel, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) may
constitute "unrelated business taxable income" generally taxable to the holder
under the Code.
In the opinion of tax counsel, an individual taxpayer's share of expenses
of the trust fund (including fees to the servicer but not interest expense)
would be miscellaneous itemized deductions. Such deductions might be disallowed
to the individual in whole or in part and might result in such holder being
taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued with
OID, and, therefore, the trust fund should not have OID income. However, the
purchase price paid by the trust fund for the loans may be greater or less than
the remaining principal balance of the loans at the time of purchase. If so, in
the opinion of tax counsel, the loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the trust fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
loan-by-loan basis.)
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include any discount in income currently as it accrues
over the life of the loans or to
105
offset any premium against interest income on the loans. As indicated above, a
portion of market discount income or premium deduction may be allocated to
certificateholders.
Section 708 Termination. In the opinion of tax counsel, under section 708
of the Code, the trust fund will be deemed to terminate for federal income tax
purposes if 50% or more of the capital and profits interests in the trust fund
are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under section 708 of the Code, if such a
termination occurs, the trust fund would be deemed to contribute its assets to a
new partnership in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the original trust fund in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of tax counsel,
capital gain or loss will be recognized on a sale of certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the certificates sold. A certificateholder's tax basis in a certificate will
generally equal the holder's cost increased by the holder's share of trust fund
income (includible in income) and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in the certificates
and the amount realized on a sale of a certificate would include the holder's
share of the notes and other liabilities of the trust fund. A holder acquiring
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in the certificates, and, upon sale or other disposition of
some of the certificates, allocate a portion of the aggregate tax basis to the
certificates sold (rather than maintaining a separate tax basis in each
certificate for purposes of computing gain or loss on a sale of that
certificate).
Any gain on the sale of a certificate attributable to the holder's share of
unrecognized accrued market discount on the loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The trust fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the trust fund will elect to include market discount in
income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, this excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the
106
certificateholders. The trust fund's method of allocation between transferors
and transferees may be revised to conform to a method permitted by future
regulations.
Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make such
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
Administrative Matters. The trustee is required to keep or have kept
complete and accurate books of the trust fund. Books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-l information to nominees that fail to provide
the trust fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. Such information includes:
o the name, address and taxpayer identification number of the nominee;
and
o as to each beneficial owner (a) the name, address and identification
number of such person, (b) whether such person is a U.S. Person, a
tax-exempt entity or a foreign government, an international
organization or any wholly owned agency or instrumentality of either of
the foregoing, and (c) certain information on certificates that were
held, bought or sold on behalf of such person throughout the year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under section 17A of the Securities Exchange Act of 1934 is not
required to furnish any such information statement to the trust fund. The
information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
107
The depositor will be designated as the tax matters partner in the related
trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the trust fund would be engaged in a trade or business in the United States
for such purposes, the trust fund will withhold as if it were so engaged in
order to protect the trust fund from possible adverse consequences of a failure
to withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the trust fund to change its withholding procedures. In determining a holder's
withholding status, the trust fund may rely on IRS Form W-8BEN or a similar
form, IRS Form W-9 or the holder's certification of nonforeign status signed
under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the trust fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the trust fund on Form W-8BEN in order to assure appropriate crediting of the
taxes withheld. A foreign holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the trust fund taking
the position that no taxes were due because the trust fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30%, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the
108
certificateholder fails to comply with certain identification procedures, unless
the holder is an exempt recipient under applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in this
prospectus under "Material Federal Income Tax Considerations," potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the securities. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences of
an investment in the securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities effective on
September 1, 1997. On February 4, 2000, the IRS and Treasury issued proposed
Treasury regulations for FASITs. The regulations generally would not be
effective until final regulations are filed with the federal register. However,
it appears that certain anti-abuse rules would apply as of February 4, 2000.
Investors also should note that the FASIT discussions contained herein
constitutes only a summary of the federal income tax consequences to holders of
FASIT securities. With respect to each series of FASIT securities, the related
prospectus supplement will provide a detailed discussion regarding the federal
income tax consequences associated with the particular transaction.
FASIT securities will be classified as either FASIT "regular securities,"
which generally will be treated as debt for federal income tax purposes, or
FASIT "ownership securities," which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related series. The prospectus supplement for
each series of securities will indicate whether one or more FASIT elections will
be made for the series, and which securities of the series will be designated as
regular securities, and which, if any, will be designated as ownership
securities.
Qualification as a FASIT. The trust fund underlying a series (or one or
more designated pools of assets held in the trust fund) will qualify under the
Code as a FASIT in which the FASIT regular securities and the FASIT ownership
securities will constitute the "regular interests" and the "ownership
interests," respectively, if
o a FASIT election is in effect,
o certain tests concerning the composition of the FASIT's assets and the
nature of the holders' interests in the FASIT are met on a continuing
basis, and
o the trust fund is not a regulated investment company or RIC as defined
in section 851(a) of the Code.
109
However, the qualification as a FASIT of any trust fund for which a FASIT
election is made depends on the trust's ability to satisfy the requirements of
the FASIT provisions on an ongoing basis, including, without limitation, the
requirements of any final Treasury regulations that may be promulgated in the
future under the FASIT provisions or as a result of any change in applicable
law. Thus, no assurances can be made regarding the qualification as a FASIT of
any trust for which a FASIT election is made at any particular time after the
issuance of securities by the trust.
Asset Composition. In order for a trust fund (on one or more designated
pools of assets held by a trust fund) to be eligible for FASIT status,
substantially all of the assets of the trust fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter. Permitted assets include
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only type rate,
o foreclosure property,
o certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the
obligor on FASIT interests,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT regular interests, and
o REMIC regular interests.
o Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to
the holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet certain requirements. All of
the interests in a FASIT must belong to either
o one or more classes of regular interests or
o a single class of ownership interest that is held by a fully taxable
domestic corporation. In the case of series that include FASIT
ownership securities, the ownership interest will be represented by the
FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if
o it is designated as a regular interest,
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o it has a stated maturity no greater than thirty years,
o it entitles its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its stated
principal amount,
o the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
o if it pays interest, such interest is payable either at a fixed rate
with respect to the principal amount of the regular interest or at a
permissible variable rate with respect to the principal amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax Considerations--Taxation of
Debt Securities--Variable Rate Debt Securities" in this prospectus.
If a FASIT security fails to meet one or more of the requirements set out
in the third, fourth or fifth bullet in the preceding paragraph, but otherwise
meets the above requirements, it may still qualify as a type of regular interest
known as a "high-yield interest." In addition, if a FASIT security fails to meet
the requirements of the final bullet in the preceding paragraph, but the
interest payable on the security consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the security also will qualify as a high-yield interest. A high-yield
interest may be held only by domestic corporations that are fully subject to
corporate income tax, other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
high-yield interests are subject to limitations on offset of income derived from
such interest. See "--Tax Treatment of FASIT Regular Securities" and
"--Treatment of High-Yield Interests" below.
Anti-Abuse Rule. Under proposed Treasury regulations, the IRS Commissioner
may make appropriate adjustments with regard to the FASIT and any arrangement or
transaction involving the FASIT if a principal purpose of forming or using the
FASIT is to achieve results inconsistent with the intent of the FASIT provisions
and the FASIT regulations. This determination would be based on all of the facts
and circumstances, including a comparison of the purported business purpose for
a transaction and the claimed tax benefits resulting from the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT. If a
FASIT trust fails to comply with one or more of the Code's ongoing requirements
for FASIT status during any taxable year, proposed Treasury regulations provide
that its FASIT status would be lost for that year and the FASIT trust would be
unable to elect FASIT status without the Commissioner's approval. If FASIT
status is lost, under proposed Treasury regulations the entity classification of
the former FASIT would be determined under general federal income tax
principles. The holder of the FASIT ownership security would be treated as
exchanging the assets of the former FASIT for an amount equal to their value and
gain recognized would be treated as gain from a prohibited transaction that is
subject to the 100% tax, without exception. Loss, if any, would be disallowed.
In addition, the holder of the FASIT ownership security must recognize
cancellation
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of indebtedness income, on a regular interest by regular interest basis, in an
amount equal to the adjusted issue price of each FASIT regular security
outstanding immediately before the loss of FASIT status over its fair market
value. If the holder of the FASIT ownership security has a continuing economic
interest in the former FASIT, the characterization of this interest is
determined under general federal income tax principles. Holders of FASIT regular
securities are treated as exchanging their securities for interests in the new
entity classification of the former FASIT, which classification is determined
under general federal income tax principles. Gain is recognized to the extent
the new interest either does not qualify as debt or differs either in kind or
extent. The basis of the interest in the new entity classification of the former
FASIT equals the basis in the FASIT regular security increased by any gain
recognized on the exchange.
Tax Treatment of FASIT Regular Securities. Payments received by holders of
FASIT regular securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC regular securities. As in the case of holders of REMIC regular
securities, holders of FASIT regular securities must report income from such
securities under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. Except in the case of
FASIT regular securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT regular security
generally will be treated as ordinary income to the holder and a principal
payment on the security will be treated as a return of capital to the extent
that the holder's basis is allocable to that payment. Holders of FASIT regular
securities issued with original issue discount or acquired with market discount
or premium generally will be required to treat interest and principal payments
on the securities in the same manner described for REMIC regular securities. See
"Material Federal Income Tax Considerations--Taxation of Debt Securities,"
"--Market Discount," and "--Premium" in this prospectus. High-yield interests
may be held only by fully taxable domestic corporations, other FASITs, and
certain securities dealers. Holders of high-yield interests are subject to
limitations on their ability to use current losses or net operating loss
carryforwards or carrybacks to offset any income derived from those securities.
If a FASIT regular security is sold or exchanged, the holder generally will
recognize gain or loss upon the sale in the manner described above for
securities other than REMIC regular interest securities. See "Material Federal
Income Tax Considerations--Sale or Exchange" in this prospectus. In addition, if
a FASIT regular security becomes wholly or partially worthless as a result of
default and delinquencies of the underlying assets, the holder of the security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income). See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Effects of Default and
Delinquencies" in this prospectus.
FASIT regular securities held by a real estate investment trust or REIT
will qualify as "real estate assets" within the meaning of section 856(c) (4)(A)
of the Code, and interest on such securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) of the Code to the same
extent that REMIC securities would be so considered. FASIT regular securities
held by a thrift institution taxed as a "domestic building and loan association"
will represent qualifying assets for purposes of the qualification requirements
set forth in section 7701(a)(19) of the Code to the same extent that REMIC
securities would be so considered. See "Material Federal Income Tax
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Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
this prospectus. In addition, FASIT regular securities held by a financial
institution to which section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of section 582(c)(1) of the Code. FASIT
securities will not qualify as "government securities" for either REIT - or RIC
- - qualification purposes.
Treatment of High-Yield Interests. High-yield interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT security with
losses. High-yield interests may be held only by eligible corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an eligible corporation) initially acquires a
high-yield interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the high-yield interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
regular security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT regular
security and that have the same features as high-yield interests.
Tax Treatment of FASIT Ownership Securities. A FASIT ownership security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT ownership security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
ownership interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT ownership interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT ownership security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT regular
securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT ownership
securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT security as are the holders of high-yield
interests. See "FASIT Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT ownership securities. Accordingly, losses on
dispositions of a FASIT ownership security generally will be disallowed where,
within six months before or after the disposition, the seller of such security
acquires any other FASIT ownership security or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool described in section
7701 of the Code that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT ownership
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security was required to be marked-to-market under section 475 of the Code by
such holder, then section 475 will continue to apply to such securities, except
that the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The holder of a FASIT ownership security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
securities will be subject to backup withholding to the same extent holders of
REMIC securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC securities.
Under proposed Treasury regulations, if a non-U.S. Person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax, such as a partnership or a trust) a FASIT regular security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. Person FASIT regular security
holder is treated as received or accrued from the conduit debtor. The proposed
Treasury regulations state that a debtor is a conduit debtor if the debtor is a
U.S. Person or the United States branch of a non-U.S. Person and the non-U.S.
Person FASIT regular security holder is (1) a "10 percent shareholder" of the
debtor, (2) a "controlled foreign corporation" and the debtor is a related
person with respect to the controlled foreign corporation or (3) related to the
debtor. As set forth above, the proposed Treasury regulations would not be
effective until final regulations are filed with the federal register.
Due to the complexity of the federal income tax rules applicable to holders
and the considerable uncertainty that exists with respect to many aspects of
those rules, potential investors should consult their own tax advisors regarding
the tax treatment of the acquisition, ownership, and disposition of the
securities.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended and the Internal Revenue
Code, which apply only to securities of a series that are not divided into
subclasses. If securities are divided into subclasses, the related prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to the related subclasses.
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ERISA and Section 4975 of the Code impose requirements on employee benefit
plans - and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which plans, accounts or arrangements
are invested - and on persons who are fiduciaries with respect to these types of
plans and arrangements. In this prospectus we refer to these types of plans and
arrangements as "Plans." Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans, such as the duty
to invest prudently, to diversify investments unless it is prudent not to do so,
and to invest in accordance with the documents governing the Plan. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Plan, or who renders investment advice for a fee,
is considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA),
are not subject to ERISA's requirements. Accordingly, assets of such plans may
be invested in securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable federal or state law.
Any such plan that is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
On January 5, 2000, the United States Department of Labor (DOL) issued
final regulations under Section 401(c) of ERISA describing a safe harbor for
insurers that issued certain nonguaranteed policies supported by their general
accounts to Plans, and under which an insurer would not be considered an ERISA
fiduciary with respect to its general account by virtue of a Plan's investment
in such a policy. In general, to meet the safe harbor, an insurer must
o disclose certain specified information to investing Plan fiduciaries
initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days' notice to
the insurer, and to elect, without penalty, either a lump-sum payment
or annual installment payments over a ten-year period, with interest;
and
o give Plans written notice of "insurer-initiated amendments" 60 days
before the amendments take effect.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and Section 4975 of the Code prohibit a
broad range of transactions involving Plan assets and persons having certain
specified relationships to a Plan ("parties in interest"), and impose additional
prohibitions where parties in interest are fiduciaries with respect to a Plan.
Certain parties in interest that participate in a prohibited transaction may be
subject to excise taxes imposed pursuant to Section 4975 of the Code, or
penalties imposed pursuant to Section 502(i) of ERISA, unless a statutory,
regulatory or administrative exemption is available.
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The DOL has issued Plan asset regulations defining what constitutes the
assets of a Plan (Labor Reg. Section 2510.3-101). Under these regulations, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment could be
deemed for purposes of ERISA to be assets of the investing Plan in certain
circumstances.
Under the Plan asset regulations, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the trust fund issues notes that are not treated as equity
interests in the trust fund for purposes of the Plan asset regulations, a Plan's
investment in such notes would not cause the assets of the trust to be deemed
Plan assets. However, the seller, the servicer, the backup servicer, the
indenture trustee, the owner trustee, the underwriter and the depositor may be
the sponsor of or investment advisor with respect to one or more Plans. Because
such parties may receive certain benefits in connection with the sale of the
notes, the purchase of notes using Plan assets over which any of these parties
(or their affiliates) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, notes may not be purchased using the assets of
any Plan if the seller, the servicer, the backup servicer, the indenture
trustee, the owner trustee, the underwriter, the depositor or any of their
affiliates
o has investment or administrative discretion with respect to such Plan
assets;
o has authority or responsibility to give, or regularly gives, investment
advice with respect to such Plan assets for a fee and pursuant to an
agreement or understanding that the advice will serve as a primary
basis for investment decisions with respect to the Plan assets and will
be based on the particular investment needs for the Plan; or
o is an employer maintaining or contributing to such Plan.
In addition, the trust fund, any underwriter, the trustee or their
affiliates might be considered or might become "parties in interest" with
respect to a Plan. Also, any holder of certificates of the trust fund, because
of its activities or the activities of its respective affiliates, may be deemed
to be a "party in interest" with respect to certain Plans, including but not
limited to Plans sponsored by the holder. In either case, whether nor not the
assets of the trust are considered to be Plan assets the acquisition or holding
of notes by or on behalf of a Plan could give rise to a prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as:
o Prohibited Transaction Class Exemption (PTCE) 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager;"
o PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts;
o PTCE 91-38, which exempts certain transactions involving bank
collective investment funds;
116
o PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; or
o PTCE 96-23, which exempts certain transactions effected on behalf of a
Plan by certain "in-house asset managers."
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan's investment in notes, or, even if it did apply,
that any exemption would apply to all prohibited transactions that may occur in
connection with such an investment. Unless a different requirement is imposed in
the prospectus supplement, each prospective purchaser or transferee of a note
that is a Plan or a person acting on behalf or investing the assets of a Plan
shall be required to represent (or, with respect to any transfer of a beneficial
interest in a global note, shall be deemed to represent) to the indenture
trustee and the note registrar that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
The Plan asset regulations provide that, generally, the assets of an entity
in which a Plan invests will not be deemed to be assets of the Plan for purposes
of ERISA if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, a publicly-offered security, as defined in the
Plan asset regulations, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934. Equity participation
in an entity by benefit plan investors is not significant if, after the most
recent acquisition of an equity interest in the entity, less than 25% of the
value of each class of equity interest in the entity is held by "benefit plan
investors," which include benefit plans described in ERISA or under Section 4975
of the Code, whether or not they are subject to ERISA, as well as entities whose
underlying assets include assets of a Plan by reason of a Plan's investment in
the entity.
If no exception under the Plan asset regulations applies and if a Plan (or
a person investing Plan assets, such as an insurance company general account)
acquires an equity interest in the trust, then the assets of the trust would be
considered to be assets of the Plan. Because the loans held by the trust may be
deemed assets of each Plan that purchases an equity interest, an investment in
an equity interest issued by the trust by a Plan might be a prohibited
transaction under ERISA and subject to an excise tax under Section 4975 of the
Code, and may cause transactions undertaken in the course of operating the trust
to constitute prohibited transactions, unless a statutory or administrative
exemption applies.
The DOL issued to Bear, Stearns & Co. Inc., an individual underwriter
exemption (Prohibited Transaction Exemption 90-30, 55 Fed. Reg. 21461 (1990)),
which exempts from the application of certain of the prohibited transaction
rules transactions relating to the acquisition, sale and holding by Plans of
certain securities, including certificates, representing an interest in
asset-backed pass-through entities, including trusts, that hold certain types of
receivables or obligations and with respect to which Bear, Stearns & Co. Inc. is
the underwriter, or the manager or co-manager of an underwriting syndicate.
The underwriter exemption sets forth the following general conditions which
must be satisfied before a transaction involving the acquisition, sale and
holding of the certificates or a
117
transaction in connection with the servicing, operation and management of the
trust fund may be eligible for exemptive relief thereunder:
o The acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to the
investing Plan as they would be in an arm's-length transaction with an
unrelated party.
o The rights and interests evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by
other certificates of the same trust fund, other than in the case of a
"designated transaction" (as defined below).
o The certificates acquired by the Plan have received a rating at the
time of such acquisition that is in one of the three (or in the case of
a designated transaction, four) highest generic rating categories from
any of Fitch, Inc., Moody's Investors Service, Inc. and Standard &
Poor's.
o The trustee is not an affiliate of the underwriters, the depositor, the
servicer, any borrower whose obligations under one or more mortgage
loans constitute more than 5% of the aggregate unamortized principal
balance of the assets in the trust, the counterparty in a permitted
notional principal transaction, or any of their respective affiliates
(together with the trustee, the "restricted group").
o The sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting or placing such
certificates; the sum of all payments made to and retained by the
depositor pursuant to the sale of the mortgage loans to the trust
represents not more than the fair market value of such mortgage loans;
and the sum of all payments made to and retained by the servicers
represent not more than reasonable compensation for the servicers'
services under the pooling and servicing agreements and reimbursement
of the servicers' reasonable expenses in connection therewith.
o The Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
For purposes of the underwriter exemption, a "designated transaction"
means, for certificates issued on or after August 23, 2000, a transaction in
which the assets underlying the certificates consist of single-family
residential, multi-family residential, home equity, manufactured housing and/or
commercial mortgage obligations that are fully secured by single-family
residential, multi-family residential or commercial real property or leasehold
interests in the foregoing.
Moreover, the underwriter exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which such person (or its affiliate) is an obligor; provided,
that among other requirements:
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o the person (or its affiliate) is not an obligor with respect to more
than 5% of the fair market value of the obligations or receivables
contained in the trust;
o the Plan is not a plan with respect to which any member of the
restricted group is the "plan sponsor" (as defined in Section 3(16)(B)
of ERISA);
o in the case of an acquisition in connection with the initial issuance
of certificates, at least 50% of each class of certificates in which
Plans have invested is acquired by persons independent of the
restricted group and at least 50% of the aggregate interest in the
trust fund is acquired by persons independent of the restricted group;
o a Plan's investment in certificates of any class does not exceed 25% of
all of the certificates of that class outstanding at the time of the
acquisition; and
o immediately after the acquisition, no more than 25% of the assets of
any Plan with respect to which such person has discretionary authority
or renders investment advice are invested in certificates representing
an interest in one or more trusts containing assets sold or serviced by
the same entity.
The underwriter exemption issued to Bear, Stearns & Co., Inc. was amended
by Prohibited Transaction Exemption 97-34, 62 Fed. Reg. 39021 (1997), in part,
to provide exemptive relief to certain mortgage-backed and asset-backed
securities transactions that utilize pre-funding accounts and that otherwise
satisfy the requirements of the underwriter exemption. Mortgage loans or other
secured receivables supporting payments to certificateholders, and having a
value equal to no more than 25% of the total principal amount of the
certificates being offered by the trust, may be transferred to the trust within
a 90-day or three-month funding period following the closing date instead of
being required to be either identified or transferred on or before the closing
date. The relief is available when the following conditions are met:
o The funding limit (i.e., the ratio of the amount allocated to the
pre-funding account to the total principal amount of the certificates
being offered) must not exceed 25%.
o All the additional obligations transferred after the closing date must meet
the same terms and conditions for eligibility as the original obligations
used to create the trust, which terms and conditions have been approved by
a rating agency; provided, that the terms and conditions for determining
the eligibility of an obligation may be changed if such changes receive
prior approval either by a majority vote of the outstanding
certificateholders or by a rating agency.
o The transfer of additional obligations to the trust during the funding
period must not result in the certificates to be covered by the underwriter
exemption receiving a lower credit rating from a rating agency upon
termination of the funding period than the rating that was obtained at the
time of the initial issuance of the certificates by the trust.
o Solely as a result of the use of pre-funding, the weighted average annual
percentage interest rate for all of the obligations in the trust at the end
of the funding period must not be more
119
than 100 basis points lower than the average interest rate for the
obligations transferred to the trust on the closing date.
o In order to insure that the characteristics of the additional obligations
are substantially similar to the original obligations which were
transferred to the trust fund:
(i) the characteristics of the additional obligations must be
monitored by an insurer or other credit support provider
that is independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to
each rating agency rating the certificates, the related
underwriter and the related trustee) stating whether or not
the characteristics of the additional obligations conform to
the characteristics described in the related prospectus or
prospectus supplement and/or pooling and servicing
agreement. In preparing the letter, the independent
accountant must use the same type of procedures as were
applicable to the obligations transferred to the trust as of
the closing date.
o The period of pre-funding must end no later than three months or 90
days after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments.
o The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the funding limit for
the trust; and
(iv) that the amounts remaining in the pre-funding account at the
end of the funding period will be remitted to
certificateholders as repayments of principal.
o The related pooling and servicing agreement must describe the permitted
investments for the pre-funding account and/or capitalized interest account
and, if not disclosed in the related prospectus or prospectus supplement,
the terms and conditions for eligibility of additional obligations.
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On November 13, 2000, the DOL published in the Federal Register an
amendment (Prohibited Transaction Exemption 2000-58) to the underwriter
exemption (65 Fed. Reg. 67765 (2000)) that, effective as of August 23, 2000,
generally permits Plans to purchase securities, including subordinated
securities, rated in any of the four highest ratings categories (provided that
all other requirements of the underwriter exemption are met). The description
above reflects this amendment.
In general, neither PTCE 83-1, which exempts certain transactions involving
Plan investments in mortgage trusts, nor the underwriter exemption applies to a
trust which contains unsecured obligations. However, PTE 2000-58 provides that,
for purposes of the underwriter exemption, residential and home equity loan
receivables issued in designated transactions may be less than fully secured if
o the rights and interests evidenced by the certificates issued in the
designated transaction are not subordinated to the rights and interests
evidenced by other securities of the same trust fund,
o the certificates have received a rating at the time of acquisition that
is in one of the two highest generic rating categories from a rating
agency, and
o the receivables are secured by collateral whose fair market value on
the closing date of the designated transaction is at least 80% of the
sum of the outstanding principal balance due under the receivable and
the outstanding principal balance of any other receivable of higher
priority which is secured by the same collateral.
Any Plan fiduciary that proposes to cause a Plan to purchase securities
should consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the underwriter exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
an investment. Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL MATTERS
The legality of the securities of each series, including the material
federal income tax consequences with respect to the securities, will be passed
upon for the depositor by Brown & Wood LLP, New York, New York, Morgan, Lewis &
Bockius LLP, New York, New York, or other counsel designated in the prospectus
supplement.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of securities. No trust
fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related series of securities. Accordingly, no
financial statements with respect to any trust fund will be included in this
prospectus or in the related prospectus supplement.
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AVAILABLE INFORMATION
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the prospectus
supplement relating to each series of securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the registration statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the registration statement and its exhibits. The registration statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. In addition, the SEC maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the depositor,
that file electronically with the SEC.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This prospectus incorporates by reference all documents and reports filed
by the depositor, Bear Stearns Asset Backed Securities, Inc., with respect to a
trust fund pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended, prior to the termination of the offering of the related
securities. Upon request by any person to whom this prospectus is delivered in
connection with the offering of one or more classes securities, the depositor
will provide or cause to be provided without charge a copy of any of the
documents and/or reports incorporated herein by reference, in each case to the
extent the documents or reports relate to those classes of securities, other
than the exhibits to the documents (unless the exhibits are specifically
incorporated by reference in such documents). Requests to the depositor should
be directed in writing to: Bear Stearns Asset Backed Securities, Inc., 245 Park
Avenue, New York, New York 10167, telephone number (212) 272-4095. The depositor
has determined that its financial statements are not material to the offering of
any securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
RATINGS
It is a condition to the issuance of the securities of each series offered
by this prospectus and the accompanying prospectus supplement that they shall
have been rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the prospectus
supplement.
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Each such rating will be based on, among other things, the adequacy of the
value of the trust fund assets and any credit enhancement with respect to the
related class and will reflect the rating agency's assessment solely of the
likelihood that the related holders will receive payments to which they are
entitled. No rating will constitute an assessment of the likelihood that
principal prepayments on the related loans will be made, the degree to which the
rate of prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the securities. A rating should not
be deemed a recommendation to purchase, hold or sell securities, inasmuch as it
does not address market price or suitability for a particular investor. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any rating will remain in effect for any
given period of time or that it may not be lowered or withdrawn entirely by the
applicable rating agency in the future if in its judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of trust fund assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
The amount, type and nature of any credit enhancement established with
respect to a series of securities will be determined on the basis of criteria
established by each rating agency named in the related prospectus supplement.
These criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each rating agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If residential real estate
markets should experience an overall decline in property values such that the
principal balances of the loans in a particular trust fund and any secondary
financing on the related properties become equal to or greater than the value of
those properties, the rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal of and interest on the loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any trust fund. To the
extent that losses are not covered by credit enhancement, losses will be borne,
at least in part, by the holders of one or more classes of the securities of the
related series.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise specified in the related prospectus supplement, the
securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Credit Enhancement Act of 1984, as amended.
Accordingly, investors whose investment
123
authority is subject to legal restrictions should consult their own legal
advisors to determine whether and to what extent the securities constitute legal
investments for them.
PLAN OF DISTRIBUTION
The depositor may offer each series of securities through Bear, Stearns &
Co. Inc. (BS&Co.) or one or more other firms that may be designated at the time
of the related offering. The participation of BS&Co. in any offering will comply
with Schedule E to the By-Laws of the National Association of securities
Dealers, Inc. The prospectus supplement relating to each series of securities
will set forth the specific terms of the offering of the series and of each
class within the series, the names of the underwriters, the purchase price of
the securities, the proceeds to the depositor from the sale, any securities
exchange on which the securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to dealers. The place and
time of delivery of each series of securities will also be set forth in the
related prospectus supplement. BS&Co. is an affiliate of the depositor.
124
GLOSSARY OF TERMS
Agency Securities. Mortgage-backed securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
Asset Value. Unless otherwise specified in the related prospectus
supplement with respect to the primary assets in the trust fund, the product of
the Asset Value percentage set forth in the related indenture multiplied by the
lesser of
o the stream of remaining regularly scheduled payments in the primary
assets net of certain amounts payable as expenses, together with income
earned on each regularly scheduled payment received through the day
preceding the next distribution date at the Assumed Reinvestment Rate,
if any, discounted to present value at the highest interest rate on the
notes of the series over periods equal to the interval between payments
on the notes and
o the then outstanding principal balance of the primary assets.
Assumed Reinvestment Rate. With respect to a series of securities, the
highest rate permitted by the rating agencies named in the related prospectus
supplement or a rate insured by means of a surety bond, guaranteed investment
contract, reinvestment agreement or other arrangement satisfactory to the rating
agencies.
Home Equity Loans. Closed-end loans and/or revolving credit line loans
secured by mortgages, deeds of trust or other similar security instruments
creating senior or junior liens on one- to four-family residential properties or
mixed-use properties.
Home Improvement Contracts. Home Improvement installment sales contracts
and installment loan agreements which are either unsecured or secured by
mortgages, deeds of trust or similar security instruments creating generally
junior liens on one- to four-family residential properties or mixed-use
properties or secured by purchase money security interests in the related home
improvements.
Insurance Proceeds. Amounts received by the related servicer under any
title insurance policy, hazard insurance policy or other insurance policy
covering any primary asset in a trust fund, other than amounts to be applied to
the restoration or repair of the related property or released to the borrower
under the related agreement.
Liquidation Proceeds. Amounts received by the related servicer in
connection with the liquidation of the primary assets or related real property
in a trust fund, whether through foreclosure sale, repossession or otherwise,
including payments in connection with the primary assets received from the
borrower, other than amounts required to be paid or refunded to the borrower
under the applicable loan documents or pursuant to law, net of the related
liquidation expenses.
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OID Regulations. Sections 1271 through 1275 of the Internal Revenue Code of
1986, as amended, and the Treasury regulations issued thereunder on February 2,
1994 and amended on June 11, 1996.
Manufactured Housing Contracts. Manufactured housing installment sales
contracts and installment loan agreements secured by senior or junior liens on
the related manufactured homes or secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on the real estate
on which the related manufactured homes are located.
Private Label Securities. Private mortgage-backed securities, other than
Agency Securities, backed or secured by underlying loans that may be Residential
Loans, Home Equity Loans, Home Improvement Contracts and/or Manufactured Housing
Contracts.
Residential Loans. Loans secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on one- to
four-family residential properties.
U.S. Person: Any of the following:
o a citizen or resident of the United States;
o a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a
partnership Treasury regulations are adopted that provide otherwise);
o an estate whose income from sources outside the United States is
includible in gross income for federal income tax purposes regardless
of its connection with the conduct of a trade or business within the
United States; or
o a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more U.S.
Persons have the authority to control all substantial decisions of the
trust.
In addition, certain trusts which would not qualify as U.S. Persons under the
above definition but which are eligible to and make an election to be treated as
U.S. Persons will also be treated as U.S. Persons.
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No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus supplement and
the prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the depositor or by the
underwriters. This prospectus supplement and the prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby by anyone in any jurisdiction in which such an offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any such offer or
solicitation. Neither the delivery of this prospectus supplement and the
prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that information herein or therein is correct as of any time since
the date of this prospectus supplement or the prospectus.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Table of Contents...................................... S-iii
Summary................................................ S-1
Risk Factors........................................... S-5
Transaction Overview................................... S-7
The Mortgage Loan Pools................................ S-8
The Originators, the Seller and the Servicer........... S-24
The Trustee and the Collateral Agent................... S-35
Description of the Certificates........................ S-35
Servicing of the Mortgage Loans........................ S-53
The Policy............................................. S-60
The Certificate Insurer................................ S-62
MBIA Financial Information............................. S-63
Prepayment and Yield Considerations.................... S-66
Material Federal Income Tax Considerations............. S-73
State Taxes............................................ S-76
ERISA Considerations................................... S-76
Legal Investment....................................... S-78
Plan of Distribution................................... S-78
Incorporation of Certain Information by Reference ..... S-79
Legal Matters.......................................... S-80
Ratings................................................ S-80
Glossary............................................... S-80
PROSPECTUS
Risk Factors........................................... 4
Description of the Securities.......................... 14
The Trust Funds........................................ 19
Credit Enhancement..................................... 39
Servicing of Loans..................................... 44
The Agreements......................................... 53
Material Legal Aspects of the Loans.................... 64
The Depositor.......................................... 78
Use of Proceeds........................................ 78
Material Federal Income Tax Considerations............. 79
State Tax Considerations............................... 109
FASIT Securities....................................... 109
ERISA Considerations................................... 114
Legal Matters.......................................... 121
Financial Information.................................. 121
Available Information.................................. 122
Incorporation of Certain Information by Reference ..... 122
Ratings................................................ 122
Legal Investment Considerations........................ 123
Plan of Distribution................................... 124
Glossary of Terms...................................... 125
$355,000,000
[GRAPHIC OMITTED] (R)
ABFS MORTGAGE LOAN TRUST 2001-2
Issuer
AMERICAN BUSINESS CREDIT, INC.
Servicer
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
$275,000,000 CLASS A-1 CERTIFICATES
$32,798,000 CLASS A-2 CERTIFICATES
$23,278,000 CLASS A-3 CERTIFICATES
$23,924,000 CLASS A-4 CERTIFICATES
$35,500,000 CLASS A-IO CERTIFICATES
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 2001-2
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PROSPECTUS SUPPLEMENT
--------------------
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
JUNE 8, 2001
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