AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
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Registration No.333-44409
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 4 TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOME EQUITY SECURITIZATION CORP.
(Exact Name of Registrant as Specified in its Charter)
NORTH CAROLINA 301 South College Street 56-2064715
Charlotte, North Carolina 28202-6001
(State or other jurisdiction of (Address, including zip code, and I.R.S. Employer Identification Number)
incorporation or organization) telephone number, including area code, of
registrant's principal executive offices)
Marion A. Cowell, Jr., Esq.
Executive Vice President, Secretary and General Counsel
First Union Corporation
One First Union Center
301 South College Street
Charlotte, North Carolina 28202-6001
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
Christopher J. DiAngelo
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019-6092
Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
CALCULATION OF REGISTRATION FEE
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Title of each class of Amount to be Proposed Maximum Aggregate Proposed Maximum Aggregate Amount of
securities registered Registered Price Per Unit Offering Price Registration Fee
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Asset Backed Securities $1,000,000 100% $1,000,000(1) $295.00
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(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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HOME EQUITY SECURITIZATION CORP.
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(a) AND ITEM 501 OF REGULATION S-K)
Item Location in Form S-3
1. Forepart of the Registration Statement and Outside Front Cover Page of
Prospectus........................................................... Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus.............. Inside Front and Outside Back
Cover Pages**
3. Summary Information; Risk Factors and Ratio of Earnings to Fixed
Charges*............................................................. Prospectus Summary**; Risk
Factors**; *
4. Use of Proceeds...................................................... Use of Proceeds
5. Determination of Offering Price ..................................... *
6. Dilution............................................................. *
7. Selling Security Holders............................................. *
8. Plan of Distribution................................................. Underwriting**
9. Description of Securities to be Registered........................... Outside Front Cover Page**;
Prospectus Summary**;
The Trust Fund**; Description of
Certificates**
10. Interests of Named Experts and Counsel............................... *
11. Material Changes..................................................... *
12. Incorporation of Certain Information by Reference.................... Incorporation of Certain
Documents by Reference
13. Disclosure of Commission Position on Indemnification for Securities Act
Liabilities.......................................................... See Part II
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* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement
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PROSPECTUS
ASSET BACKED NOTES AND ASSET BACKED CERTIFICATES, ISSUABLE IN SERIES
HOME EQUITY SECURITIZATION CORP.
(DEPOSITOR)
Home Equity Securitization Corp. (the "Depositor") may offer from time
to time under this Prospectus and the related prospectus supplements (the
related "Prospectus Supplements") the Asset-Backed Notes (the "Notes") and the
Asset-Backed Certificates (the "Certificates" and, together with the Notes, the
"Securities") which may be sold from time to time in one or more series (each, a
"Series").
The Certificates of a Series will evidence undivided interests in
certain assets deposited into a trust (each, a "Trust Fund") by the Depositor
pursuant to a Pooling and Servicing Agreement or a Trust Agreement (an
"Agreement"), as described herein. The Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness secured the
related Trust Fund. The Trust Fund for a Series of Securities will include
assets originated or acquired by the originator or originators (the
"Originator") specified in the related Prospectus Supplement composed of (a)
primary assets, which may include one or more pools (each, a "Pool") of (i)
mortgage loans (the "Mortgage Loans"), secured by mortgages on residential
properties and (ii) securities backed or secured by Mortgage Loans
(collectively, the "Primary Assets"), (b) all monies due thereunder net, if and
as provided in the related Prospectus Supplement, of certain amounts payable to
the servicer of the Mortgage Loans, which servicer may also be the related
Originator, specified in the related Prospectus Supplement (the "Servicer"), (c)
as more fully described in the related Prospectus Supplement, funds on deposit
in one or more pre-funding amounts and/or capitalized interest accounts and (d)
reserve funds, letters of credit, surety bonds, insurance policies or other
forms of credit support as described herein and in the related Prospectus
Supplement. The Mortgage Loans will be secured by mortgages and deeds of trust
or other similar security instruments creating a lien on a Mortgaged Property,
which may be subordinated to one or more senior liens on the Mortgaged Property.
Certain of the Primary Assets may be acquired from one or more
institutions which may be affiliated or unaffiliated with the Depositor.
(COVER CONTINUED ON NEXT PAGE)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS SECURED BY, AND
CERTIFICATES OF A SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST
FUND ONLY AND ARE NOT GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR,
THE RELATED ORIGINATOR, THE TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE
AFFILIATES. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
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FOR A DISCUSSION OF MATERIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION HEREIN UNDER "RISK FACTORS" BEGINNING ON PAGE
15.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by First Union Capital Markets Corp. and the other
underwriters set forth in the related Prospectus Supplement, if any, subject to
prior sale, to withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by First Union Capital Markets Corp. and
the other underwriters, if any, and certain further conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the Securities offered hereby unless accompanied by a Prospectus
Supplement.
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FIRST UNION CAPITAL MARKETS CORP.
MAY __, 1998
(CONTINUED FROM PREVIOUS PAGE)
Each Series of Securities will be issued in one or more classes (each,
a "Class"). Interest on and principal of the Securities of a Series will be
payable on each distribution date specified in the related Prospectus Supplement
(the "Distribution Date"), at the times, at the rates, in the amounts and in the
order of priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with
respect to the amount, percentage and timing of distributions of principal,
interest or both and one or more Classes may be subordinated to other Classes
with respect to distributions of principal, interest or both as described herein
and in the related Prospectus Supplement. The Primary Assets and other assets
comprising the Trust Fund may be divided into one or more Asset Groups and each
Class of the related Series will evidence beneficial ownership of the
corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class
of a Series may depend principally upon the rate of payment (including
prepayments) with respect to the Mortgage Loans or Underlying Loans relating to
the Private Securities, as applicable. A rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
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PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be
offered hereunder will, among other things, set forth with respect to such
Series of Securities: (i) the aggregate principal amount, interest rate, and
authorized denominations of each Class of such Securities; (ii) certain
information concerning the Primary Assets, the Originator and any Servicer;
(iii) the terms of any credit enhancement with respect to such Series; (iv) the
terms of any insurance related to the Primary Assets; (v) information concerning
any other assets in the related Trust Fund, including any Reserve Fund; (vi) the
final scheduled distribution date of each Class of such Securities; (vii) the
method to be used to calculate the amount of principal required to be applied to
the Securities of each Class of such Series on each Distribution Date, the
timing of the application of principal and the order of priority of the
application of such principal to the respective Classes and the allocation of
principal to be so applied; (viii) the Distribution Dates and any Assumed
Reinvestment Rate (as defined herein); (ix) additional information with respect
to the plan of distribution of such Securities; and (x) the federal income tax
characterization of the Securities.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under the related Agreement to be forwarded to
holders of the related Series of Securities (the "Holders"). IF THE SECURITIES
ARE issued in book-entry form, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See "THE AGREEMENTS-- Reports to
Holders" herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission ") a Registration Statement under the Securities Act of 1933,
as amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
NW, Washington, D.C. 20549, and at its Regional Office located as follows,
Midwest Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and
Northeast Regional Office, Seven World Trade Center, New York, New York 10048.
In addition, the Commission maintains a World Wide Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended. The Depositor intends to cause each Trust Fund to suspend filing
such reports if and when such reports are no longer required under said Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the termination of any offering of the Securities issued by such Trust
Fund shall be deemed to be incorporated by reference in this Prospectus and to
be a part of this Prospectus from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for all purposes
of this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge
to each person to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to above
that have been or may be incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Such requests should be directed to the
Depositor at One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-0630.
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SUMMARY OF PROSPECTUS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND BY REFERENCE TO
THE INFORMATION WITH RESPECT TO EACH SERIES OF SECURITIES CONTAINED IN THE
PROSPECTUS SUPPLEMENT TO BE PREPARED AND DELIVERED IN CONNECTION WITH THE
OFFERING OF SECURITIES OF SUCH SERIES. CAPITALIZED TERMS USED AND NOT OTHERWISE
DEFINED HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT SHALL HAVE THE MEANINGS
SET FORTH IN THE "GLOSSARY OF TERMS" HEREIN.
Securities Offered.......... Asset-Backed Certificates (the "Certificates") and
Asset-Backed Notes (the "Notes"). Certificates are
issuable from time to time in Series pursuant to a
Pooling and Servicing Agreement or Trust Agreement
(the related "Agreement"). Each Certificate of a
Series will evidence an interest in the Trust Fund
for such Series, or in an Asset Group specified in
the related Prospectus Supplement. Notes are
issuable from time to time in Series pursuant to
an Indenture between the Issuer and the related
trustee (the "Trustee") whereby the Issuer will
pledge the Trust Fund to secure the Notes under
the lien of the Indenture. Each series of Notes
will represent the indebtedness of the Issuer.
Each Series of Securities will consist of one or
more Classes, one or more of which may be Classes
of compound interest securities, planned
amortization class ("PAC") securities, variable
interest securities, zero coupon securities,
principal only securities, interest only
securities, participating securities, senior
securities or subordinate securities. Each Class
may differ in, among other things, the amounts
allocated to and the priority of principal and
interest payments, final scheduled distribution
dates, Distribution Dates and interest rates. The
Securities of each Class will be issued in fully
registered form in the denominations specified in
the related Prospectus Supplement. The Securities
or certain Classes of such Securities offered
thereby may be available in book-entry form only.
Depositor ....................Home Equity Securitization Corp. (the "Depositor")
was incorporated in the State of North Carolina in
December 1997, and is a wholly-owned, special
purpose subsidiary of First Union National Bank, a
national banking association with its headquarters
in Charlotte, North Carolina. Neither First Union
National Bank nor any other affiliate of the
Depositor, the Servicer, the Trustee or the
Originator has guaranteed or is otherwise
obligated with respect to the Securities of any
Series. See "THE DEPOSITOR" herein.
Issuer ...................... With respect to each series of Notes, the
issuer (the "Issuer") will be an owner trust (the
"Owner Trust") established for the purpose of
issuing such series of Notes. Each such Owner
Trust will be created pursuant to the Trust
Agreement (the "Trust Agreement") between the
Depositor and the Owner Trustee. With respect to
each series of Certificates, the Issuer will be
the Trust established pursuant to the related
Agreement.
Trustees .....................The trustee or indenture trustee (each,
the "Trustee") for each series of Certificates and
Notes, respectively, will be named in the related
Prospectus Supplement. The Owner Trustee (the
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"Owner Trustee") for each series of Notes will be
named in the related Prospectus Supplement. See
"The Agreements--The Trustee" herein.
Interest Payments ............Interest payments on the
Securities of a Series entitled by their terms to
receive interest will be made on each Distribution
Date, to the extent set forth in, and at the
applicable rate specified in (or determined in the
manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a
Series may be variable or change with changes in
the rates of interest on the related Mortgage
Loans, or Underlying Loans relating to the Private
Securities, as applicable and/or as prepayments
occur with respect to such Mortgage Loans or
Underlying Loans, as applicable. Interest Only
Securities may be assigned a "Notional Amount" set
forth in the related Prospectus Supplement which
is used solely for convenience in expressing the
calculation of interest and for certain other
purposes and does not represent the right to
receive any distributions allocable to principal.
Principal Only Securities may not be entitled to
receive any interest payments or may be entitled
to receive only nominal interest payments.
Interest payable on the Securities of a Series on
a Distribution Date will include all interest
accrued during the period specified in the related
Prospectus Supplement. See "DESCRIPTION OF THE
SECURITIES--Payments of Interest" herein.
Principal Payments ...........All payments of principal of a Series of
Securities will be made in an aggregate amount
determined as set forth in the related Prospectus
Supplement and will be paid at the times and will
be allocated among the Classes of such Series in
the order and amounts, and will be applied either
on a pro rata or a random lot basis among all
Securities of any such Class, all as specified in
the related Prospectus Supplement.
Final Scheduled
Distribution Date
of the Securities.............The "Final Scheduled Distribution Date" with
respect to each Class of Notes is the date no
later than which principal thereof will be fully
paid and with respect to each Class of
Certificates is the date after which no
Certificates of such Class are expected to remain
outstanding, in each case calculated on the basis
of the assumptions applicable to such Series
described in the related Prospectus Supplement.
The Final Scheduled Distribution Date of a Class
may equal the maturity date of the Primary Asset
in the related Trust Fund which has the latest
stated maturity or will be determined as described
herein and in the related Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will depend primarily upon
the rate of payment (including prepayments,
liquidations due to default, the receipt of
proceeds from casualty insurance policies and
repurchases) of the Mortgage Loans or Underlying
Loans relating to the Private Securities, as
applicable, in the related Trust Fund. The actual
final Distribution Date of A Security may occur
substantially earlier or may occur later than its
Final Scheduled Distribution Date as a result of
the application of
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prepayments to the reduction of the principal
balances of the Securities and as a result of
defaults on the Primary Assets. The rate of
payments on the Mortgage Loans or Underlying Loans
relating to the Private Securities, as applicable,
in the Trust Fund for a Series will depend on a
variety of factors, including certain
characteristics of such Mortgage Loans or
Underlying Loans, as applicable, and the
prevailing level of interest rates from time to
time, as well as on a variety of economic,
demographic, tax, legal, social and other factors.
No assurance can be given as to the actual
prepayment experience with respect to a Series.
See "RISK FACTORS--Yield May Vary" and
"DESCRIPTION OF THE SECURITIES--Weighted Average
Life of the Securities" herein.
Optional Termination .........One or more Classes of Securities of any Series
may be redeemed or repurchased in whole or in
part, at such time, by such persons and under the
circumstances specified in the related Prospectus
Supplement, at the price set forth therein. Each
such redemption or repurchase may occur on or
after a specified date, or on or after such time
as the aggregate principal balance of the
Securities of the Series or the Primary Assets
relating to such Series is less than the amount or
percentage specified in the related Prospectus
Supplement. See "DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or
Termination" herein.
Mandatory Termination;
Auction Sale .................The Trustee, the Servicer or the related
ORIGINATOR may be required to effect early
retirement of a series of Securities by soliciting
competitive bids for the purchase of the related
Primary Assets or otherwise, under other
circumstances and in the manner specified in "THE
AGREEMENTS--Termination" and in the related
AGREEMENT.
A mandatory termination may take the form of an
auction sale. Within a certain period following
the first Distribution Date as of which the
aggregate Pool principal balance is less than 10%
or a percentage set forth in the related AGREEMENT
of the initial aggregate Pool principal balance,
if the optional termination right has not been
exercised by the parties having such right by such
date, the Trustee shall solicit bids for the
purchase of all Mortgage Loans remaining in the
Trust. In the event that satisfactory bids are
received , the net sale proceeds will be
distributed to Holders, in the same order of
priority as collections received in respect of the
Mortgage Loans. If satisfactory bids are not
received, the Trustee shall decline to sell the
Mortgage Loans and shall not be under any
obligation to solicit any further bids or
otherwise negotiate any further sale of the
Mortgage Loans. Such sale and consequent
termination of the Trust must constitute a
"qualified liquidation" of each REMIC established
by the Trust under Section 860F of the Internal
Revenue Code of 1986, as amended, including,
without limitation, the requirement that the
qualified liquidation takes place over a period
not to exceed 90 days.
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The Trust Fund................The Trust Fund for a Series of Securities will
consist of one or more of the assets described
below, as described in the related Prospectus
Supplement.
A. Primary Assets.......The Primary Assets for a Series may consist of any
combination of the following assets, to the extent
and as specified in the related Prospectus
Supplement. The Primary Assets will be acquired by
the related Trust Fund from the related
Originator, or may be acquired in the open market
or in privately negotiated transactions.
(1) Mortgage Loans.......The Primary Assets for a Series will consist, in
whole or in part, of mortgage loans secured by
mortgages on residential properties (the "Mortgage
Loans"). Some Mortgage Loans may be delinquent to
the extent specified in the related Prospectus
Supplement. The percentage of those Mortgage Loans
which are delinquent shall not exceed 10% of the
aggregate principal balance of the Primary Assets
as of the cut-off date for that Series (the
"Cut-Off Date").
THE MORTGAGE LOANS WILL GENERALLY CONSIST OF WHAT
ARE COMMONLY REFERRED TO AS "HOME EQUITY" LOANS,
AS DISTINGUISHED FROM "PURCHASE MONEY" LOANS. BOTH
OF THESE CONCEPTS REFER TO THE USE OF PROCEEDS
MADE BY THE RELATED BORROWER, RATHER THAN TO ANY
LEGAL OR OTHER DOCUMENTARY DIFFERENCES BETWEEN THE
TWO TYPES OF LOANS, EXCEPT THAT "HOME EQUITY"
LOANS ARE USUALLY (BUT NOT ALWAYS) SECURED BY
MORTGAGES WHICH ARE IN A SUBORDINATE LIEN POSITION
WHILE "PURCHASE MONEY" LOANS ARE USUALLY (BUT NOT
ALWAYS) SECURED BY MORTGAGES WHICH ARE IN A SENIOR
LIEN POSITION, AND "HOME EQUITY" LOANS ARE
TYPICALLY (BUT NOT ALWAYS) SHORTER IN MATURITY
THAN "PURCHASE MONEY" LOANS (I.E., FIFTEEN RATHER
THAN THIRTY YEARS).
A "HOME EQUITY" LOAN IS A MORTGAGE LOAN THE
PROCEEDS OF WHICH ARE NOT USED TO PURCHASE THE
RELATED MORTGAGED PROPERTY; THE PROCEEDS OF A
"PURCHASE MONEY" MORTGAGE ARE APPLIED TO THE
PURCHASE OF THE RELATED MORTGAGED PROPERTY.
TYPICAL USES OF PROCEEDS OF "HOME EQUITY" LOANS
WOULD BE HOME IMPROVEMENT, DEBT CONSOLIDATION AND
THE FUNDING OF LARGE EXPENSES SUCH AS COLLEGE
TUITION.
PAYMENT FEATURES OF MORTGAGE LOANS; BALLOON LOANS.
The Trust Fund may contain loans which have
various payment characteristics, including balloon
or other non-traditional payment features, and may
accrue interest at a fixed rate or an adjustable
rate. Balloon loans do not amortize their entire
principal balance by their stated maturity in
accordance with their terms and require a balloon
payment of the remaining principal balance at
maturity (each such Mortgage Loan, a "Balloon
Loan"). See "RISK FACTORS--Balloon Loans" and
"DESCRIPTION OF THE SECURITIES--Weighted Average
Life of the Securities" herein.
The Mortgage Loans will be secured by mortgages
and deeds of trust or other similar security
instruments creating a lien on
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a Mortgaged Property, which may be subordinated to
one or more senior liens on the Mortgaged
Property. The related Prospectus Supplement will
describe certain characteristics of the Mortgage
Loans for a Series, including, without limitation,
and to the extent relevant: (a) the aggregate
unpaid principal balance of the Mortgage Loans (or
the aggregate unpaid principal balance included in
the Trust Fund for the related Series); (b) the
range and weighted average interest rate (the
"Loan Rate") on the loans and in the case of
adjustable rate loans, the range and weighted
average of the current rate of interest borne by
such loans (the "Current Interest Rates") and any
maximum lifetime interest rates thereon (the
"Lifetime Rate Caps"); (c) the range and the
average outstanding principal balance of the
Mortgage Loans; (d) the weighted average original
and remaining term-to-stated maturity of the
Mortgage Loans and the range of original and
remaining terms-to-stated maturity, if applicable;
(e) the range and combined loan-to-value ratios
(each a "Combined Loan-to-Value Ratio") or
loan-to-value ratios, (each a "Loan-to-Value
Ratio") as applicable, of the Mortgage Loans,
computed in the manner described in the related
Prospectus Supplement; (f) the percentage (by
principal balance as of the Cut-off Date) of
Mortgage Loans that accrue interest at adjustable
or fixed interest rates; (g) any Credit
Enhancement relating to the Mortgage Loans; (h)
the geographic distribution of any Mortgaged
Properties securing the Mortgage Loans; (I) the
use and type of each Mortgaged Property securing a
Mortgage Loan; (J) the lien priority of the
Mortgage Loans; and (K) the delinquency status and
year of origination of the Mortgage Loans.
(2) Private Securities.......Primary Assets for a Series may consist, in whole
or in part, of Private Securities which include
(a) pass-through certificates representing
beneficial interests in loans of the type that
would otherwise be eligible to be Mortgage Loans
(the "Underlying Loans") or (b) collateralized
obligations secured by Underlying Loans. Such
pass-through certificates or collateralized
obligations will have previously been (a) offered
and distributed to the public pursuant to an
effective registration statement or (b) acquired
in a transaction not involving any public offering
from a person who is not an affiliate of the
issuer of such securities at the time of transfer
(nor an affiliate thereof at any time during the
three preceding months); provided a period of
three years has elapsed since the later of the
date the securities were acquired from the issuer
or an affiliate thereof. Although individual
Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality
thereof, they need not be, and the Private
Securities themselves will not be so insured or
guaranteed. See "THE TRUST FUNDS--Private
Securities" herein.
The related Prospectus Supplement for a Series
will specify (such disclosure may be on an
approximate basis, as described above and will be
as of the date specified in the related Prospectus
Supplement) to the extent relevant and to the
9
extent such information is reasonably available to
the Depositor and the Depositor reasonably
believes such information to be reliable: (i) the
aggregate approximate principal amount and type of
any Private Securities to be included in the Trust
Fund for such Series; (ii) certain characteristics
of the Underlying Loans including (A) the payment
features of such Underlying Loans (i.e., whether
they are fixed rate or adjustable rate and whether
they provide for fixed level payments, negative
amortization or other payment features), (B) the
approximate aggregate principal amount of such
Underlying Loans which are insured or guaranteed
by a governmental entity, (C) the servicing fee or
range of servicing fees with respect to such
Underlying Loans, (D) the minimum and maximum
stated maturities of such Underlying Loans at
origination, (E) the lien priority of such
Underlying Loans, and (F) the delinquency status
and year of origination of such Underlying Loans;
(iii) the maximum original term-to-stated maturity
of the Private Securities; (iv) the weighted
average term-to-stated maturity of the Private
Securities; (v) the pass-through or certificate
rate or ranges thereof for the Private Securities;
(vi) the sponsor or depositor of the Private
Securities (the "PS Sponsor"), the servicer of the
Private Securities (the "PS Servicer") and the
trustee of the Private Securities (the "PS
Trustee"); (vii) certain characteristics of Credit
Enhancement, if any, such as reserve funds,
insurance policies, letters of credit or
guarantees, relating to the Mortgage Loans
underlying the Private Securities, or to such
Private Securities themselves; (viii) the terms on
which the Underlying Loans may, or are required
to, be repurchased prior to stated maturity; (ix)
the terms on which substitute Underlying Loans may
be delivered to replace those initially deposited
with the PS Trustee; and (x) a description of the
limited purpose and business of the issuer of the
Private Securities, the availability of public
information concerning such issuer and market
information with respect to the Private
Securities. See "THE TRUST FUNDS--Additional
Information" herein.
B. Collection and
Distribution
Accounts.............All payments on or with respect to the Primary
Assets for a Series will be remitted directly to
an account (the "Collection Account") to be
established for such Series with the Trustee or
the Servicer, in the name of the Trustee. The
Trustee shall be required to apply a portion of
the amount in the Collection Account, together
with reinvestment earnings from eligible
investments specified in the related Prospectus
Supplement, to the payment of certain amounts
payable to the Servicer under the related
Agreement and any other person specified in the
Prospectus Supplement, and to deposit a portion of
the amount in the Collection Account into a
separate account (the "Distribution Account") to
be established for such Series, each in the manner
and at the times established in the related
Prospectus Supplement. The amounts deposited in
such Distribution Account will be available for
(i) application to the payment of principal of and
interest on such Series of Securities on the next
Distribution Date, (ii) the making of adequate
provision for future payments on certain Classes
of Securities and (iii) any other purpose
specified in the related Prospectus Supplement.
After applying the funds in the Collection Account
as described above, any funds remaining in the
Collection Account may be paid over to the
Servicer, the Depositor, any provider of Credit
Enhancement with respect to such Series (a "Credit
Enhancer") or any other person entitled thereto in
the manner and at the times established in the
related Prospectus Supplement.
C. Pre-Funding and
Capitalized
Interest Accounts....A Trust Fund may include one or more segregated
trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for
the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of
the Securities of such Series (such amount, the
"Pre-Funded Amount") will be deposited in the
Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of
time specified in the related Prospectus
Supplement (the "Pre-Funding Period"). If any
Pre-Funded Amount remains on deposit in the
Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner
specified in the related Prospectus Supplement to
prepay the Notes and/or the Certificates of the
applicable Series. If a Trust Fund includes a
Pre-Funding Account and the principal balance of
additional Primary Assets delivered to the Trust
Fund during the Pre-Funding Period is less than
the original Pre-Funded Amount, the Holders of the
Securities of the related Series will receive a
prepayment of principal as and to the extent
described in the related Prospectus Supplement.
Any such principal prepayment may adversely affect
the yield to maturity of the applicable
Securities.
IF A Pre-Funding Account IS ESTABLISHED, (A) the
Pre-Funding Period will not exceed 90 days from
the related closing date, (b) the additional
Primary Assets to be acquired during the
Pre-Funding Period will be subject to the same
representations and warranties and satisfy the
same eligibility requirements as the Primary
Assets included in the related Trust Fund on the
closing date, subject to such exceptions as are
expressly stated in such Prospectus Supplement,
(c) the Pre-Funding Amount will not exceed 25% of
the principal amount of the Securities issued
pursuant to a particular offering and (d) prior to
the investment of the Pre-Funded Amount in
additional Primary Assets, such Pre-Funded Amount
will be invested in one or more "Eligible
Investments" specified in the related Agreement
and described herein under "THE TRUST FUNDS --
Collection and Distribution Accounts." Any
Eligible Investment must mature no later than the
Business Day prior to the next Distribution Date.
"Business Day" means any day other than a
Saturday, Sunday or other day on which commercial
banking institutions or trust companies in New
York, New York or the principal place of business
of the Trustee are closed.
11
If a Pre-Funding Account is established, one or
more segregated trust accounts (each, a
"Capitalized Interest Account") may be established
and maintained with the Trustee for the related
Series. On the closing date for such Series, a
portion of the proceeds of the sale of the
Securities of such Series will be deposited in the
Capitalized Interest Account and used to fund the
excess, if any, of (x) the sum of (i) the amount
of interest accrued on the Securities of such
Series and (ii) certain fees or expenses during
the Pre-Funding Period such as trustee fees and
credit enhancement fees, over (y) the amount of
interest available therefor from the Primary
Assets in the Trust Fund. Any amounts on deposit
in the Capitalized Interest Account at the end of
the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person
specified in the related Prospectus Supplement.
See "THE TRUST FUNDS--Pre-Funding Account" herein.
Credit Enhancement............If stated in the Prospectus Supplement relating to
a Series, the Depositor will obtain an irrevocable
letter of credit, surety bond, certificate
insurance policy, insurance policy or other form
of credit support (collectively, "Credit
Enhancement") in favor of the Trustee on behalf of
the Holders of such Series and any other person
specified in such Prospectus Supplement from an
institution (a "Credit Enhancer") acceptable to
the rating agency or agencies identified in the
related Prospectus Supplement as rating such
Series of Securities (collectively, the "Rating
Agency") for the purposes specified in such
Prospectus Supplement. The Credit Enhancement will
support the payments on the Securities and may be
used for other purposes, to the extent and under
the conditions specified in such Prospectus
Supplement. See "CREDIT ENHANCEMENT" herein.
Credit Enhancement for a Series may include one or
more of the following types of Credit Enhancement,
or such other type of Credit Enhancement specified
in the related Prospectus Supplement.
A. Subordinate
Securities...........Credit Enhancement for a Series may consist of one
or more Classes of Subordinate Securities. The
rights of Holders of such Subordinate 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
Series, but only to the extent described in the
related Prospectus Supplement.
B. Insurance ...........Credit Enhancement for a Series may consist of
special hazard insurance policies, bankruptcy
bonds and other types of insurance supporting
payments on the Securities.
C. Reserve Funds .......If stated in the Prospectus Supplement, the
Depositor may deposit cash, a letter or letters of
credit, short-term investments, or other
instruments acceptable to the Rating Agency in one
or more reserve funds to be established in the
name of the Trustee (each a "Reserve Fund"), which
will be used by the Trustee to make required
payments of principal of or interest on the
Securities of such Series, to make adequate
provision for future payments on such Securities
or for any
12
other purpose specified in the Agreement, with
respect to such Series, to the extent that funds
are not otherwise available. In the alternative or
in addition to such deposit, a Reserve Fund for a
Series may be funded through application of all or
a portion of the excess cash flow from the Primary
Assets for such Series, to the extent described in
the related Prospectus Supplement.
D. Minimum Principal
Payment Agreement....If stated in the Prospectus Supplement relating to
a Series of Securities, the Depositor will enter
into a minimum principal payment agreement (the
"Minimum Principal Payment Agreement") with an
entity meeting the criteria of the Rating Agency,
pursuant to which such entity will provide funds
in the event that aggregate principal payments on
the Primary Assets for such Series are not
sufficient to make certain payments. See "CREDIT
ENHANCEMENT--Minimum Principal Payment Agreement"
herein.
E. Deposit Agreement....If stated in the Prospectus Supplement, the
Depositor and the Trustee will enter into a
guaranteed investment contract or an investment
agreement (the "Deposit Agreement") pursuant to
which all or a portion of amounts held in the
Collection Account, the Distribution Account or in
any Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The
Trustee will be entitled to withdraw amounts so
invested, plus interest at a rate equal to the
Assumed Reinvestment Rate, in the manner specified
in the Prospectus Supplement. See "CREDIT
ENHANCEMENT--Deposit Agreement" herein.
Servicing.....................The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans for a Series. In addition, the Servicer may
act as custodian and be responsible for
maintaining custody of the Mortgage Loans and
related documentation on behalf of the Trustee.
Advances with respect to delinquent payments of
principal or interest on a Mortgage Loan will be
made by the Servicer only to the extent described
in the related Prospectus Supplement. Such
advances will be intended to provide liquidity
only and the related Prospectus Supplement will
specify the extent to which they are reimbursable
to the Servicer from scheduled payments of
principal and interest, late collections, or from
the proceeds of liquidation of the related
Mortgage Loans or from other recoveries relating
to such Mortgage Loan (including any insurance
proceeds or payments from other credit support).
In performing these functions, the Servicer will
exercise the same degree of skill and care that it
customarily exercises with respect to similar
receivables or Mortgage Loans owned or serviced by
it. Under certain limited circumstances, the
Servicer may resign or be removed, in which event
either the Trustee or a third-party servicer will
be appointed as successor servicer. The Servicer
will receive a periodic fee as servicing
compensation (the "Servicing Fee") and may, as
specified herein and in the related Prospectus
Supplement, receive certain additional
compensation. See
13
"SERVICING OF MORTGAGE LOANS -- Servicing
Compensation and Payment of Expenses" herein.
Material Federal Income
Tax Consequences............Securities of each series offered hereby will, for
federal income tax purposes, constitute either (i)
interests ("Grantor Trust Securities") in a Trust
treated as a grantor trust under applicable
provisions of the Code, (ii) "regular interests"
("REMIC Regular Securities") or "residual
interests" ("REMIC Residual Securities") in a
Trust treated as a real estate mortgage investment
conduit ("REMIC") (or, in certain instances,
containing one or more REMIC's) under Sections
860A through 860G of the Code, (iii) debt issued
by an Issuer ("Debt Securities") (iv) interests in
an Issuer which is treated as a partnership
("Partnership Interests"), or (v) "regular
interests" ("FASIT Regular Securities"),
"high-yield interests" ("FASIT High-Yield
Securities") or an ownership interest ("FASIT
OWNERSHIP SECURITY") in a Trust treated as a
financial asset securitization investment conduit
("FASIT") (or, in certain circumstances containing
one or more FASITs) under Sections 860H through
860L of the Code. IN THE EVENT THAT FASIT
SECURITIES ARE ISSUED, ANY REVOLVING PERIOD, OR
ADDITION OR SUBSTITUTION OF COLLATERAL PROVISIONS
OTHERWISE AVAILABLE BY MEANS OF THE FASIT ELECTION
WILL BE RESTRICTED SO AS TO NOT RESULT IN THE
RELATED COLLATERAL POOL NOT BEING A "DISCRETE
POOL" OF ASSETS WITHIN THE MEANING OF THE
APPLICABLE REQUIREMENTS FOR THE USE OF A FORM S-3
REGISTRATION STATEMENT (I.E., THE REVOLVING
PERIOD, ADDITION AND SUBSTITUTION PENSIONS OF
FASITS WILL GENERALLY CONFORM TOT HE REQUIREMENTS
OF REMICS).
DEWEY BALLANTINE LLP, SPECIAL TAX COUNSEL TO THE
DEPOSITOR, WILL RENDER AN OPINION UPON ISSUANCE OF
A SERIES OF SECURITIES WHICH WILL BE FILED WITH
THE COMMISSION AS AN EXHIBIT TO A POST-EFFECTIVE
AMENDMENT OR IN A CURRENT REPORT ON FORM 8-K.
Investors are urged to consult their tax advisors
and to review "Material Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
ERISA Considerations..........A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its own legal advisors
whether the purchase or holding of Securities
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code. A
violation of the prohibited transaction rules may
generate excise tax and other liabilities under
ERISA and the Code. If the Securities offered are
Certificates, an individual prohibited transaction
exemption issued by the Department of Labor to
various underwriters may exempt the purchase,
holding and resale of such Certificates. In
addition, Prohibited Transaction Class Exemption
83-1 may exempt the sale or exchange of the
Certificates. If the Securities offered are Notes
which are treated as indebtedness without
substantial equity features for purposes of ERISA,
various Department of Labor Class
14
Exemptions may exempt the purchase and holding of
such Notes, and each purchaser and transferee of
such Notes may be required to represent and
warrant that such an exemption is applicable to
its purchase and holding of the Notes. See "ERISA
CONSIDERATIONS" herein.
Legal Investment .............The related Prospectus Supplement will state
whether or not the Securities of each Series
offered by this Prospectus and the related
Prospectus Supplement will constitute "mortgage
related securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA").
Investors whose investment authority is subject to
legal restrictions should consult their own legal
advisors to determine whether and to what extent
the Securities constitute legal investments for
them. See "LEGAL INVESTMENT" herein.
Use of Proceeds ..............The net proceeds from the sale of each Series will
be applied to one or more of the following
purposes: (i) to the acquisition of the related
Primary Assets, (ii) to repay indebtedness which
has been incurred to obtain funds to acquire such
Primary Assets, (iii) to establish any Reserve
Funds described in the related Prospectus
Supplement and (iv) to pay costs of structuring
and issuing such Securities, including the costs
of obtaining Credit Enhancement, if any. The
acquisition of the Primary Assets for a Series may
be effected by an exchange of Securities with the
Originator of such Primary Assets. See "USE OF
PROCEEDS" herein.
Ratings ......................It will be a requirement for issuance of any
Series that the Securities offered by this
Prospectus and the related Prospectus Supplement
be rated by at least one Rating Agency in one of
its four highest applicable rating categories. The
rating or ratings applicable to Securities of each
Series offered hereby and by the related
Prospectus Supplement will be as set forth in the
related Prospectus Supplement. A securities rating
should be evaluated independently of similar
ratings on different types of securities. A
securities rating is not a recommendation to buy,
hold or sell securities and does not address the
effect that the rate of prepayments on Mortgage
Loans or Underlying Loans relating to Private
Securities, as applicable, for a Series may have
on the yield to investors in the Securities of
such Series. See "RISK FACTORS--Ratings Are Not
Recommendations" herein.
Absence of Market ............The Securities will be a new issue of securities
with no established trading market. The Issuer
does not expect to apply for listing of the
Securities on any national securities exchange or
quote the Securities in the automated quotation
system of a registered securities association. The
Underwriter(s) specified in the related Prospectus
Supplement expects to make a secondary market in
the Securities, but has no obligation to do so.
See "RISK FACTORS" herein.
Risk Factors..................There are material risks associated with an
investment in the Securities. For a discussion of
all material factors that should be considered by
prospective investors in the Securities, see
15
"RISK FACTORS" herein and in the related
Prospectus Supplement.
16
RISK FACTORS
For a discussion of all material risk factors THAT COULD MAKE the
OFFERING of the Securities SPECULATIVE OR ONE OF HIGH RISK, Investors should
consider, among other things, the following factors and "Risk Factors" in the
related Prospectus Supplement.
AN INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT, WHICH MAY RESULT IN
THE HOLDER HOLDING SUCH INVESTMENT TO MATURITY.
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Holders with liquidity of
investment or will continue for the life of the Securities of such Series. The
Underwriter(s) specified in the related Prospectus Supplement expects to make a
secondary market in the Securities, but has no obligation to do so.
THE ASSETS OF THE TRUST FUND, AS WELL AS ANY APPLICABLE CREDIT ENHANCEMENT, WILL
BE LIMITED AND, IF SUCH ASSETS AND/OR CREDIT ENHANCEMENT BECOME INSUFFICIENT TO
SERVICE THE RELATED SECURITIES, LOSSES MAY RESULT.
The Securities of a Series will be payable solely from the assets of
the Trust Fund for such Securities. There will be no recourse to the Depositor
or any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, at the times and to the extent set
forth in the related Prospectus Supplement, certain Primary Assets and/or any
balance remaining in the Collection Account or Distribution Account immediately
after making all payments due on the Securities of such Series and other
payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Depositor, the Servicer, the Credit Enhancer or any
other person entitled thereto and will no longer be available for making
payments to Holders. Consequently, Holders of Securities of each Series must
rely solely upon payments with respect to the Primary Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any Credit Enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Credit Enhancer and any
other service provider specified in the related Prospectus Supplement generally
will be entitled to receive the proceeds of any such sale to the extent of
unpaid fees and other amounts owing to such persons under the related Agreement
prior to distributions to Holders of Securities. Upon any such sale, the
proceeds thereof may be insufficient to pay in full the principal of and
interest on the Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "THE AGREEMENTS--Assignment of Primary Assets" herein.
CREDIT ENHANCEMENT WILL BE LIMITED IN AMOUNT AND SCOPE OF COVERAGE AND MAY NOT
BE SUFFICIENT TO COVER LOSSES.
Although any Credit Enhancement is intended to reduce the risk of
delinquent payments or losses to Holders entitled to the benefit thereof, the
amount of such Credit Enhancement will be limited and will decline and could be
depleted under certain circumstances prior to the payment in full of the related
Series of Securities, and as a result Holders may suffer losses. Furthermore,
such Credit Enhancement may provide only very limited coverage as to certain
types of losses and may provide no coverage as to certain other types of losses.
Generally, Credit Enhancements do not directly or indirectly guarantee to the
holders of Securities, any specific rate of prepayment. See "CREDIT ENHANCEMENT"
herein.
17
THE TIMING OF PRINCIPAL PAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF
THE SECURITIES.
The yield to maturity experienced by a Holder of Securities may be
affected by the rate of payment of principal of the Mortgage Loans or Underlying
Loans relating to the Private Securities, as applicable. The timing of principal
payments of the Securities of a Series will be affected by a number of factors,
including the following: (i) the extent of prepayments of the Mortgage Loans or
Underlying Loans relating to the Private Securities, as applicable; (ii) the
manner of allocating principal payments among the Classes of Securities of a
Series as specified in the related Prospectus Supplement; (iii) the exercise by
the party entitled thereto of any right of optional termination; (iv)
liquidations due to defaults and (v) repurchases of Mortgage Loans or Underlying
Loans due to conversion of adjustable-rate mortgage loans ("ARM Loans") to
fixed-rate loans or breaches of the related Originator's or Servicer's
representations and warranties). See "DESCRIPTION OF THE SECURITIES--Weighted
Average Life of Securities.".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See "DESCRIPTION OF THE SECURITIES--Payments of
Interest."
PREPAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE SECURITIES.
The yield to maturity of the Securities of each series may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
related Mortgage Loans. The yield to maturity on interest-only Private
Securities or Private Securities purchased at premiums or discounted to par will
be extremely sensitive to the rate of prepayments on the related Mortgage Loans.
In addition, the yield to maturity on certain other types of classes of
Securities, including certain classes in a series including more than one class
of Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities.
The Mortgage Loans may be prepaid in full or in part at any time;
however, a prepayment penalty or premium may be imposed in connection therewith.
Unless so specified in the related Prospectus Supplement, such penalties will
not be property of the related Trust. The rate of prepayments of the Mortgage
Loans cannot be predicted and is influenced by a wide variety of economic,
social and other factors, including prevailing mortgage market interest rates,
the availability of alternative financing, local and regional economic
conditions and homeowner mobility. Therefore, no assurance can be given as to
the level of prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in Pre-Funding Accounts, if any, voluntary early payments by
borrowers (including payments in connection with refinancings of the related
senior Mortgage Loan or Loans), sales of Mortgaged Properties subject to
"due-on-sale" provisions and liquidations due to default, as well as the receipt
of proceeds from physical damage, credit life and disability insurance policies.
In addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. The related Prospectus Supplement will specify whether any
or all of the Mortgage Loans contain "due-on-sale" provisions.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
18
AS A RESULT OF OPTIONAL REDEMPTION OR REPURCHASE OR AUCTION SALE, HOLDERS COULD
BE FULLY PAID SIGNIFICANTLY EARLIER THAN WOULD OTHERWISE BE THE CASE.
One or more Classes of Securities of any Series may be subject to
optional redemption or repurchase, in whole or in part, on or after a date
specified in the related Prospectus Supplement, or on or after such time as the
aggregate outstanding principal amount of the Primary Assets is less than the
amount or percentage specified in the related Prospectus Supplement, such amount
or percentage not to exceed 10% of the aggregate principal balance of the
Primary Assets as of the Cut-off Date for that Series. NEITHER THE TRUST NOR THE
HOLDERS WILL HAVE ANY CONTINUING LIABILITY UNDER SUCH OPTIONAL REDEMPTION OR
REPURCHASE. IF THE OPTIONAL TERMINATION IS NOT EXERCISED, THEN ONE OR MORE
CLASSES OF SECURITIES MAY BE SUBJECT TO EARLY RETIREMENT BY AN AUCTION SALE. SEE
"THE AGREEMENTS--TERMINATION" HEREIN. The risk of reinvesting unscheduled
distributions resulting from redemption or repurchase of the Securities will be
borne by the Holders. See "DESCRIPTION OF THE SECURITIES--Optional Redemption,
Purchase or Termination." THE OPTIONAL TERMINATION AND MANDATORY TERMINATION
DESCRIBED HEREIN ARE THE ONLY CIRCUMSTANCES IN WHICH THE SECURITIES COULD BE
RETIRED EARLIER THAN WOULD BE THE CASE IF THE TRUST WERE ALLOWED TO GO TO TERM.
MORTGAGE LOANS WITH BALLOON AND NON-TRADITIONAL PAYMENT METHODS MAY CREATE
GREATER DEFAULT RISK.
A portion of the aggregate principal balance of the Mortgage Loans at
any time may be Balloon Loans that provide for the payment of the unamortized
principal balance of such Mortgage Loan in a single payment at maturity Such
Balloon Loans provide for equal monthly payments, consisting of principal and
interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Other types of loans that may be included in the Trust Fund may involve
additional uncertainties not present in traditional types of loans. For example,
certain of the Mortgage Loans may provide for escalating or variable payments by
the borrower under the Mortgage Loan, as to which the borrower is generally
qualified on the basis of the initial payment amount. In some instances the
borrower's income may not be sufficient to enable them to continue to make their
loan payments as such payments increase and thus the likelihood of default will
increase. The Depositor does not have any information regarding the default
history or prepayment history of payments on these non-traditional loans
JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND LOSSES.
If the Mortgages in a Trust Fund are primarily junior liens subordinate
to the rights of the mortgagee under the related senior mortgage or mortgages,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the MORTGAGED Property securing a junior mortgage unless it
forecloses subject to the senior mortgages, in which case it must either pay the
entire amount due on the senior mortgages to the senior mortgagees at or prior
to the foreclosure sale or undertake the obligation to make payments on the
senior mortgages in the event the mortgagor is in default thereunder. The Trust
Fund will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES.
There are several factors that could adversely affect the value of
MORTGAGED Properties such that the outstanding balance of the related Mortgage
Loan, together with any senior financing on the MORTGAGED Properties, would
equal or exceed the value of the MORTGAGED Properties. Among the factors that
could adversely affect the value of the MORTGAGED Properties are an overall
decline in the residential real estate market in the areas in which the
MORTGAGED Properties are located or a decline in the general condition of the
MORTGAGED Properties as a result
19
of failure of borrowers to maintain adequately
the MORTGAGED Properties or of natural disasters that are not necessarily
covered by insurance, such as earthquakes and floods. Any such decline could
extinguish the value of a junior interest in a MORTGAGED Property before having
any effect on the related senior interest therein. If such a decline occurs, the
actual rates of delinquencies, foreclosure and losses on the junior loans could
be higher than those currently experienced in the mortgage lending industry in
general.
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES, IF
PARTICULAR REGIONS EXPERIENCE DOWNTURNS.
Certain geographic regions from time to time will experience weaker
regional economic conditions and housing markets than will other regions, and,
consequently, will experience higher rates of loss and delinquency on mortgage
loans generally. The Mortgage Loans underlying certain Series of Securities may
be concentrated in such regions, and such concentrations may present risk
considerations in addition to those generally present for similar mortgage loan
asset-backed securities without such concentrations. . Information with respect
to geographic concentration of MORTGAGED Properties THAT IS KNOWN AT THE TIME OF
THE OFFERING will be specified in the related Prospectus Supplement .
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT.
If a Trust Fund includes a Pre-Funding Account and the principal
balance of additional Primary Assets delivered to the Trust Fund during the
Pre-Funding Period is less than the original Pre-Funded Amount, the Holders of
the Securities of the related Series will receive a prepayment of principal as
and to the extent described in the related Prospectus Supplement. Any such
principal prepayment may adversely affect the yield to maturity of the
applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
Each additional Primary Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and the related agreements. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or Credit Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Primary Asset were included as part
of the initial Trust Fund, the credit quality of such assets would be consistent
with the initial rating of each Class of Securities of such Series. Following
the transfer of additional Primary Assets to the Trust, the aggregate
characteristics of the Primary Assets then held in the Trust may vary from those
of the initial Primary Assets of such Trust. As a result, the additional Primary
Assets may adversely affect the performance of the related Securities
The ability of a Trust to invest in additional Primary Assets during
the related Pre-Funding Period will be dependant on the ability of the
Originator to originate or acquire Primary Assets that satisfy the requirements
for transfer to the Trust Fund. The ability of the Originator to originate or
acquire such Primary Assets will be affected by a variety of social and economic
factors, including the prevailing level of market interest rates, unemployment
levels and consumer perceptions of general economic conditions.
ENVIRONMENTAL CONDITIONS ON THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY.
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
MORTGAGED PROPERTY may give rise to a lien on the MORTGAGED PROPERTY to assure
the costs of clean-up. In several states, such a lien has priority over the lien
of an existing mortgage or owner's interest against such MORTGAGED PROPERTY. In
addition, under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), a
lender may be liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances that require remedy at a
property, if agents or employees of the lender have become sufficiently involved
in the operations of the borrower, regardless of whether or not the
environmental damage or threat was caused by a prior owner. A lender also risks
such liability on foreclosure of the Mortgaged Property.
20
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND
INTEREST ON THE MORTGAGE LOANS.
Applicable state laws generally regulate interest rates and other
charges and require certain disclosures. In addition, other state laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Mortgage Loans.
The Mortgage Loans may also be subject to Federal laws, including: (i)
the Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; and (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Mortgage Loan to damages and administrative enforcement.
See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS" herein.
RATINGS ARE NOT RECOMMENDATIONS. A REDUCTION IN THE RATING OF ANY CREDIT
ENHANCER WOULD LIKELY ADVERSELY IMPACT THE RATING OF THE SECURITIES.
It will be a condition to the issuance of a Series of Securities that
they be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Credit Enhancement with respect to such Series. Such rating should not be deemed
a recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor.
A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY IMPACT
THE RATING OF THE SECURITIES.
There is also no assurance that any such rating will remain in effect
for any given period of time or may not be lowered or withdrawn entirely by the
Rating Agency if in its judgment circumstances in the future so warrant. In
addition to being lowered or withdrawn due to any erosion in the adequacy of the
value of the Primary Assets, such rating might also be lowered or withdrawn,
among other reasons, because of an adverse change in the financial or other
condition of a Credit Enhancer or a change in the rating of such Credit
Enhancer's long term debt.
ERISA MAY RESTRICT THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SECURITIES.
Generally, ERISA applies to investments made by benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of Securities. See "ERISA
CONSIDERATIONS" herein.
PURCHASE OF MORTGAGE LOANS OR UNDERLYING LOANS FROM AFFILIATES MAY LEAD TO
CONFLICTS OF INTEREST.
The Depositor may acquire Mortgage Loans or Private Securities backed
by Underlying Loans from affiliated sellers. In such a transaction, the
Depositor could be thought to "stand on both sides" of the transaction, with the
resultant risk that the terms of the such transaction are otherwise then would
be the case in an arms-length transaction. The related Prospectus Supplement
will describe the terms of any such affiliated transaction.
21
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Issuer and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
Agreement" or a "Trust Agreement") among the Depositor, the Servicer, if the
Series relates to Mortgage Loans, and the Trustee. A form of Pooling and
Servicing Agreement has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Originator may agree to reimburse the Depositor for certain fees
and expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be compound interest securities, variable
interest securities, PAC securities, zero coupon securities, principal only
securities, interest only securities or participating securities. A Series may
also include one or more Classes of subordinate 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 the conditions, if any, applicable to a Class
of a Series, the transfer of the Securities may be registered and the Securities
may be exchanged at the office of the Trustee specified in the Prospectus
Supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with such registration of transfer or
exchange. One or more Classes of a Series may be available in book-entry form
only.
PAYMENTS of principal of and interest on a Series of Securities will
be made on the Distribution Dates specified in the Prospectus Supplement
relating to such Series by check mailed to Holders of such Series, registered as
such at the close of business on the record date specified in the related
Prospectus Supplement applicable to such Distribution Dates at their addresses
appearing on the security register, except that (a) payments may be made by wire
transfer (at the expense of the Holder requesting payment by wire transfer) in
certain circumstances described in the related Prospectus Supplement and (b)
final payments of principal in retirement of each Security will be made only
upon presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
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. PAYMENTS with respect to the Primary Assets for a
Series, together with reinvestment income thereon, amounts withdrawn from any
Reserve Fund, and amounts available pursuant to any other Credit Enhancement
will be deposited into the Collection Account. Such amounts may be net of
certain amounts payable to the related Servicer and any other person specified
in the Prospectus Supplement. Such amounts thereafter will be deposited into the
Distribution Account and will be available to make payments on the Securities of
such Series on the next Distribution Date. See "THE TRUST FUNDS--Collection and
Distribution Accounts" herein.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive
interest will bear interest from the date and at the rate per annum specified,
or calculated in the method described in the related Prospectus Supplement.
Interest
22
on such 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
percentage rates of the Mortgage Loans or Underlying Loans relating to the
Private Securities, as applicable included in the related Trust Fund and/or as
prepayments occur with respect to such Mortgage Loans or Underlying Loans, as
applicable. 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 the principal thereof on
such Distribution Date.
Interest payable on the Securities on a Distribution Date will include
all interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made
to the Holders of the Securities of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority (which may, in
certain cases, include allocation by random lot) set forth in the related
Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which the principal thereof will be fully paid
and with respect to each Class of a Series of Certificates will be the date on
which the entire aggregate principal balance of such Class is expected to be
reduced to zero, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus Supplement. The
Final Scheduled Distribution Date for each Class of a Series will be specified
in the related Prospectus Supplement. Since payments on the Primary Assets will
be used to make distributions in reduction of the outstanding principal amount
of the Securities, it is likely that the actual final Distribution Date of any
such Class will occur earlier, and may occur substantially earlier, than its
Final Scheduled Distribution Date.
Furthermore, with respect to a Series of Certificates, as will be
further described in the related Prospectus Supplement, as a result of
delinquencies, defaults and liquidations of the Primary Assets in the Trust
Fund, the actual final Distribution Date of any Certificate may occur later than
its Final Scheduled Distribution Date. No assurance can be given as to the
actual prepayment experience with respect to a Series. See "Weighted Average
Life of the Securities" below.
SPECIAL REDEMPTION
ONE OR MORE CLASSES OF SECURITIES OF a Series of Securities having
other than monthly Distribution Dates may be subject to special redemption, in
whole or in part, on the day specified in the related Prospectus Supplement (a
"Special Redemption Date") if, as a consequence of prepayments on the Mortgage
Loans or Underlying Loans, as applicable, relating to such Securities or low
yields then available for reinvestment, the entity specified in the related
Prospectus Supplement determines, based on assumptions specified in the
applicable Agreement, that the amount available for the payment of interest that
will have accrued on such Securities (the "Available Interest Amount") through
the designated interest accrual date specified in the related Prospectus
Supplement is less than the amount of interest that will have accrued on such
Securities to such date. In such event and as further described in the related
Prospectus Supplement, the Trustee will redeem a principal amount of outstanding
Securities of such Series as will cause the Available Interest Amount to equal
the amount of interest that will have accrued through such designated interest
accrual date for such Series of Securities outstanding immediately after such
redemption.
23
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
One or more Classes of Notes or purchase one or more Classes of
Securities of any Series may be subject to optional redemption or repurchase, in
whole or in part, on any Distribution Date under the circumstances, if any,
specified in the Prospectus Supplement relating to such Series. Such redemption
or repurchase may occur or on or after a date specified in the related
Prospectus Supplement, or on or after such time as the aggregate outstanding
principal amount of the Securities or Primary Assets, as specified in the
related Prospectus Supplement, is less than the amount or percentage specified
in the related Prospectus Supplement, such amount or percentage not to exceed
10% of the aggregate principal balance of the Primary Assets as of the Cut-off
Date for that Series . Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. In the event that a REMIC election has been made, the
Trustee shall receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under Section 860F of the Code. The risk of reinvesting
unscheduled distributions resulting form prepayments of the Securities will be
borne by the Holders. Neither the Trust nor the Holders will have any continuing
liability under such optional redemption or repurchase.
In addition, the Trustee, the Servicer or certain other entities
specified in the related Prospectus Supplement may be required to effect early
retirement of a series of Securities by soliciting competitive bids for the
purchase of the related Primary Assets or otherwise, under other circumstances
and in the manner specified in "THE AGREEMENTS--Termination " herein.
WEIGHTED AVERAGE LIFE 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
such security will be repaid to the investor. The weighted average life of the
Securities of a Class will be influenced by the rate at which the amount
financed under Primary Assets included in the Trust Fund for a Series is paid.
Such repayment may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans or Underlying Loans relating to the Private Securities, as
applicable, included in the related Trust Fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in such
Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund will conform to any level of any prepayment standard
or model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also 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 Mortgage
Loans or Underlying Loans either from time to time or over the lives of such
Mortgage 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
Mortgage Loans or Underlying Loans relating to the Private Securities, as
applicable, for a Series, such loans are likely to prepay at rates higher than
if prevailing interest rates remain at or above the interest rates borne by such
loans. In this regard, it should be noted that the Mortgage Loans or Underlying
Loans, as applicable, for a Series
24
may have different interest rates. In addition, the weighted average life of the
Securities may be affected by the varying maturities of the Mortgage Loans or
Underlying Loans relating to the Private Securities, as applicable. If any
Mortgage Loans or Underlying Loans relating to the Private Securities, as
applicable, for a Series have actual terms-to-stated maturity of less than those
assumed in calculating the Final Scheduled Distribution Date of the related
Securities, one or more Classes of the Series may be fully paid prior to their
respective Final Scheduled Distribution Date, even in the absence of prepayments
and a reinvestment return higher than the Assumed Reinvestment Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of
the related Trust Fund, and the Certificates of each Series will represent
interests in the assets of the related Trust Fund. The Trust Fund of each Series
will include assets acquired from the Originator composed of (i) the Primary
Assets, (ii) any Credit Enhancement, (iii) any MORTGAGED Property that secured a
Mortgage Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession and (iv) the amount, if any, initially deposited in
the Collection Account or Distribution Account for a Series as specified in the
related Prospectus Supplement. A MAXIMUM OF 5% (BY CUT-OFF DATE PRINCIPAL
BALANCE) OF THE AGGREGATE PRIMARY ASSETS THAT ARE INCLUDED IN A TRUST FUND AS
SUCH TRUST FUND WILL BE CONSTITUTED AT THE CLOSING DATE WILL DEVIATE FROM THE
CHARACTERISTICS THAT ARE DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
The Securities will be non-recourse obligations secured by the related
Trust Fund. Holders of a Series of Notes may only proceed against such
collateral securing such Series of Notes in the case of a default with respect
to such Series of Notes and may not proceed against any assets of the Depositor
or the related Trust Fund not pledged to secure such Notes.
The Primary Assets for a Series will be acquired by the related Trust
Fund from the related Originator, or may be acquired in the open market or in
privately negotiated transactions. Mortgage Loans relating to a Series will be
serviced by the Servicer, which may be the Originator, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a "Servicing
Agreement") between the Trust Fund and Servicer, with respect to a Series of
Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
A Trust Fund relating to a Series of Securities may be a business trust
formed under the laws of the state specified in the related Prospectus
Supplement pursuant to a trust agreement (each, a "Trust Agreement") between the
Depositor and the trustee of such Trust Fund specified in the related Prospectus
Supplement
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Credit Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of
any combination of Mortgage Loans and Private Securities, to the extent and as
specified in the related Prospectus Supplement. Some of the Mortgage Loans may
be delinquent to the extent and as specified in the related Prospectus
Supplement. The percentage of those Mortgage Loans which are delinquent shall
not exceed 10% of the aggregate principal balance of the Primary Assets as of
the Cut-off Date for that Series. The following is a brief description of the
Mortgage Loans expected to be included in the related Trusts.
25
THE MORTGAGE LOANS
MORTGAGE LOANS. The Primary Assets for a Series may consist, in whole
or in part, of mortgage loans (the "Mortgage Loans") secured by mortgages on
one- to four-family residential housing ("Single Family Properties"), including
condominium units ("Condominium Units") and cooperative dwellings ("Cooperative
Dwellings") which may be subordinated to other mortgages on the same Mortgaged
Property. The Mortgage Loans may have fixed interest rates or adjustable
interest rates and may provide for other payment characteristics as described
below and in the related Prospectus Supplement.
THE MORTGAGE LOANS WILL GENERALLY CONSIST OF WHAT ARE COMMONLY REFERRED
TO AS "HOME EQUITY" LOANS, AS DISTINGUISHED FROM "PURCHASE MONEY" LOANS. BOTH OF
THESE CONCEPTS REFER TO THE USE OF PROCEEDS MADE BY THE RELATED BORROWER, RATHER
THAN TO ANY LEGAL OR OTHER DOCUMENTARY DIFFERENCES BETWEEN THE TWO TYPES OF
LOANS, EXCEPT THAT "HOME EQUITY" LOANS ARE USUALLY (BUT NOT ALWAYS) SECURED BY
MORTGAGES WHICH ARE IN A SUBORDINATE LIEN POSITION WHILE "PURCHASE MONEY" LOANS
ARE USUALLY (BUT NOT ALWAYS) SECURED BY MORTGAGES WHICH ARE IN A SENIOR LIEN
POSITION, AND "HOME EQUITY" LOANS ARE TYPICALLY (BUT NOT ALWAYS) SHORTER IN
MATURITY THAN "PURCHASE MONEY" LOANS (I.E., FIFTEEN RATHER THAN THIRTY YEARS).
A "HOME EQUITY" LOAN IS A MORTGAGE LOAN THE PROCEEDS OF WHICH ARE NOT
USED TO PURCHASE THE RELATED MORTGAGED PROPERTY; THE PROCEEDS OF A "PURCHASE
MONEY" MORTGAGE ARE APPLIED TO THE PURCHASE OF THE RELATED MORTGAGED PROPERTY.
TYPICAL USES OF PROCEEDS OF "HOME EQUITY" LOANS WOULD BE HOME IMPROVEMENT, DEBT
CONSOLIDATION AND THE FUNDING OF LARGE EXPENSES SUCH AS COLLEGE TUITION.
The Mortgage Loans may be (i) "conventional" mortgage loans, that is,
they will not be insured or guaranteed by any governmental agency, (ii) insured
by the Federal Housing Authority ("FHA") or (iii) partially guaranteed by the
Veteran's Administration, as specified in the related Prospectus Supplement. THE
MORTGAGE LOANS MAY BE EITHER "CLOSED-END" LOANS (I.E., LOANS WHICH DO NOT PERMIT
THE RELATED BORROWER TO OBTAIN THE PROCEEDS OF FUTURE ADVANCES) OR "OPEN-END"
LOANS (I.E., LOANS STRUCTURED AS LINES OF CREDIT, WHICH PERMIT THE RELATED
BORROWER, SUBJECT TO A MAXIMUM DOLLAR AMOUNT, TO OBTAIN MORE THAN ONE ADVANCE OF
PROCEEDS). THE MORTGAGE LOANS will be secured by first, second or more junior
liens on fee simple or leasehold interests in one- to four-family residential
properties. The principal and interest on the Mortgage Loans included in the
Trust for a Series of Securities will be payable either on the first day of each
month or on different scheduled days throughout each month, and the interest
will be calculated either on a simple interest, actuarial method or "Rule of
78s" method, as described herein and in the related Prospectus Supplement. When
a full principal prepayment is paid on a Mortgage Loan during a month, the
Mortgagor is generally charged interest only on the days of the month actually
elapsed up to the date of such prepayment, at a daily interest rate that is
applied to the principal amount of the Mortgage Loan so prepaid.
PAYMENT TERMS. The payment terms of the Mortgage Loans to be included
in a Trust for a Series will be described in the related Prospectus Supplement
and may include any of the following features of combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index (which will be
specified in the related Prospectus Supplement), a rate that is fixed
for a period of time or under certain circumstances and is followed by
an adjustable rate, a rate that otherwise varies from time to time, or
a rate that is convertible from and adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
Loan Rate for a period of time of for the life of the Mortgage Loan,
and the amount of any difference may be contributed from funds supplied
by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service
basis to fully amortize the Mortgage Loan over its term, may be
calculated on the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity or on an
interest rate that is different from the Loan Rate or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the
26
principal may be due on maturity. Principal may include interest that
has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly Payments of principal and interest may be
fixed for the life of the Mortgage Loan, may increase over a specified
period of time or may change from period to period. Mortgage 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.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the Mortgage Loan or
may decline over time, and may be prohibited for the life of the
Mortgage Loan or for certain periods. Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified
time periods. The Mortgage Loans may include "due on sale" clauses
which permit the mortgagee to demand payment of the entire Mortgage
Loan in connection with the sale or certain transfers of the related
Mortgaged Property. Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting standards of the Originator.
AMORTIZATION OF THE MORTGAGE LOANS. The Mortgage Loans will provide for
payments that are allocated to principal and interest according to either the
actuarial method (an "Actuarial Mortgage Loan"), the simple interest method (a
"Simple Interest Mortgage Loan") or the "Rule of 78s" method (a "Rule of 78s
Mortgage Loan"), as set forth in the related Prospectus Supplement. The related
Prospectus Supplement will set forth whether any of the Mortgage Loans will
provide for deferred interest or negative amortization.
An Actuarial Mortgage Loan provides for payments in level monthly
installments (except, in the case of a Balloon Loan, the final payment)
consisting of interest equal to one-twelfth of the applicable Loan Rate times
the unpaid principal balance, with the remainder of such payment applied to
principal.
A Simple Interest Mortgage Loan provides for the amortization of the
amount financed under such Mortgage Loan over a series of equal Monthly Payments
(except, in the case of a Balloon Loan, the final payment). Each Monthly Payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Mortgage Loan being multiplied by the
stated Loan Rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on such Mortgage Loan. As payments are received under
a Simple Interest Mortgage Loan, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if a borrower pays a fixed monthly
installment on a Simple Interest Mortgage Loan before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. However, the next
succeeding payment will result in an allocation of a greater amount to interest
if such payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a Simple Interest Mortgage
Loan is made on or prior to its scheduled due date, the principal balance of the
Mortgage Loan will amortize in the manner described in the preceding paragraph.
However, if the borrower consistently makes scheduled payments after the
scheduled due date, the Mortgage Loan will amortize more slowly than scheduled.
If a Simple Interest Mortgage Loan is prepaid, the borrower is required to pay
interest only to the date of prepayment.
Certain of the Mortgage Loans contained in a Trust may be loans insured
under the FHA Title I credit insurance program created pursuant to Sections 1
and 2(a) of the National Housing Act of 1934 (the "Title I Program"). Under the
Title I Program, the FHA is authorized and empowered to insure qualified lending
institutions against losses on eligible loans. The Title I Program operates as a
coinsurance program in which the FHA insures
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up to 90% of certain losses incurred on an individual insured loan, including
the unpaid principal balance of the loan, but only to the extent of the
insurance coverage available in the lender's FHA insurance coverage reserve
account. The owner of the loan bears the uninsured loss on each loan.
The Mortgaged Properties will include Single Family Property (i.e.,
one-to four-family residential housing, including Condominium Units and
Cooperative Dwellings) The Mortgaged Properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Mortgage. 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.
The related Prospectus Supplement will specify whether or not Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. The sole basis for a representation that a given percentage of the
Mortgage Loans are secured by Single Family Property that is owner-occupied will
be either (i) the making of a representation by the Mortgagor at origination of
the Mortgage Loan either that the underlying Mortgaged Property will be used by
the Mortgagor for a period of at least six months every year or that the
Mortgagor intends to use the Mortgaged Property as a primary residence, or (ii)
a finding that the address of the underlying Mortgaged Property is the
Mortgagor's mailing address as reflected in the Servicer's records. To the
extent specified in the related Prospectus Supplement, the Mortgaged Properties
may include non-owner occupied investment properties and vacation and second
homes.
The initial Combined Loan-to-Value Ratio of a Mortgage Loan is computed
in the manner described in the related Prospectus Supplement, taking into
account the amounts of any related senior mortgage loans.
ADDITIONAL INFORMATION. The selection criteria which will apply with
respect to the Mortgage Loans, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The Mortgage Loans for a Series may include Mortgage Loans that do not
amortize their entire principal balance by their stated maturity in accordance
with their terms and require a balloon payment of the remaining principal
balance at maturity, as specified in the related Prospectus Supplement. The
Mortgage Loans for a Series may include loans that do not have a specified
stated maturity.
The related Prospectus Supplement for each Series will provide
information with respect to the Mortgage Loans that are Primary Assets as of the
Cut-off Date, including, among other things, and to the extent relevant: (a) the
aggregate unpaid principal balance of the Mortgage Loans; (b) the range and
weighted average Loan Rate on the Mortgage Loans, and, in the case of adjustable
rate loans, the range and weighted average of the current Loan Rates and the
Lifetime Rate Caps, if any; (c) the range and average outstanding principal
balance of the Loans; (d) the weighted average original and remaining
term-to-stated maturity of the Mortgage Loans and the range of original and
remaining terms-to-stated maturity, if applicable; (e) the range and weighted
average of Combined Loan-to-Value Ratios or Loan-to-Value Ratios for the
Mortgage Loans, as applicable; (f) the percentage (by outstanding principal
balance as of the Cut-off Date) of Mortgage Loans that accrue interest at
adjustable or fixed interest rates; (g) any special hazard insurance policy or
bankruptcy bond or other Credit Enhancement relating to the Mortgage Loans; (h)
the GEOGRAPHIC DISTRIBUTION OF ANY MORTGAGED PROPERTIES SECURING THE MORTGAGE
LOANS; (I) THE PERCENTAGE OF MORTGAGE LOANS (by principal balance as of the
Cut-off Date) that are secured by Single Family MORTGAGED Properties, shares
relating to Cooperative Dwellings, Condominium Units, investment property and
vacation or second homes; (J) the lien priority of the Mortgage Loans; (K) year
of origination of the Mortgage Loans; and (L) the delinquency status of Mortgage
Loans, including the duration and history of such delinquencies and the
percentage of the of Mortgage Loans (by principal balance as of the Cut-off
Date) that are delinquent. The
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related Prospectus Supplement will also specify any other limitations on the
types or characteristics of Mortgage Loans for a Series.
If specific information respecting the Mortgage Loans is not known at
the time the related series of Securities initially is offered, information of
the nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the Commission within fifteen days after the initial issuance of such
Securities. A copy of the Pooling and Servicing Agreement with respect to each
Series of Securities will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the related
Prospectus Supplement. A schedule of the Mortgage Loans relating to such Series
will be attached to the Pooling and Servicing Agreement delivered to the Trustee
upon delivery of the Securities.
PRIVATE SECURITIES
GENERAL. Primary Assets for a Series may consist, in whole or in part,
of Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Mortgage Loans (the "Underlying Loans") or (b) collateralized obligations
secured by Underlying Loans. Such pass-through certificates or collateralized
obligations will have previously been (a) offered and distributed to the public
pursuant to an effective registration statement or (b) acquired in a transaction
not involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of transfer (nor an affiliate thereof at
any time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality thereof, they
need not be, and Private Securities themselves will not be so insured or
guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. The PS Sponsor may be
an affiliate of the Depositor. The obligations of the PS Sponsor will generally
be limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Additionally, although the Underlying Loans
may be guaranteed by an agency or instrumentality of the United States, the
Private Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
CREDIT SUPPORT RELATING TO PRIVATE SECURITIES. Credit support in the
form of Reserve Funds, subordination of other private securities issued under
the PS Agreement, guarantees, letters of credit, cash collateral accounts,
insurance policies or other types of credit support may be provided with respect
to the Underlying Loans or with respect to the Private Securities themselves.
The type, characteristics and amount of credit support will be a function of
certain characteristics of the Underlying Loans and other factors and will have
been established for the
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Private Securities on the basis of requirements of the nationally recognized
statistical rating organization that rated the Private Securities.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Primary Assets include Private Securities will specify (such
disclosure may be on an approximate basis and will be as of the date specified
in the related Prospectus Supplement), to the extent relevant and to the extent
such information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination, (E) the lien priority of
such Underlying Loans, and (F) the delinquency status and year of origination of
such Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Mortgage Loans
underlying the Private Securities or to such Private Securities themselves;
(viii) the terms on which Underlying Loans may, or are required to, be purchased
prior to their stated maturity or the stated maturity of the Private Securities;
and (ix) the terms on which Underlying Loans may be substituted for those
originally underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and any income earned thereon. Certain amounts on
deposit in such Collection Account and certain amounts available pursuant to any
Credit Enhancement will be deposited in a related Distribution Account, which
will also be established by the Trustee for each such Series of Securities, for
distribution to the related Holders. The TRUSTEE MAY invest the funds in the
Collection and Distribution Accounts in eligible investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited in the
Distribution Account or otherwise distributed and, in the case of funds in the
Distribution Account, than the day preceding the next Distribution Date for the
related Series of Securities. "Eligible Investments" include, among other
investments, obligations of the United States and certain agencies thereof,
federal funds, certificates of deposit, commercial paper, demand and time
deposits and banker's acceptances, certain repurchase agreements of United
States government securities and certain guaranteed investment contracts, in
each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
PRE-FUNDING ACCOUNTS
A Trust Fund may include one or more segregated trust accounts (each, a
"Pre-Funding Account") established and maintained with the Trustee for the
related Series. On the closing date for such Series, a portion of the proceeds
of the sale of the Securities of such Series (such amount, the "Pre-Funded
Amount") will be deposited in the Pre-Funding Account and may be used to acquire
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). If any Pre-Funded Amount
remains on
30
deposit in the Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner specified in the related
Prospectus Supplement to prepay the Notes and/or the Certificates of the
applicable Series.
IF A Pre-Funding Account IS ESTABLISHED, (A) the Pre-Funding Period
will not exceed 90 days from the related closing date, (b) the additional
Primary Assets to be acquired during the Pre-Funding Period will be subject to
the same representations and warranties and satisfy the same eligibility
requirements as the Primary Assets included in the related Trust Fund on the
closing date, subject to such exceptions as are expressly stated in such
Prospectus Supplement, (c) the Pre-Funding Amount will not exceed 25% of the
principal amount of the Securities issued pursuant to a particular offering and
(d) prior to the investment of the Pre-Funded Amount in additional Primary
Assets, such Pre-Funded Amount will be invested in one or more Eligible
Investments. Any Eligible Investment must mature no later than the Business Day
prior to the next Distribution Date.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) certain fees or expenses during the
Pre-Funding Period, over the amount of interest available therefor from the
Primary Assets in the Trust Fund. Any amounts on deposit in the Capitalized
Interest Account at the end of the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person specified in the related
Prospectus Supplement.
If a Trust Fund includes a Pre-Funding Account and the principal
balance of additional Primary Assets delivered to the Trust Fund during the
Pre-Funding Period is less than the original Pre-Funded Amount, the Holders of
the Securities of the related Series will receive a prepayment of principal as
and to the extent described in the related Prospectus Supplement. Any such
principal prepayment may adversely affect the yield to maturity of the
applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
CREDIT ENHANCEMENT
If stated 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 an irrevocable letter of credit,
surety bond or insurance policy, issue Subordinate Securities or obtain any
other form of credit enhancement or combination thereof (collectively, "Credit
Enhancement") in favor of the Trustee on behalf of the Holders of the related
Series or designated Classes of such Series from an institution or by other
means acceptable to the Rating Agency. The Credit Enhancement will support the
payment of principal and interest on the Securities, and may be applied for
certain other purposes to the extent and under the conditions set forth in such
Prospectus Supplement. Credit Enhancement for a Series may include one or more
of the following forms, or such other form as may be specified in the related
Prospectus Supplement. Credit Enhancement may be structured so as to protect
against losses relating to more than one Trust Fund, in the manner described
therein.
SUBORDINATE SECURITIES
Credit Enhancement for a Series may consist of one or more Classes of
Subordinate Securities. The rights of holders of such Subordinate 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 Series, but only
to the extent described in the related Prospectus Supplement.
INSURANCE
Credit Enhancement for a Series may consist of 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.
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POOL INSURANCE POLICY. The related Prospectus Supplement will describe
ANY pool insurance policy OBTAINED BY THE DEPOSITOR for the Mortgage Loans in
the related Trust Fund. The pool insurance policy will cover any loss (subject
to the limitations described in a related Prospectus Supplement) by reason of
default. but will not cover the portion of the principal balance of any Mortgage
Loan that is required to be covered by any primary mortgage insurance policy.
The amount and terms of any such coverage will be set forth in the related
Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICY. Although the terms of such policies
vary to some degree, a special hazard insurance policy typically provides that,
where there has been damage to MORTGAGED Property securing a defaulted or
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the standard hazard insurance policy
or any flood insurance policy, if applicable, required to be maintained with
respect to such MORTGAGED Property, or in connection with partial loss resulting
from the application of the coinsurance clause in a standard hazard insurance
policy, the special hazard insurer will pay the lesser of (i) the cost of repair
or replacement of such MORTGAGED Property or (ii) upon transfer of such
MORTGAGED Property to the special hazard insurer, the unpaid principal balance
of such Mortgage Loan at the time of acquisition of such MORTGAGED 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
such MORTGAGED Property. If the unpaid principal balance plus accrued interest
and certain expenses is paid by the special hazard insurer, the amount of
further coverage under the special hazard insurance policy will be reduced by
such amount less any net proceeds from the sale of such MORTGAGED Property. Any
amount paid as the cost of repair of such MORTGAGED Property will reduce
coverage by such 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 MORTGAGED Property with the proceeds described under
(i) above is expected to satisfy the condition under any pool insurance policy
that such MORTGAGED Property be restored before a claim under such pool
insurance policy may be validly presented with respect to the defaulted Mortgage
Loan secured by such MORTGAGED Property. The payment described under (ii) above
will render unnecessary presentation of a claim in respect of such Mortgage Loan
under any pool insurance policy. Therefore, so long as such pool insurance
policy remains in effect, the payment by the special hazard insurer of the cost
of repair or of the unpaid principal balance of the related Mortgage Loan plus
accrued interest and certain expenses will not affect the total 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 MORTGAGED Property securing the
related Mortgage Loan at an amount less than the then-outstanding principal
balance of such Mortgage Loan. The amount of the secured debt could be reduced
to such value, and the holder of such Mortgage Loan thus would become an
unsecured creditor to the extent the outstanding principal balance of such
Mortgage Loan exceeds the value so assigned to the MORTGAGED Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL
ASPECTS OF MORTGAGE LOANS" herein. If so provided in the related Prospectus
Supplement, the Depositor or other entity specified in the related Prospectus
Supplement will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") covering losses resulting from proceedings with respect to
borrowers under the 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 Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Mortgage Loans in the
Trust Fund for such Series. Such amount will be reduced by payments made under
such bankruptcy bond in respect of such Mortgage Loans, and will not be
restored.
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RESERVE FUNDS
The Depositor may deposit into one or more funds to be established with
the Trustee as part of the Trust Fund for such Series or for the benefit of any
Credit Enhancer with respect to such Series (the "Reserve Funds") cash, a letter
or letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such 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 a Series, to pay expenses, to reimburse
any Credit Enhancer or for any other purpose, in the manner and to the extent
specified in the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated 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 Agency pursuant to which such
entity will provide certain payments on the Securities of such Series in the
event that aggregate scheduled principal payments and/or prepayments on the
Primary Assets for such Series are not sufficient to make certain payments on
the Securities of such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
The Depositor and the Trustee for such Series of Securities will enter
into a Deposit Agreement with the entity specified in such Prospectus Supplement
on or before the sale of such Series of Securities. The purpose of a Deposit
Agreement would be to accumulate available cash for investment so that such
cash, together with income thereon, can be applied to future distributions on
one or more Classes of Securities. The Prospectus Supplement for a Series of
Securities pursuant to which a Deposit Agreement is used will contain a
description of the terms of such Deposit Agreement.
SERVICING OF MORTGAGE LOANS
GENERAL
Customary servicing functions with respect to Mortgage Loans comprising
the Primary Assets in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments
required to be made under the Mortgage Loans and will, consistent with the terms
of the related 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 may, in its
discretion, (i) waive any assumption fee, late payment charge, or other charge
in connection with a Mortgage Loan and (ii) to the extent provided in the
related Agreement arrange with an obligor a schedule for the liquidation of
delinquencies by extending the dates on which the related payments (the
"Scheduled Payments") are due (the "Due Dates") on such Mortgage Loan.
33
The Servicer, to the extent permitted by law, will establish and
maintain escrow or impound accounts ("Escrow Accounts") with respect to Mortgage
Loans in which payments by obligors to pay taxes, assessments, mortgage and
hazard insurance premiums, and other comparable items will be deposited.
Mortgage Loans may not require such payments under the loan related documents,
in which case the Servicer would not be required to establish any Escrow Account
with respect to such Mortgage Loans. Withdrawals from the Escrow Accounts are to
be made to effect timely payment of taxes, assessments and mortgage and hazard
insurance, to refund to obligors amounts determined to be overages, to pay
interest to obligors on balances in the Escrow Account to the extent required by
law, to repair or otherwise protect the MORTGAGED PROPERTY securing the related
Mortgage Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Trustee or the Servicer will establish a separate account (the
"Collection Account") in the name of the Trustee. Unless otherwise indicated in
the related Prospectus Supplement, the Collection Account will be an account
maintained (i) at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit therein are rated by each Rating
Agency rating the Securities of such Series at levels satisfactory to each
Rating Agency or (ii) in an account or accounts the deposits in which are
insured to the maximum extent available by the Federal Deposit Insurance
Corporation ("FDIC") or which are secured in a manner meeting requirements
established by each Rating Agency.
The funds held in the Collection Account may be invested, pending
remittance to the Trustee, in Eligible Investments. The Servicer will be
entitled to receive as additional compensation any interest or other income
earned on funds in the Collection Account.
The Servicer, the Depositor, the Trustee or the Originator, as
appropriate, will deposit into the Collection Account for each Series on the
Business Day following the Closing Date any amounts representing Scheduled
Payments 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
it (other than, unless otherwise provided in the related Prospectus Supplement,
in respect of principal of and interest on the related Primary Assets due on or
before such Cut-off Date):
(i) All payments on account of principal, including
prepayments, on such Primary Assets;
(ii) All payments on account of interest on such Primary
Assets after deducting therefrom, at the discretion of the Servicer but
only to the extent of the amount permitted to be withdrawn or withheld
from the Collection Account in accordance with the related Agreement,
the Servicing Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection
with the liquidation of Primary Assets or property acquired in respect
thereof, whether through foreclosure sale, repossession or otherwise,
including payments in connection with such Primary Assets received from
the obligor, other than amounts required to be paid or refunded to the
obligor pursuant to the terms of the applicable loan documents or
otherwise pursuant to law ("Liquidation Proceeds"), exclusive of, in
the discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Collection Account in accordance
with the related Agreement, the Servicing Fee, if any, in respect of
the related Primary Asset;
(iv) All proceeds under any title insurance, hazard
insurance or other insurance policy covering any such Primary Asset,
other than proceeds to be applied to the restoration or repair of the
related MORTGAGED Property or released to the obligor in accordance
with the related Agreement;
(v) All amounts required to be deposited therein from any
applicable Reserve Fund for such Series pursuant to the related
Agreement;
(vi) All Advances made by the Servicer required pursuant
to the related Agreement; and
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(vii) All repurchase prices of any such Primary Assets
repurchased by the Depositor, the Servicer or the Originator pursuant
to the related Agreement.
The SERVICER MAY BE permitted, from time to time, to make withdrawals
from the Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made
by it pursuant to the related Agreement; the Servicer's right to
reimburse itself is limited to amounts received on or in respect of
particular Mortgage Loans (including, for this purpose, Liquidation
Proceeds and amounts representing proceeds of insurance policies
covering the related MORTGAGED Property) which represent late
recoveries of Scheduled Payments respecting which any such Advance was
made;
(ii) to the extent provided in the related Agreement, to
reimburse itself for any Advances for such Series that the Servicer
determines in good faith it will be unable to recover from amounts
representing late recoveries of Scheduled Payments respecting which
such Advance was made or from Liquidation Proceeds or the proceeds of
insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for
liquidation expenses and for amounts expended by it in good faith in
connection with the restoration of damaged MORTGAGED Property and, in
the event deposited in the Collection Account and not previously
withheld, and to the extent that Liquidation Proceeds after such
reimbursement exceed the outstanding principal balance of the related
Mortgage Loan, together with accrued and unpaid interest thereon to the
Due Date for such Mortgage Loan next succeeding the date of its receipt
of such Liquidation Proceeds, to pay to itself out of such excess the
amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Mortgage Loan;
(iv) in the event it has elected not to pay itself the
Servicing Fee out of the interest component of any Scheduled Payment,
late payment or other recovery with respect to a particular Mortgage
Loan prior to the deposit of such Scheduled Payment, late payment or
recovery into the Collection Account, to pay to itself the Servicing
Fee, as adjusted pursuant to the related Agreement, from any such
Scheduled Payment, late payment or such other recovery, to the extent
permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each
Primary Asset or Mortgaged Properties acquired through or in lieu of
foreclosure (each, an "REO Property") acquired in respect thereof that
has been repurchased or removed from the Trust Fund by the Depositor,
the Servicer or the Originator pursuant to the related Agreement, all
amounts received thereon and not distributed as of the date on which
the related repurchase price was determined;
(vii) to make payments to the Trustee of such Series for
deposit into the Distribution Account, if any, or for remittance to the
Holders of such Series in the amounts and in the manner provided for in
the related Agreement; and
(viii) to clear and terminate the Collection Account
pursuant to the related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if
any, under which the Servicer will make Advances with respect to delinquent
payments on Mortgage Loans. The Servicer will be obligated to make Advances, and
such obligation may be limited in amount, or may not be activated until a
certain portion of a
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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 Mortgage Loans which represent late recoveries of principal or
interest, proceeds of insurance policies or Liquidation Proceeds respecting
which any such Advance was made. If an Advance is made and subsequently
determined to be nonrecoverable from late collections, proceeds of insurance
policies, or Liquidation Proceeds from the related Mortgage Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account, 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. The related Prospectus
Supplement will SPECIFY THE EXTENT TO WHICH the Servicer will be required to
maintain or to cause the obligor on each Mortgage Loan to maintain a standard
hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the related MORTGAGED 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 Mortgage Loans. In general, the
standard form of fire and extended coverage policy will cover physical damage to
or destruction of, the related MORTGAGED Property caused by fire, lightning,
explosion, smoke, windstorm, hail, riot, strike and civil commotion, subject to
the conditions and exclusions particularized in each policy. Because the
standard hazard insurance policies relating to the Mortgage Loans will be
underwritten by different hazard insurers and will cover MORTGAGED Properties
located in various states, such 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 MORTGAGED Property securing a Mortgage 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 such MORTGAGED Property, to the extent available.
The standard hazard insurance policies covering MORTGAGED Properties
securing Mortgage Loans typically will contain a "coinsurance" clause which, in
effect, will require the insured at all times to carry hazard insurance of a
specified percentage (generally 80% to 90%) of the full replacement value of the
MORTGAGED Property, including the improvements on any MORTGAGED Property, in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, such clause will provide that the hazard
insurer's liability in the event of partial loss will not exceed the greater of
(i) the actual cash value (the replacement cost less physical depreciation) of
the MORTGAGED Property, including the improvements, if any, damaged or destroyed
or (ii) such proportion of the loss, without deduction for depreciation, as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such MORTGAGED Property and improvements. Since the amount
of hazard insurance to be maintained on the improvements securing the Mortgage
Loans declines as the principal balances owing thereon decrease, and since the
value of the MORTGAGED Properties will fluctuate in value 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
MORTGAGED Property.
Generally, coverage will be in an amount at least equal to the greater
of (i) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (ii) the outstanding principal balance of the related
Mortgage Loan. The SERVICER MAY also maintain on REO Property that secured a
defaulted Mortgage Loan and that has been acquired upon foreclosure, deed in
lieu of foreclosure, or repossession, a standard hazard insurance policy in an
amount that is at least equal to the maximum insurable value of such REO
Property. No earthquake or other additional insurance will be required of any
obligor or will be maintained on REO Property acquired in respect of a defaulted
Mortgage Loan, other than pursuant to such applicable laws and regulations as
shall at any time be in force and shall require such additional insurance.
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Any amounts collected by the Servicer under any such policies of
insurance (other than amounts to be applied to the restoration or repair of the
MORTGAGED Property, released to the obligor in accordance with normal servicing
procedures or used to reimburse the Servicer for amounts to which it is entitled
to reimbursement) will be deposited in the Collection Account. In the event that
the Servicer obtains and maintains a blanket policy insuring against hazard
losses on all of the Mortgage Loans, written by an insurer then acceptable to
each Rating Agency which assigns a rating to such Series, it will conclusively
be deemed to have satisfied its obligations to cause to be maintained a standard
hazard insurance policy for each Loan or related REO Property. This blanket
policy may contain a deductible clause, in which case the Servicer will be
required, in the event that there has been a loss that would have been covered
by such policy absent such deductible clause, to deposit in the Collection
Account the amount not otherwise payable under the blanket policy because of the
application of such deductible clause.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the MORTGAGED
Properties securing the related Mortgage Loans as come into and continue in
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. In connection with such foreclosure or other conversion,
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 serviced by it. However, the Servicer will not be required
to expend its own funds in connection with any foreclosure or towards the
restoration of the MORTGAGED Property unless it determines that (i) such
restoration or foreclosure will increase the Liquidation Proceeds in respect of
the related Mortgage Loan available to the Holders after reimbursement to itself
for such expenses and (ii) such expenses will be recoverable by it either
through Liquidation Proceeds or the proceeds of insurance. Notwithstanding
anything to the contrary herein, in the case of a Trust Fund for which a REMIC
election has been made, the Servicer will be required to liquidate any MORTGAGED
Property acquired through foreclosure within two years after the acquisition of
the beneficial ownership of such MORTGAGED Property. While the holder of a
MORTGAGED Property acquired through foreclosure can often maximize its recovery
by providing financing to a new purchaser, the Trust Fund, if applicable, will
have no ability to do so and neither the Servicer nor the Depositor will be
required to do so.
The Servicer may arrange with the obligor on a defaulted Mortgage Loan
a modification of such Mortgage Loan (a "Modification") to the extent provided
in the related Prospectus Supplement. Such Modifications may only be entered
into if they meet the underwriting policies and procedures employed by the
Servicer in servicing receivables for its own account and meet the other
conditions set forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
WHEN ANY MORTGAGED Property is about to be conveyed by the obligor,
the Servicer MAY, to the extent it has knowledge of such prospective conveyance
and prior to the time of the consummation of such conveyance, exercise its
rights to accelerate the maturity of the related Mortgage Loan under the
applicable "due-on-sale" clause, if any, unless it reasonably believes that such
clause is not enforceable under applicable law or if the enforcement of such
clause would result in loss of coverage under any primary mortgage insurance
policy. In such event, the Servicer is authorized to accept from or enter into
an assumption agreement with the person to whom such MORTGAGED PROPERTY has been
or is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Loan and pursuant to which the original obligor is released from
liability and such person is substituted as the obligor and becomes liable under
the Mortgage Loan. Any fee collected in connection with an assumption will be
retained by the Servicer as additional servicing compensation. The terms of a
Mortgage Loan may not be changed in connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to a periodic fee as servicing
compensation (the "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, the Servicer
will be entitled to servicing compensation in the form of assumption fees, late
payment charges and similar items, or excess proceeds following disposition of
MORTGAGED Property in connection with defaulted Mortgage Loans, as will be
further specified in the related Prospectus Supplement,.
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The SERVICER MAY pay certain expenses incurred in connection with the
servicing of the Mortgage Loans, including, without limitation, the payment of
the fees and expenses of the Trustee and independent accountants, payment of
insurance policy premiums and the cost of credit support, if any, and payment of
expenses incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates
on the related Mortgage Loan, the obligor will generally 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 Holders 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 Trustee
for deposit into the Distribution Account an amount equal to one month's
interest on the related Mortgage Loan (less the Servicing Fee). If the aggregate
amount of such shortfalls in a month exceeds the Servicing Fee for such month, a
shortfall to Holders may occur.
The Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans.
The related Holders will suffer no loss by reason of such expenses to the extent
expenses are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage thereunder has been exhausted, the related Holders will
suffer a loss to the extent that Liquidation Proceeds, after reimbursement of
the Servicer's expenses, are less than the outstanding principal balance of and
unpaid interest on the related Mortgage Loan which would be distributable to
Holders. In addition, the Servicer will be entitled to reimbursement of
expenditures incurred by it in connection with the restoration of property
securing a defaulted Mortgage Loan, such right of reimbursement being prior to
the rights of the Holders to receive any related proceeds of insurance policies,
Liquidation Proceeds or amounts derived from other Credit Enhancement. The
Servicer is generally also entitled to reimbursement from the Collection Account
for Advances.
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, MAY BE subordinate to the
rights of Holders of such Series AS SET FORTH IN THE RELATED AGREEMENT.
EVIDENCE AS TO COMPLIANCE
The applicable Agreement for each Series will provide that each year, a
firm of independent public accountants will furnish a statement to the Trustee
to the effect that such firm has examined certain documents and records relating
to the servicing of the Mortgage Loans by the Servicer and that, on the basis of
such examination, such firm is of the opinion that the servicing has been
conducted in compliance with such Agreement, except for (i) such exceptions as
such firm believes to be immaterial and (ii) such other exceptions as are set
forth in such statement.
The applicable Agreement for each Series will also provide for delivery
to the Trustee for such Series of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its obligations under
such 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 ("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. Such Events of Default and the
rights of the Trustee upon such a default under the Agreement for the related
Series will be substantially similar to those described under "THE AGREEMENTS--
Events of Default; Rights Upon Events of Default--Pooling and Servicing
Agreement; Servicing Agreement" herein.
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The related Agreement will specify the circumstances under which the
Servicer may assign its rights and delegate its duties and obligations
thereunder for each Series, which generally will require that the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the related Agreement from and
after the date of such agreement. No such 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, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related 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
related Agreement provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which 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 thereunder. 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 thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
GENERAL. At the time of issuance of the Securities of a Series, the
Originator will transfer, convey and assign to the Trust Fund all right, title
and interest of the Originator in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
interests in the Trust Fund retained by the Depositor or its affiliate
("Retained Interests")). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
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ASSIGNMENT OF MORTGAGE LOANS. The Depositor will, as to each Mortgage
Loan, deliver or cause to be delivered to the Trustee, or, as specified in the
related Prospectus Supplement a custodian on behalf of the Trustee (the
"Custodian"), the Mortgage Note endorsed without recourse to the order of the
Trustee or in blank, the original Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
in which case a copy of such Mortgage will be delivered, together with a
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. The Trustee or the
Custodian will hold such documents in trust for the benefit of the Holders.
With respect to Mortgage Loans secured by Mortgages and to the extent
described in the related Prospectus Supplement, the Depositor will, at the time
of issuance of the Securities, cause assignments to the Trustee of the Mortgages
relating to the Mortgage Loans for a Series 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, such recording is not required to protect
the Trustee's interest in the related Mortgage Loans. The Depositor will cause
such assignments to be so recorded within the time after issuance of the
Securities as is specified in the related Prospectus Supplement, in which event,
the Agreement may require the Originator to repurchase from the Trustee any
Mortgage Loan the related Mortgage of which is not recorded within such time, at
the price described below with respect to repurchases by reason of defective
documentation. The related Prospectus Supplement will specify whether or not 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.
Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Agreement (the "Loan Schedule"). Such Loan Schedule will
specify with respect to each Mortgage Loan: the original principal amount and
unpaid principal balance as of the Cut-off Date; the current interest rate; the
current Scheduled Payment of principal and interest; the maturity date, if any,
of the related Mortgage Note; if the Mortgage Loan is an adjustable rate
Mortgage Loan, the Lifetime Rate Cap, if any, and the current index.
ASSIGNMENT OF PRIVATE SECURITIES. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. The related Prospectus
Supplement will specify whether or not the Trustee will be in possession of or
be assignee of record of any underlying assets for a Private Security. See "THE
TRUST FUNDS--Private Securities" herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING PRIMARY ASSETS. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Originator does not cure such defect
within 90 days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Originator will, not later than 90 days or within
such other period specified in the related Prospectus Supplement, after the
Trustee's notice to the Depositor or the Originator, as the case may be, of the
defect, repurchase the related Primary Asset or any property acquired in respect
thereof from the Trustee at a price generally equal to, (a) the lesser of (i)
the outstanding principal balance of such Primary Asset and (ii) the Trust
Fund's federal income tax basis in the Primary Asset and (b) accrued and unpaid
interest to the date of the next scheduled payment on such Primary Asset at the
rate set forth in the related Agreement, provided, however, the purchase price
shall not be limited in (i) above to the Trust Fund's federal income tax basis
if the repurchase at a price equal to the outstanding principal balance of such
Primary Asset will not result in any prohibited transaction tax under Section
860F(a) of the Code.
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The Depositor or Originator, as the case may be, may, rather than
repurchase the Primary Asset as described above, remove such Primary Asset from
the Trust Fund (the "Deleted Primary Asset") and substitute in its place one or
more other Primary Assets (each, a "Qualifying Substitute Primary Asset")
provided, however, that (i) with respect to a Trust Fund for which no REMIC
election is made, such substitution must be effected within 120 days of the date
of initial issuance of the Securities and (ii) with respect to a Trust Fund for
which a REMIC election is made, after a specified time period, the Trustee must
have received a satisfactory opinion of counsel that such substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax.
ANY Qualifying Substitute Primary Asset will have, on the date of
substitution, (i) an outstanding principal balance, after deduction of all
Scheduled Payments due in the month of substitution, not in excess of the
outstanding 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), (ii) an interest rate not less than the interest
rate of the Deleted Primary Asset, (iii) a remaining term-to-stated maturity not
greater than that of the Deleted Primary Asset, and will comply with all of the
representations and warranties set forth in the applicable Agreement as of the
date of substitution.
THE above-described cure, repurchase or substitution obligations
constitute the sole remedies available to the Holders or the Trustee for a
material defect in a document for a Primary Asset.
The Depositor or another entity will make representations and
warranties with respect to Primary Assets for a Series. If the Depositor or such
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 such breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or such entity is obligated to repurchase the affected
Primary Asset or, if provided in the related Prospectus Supplement, provide a
Qualifying Substitute Primary Asset therefor, 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 Originator of such Primary Assets. See
"SPECIAL CONSIDERATIONS--Limited Assets" herein.
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus
Supplement will prepare and forward to each Holder on each Distribution Date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the
related Securities and the outstanding principal balance of such
Securities following such distribution;
(ii) the amount of interest distributed to Holders of the
related Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest
included in such distribution, (b) any remaining overdue accrued
interest with respect to such Securities or (c) any current shortfall
in amounts to be distributed as accrued interest to Holders of such
Securities;
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(iv) the amounts of (a) any overdue payments of scheduled
principal included in such distribution, (b) any remaining overdue
principal amounts with respect to such Securities, (c) any current
shortfall in receipt of scheduled principal payments on the related
Primary Assets or (d) any realized losses or Liquidation Proceeds to be
allocated as reductions in the outstanding principal balances of such
Securities;
(v) the amount received under any related Credit
Enhancement, and the remaining amount available under such Credit
Enhancement;
(vi) the amount of any delinquencies with respect to
payments on the related Primary Assets;
(vii) the book value of any REO Property acquired by the
related Trust Fund; and
(viii) such other information as specified in the related
Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will furnish to each Holder of record at any time
during such calendar year (a) the aggregate of amounts reported pursuant to (i),
(ii), and (iv)(d) above for such calendar year and (b) such information
specified in the related Agreement to enable Holders to prepare their tax
returns including, without limitation, the amount of original issue discount
accrued on the Securities, if applicable. Information in the Distribution Date
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 the Servicer's servicing of the Mortgage Loans. See "SERVICING OF MORTGAGE
LOANS --Evidence as to Compliance" herein.
A Series of Securities or one or more Classes of such Series may be
issued in book-entry form. In such event, owners of beneficial interests in such
Securities will not be considered Holders and will not receive such reports
directly from the Trustee. The Trustee will forward such reports only to the
entity or its nominee which is the registered holder of the global certificate
which evidences such book-entry securities. Beneficial owners will receive such
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the practices and procedures of such
entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Events of Default
under the Pooling and Servicing Agreement for each Series of Certificates
relating to Mortgage Loans generally include (i) any failure by the Servicer to
deposit amounts in the Collection Account and Distribution Account to enable the
Trustee to distribute to Holders of such Series any required payment, which
failure continues unremedied for the number of days specified in the related
Prospectus Supplement after the giving of written notice of such failure to the
Servicer by the Trustee for such Series, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, (ii) any failure by the Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the applicable Agreement which continues unremedied for the number
of days specified in the related Prospectus Supplement after the giving of
written notice of such failure to the Servicer by the Trustee, or to the
Servicer and the Trustee by the Holders of such Series evidencing not less than
25% of the aggregate voting rights of the Securities for such Series, and (iii)
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.
The related Agreement will specify the circumstances under which the
Trustee of the Holders of Securities may remove the Servicer upon the occurrence
and continuance of an Event of Default thereunder relating to the servicing of
Mortgage Loans (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such 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 such Agreement
and will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the form
of assumption fees, late payment charges or otherwise as provided in such
Agreement.
42
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 applicable 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 the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series 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 such Series, and Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such 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 that 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 such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such direction if the
Trustee 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 nonassenting Holders.
INDENTURE. Events of Default under the Indenture for each Series of
Notes generally include: (i) a default in the payment of any principal of or
interest on any Note of such Series, which continues for the period of time
specified in the related Prospectus Supplement; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for the period of time specified in the related Prospectus Supplement
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such Series having been incorrect in a material respect as of the time
made, and such breach is not cured within the period of time specified in the
related Prospectus Supplement after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the Holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
43
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
In the event the principal of the Notes of a Series is declared due and
payable, as described above, the Holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Holders of Notes of such Series, unless such Holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Securities will be set
forth in the related Prospectus Supplement. The entity 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, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund relating to a Series of
Securities. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Agreement relating to
such Series will be conferred or imposed upon the Trustee and each such 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 such
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 the responsibilities of the
Trustee, which agents will have any or all of the rights, powers, duties and
obligations of the Trustee conferred on them by such appointment; provided that
the Trustee will continue to be responsible for its duties and obligations under
the Agreement.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the 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 Trustee is 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 is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the 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.
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RESIGNATION OF TRUSTEE
The 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 the 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. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
AMENDMENT OF AGREEMENT
The Agreement for each Series of Securities may be amended by the
Depositor, the Servicer (with respect to a Series relating to Mortgage Loans),
and the Trustee with respect to such Series, without notice to or consent of the
Holders (i) to cure any ambiguity, (ii) to correct any defective provisions or
to correct or supplement any provision therein, (iii) to add to the duties of
the Depositor, the Trust Fund or Servicer, (iv) to add any other provisions with
respect to matters or questions arising under such Agreement or related Credit
Enhancement, (v) to add or amend any provisions of such Agreement as required by
a Rating Agency in order to maintain or improve the rating of the Securities (it
being understood that none of the Depositor, the Originator, the Servicer or
Trustee is obligated to maintain or improve such rating), or (vi) to comply with
any requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an opinion of
counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence 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 rating such Securities that such amendment will not cause such
Rating Agency to reduce the then current rating thereof. The Agreement for each
Series may also be amended by the Trustee, the Servicer, if applicable, and the
Depositor with respect to such Series with the consent of the Holders possessing
not less than 66 2/3% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
affected by such amendment, 66 2/3% of the aggregate outstanding principal
amount of the Securities of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such Agreement or modifying in any manner the rights of
Holders of such Series; provided, however, that no such amendment may (a) reduce
the amount or delay the timing of payments on any Security without the consent
of the Holder of such Security; or (b) reduce the aforesaid percentage of the
aggregate 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 aggregate outstanding principal amount of each Class
of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders 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.
45
FORM OF SECURITIES
The SECURITIES IN EACH SERIES WILL EITHER be issued as physical
CERTIFICATES OR IN UNCERTIFICATED BOOK-ENTRY FORM. PHYSICAL certificates
("Physical Certificates") in fully registered form only in the denominations
specified in the related Prospectus Supplement, and will be transferable and
exchangeable at the corporate trust office of the registrar of the Securities
(the "Security Registrar") named in the related Prospectus Supplement. No
service charge will be made for any registration of exchange or transfer of
Securities, but the Trustee may require payment of a sum sufficient to cover any
tax or other government charge.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. DTC is a limited purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the Uniform Commercial Code
("UCC") and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Under a book-entry format, Holders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of the Securities registered in the name of Cede, as nominee of DTC,
may do so only through Participants and Indirect Participants. In addition, such
Holders will receive all distributions of principal of and interest on the
Securities from the Trustee through DTC and its Participants. Under a book-entry
format, Holders will receive payments after the related Payment Date because,
while payments are required to be forwarded to Cede, as nominee for DTC, on each
such date, DTC will forward such payments to its Participants, which thereafter
will be required to forward such payments to Indirect Participants or Holders.
Unless and until Physical Securities are issued, it is anticipated that the only
Holder will be Cede, as nominee of DTC, and that the beneficial holders of
Securities will not be recognized by the Trustee as Holders under the Pooling
and Servicing Agreement. The beneficial holders of such Securities will only be
permitted to exercise the rights of Holders under the Pooling and Servicing
Agreement indirectly through DTC and its Participants who in turn will exercise
their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Holders have
accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Holders. Accordingly, although Holders will not process Securities,
the rules provide a mechanism by which Holders will receive distributions and
will be able to transfer their interests.
Unless and until Physical Certificates are issued, Holders who are not
Participants may transfer ownership of Securities only through Participants by
instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Holders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Holder to
pledge Securities to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such Securities may be limited
due to the lack of a Physical Certificate for such Securities.
46
DTC in general advises that it will take any action permitted to be
taken by a Holder under a Pooling and Servicing Agreement only at the direction
of one or more Participants to whose account with DTC the related Securities are
credited. Additionally, DTC in general advises that it will take such actions
with respect to specified percentages of the Holders only at the direction of
and on behalf of Participants whose holdings include current principal amounts
of outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Securities initially registered as Physical Certificates in the
name of Cede, as nominee of DTC, will be issued in fully registered,
certificated form to Holders or their nominees, rather than to DTC or its
nominee only under the events specified in the related Pooling and Servicing
Agreement and described in the related Prospectus Supplement. Upon the
occurrence of any of the events specified in the related Pooling and Servicing
Agreement and the Prospectus Supplement, DTC will be required to notify all
Participants of the availability through DTC of Physical Certificates. Upon
surrender by DTC of the securities representing the Securities and instruction
for reregistration, the Trustee will take the Securities in the form of Physical
Certificates, and thereafter the Trustee will recognize the holders of such
Physical Certificates as Holders. Thereafter, payments of principal of and
interest on the Securities will be made by the Trustee directly to Holders in
accordance with the procedures set forth herein and in the Pooling and Servicing
Agreement. The final distribution of any Security (whether Physical Certificates
or Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the Trust Fund may be performed by a REMIC administrator, who may be
an affiliate of the Depositor.
TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Primary Asset remaining in the
Trust Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset; (ii) the repurchase, as described below, by the Servicer or other
entity specified in the related Prospectus Supplement from the Trustee for such
Series of all Primary Assets and other property at that time subject to such
Agreement; or (iii) the mandatory termination of the Trust by the Trustee, the
Servicer or certain other entities specified in the related Prospectus
Supplement by soliciting competitive bids for the purchase of the Primary Assets
of the related Trust Fund
REPURCHASE OF THE REMAINING PRIMARY ASSETS. The Agreement for each
Series may permit, but not require, the Servicer or other entity specified in
the related Prospectus Supplement to purchase from the Trust Fund for such
Series all remaining Primary Assets at a price equal to 100% of the aggregate
Principal Balance of such Primary Assets plus, with respect to any property
acquired in respect of a Primary Asset, if any, the outstanding Principal
Balance of the related Primary Asset at the time of foreclosure, less, in either
case, related unreimbursed Advances (in the case of the Primary Assets, only to
the extent not already reflected in the computation of the aggregate Principal
Balance of such Primary Assets) and unreimbursed expenses (that are reimbursable
pursuant to the terms of the Pooling and Servicing Agreement) plus, in either
case, accrued interest thereon at the weighted average rate on the related
Primary Assets through the last day of the Due Period in which such repurchase
occurs; provided, however, that if an election is made for treatment as a REMIC
under the Code, the repurchase price may equal the greater of (a) 100% of the
aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of such
Primary Assets plus the fair market value of any property acquired in respect of
a Primary Asset and remaining in the Trust Fund. The exercise of such right will
effect early retirement of the Securities of such Series, but such entity's
right to so purchase is subject to the aggregate Principal Balance of the
Primary Assets
47
at the time of repurchase being less than a fixed percentage, to
be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Primary Assets as of the Cut-off Date.
MANDATORY TERMINATION; AUCTION SALE. The Trustee, the Servicer or
certain other entities specified in the related Prospectus Supplement may be
required to effect early retirement of a series of Securities by soliciting
competitive bids for the purchase of the related Trust Estate.
THE mandatory termination may take the form of an auction sale. Within
a certain period following the first Distribution Date as of which the aggregate
Pool principal balance is less than 10% or a percentage set forth in the related
Prospectus Supplement of the initial aggregate Pool principal balance, if the
optional termination right has not been exercised by the parties having such
right by such date, the Trustee shall solicit bids for the purchase of all
Mortgage Loans remaining in the Trust. In the event that satisfactory bids are
received as specified in the related Pooling and Servicing Agreement, the net
sale proceeds will be distributed to Holders, in the same order of priority as
collections received in respect of the Mortgage Loans. If satisfactory bids are
not received, the Trustee shall decline to sell the Mortgage Loans and shall not
be under any obligation to solicit any further bids or otherwise negotiate any
further sale of the Mortgage Loans. Such sale and consequent termination of the
Trust must constitute a "qualified liquidation" of each REMIC established by the
Trust under Section 860F of the Internal Revenue Code of 1986, as amended,
including, without limitation, the requirement that the qualified liquidation
takes place over a period not to exceed 90 days.
In no event, however, will the trust created by the Agreement continue
beyond the expiration of 21 years from the death of the last survivor of certain
persons identified therein. For each Series, the Servicer or the Trustee, as
applicable, will give written notice of termination of the Agreement to each
Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency specified in the notice of
termination. The Depositor or another entity may effect an optional termination
of the Trust Fund under the circumstances described in such Prospectus
Supplement. See "DESCRIPTION OF THE SECURITIES--Optional Redemption, Purchase or
Termination" herein.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor reflect the laws
of any particular state, nor encompass the laws of all states in which the
properties securing the Mortgage Loans are situated.
48
GENERAL
THE MORTGAGE LOANS WILL BE REPRESENTED BY A NOTE AND AN ACCOMPANYING
MORTGAGE. PURSUANT TO THE NOTE, THE RELATED BORROWER IS PERSONALLY LIABLE TO
REPAY THE INDEBTEDNESS EVIDENCED BY THE MORTGAGE LOAN; PURSUANT TO THE MORTGAGE,
SUCH INDEBTEDNESS IS SECURED BY A LIEN ON THE RELATED MORTGAGED PROPERTY.
ENFORCEMENT OF THE NOTE
PURSUANT TO THE NOTE, THE RELATED BORROWER IS PERSONALLY LIABLE TO
REPAY THE INDEBTEDNESS EVIDENCED BY THE MORTGAGE LOAN. IN CERTAIN STATES, THE
LENDER ON A NOTE SECURED BY A LIEN ON REAL PROPERTY HAS THE OPTION OF BRINGING A
PERSONAL ACTION AGAINST THE BORROWER ON THE DEBT WITHOUT FIRST EXHAUSTING SUCH
SECURITY; HOWEVER, IN SOME OF THESE STATES THE LENDER, FOLLOWING JUDGMENT ON
SUCH PERSONAL ACTION, MAY BE DEEMED TO HAVE ELECTED A REMEDY AND MAY BE
PRECLUDED FROM EXERCISING REMEDIES WITH RESPECT TO THE RELATED PROPERTY
SECURITY. CONSEQUENTLY, THE PRACTICAL EFFECT OF THE ELECTION REQUIREMENT, IN
THOSE STATES PERMITTING SUCH ELECTION, IS THAT LENDERS WILL USUALLY PROCEED
AGAINST THE PROPERTY FIRST RATHER THAN BRINGING A PERSONAL ACTION AGAINST THE
BORROWER ON THE NOTE.
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, INCLUDING CALIFORNIA, STATUTES LIMIT THE RIGHT OF THE
BENEFICIARY OR MORTGAGEE TO OBTAIN A DEFICIENCY JUDGMENT AGAINST THE BORROWER
FOLLOWING FORECLOSURE. A DEFICIENCY JUDGMENT IS A PERSONAL JUDGMENT AGAINST THE
FORMER BORROWER EQUAL IN MOST CASES TO THE DIFFERENCE BETWEEN THE AMOUNT DUE TO
THE LENDER AND THE NET AMOUNT REALIZED UPON THE PUBLIC SALES OF THE REAL
PROPERTY. IN THE CASE OF A MORTGAGE LOAN SECURED BY A PROPERTY OWNED BY A TRUST
WHERE THE MORTGAGE NOTE IS EXECUTED ON BEHALF OF THE TRUST, A DEFICIENCY
JUDGMENT AGAINST THE TRUST FOLLOWING FORECLOSURE OR SALE UNDER A DEED OF TRUST,
EVEN IF OBTAINABLE UNDER APPLICABLE LAW, MAY BE OF LITTLE VALUE TO THE MORTGAGEE
OR BENEFICIARY IF THERE ARE NO TRUST ASSETS AGAINST WHICH SUCH DEFICIENCY
JUDGMENT MAY BE EXECUTED. 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. FINALLY, IN CERTAIN OTHER STATES, STATUTORY PROVISIONS LIMIT ANY
DEFICIENCY JUDGMENT AGAINST THE FORMER BORROWER FOLLOWING A FORECLOSURE TO THE
EXCESS OF THE OUTSTANDING DEBT OVER THE FAIR VALUE OF THE PROPERTY AT THE TIME
OF THE PUBLIC SALE. THE PURPOSE OF THESE STATUTES IS GENERALLY TO PREVENT A
BENEFICIARY OR MORTGAGEE FROM OBTAINING A LARGE DEFICIENCY JUDGMENT AGAINST THE
FORMER BORROWER AS A RESULT OF LOW OR NO BIDS AT THE JUDICIAL SALE.
IN ADDITION TO LAWS LIMITING OR PROHIBITING DEFICIENCY JUDGMENTS,
NUMEROUS OTHER FEDERAL AND STATE STATUTORY PROVISIONS, INCLUDING THE FEDERAL
BANKRUPTCY LAWS AND STATE LAWS AFFORDING RELIEF TO DEBTORS, MAY INTERFERE WITH
OR AFFECT THE ABILITY OF THE SECURED MORTGAGE LENDER TO REALIZE UPON COLLATERAL
OR ENFORCE A DEFICIENCY JUDGMENT. FOR EXAMPLE, WITH RESPECT TO FEDERAL
BANKRUPTCY LAW, A COURT WITH FEDERAL BANKRUPTCY JURISDICTION MAY PERMIT A DEBTOR
THROUGH HIS OR HER CHAPTER 11 OR CHAPTER 13 REHABILITATIVE PLAN TO CURE A
MONETARY DEFAULT IN RESPECT OF A MORTGAGE LOAN ON A DEBTOR'S RESIDENCE BY PAYING
ARREARAGES WITHIN A REASONABLE TIME PERIOD AND REINSTATING THE ORIGINAL MORTGAGE
LOAN PAYMENT SCHEDULE EVEN THOUGH THE LENDER ACCELERATED THE MORTGAGE LOAN AND
FINAL JUDGMENT OF FORECLOSURE HAD BEEN ENTERED IN STATE COURT (PROVIDED NO SALE
OF THE RESIDENCE HAD YET OCCURRED) PRIOR TO THE FILING OF THE DEBTOR'S PETITION.
SOME COURTS WITH FEDERAL BANKRUPTCY JURISDICTION HAVE APPROVED PLANS, BASED ON
THE PARTICULAR FACTS OF THE REORGANIZATION CASE, THAT EFFECTED THE CURING OF A
MORTGAGE LOAN DEFAULT BY PAYING ARREARAGES OVER A NUMBER OF YEARS.
COURT WITH FEDERAL BANKRUPTCY JURISDICTION ALSO HAVE INDICATED THAT THE
TERMS OF A MORTGAGE LOAN SECURED BY PROPERTY OF THE DEBTOR MAY BE MODIFIED.
THESE COURTS HAVE ALLOWED MODIFICATIONS THAT INCLUDE REDUCING THE AMOUNT OF EACH
MONTHLY PAYMENT, CHANGING THE RATE OF INTEREST, ALTERING THE REPAYMENT SCHEDULE,
FORGIVING ALL OR A PORTION OF THE DEBT AND REDUCING THE LENDER'S SECURITY
INTEREST TO THE VALUE OF THE RESIDENCE, THUS LEAVING THE LENDER A GENERAL
UNSECURED CREDITOR FOR THE DIFFERENCE BETWEEN THE VALUE OF THE RESIDENCE AND THE
OUTSTANDING BALANCE OF THE LOAN.
CERTAIN STATES HAVE IMPOSED GENERAL EQUITABLE PRINCIPLES UPON JUDICIAL
FORECLOSURE. THESE EQUITABLE PRINCIPLES ARE GENERALLY DESIGNED TO RELIEVE THE
BORROWER FROM THE LEGAL EFFECT OF THE BORROWER'S DEFAULT UNDER THE RELATED LOAN
DOCUMENTS. EXAMPLES OF JUDICIAL REMEDIES THAT HAVE BEEN FASHIONED INCLUDE
JUDICIAL REQUIREMENTS THAT THE LENDER UNDERTAKE AFFIRMATIVE AND EXPENSIVE
ACTIONS TO DETERMINE THE CAUSES FOR THE
49
BORROWER'S DEFAULT AND THE LIKELIHOOD THAT THE BORROWER WILL BE ABLE TO
REINSTATE THE LOAN. IN SOME CASES, LENDER HAVE BEEN REQUIRED TO REINSTATE LOANS
OR RECAST PAYMENT SCHEDULES IN ORDER TO ACCOMMODATE BORROWERS WHO ARE SUFFERING
FROM TEMPORARY FINANCIAL DISABILITIES. IN OTHER CASES, SUCH COURTS HAVE LIMITED
THE RIGHT OF THE LENDER TO FORECLOSE IF THE DEFAULT UNDER THE LOAN IS NOT
MONETARY, SUCH AS THE BORROWER FAILING TO ADEQUATELY MAINTAIN THE PROPERTY OR
THE BORROWER EXECUTING A SECOND DEED OF TRUST AFFECTING THE PROPERTY.
CERTAIN TAX LIENS ARISING UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED, MAY IN CERTAIN CIRCUMSTANCES PROVIDE PRIORITY OVER THE LIEN OF A
MORTGAGE OR DEED OF TRUST. IN ADDITION, SUBSTANTIVE REQUIREMENTS ARE IMPOSED
UPON MORTGAGE LENDERS IN CONNECTION WITH THE ORIGINATION AND THE SERVICING OF
MORTGAGE LOANS BY NUMEROUS FEDERAL AND SOME STATE CONSUMER PROTECTION LAWS.
THESE LAWS INCLUDE, BY EXAMPLE, 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 STATE LAWS, SUCH A S THE
CALIFORNIA FAIR DEBT COLLECTION PRACTICES ACT. THESE LAWS AND REGULATIONS IMPOSE
SPECIFIC STATUTORY LIABILITIES UPON LENDERS WHO ORIGINATE MORTGAGE LOANS AND
FAIL TO COMPLY WITH THE PROVISIONS OF THE LAW. IN SOME CASES, THIS LIABILITY MAY
AFFECT ASSIGNEES OF THE MORTGAGE LOANS.
SECURITY INTERESTS
REAL ESTATE MORTGAGES. The Mortgage Loans for a Series will be secured
by either mortgages or deeds of trust or deeds to secure debt depending upon the
prevailing practice in the state in which the MORTGAGED Property subject to a
Mortgage Loan is located. The filing of a mortgage, deed of trust or deed to
secure debt creates a lien or title interest upon the real property covered by
such 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 such 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 MORTGAGED 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 MORTGAGED 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 MORTGAGED
PROPERTY. In some states, mortgages may also be foreclosed by advertisement,
pursuant to a power of sale provided in the mortgage. Foreclosure of a mortgage
by advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the MORTGAGED PROPERTY upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not
50
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 MORTGAGED PROPERTY
and sent to all parties having an interest of record in the MORTGAGED PROPERTY.
The trustor, borrower, or any person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the MORTGAGED PROPERTY, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party purchasers
at the sale have in determining the exact status of title and because the
physical condition of the MORTGAGED PROPERTY may have deteriorated during the
foreclosure proceedings, it is uncommon for a third party to purchase the
MORTGAGED PROPERTY at a foreclosure sale. Rather, it is common for the lender to
purchase the MORTGAGED PROPERTY from the trustee or referee for an amount which
may be equal to the unpaid principal amount of the mortgage note secured by the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such a judgment is
available. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making such repairs at its own expense as are necessary to render the MORTGAGED
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 MORTGAGED PROPERTY. Depending upon market conditions, the ultimate
proceeds of the sale of the MORTGAGED PROPERTY may not equal the lender's
investment in the MORTGAGED PROPERTY. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
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 MORTGAGED
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 MORTGAGED PROPERTY. The exercise of a right of
redemption would defeat the title of any purchaser at a foreclosure
51
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 MORTGAGED PROPERTY and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem MORTGAGED PROPERTY after a trustee's sale under a deed of
trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES. The Mortgage Loans
comprising or underlying the Primary Assets included in the Trust Fund for a
Series will be secured by mortgages or deeds of trust which may be second or
more junior mortgages to other mortgages held by other lenders or institutional
investors. The rights of the Trust Fund (and therefore the Holders), as
mortgagee under a junior mortgage, are subordinate to those of the mortgagee
under the senior mortgage, including the prior rights of the senior mortgagee to
receive hazard insurance and condemnation proceeds and to cause the MORTGAGED
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 MORTGAGED PROPERTY in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the MORTGAGED PROPERTY are damaged or destroyed by fire or
other casualty, or in the event the MORTGAGED 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 MORTGAGED PROPERTY and, when due,
all encumbrances, charges and liens on the MORTGAGED PROPERTY which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
MORTGAGED PROPERTY, to maintain and repair the MORTGAGED PROPERTY and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the MORTGAGED 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.
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
MORTGAGED 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
(the "Garn-St. Germain Act") preempts state constitutional, statutory and case
law that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain
exceptions. As a result, due-on-sale clauses have become generally enforceable
except in those states whose legislatures exercised their authority to regulate
the enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. The Federal Home Loan Mortgage Corporation ("FHLMC") has taken
the position in its published mortgage servicing standards that, out of a total
of eleven "window period states," five states (Arizona, Michigan, Minnesota, New
Mexico and Utah) have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due-on-sale clauses with
respect to certain categories of window period loans. Also, the Garn-St. Germain
Act does "encourage"
52
lenders to permit assumption of loans at the original rate of interest or at
some other rate less than the average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such bankruptcy
proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES. Forms of notes,
mortgages and deeds of trust used by lenders may contain provisions obligating
the borrower to pay a late charge if payments are not timely made, and in some
circumstances may provide for prepayment fees or penalties if the obligation is
paid prior to maturity. In certain states, there are or may be specific
limitations, upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Late
charges and prepayment fees are typically retained by servicers as additional
servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES. In connection with lenders' attempts
to realize upon their security, courts have invoked general equitable
principles. The equitable principles are generally designed to relieve the
borrower from the legal effect of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive actions to
determine the causes of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to realize upon his security if the
default under the security agreement is not monetary, such as the borrower's
failure to adequately maintain the MORTGAGED PROPERTY or the borrower's
execution of secondary financing affecting the MORTGAGED PROPERTY. Finally, some
courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under security agreements receive notices in addition to
the statutorily-prescribed minimums. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that, in cases involving
the sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift Supervision
(the "OTS") prohibit the imposition of a prepayment penalty or equivalent fee
for or in connection with the acceleration of a loan by exercise of a
due-on-sale clause. A mortgagee to whom a prepayment in full has been tendered
may be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of such
mortgage loans.
APPLICABILITY OF USURY LAWS. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March 31,
1980. Similar federal statutes were in effect with respect to mortgage loans
made during the first three months of 1980. The OTS, as successor to the Federal
Home Loan Bank Board, is authorized to issue rules and regulations and to
publish interpretations governing implementation of Tide V. Tide V authorizes
any state to reimpose interest rate limits by adopting, before April 1, 1983, a
state law, or by certifying that the voters of such state have voted in favor of
any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on mortgage loans covered by Title V.
SECURITY INTERESTS IN PERSONAL PROPERTY AND FIXTURES. A PORTION OF
EACH MORTGAGED PROPERTY MAY CONSIST OF PROPERTY WHICH IS "PERSONAL PROPERTY" OR
A "FIXTURE" UNDER LOCAL STATE LAW. THIS WILL MOST COMMONLY OCCUR WHEN THE
PROCEEDS OF THE RELATED MORTGAGE LOAN WERE APPLIED TO PROPERTY IMPROVEMENTS,
ALTHOUGH ANY MORTGAGED PROPERTY MAY HAVE SOME PERSONAL PROPERTY COMPONENTS. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase
53
money security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of such
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in such PERSONAL PROPERTY must generally be
perfected by a timely fixture filing. In general, under the UNIFORM COMMERCIAL
CODE (THE "UCC"), a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the PERSONAL PROPERTY being financed.
ENFORCEMENT OF SECURITY INTEREST IN PERSONAL PROPERTY. So long as the
PERSONAL PROPERTY has not become subject to the real estate law, a creditor can
repossess SUCH PROPERTY securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgement from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgements, and in many cases
the defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgement.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due-Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service, (i) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including Mortgage Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Mortgage Loan included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief
54
Act of 1940, none of the Trust Fund, the Servicer, the Depositor nor the Trustee
will be required to advance such amounts, and any loss in respect thereof may
reduce the amounts available to be paid to the Holders of the Securities of such
Series. Any shortfalls in interest collections on Mortgage Loans or Underlying
Loans relating to the Private Securities, as applicable, included in a Trust
Fund for a Series resulting from application of the Soldiers' and Sailors' Civil
Relief Act of 1940 will be allocated in the manner set forth in the related
Agreement.
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of North Carolina. in
December 1997, and is a wholly-owned subsidiary of First Union National Bank, a
national banking association with its headquarters in Charlotte, North Carolina.
The Depositor's principal executive offices are located at One First Union
Center, 301 S. College Street, Charlotte, North Carolina 28288-0630. Its
telephone number is (704) 373-6611.
The Depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments ("Depositor Securities")
collateralized or otherwise secured or backed by, or otherwise representing an
interest in, among other things, receivables or pass-through certificates, or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by certain first or junior mortgages on real
estate or manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
USE OF PROCEEDS
The net proceeds from the sale of each Series of Securities will be
applied to one or more of the following purposes: (i) to acquire the related
Primary Assets, (ii) to repay indebtedness which has been incurred to obtain
funds to acquire such Primary Assets, (iii) to establish any Reserve Funds
described in the related Prospectus Supplement and (iv) to pay costs of
structuring and issuing such Securities, including the costs of obtaining Credit
Enhancement, if any. The acquisition of the Primary Assets for a Series may be
effected by an exchange of Securities with the Originator of such Primary
Assets.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated
federal income tax consequences to investors of the purchase, ownership and
disposition of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors ARE URGED TO consult their own tax advisors
in determining the PARTICULAR federal, state AND local consequences to them of
the purchase, ownership and disposition of the Securities.
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The following discussion addresses securities of FIVE general types:
(i) securities ("Grantor Trust Securities") representing interests in a Trust (a
"Grantor Trust") which the Company will covenant not to elect to have treated as
a real estate mortgage investment conduit ("REMIC") OR A FINANCIAL ASSET
SECURITIZATION INVESTMENT TRUST ("FASIT"); (ii) securities ("REMIC Securities")
representing interests in a Trust, or a portion thereof, which the Company will
covenant to elect to have treated as a REMIC under sections 860A through 860G of
the Internal Revenue Code of 1986, as amended (the "Code"); (iii) securities
("Debt Securities") that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans; (IV) SECURITIES
("PARTNERSHIP INTERESTS") REPRESENTING INTERESTS IN A TRUST (A "PARTNERSHIP")
THAT IS INTENDED TO BE TREATED AS A PARTNERSHIP UNDER THE CODE; AND (V)
SECURITIES ("FASIT SECURITIES") REPRESENTING INTERESTS IN A TRUST, OR PORTION
THEREOF, WHICH THE COMPANY WILL COVENANT TO ELECT TO HAVE TREATED AS A FASIT
UNDER SECTIONS 860H THROUGH 860L OF THE CODE. The Prospectus Supplement for each
series of Securities will indicate whether a REMIC or FASIT election (or
elections) will be made for the related Trust and, if a REMIC or FASIT election
is to be made, will identify all "regular interests" and "residual interests" in
the REMIC or all "regular interests," "high-yield interests" or THE"OWNERSHIP
interest" in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the Code that
require the recognition of gain upon the "constructive sale of an appreciated
financial position." A constructive sale of an appreciated financial position
occurs if a taxpayer enters into certain transactions or series of such
transactions with respect to a financial instrument that have the effect of
substantially eliminating the taxpayer's risk of loss and opportunity for gain
with respect to the financial instrument. These provisions apply only to Classes
of Securities that do not have a principal balance.
GRANTOR TRUST SECURITIES
With respect to each series of Grantor Trust Securities, Dewey
Ballantine LLP, special tax counsel to the Company, will deliver its opinion to
the Company that (unless otherwise limited in the related Prospectus Supplement)
the related Grantor Trust will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Such opinion shall be
attached on Form 8-K to be filed with the Commission within fifteen days after
the initial issuance of such Securities or filed with the Commission as a
post-effective amendment to the Prospectus. Accordingly, each BENEFICIAL OWNER
of a Grantor Trust Security will generally be treated as the owner of an
interest in the Mortgage Loans included in the Grantor Trust.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust, together with interest
thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust and interest paid to the BENEFICIAL
OWNERS of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust will be referred to as a "Grantor Trust Strip Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, Dewey
Ballantine LLP, special tax counsel to the Company, will deliver its opinion to
the Company that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and (ii) "obligations
(including any participation or certificate of beneficial ownership therein)
which . . . are principally secured by an interest in real property" within the
meaning of section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust
Fractional Interest 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. In addition, the Grantor Trust
Strip Securities will be "obligations (including any participation or
certificate of beneficial ownership therein) . . . principally secured by an
interest in real property" within the meaning of section 860G(a)(3)(A) of the
Code. Such opinion shall be attached on Form 8-K to be filed with the Commission
within fifteen days after the initial issuance of such Securities or filed with
the Commission as a post-effective amendment to the Prospectus.
Taxation of BENEFICIAL OWNERS of Grantor Trust Securities
BENEFICIAL OWNERS of Grantor Trust Fractional Interest Securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the Mortgage Loans (including amounts
56
used to pay reasonable servicing fees and other expenses but excluding amounts
payable to BENEFICIAL OWNERS of any corresponding Grantor Trust Strip
Securities) and, subject to the limitations described below, will be entitled to
deduct their shares of any such reasonable servicing fees and other expenses. If
a BENEFICIAL OWNER acquires a Grantor Trust Fractional Interest Security for an
amount that differs from its outstanding principal amount, the amount includible
in income on a Grantor Trust Fractional Interest Security may differ from the
amount of interest distributable thereon. See "Discount and Premium," below.
Individuals holding a Grantor Trust Fractional Interest Security directly or
through certain pass-through entities will be allowed a deduction for such
reasonable servicing fees and expenses only to the extent that the aggregate of
such BENEFICIAL OWNER'S miscellaneous itemized deductions exceeds 2% of such
BENEFICIAL OWNER'S adjusted gross income. Further, BENEFICIAL OWNERS (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining alternative minimum taxable
income.
BENEFICIAL OWNERS of Grantor Trust Strip Securities generally will be
required to treat such Securities as "stripped coupons" under section 1286 of
the Code. Accordingly, such a BENEFICIAL OWNER will be required to treat the
excess of the total amount of payments on such a Security over the amount paid
for such Security as original issue discount and to include such discount in
income as it accrues over the life of such Security. See "--Discount and
Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the BENEFICIAL OWNER'S
income as it accrues (regardless of the BENEFICIAL OWNER'S method of
accounting), as described below under "--Discount and Premium." The coupon
stripping rules will not apply, however, if (i) the pass-through rate is no more
than 100 basis points lower than the gross rate of interest payable on the
underlying Mortgage Loans and (ii) the difference between the outstanding
principal balance on the Security and the amount paid for such Security is less
than 0.25% of such principal balance times the weighted average remaining
maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security
(equal to the difference between the amount realized on the sale and the
adjusted basis of such Grantor Trust Security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the Code. The adjusted
basis of a Grantor Trust Security will generally equal its cost, increased by
any income reported by the Originator (including original issue discount and
market discount income) and reduced (but not below zero) by any previously
reported losses, any amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each BENEFICIAL OWNER of a Grantor Trust
Fractional Interest Security with each distribution a statement setting forth
the amount of such distribution allocable to principal on the underlying
Mortgage Loans and to interest thereon at the related interest rate. In
addition, within a reasonable time after the end of each calendar year, based on
information provided by the Master Servicer, the Trustee will furnish to each
BENEFICIAL OWNER during such year such customary factual information as the
Master Servicer deems necessary or desirable to enable BENEFICIAL OWNERS of
Grantor Trust Securities to prepare their tax returns and will furnish
comparable information to the Internal Revenue Service (the "IRS") as and when
required to do so by law.
REMIC SECURITIES
If provided in a related Prospectus Supplement, an election will be
made to treat a Trust as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine LLP, special
tax counsel to the Company, will deliver its opinion to the Company that (unless
otherwise limited in the related Prospectus Supplement), assuming compliance
with the Pooling and Servicing Agreement, the Trust will be treated as a REMIC
for federal income tax purposes. A Trust for which a REMIC election is made will
be referred to herein as a "REMIC Trust." The Securities of each class will be
designated as "regular interests" in the REMIC Trust except that a separate
class will be designated as the "residual interest" in the REMIC Trust. The
Prospectus Supplement for each series of
57
Securities will state whether Securities of each class will constitute a regular
interest (a REMIC Regular Security) or a residual interest (a REMIC Residual
Security). Such opinion shall be attached on Form 8-K to be filed with the
Commission within fifteen days after the initial issuance of such Securities or
filed with the Commission as a post-effective amendment to the Prospectus.
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. See "--Taxes on a REMIC Trust." Generally, the total income
from the Mortgage Loans in a REMIC Trust will be taxable to the BENEFICIAL
OWNERS of the Securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will be "regular
or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) of the Code and "real estate assets" within the meaning of
section 856(c)(5)(A) of the Code. If at any time during a calendar year less
than 95% of the assets of a REMIC Trust consist of "qualified mortgages" (within
the meaning of section 860G(a)(3) of the Code) then the portion of the REMIC
Regular Securities and REMIC Residual Securities that are qualifying assets
under those sections during such calendar year may be limited to the portion of
the assets of such REMIC Trust that are qualified mortgages. Similarly, income
on the REMIC Regular Securities and REMIC Residual Securities will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of section 856(c)(3)(B) of the Code, subject to the same limitation as
set forth in the preceding sentence. For purposes of applying this limitation, a
REMIC Trust should be treated as owning the assets represented by the qualified
mortgages. The assets of the Trust Estate will include, in addition to the
Mortgage Loans, payments on the Mortgage Loans held pending distribution on the
REMIC Regular Securities and REMIC Residual Securities and any reinvestment
income thereon. REMIC Regular Securities and REMIC Residual Securities held by a
financial institution to which section 585, 586 or 593 of the Code applies will
be treated as evidences of indebtedness for purposes of section 582(c)(1) of the
Code. REMIC Regular Securities will also be qualified mortgages with respect to
other REMICs.
Taxation of BENEFICIAL OWNERS of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership interests in the
REMIC Trust or its assets. BENEFICIAL OWNERS of REMIC Regular Securities that
otherwise report income under a cash method of accounting will be required to
report income with respect to such Securities under an accrual method. For
additional tax consequences relating to REMIC Regular Securities purchased at a
discount or with premium, see "--Discount and Premium," below.
Taxation of BENEFICIAL OWNERS of REMIC Residual Securities
DAILY PORTIONS. Except as indicated below, a BENEFICIAL OWNER of a
REMIC Residual Security for a REMIC Trust generally will be required to report
its daily portion of the taxable income or net loss of the REMIC Trust for each
day during a calendar quarter that the BENEFICIAL OWNER owned such REMIC
Residual Security. For this purpose, the daily portion shall be determined by
allocating to each day in the calendar quarter its ratable portion of the
taxable income or net loss of the REMIC Trust for such quarter and by allocating
the amount so allocated among the Residual BENEFICIAL OWNERS (on such day) in
accordance with their percentage interests on such day. Any amount included in
the gross income or allowed as a loss of any Residual BENEFICIAL OWNER by virtue
of this paragraph will be treated as ordinary income or loss.
The requirement that each BENEFICIAL OWNER of a REMIC Residual Security
report its daily portion of the taxable income or net loss of the REMIC Trust
will continue until there are no Securities of any class outstanding, even
though the BENEFICIAL OWNER of the REMIC Residual Security may have received
full payment of the stated interest and principal on its REMIC Residual
Security.
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The Trustee will provide to BENEFICIAL OWNERS of REMIC Residual
Securities of each series of Securities (i) such information as is necessary to
enable them to prepare their federal income tax returns and (ii) any reports
regarding the Securities of such series that may be required under the Code.
TAXABLE INCOME OR NET LOSS OF A REMIC TRUST. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
"Prepayment Assumption" (as defined in the Related Prospectus Supplement, see
"--Discount and Premium--Original Issue Discount," below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate of the issue prices of all the
REMIC Regular Securities and REMIC Residual Securities in the REMIC Trust on the
Settlement Date. If, however, a substantial amount of a class of REMIC Regular
Securities or REMIC Residual Securities has not been sold to the public, then
the fair market value of all the REMIC Regular Securities or REMIC Residual
Securities in that class as of the date of the Prospectus Supplement should be
substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC Trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "--Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
A BENEFICIAL OWNER of a REMIC Residual Security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC Trust at a discount, some or all of the
REMIC Regular Securities are issued at a discount, and the discount included as
a result of a prepayment on a Mortgage Loan that is used to pay principal on the
REMIC Regular Securities exceeds the REMIC Trust's deduction for unaccrued
original issue discount relating to such REMIC Regular Securities. Taxable
income may also be greater in earlier years because interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Securities, may increase over time as the earlier classes of REMIC
Regular Securities are paid, whereas interest income with respect to any given
Mortgage Loan expressed as a percentage of the outstanding principal amount of
that Mortgage Loan, will remain constant over time.
BASIS RULES AND DISTRIBUTIONS. A BENEFICIAL OWNER of a REMIC Residual
Security has an initial basis in its Security equal to the amount paid for such
REMIC Residual Security. Such basis is increased by amounts included in the
income of the BENEFICIAL OWNER and decreased by distributions and by any net
loss taken into account with respect to such REMIC Residual Security. A
distribution on a REMIC Residual Security to a BENEFICIAL OWNER is not included
in gross income to the extent it does not exceed such BENEFICIAL OWNER'S basis
in the REMIC Residual Security (adjusted as described above) and, to the extent
it exceeds the adjusted basis of the REMIC Residual Security, shall be treated
as gain from the sale of the REMIC Residual Security.
A BENEFICIAL OWNER of a REMIC Residual Security is not allowed to take
into account any net loss for any calendar quarter to the extent such net loss
exceeds such BENEFICIAL OWNER'S adjusted basis in its REMIC
59
Residual Security as of the close of such calendar quarter (determined without
regard to such net loss). Any loss disallowed by reason of this limitation may
be carried forward indefinitely to future calendar quarters and, subject to the
same limitation, may be used only to offset income from the REMIC Residual
Security.
EXCESS INCLUSIONS. Any excess inclusions with respect to a REMIC
Residual Security are subject to certain special tax rules. With respect to a
BENEFICIAL OWNER of a REMIC Residual Security, the excess inclusion for any
calendar quarter is defined as the excess (if any) of the daily portions of
taxable income over the sum of the "daily accruals" for each day during such
quarter that such REMIC Residual Security was held by such BENEFICIAL OWNER. The
daily accruals are determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Security at the beginning of the calendar quarter and 120% of the
"federal long-term rate" in effect on the Settlement Date, based on quarterly
compounding, and properly adjusted for the length of such quarter. For this
purpose, the adjusted issue price of a REMIC Residual Security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
Residual Security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to such REMIC
Residual Security before the beginning of such quarter. The issue price of a
REMIC Residual Security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC Residual
Securities was sold. The federal long-term rate is a blend of current yields on
Treasury securities having a maturity of more than nine years, computed and
published monthly by the IRS.
In general, BENEFICIAL OWNERS of REMIC Residual Securities with excess
inclusion income cannot offset such income by losses from other activities. For
BENEFICIAL OWNERS that are subject to tax only on unrelated business taxable
income (as defined in section 511 of the Code), an excess inclusion of such
BENEFICIAL OWNER is treated as unrelated business taxable income. With respect
to variable contracts (within the meaning of section 817 of the Code), a life
insurance company cannot adjust its reserve to the extent of any excess
inclusion, except as provided in regulations. The REMIC Regulations indicate
that if a BENEFICIAL OWNER of a REMIC Residual Security is a member of an
affiliated group filing a consolidated income tax return, the taxable income of
the affiliated group cannot be less than the sum of the excess inclusions
attributable to all residual interests in REMICs held by members of the
affiliated group. For a discussion of the effect of excess inclusions on certain
foreign investors that own REMIC Residual Securities, see "--Foreign Investors"
below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC Residual Securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
PASS-THROUGH OF SERVICING AND GUARANTY FEES TO INDIVIDUALS. A
BENEFICIAL OWNER of a REMIC Residual Security who is an individual will be
required to include in income a share of any servicing and guaranty fees. A
deduction for such fees will be allowed to such BENEFICIAL OWNER only to the
extent that such fees, along with certain of such BENEFICIAL OWNER'S other
miscellaneous itemized deductions exceed 2% of such BENEFICIAL OWNER'S adjusted
gross income. In addition, a BENEFICIAL OWNER of a REMIC Residual Security may
not be able to deduct any portion of such fees in computing such BENEFICIAL
OWNER'S alternative minimum tax liability. A BENEFICIAL OWNER'S share of such
fees will generally be determined by (i) allocating the amount of such expenses
for each calendar quarter on a pro rata basis to each day in the calendar
quarter, and (ii) allocating the daily amount among the BENEFICIAL OWNERS in
proportion to their respective holdings on such day.
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Taxes on a REMIC Trust
PROHIBITED TRANSACTIONS. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
CONTRIBUTIONS TO A REMIC AFTER THE STARTUP DAY. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the Settlement Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a
BENEFICIAL OWNER of a residual interest, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by Treasury regulations.
NET INCOME FROM FORECLOSURE PROPERTY. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of three years, with
a possible extension. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
GENERAL. Except as provided below, if a Regular or REMIC Residual
Security is sold, the seller will recognize gain or loss equal to the difference
between the amount realized in the sale and its adjusted basis in the Security.
The adjusted basis of a REMIC Regular Security generally will equal the cost of
such Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such Security 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 with respect to such Security. See
"--Discount and Premium." The adjusted basis of a REMIC Residual Security is
determined as described above under "--Taxation of BENEFICIAL OWNERS of REMIC
Residual Securities--Basis Rules and Distributions." Except as provided in the
following paragraph or under section 582(c) of the Code, any such gain or loss
will be capital gain or loss, provided such Security is held as a "capital
asset" (generally, property held for investment) within the meaning of section
1221 of the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the BENEFICIAL OWNER of a REMIC Regular Security had
income accrued at a rate equal to 110% of the "applicable federal rate"
(generally, an average of current yields on Treasury securities) as of the date
of purchase over (ii) the amount actually includible in such BENEFICIAL OWNER'S
income. In addition, gain recognized on such a sale by a BENEFICIAL OWNER of a
REMIC Regular Security who purchased such a Security at a market discount would
also be taxable as ordinary income in an amount not exceeding the portion of
such discount that accrued during the period such Security was held by such
BENEFICIAL OWNER, reduced by any market discount includible in income under the
rules described below under "--Discount and Premium."
If a BENEFICIAL OWNER of a REMIC Residual Security sells its REMIC
Residual Security at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC Residual Security, such BENEFICIAL
OWNER purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool (as defined in section 7701(i) of the Code) comparable to
a residual interest in a REMIC. Such disallowed loss would be allowed upon the
sale of the other residual interest (or comparable interest) if the rule
referred to in the preceding sentence does not apply to that sale. While this
rule may be modified by Treasury regulations, no such regulations have yet been
published.
TRANSFERS OF REMIC RESIDUAL SECURITIES. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent, payable
61
by that agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a REMIC Residual Security and
certain other provisions that are intended to meet this requirement are
described in the Pooling and Servicing Agreement, and will be discussed more
fully in the related Prospectus Supplement relating to the offering of any REMIC
Residual Security. In addition, a pass-through entity (including a nominee) that
holds a REMIC Residual Security may be subject to additional taxes if a
disqualified organization is a record-holder therein. A transferor of a REMIC
Residual Security (or an agent of a transferee of a REMIC Residual Security, as
the case may be) will be relieved of such tax liability if (i) the transferee
furnishes to the transferor (or the transferee's agent) an affidavit that the
transferee is not a disqualified organization, and (ii) the transferor (or the
transferee's agent) does not have actual knowledge that the affidavit is false
at the time of the transfer. Similarly, no such tax will be imposed on a
pass-through entity for a period with respect to an interest therein owned by a
disqualified organization if (i) the record-holder of such interest furnishes to
the pass-through entity an affidavit that it is not a disqualified organization,
and (ii) during such period, the pass-through entity has no actual knowledge
that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an "electing large partnership." If an electing large partnership holds
a Residual Certificate, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity by section 860E(e) of the Code. An exception to this
tax, otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
such affidavits are false, is not available to an electing large partnership.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See "--Discount and Premium" and
"--Taxation of BENEFICIAL OWNERS of REMIC Residual Securities--Excess
Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., 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 Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to
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disqualified organizations discussed above. Transferors of a REMIC Residual
Security should consult with their own tax advisors for further information
regarding such transfers.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the BENEFICIAL OWNERS of REMIC Residual Securities will be
treated as partners. The Trustee will prepare, sign and file federal income tax
returns for each REMIC Trust, which returns are subject to audit by the IRS.
Moreover, within a reasonable time after the end of each calendar year, the
Trustee will furnish to each BENEFICIAL OWNER that received a distribution
during such year a statement setting forth the portions of any such
distributions that constitute interest distributions, original issue discount,
and such other information as is required by Treasury regulations and, with
respect to BENEFICIAL OWNERS of REMIC Residual Securities in a REMIC Trust,
information necessary to compute the daily portions of the taxable income (or
net loss) of such REMIC Trust for each day during such year. The Trustee will
also act as the tax matters partner for each REMIC Trust, either in its capacity
as a BENEFICIAL OWNER of a REMIC Residual Security or in a fiduciary capacity.
Each BENEFICIAL OWNER of a REMIC Residual Security, by the acceptance of its
REMIC Residual Security, agrees that the Trustee will act as its fiduciary in
the performance of any duties required of it in the event that it is the tax
matters partner.
Each BENEFICIAL OWNER of a REMIC Residual Security is required to treat
items on its return consistently with the treatment on the return of the REMIC
Trust, unless the BENEFICIAL OWNER either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC Trust level.
Termination
In general, no special tax consequences will apply to a BENEFICIAL
OWNER of a REMIC Regular Security upon the termination of a REMIC Trust by
virtue of the final payment or liquidation of the last Mortgage Loan remaining
in the Trust Estate. If a BENEFICIAL OWNER of a REMIC Residual Security's
adjusted basis in its REMIC Residual Security at the time such termination
occurs exceeds the amount of cash distributed to such BENEFICIAL OWNER in
liquidation of its interest, although the matter is not entirely free from
doubt, it would appear that the BENEFICIAL OWNER of the REMIC Residual Security
is entitled to a loss equal to the amount of such excess.
DEBT SECURITIES
General
With respect to each series of Debt Securities, Dewey Ballantine LLP,
special tax counsel to the Company, will deliver its opinion to the Company that
(unless otherwise limited in the related Prospectus Supplement) the Securities
will be classified as debt of the Company secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. BENEFICIAL OWNERS will be required to report
income received with respect to the Debt Securities in accordance with their
normal method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain
special tax attributes by virtue of their being ownership interests in the
underlying Mortgage Loans. Similarly, REMIC Securities will possess similar
attributes by virtue of the REMIC provisions of the Code. In general, Debt
Securities will not possess such special tax attributes. Investors to whom such
attributes are important should consult their own tax advisors regarding
investment in Debt Securities.
Sale or Exchange
If a BENEFICIAL OWNER of a Debt Security sells or exchanges such
Security, the BENEFICIAL OWNER will recognize gain or loss equal to the
difference, if any, between the amount received and the BENEFICIAL OWNER'S
adjusted basis in the Security. The adjusted basis in the Security generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Security and reduced by the payments previously received on the Security, other
than payments of qualified stated interest, and by any amortized premium.
63
In general (except as described in "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
PARTNERSHIP INTERESTS
WITH RESPECT TO EACH SERIES OF PARTNERSHIP INTERESTS, DEWEY
BALLANTINE LLP, SPECIAL TAX COUNSEL TO THE COMPANY, WILL DELIVER ITS OPINION TO
THE COMPANY THAT (UNLESS OTHERWISE LIMITED IN THE RELATED PROSPECTUS SUPPLEMENT)
THE TRUST WILL BE TREATED AS A PARTNERSHIP AND NOT AN ASSOCIATION TAXABLE AS A
CORPORATION FOR FEDERAL INCOME TAX PURPOSES. SUCH OPINION SHALL BE ATTACHED ON
FORM 8-K TO BE FILED WITH THE COMMISSION WITHIN FIFTEEN DAYS AFTER THE INITIAL
ISSUANCE OF SUCH SECURITIES OR FILED WITH THE COMMISSION AS A POST-EFFECTIVE
AMENDMENT TO THE PROSPECTUS. ACCORDINGLY, EACH BENEFICIAL OWNER OF A PARTNERSHIP
INTEREST WILL GENERALLY BE TREATED AS THE OWNER OF AN INTEREST IN THE MORTGAGE
LOANS.
SPECIAL TAX ATTRIBUTES
AS DESCRIBED ABOVE, GRANTOR TRUST SECURITIES WILL POSSESS
CERTAIN SPECIAL TAX ATTRIBUTES BY VIRTUE OF THEIR BEING OWNERSHIP INTERESTS IN
THE UNDERLYING MORTGAGE LOANS. SIMILARLY REMIC SECURITIES AND FASIT SECURITIES
WILL POSSESS SIMILAR ATTRIBUTES BY VIRTUE OF THE REMIC AND FASIT PROVISIONS OF
THE CODE. IN GENERAL, PARTNERSHIP INTERESTS WILL NOT POSSESS SUCH SPECIAL TAX
ATTRIBUTES. INVESTORS TO WHOM SUCH ATTRIBUTES ARE IMPORTANT SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING INVESTMENT IN PARTNERSHIP INTERESTS.
TAXATION OF BENEFICIAL OWNERS OF PARTNERSHIP INTERESTS
IF THE TRUST IS TREATED AS A PARTNERSHIP FOR FEDERAL INCOME
TAX PURPOSES, THE TRUST WILL NOT BE SUBJECT TO FEDERAL INCOME TAX. INSTEAD, EACH
BENEFICIAL OWNER OF A PARTNERSHIP INTEREST WILL BE REQUIRED TO SEPARATELY TAKE
INTO ACCOUNT AN ALLOCABLE SHARE OF INCOME, GAINS, LOSSES, DEDUCTIONS, CREDITS
AND OTHER TAX ITEMS OF THE TRUST. THESE PARTNERSHIP ALLOCATIONS ARE MADE IN
ACCORDANCE WITH THE CODE, TREASURY REGULATIONS AND THE PARTNERSHIP AGREEMENT
(HERE, THE TRUST AGREEMENT AND RELATED DOCUMENTS).
THE TRUST'S ASSETS WILL BE THE ASSETS OF THE PARTNERSHIP. THE
TRUST'S INCOME WILL CONSIST PRIMARILY OF INTEREST AND FINANCE CHARGES EARNED ON
THE UNDERLYING MORTGAGE LOANS. THE TRUST'S DEDUCTIONS WILL CONSIST PRIMARILY OF
INTEREST ACCRUING WITH RESPECT TO ANY INDEBTEDNESS ISSUED BY THE TRUST,
SERVICING AND OTHER FEES, AND LOSSES OR DEDUCTIONS UPON COLLECTION OR
DISPOSITION OF THE TRUST'S ASSETS.
IN CERTAIN INSTANCES, THE TRUST COULD HAVE AN OBLIGATION TO
MAKE PAYMENTS OF WITHHOLDING TAX ON BEHALF OF A BENEFICIAL OWNER OF A
PARTNERSHIP INTEREST. (SEE "BACKUP WITHHOLDING" AND "FOREIGN INVESTORS" BELOW).
SUBSTANTIALLY ALL OF THE TAXABLE INCOME ALLOCATED TO A
BENEFICIAL OWNER OF A PARTNERSHIP INTEREST THAT IS A PENSION, PROFIT SHARING OR
EMPLOYEE BENEFIT PLAN OR OTHER TAX-EXEMPT ENTITY (INCLUDING AN INDIVIDUAL
RETIREMENT ACCOUNT) WILL CONSTITUTE "UNRELATED BUSINESS TAXABLE INCOME"
GENERALLY TAXABLE TO SUCH A HOLDER UNDER THE CODE.
UNDER SECTION 708 OF THE CODE, THE TRUST WILL BE DEEMED TO
TERMINATE FOR FEDERAL INCOME TAX PURPOSES IF 50% OR MORE OF THE CAPITAL AND
PROFITS INTERESTS IN THE TRUST ARE SOLD OR EXCHANGED WITHIN A 12-MONTH PERIOD.
UNDER THE FINAL REGULATIONS ISSUED ON MAY 9, 1997 IF SUCH A TERMINATION OCCURS,
THE TRUST IS DEEMED TO CONTRIBUTE ALL OF ITS ASSETS AND LIABILITIES TO A NEWLY
FORMED PARTNERSHIP IN EXCHANGE FOR A PARTNERSHIP INTEREST. IMMEDIATELY
THEREAFTER, THE TERMINATED PARTNERSHIP DISTRIBUTES INTERESTS IN THE NEW
PARTNERSHIP TO THE PURCHASING PARTNER AND REMAINING PARTNERS IN PROPORTION TO
THEIR INTERESTS IN LIQUIDATION OF THE TERMINATED PARTNERSHIP.
SALE OR EXCHANGE OF PARTNERSHIP INTERESTS
GENERALLY, CAPITAL GAIN OR LOSS WILL BE RECOGNIZED ON A SALE
OR EXCHANGE OF PARTNERSHIP INTERESTS IN AN AMOUNT EQUAL TO THE DIFFERENCE
BETWEEN THE AMOUNT REALIZED AND THE SELLER'S TAX BASIS IN THE
64
PARTNERSHIP INTERESTS SOLD. A BENEFICIAL OWNER OF A PARTNERSHIP INTEREST'S TAX
BASIS IN A PARTNERSHIP INTEREST WILL GENERALLY EQUAL THE BENEFICIAL OWNER'S COST
INCREASED BY THE BENEFICIAL OWNER'S SHARE OF TRUST INCOME (INCLUDIBLE IN INCOME)
AND DECREASED BY ANY DISTRIBUTIONS RECEIVED WITH RESPECT TO SUCH PARTNERSHIP
INTEREST. IN ADDITION, BOTH THE TAX BASIS IN THE PARTNERSHIP INTEREST AND THE
AMOUNT REALIZED ON A SALE OF A PARTNERSHIP INTEREST WOULD TAKE INTO ACCOUNT THE
BENEFICIAL OWNER'S SHARE OF ANY INDEBTEDNESS OF THE TRUST. A BENEFICIAL OWNER
ACQUIRING PARTNERSHIP INTERESTS AT DIFFERENT PRICES MAY BE REQUIRED TO MAINTAIN
A SINGLE AGGREGATE ADJUSTED TAX BASIS IN SUCH PARTNERSHIP INTEREST, AND UPON
SALE OR OTHER DISPOSITION OF SOME OF THE PARTNERSHIP INTERESTS, ALLOCATE A
PORTION OF SUCH AGGREGATE TAX BASIS TO THE PARTNERSHIP INTERESTS SOLD (RATHER
THAN MAINTAINING A SEPARATE TAX BASIS IN EACH PARTNERSHIP INTEREST FOR PURPOSES
OF COMPUTING GAIN OR LOSS ON A SALE OF THAT PARTNERSHIP INTEREST).
ANY GAIN ON THE SALE OF A PARTNERSHIP INTEREST ATTRIBUTABLE TO
THE BENEFICIAL OWNER'S SHARE OF UNRECOGNIZED ACCRUED MARKET DISCOUNT ON THE
ASSETS OF THE TRUST WOULD GENERALLY BE TREATED AS ORDINARY INCOME TO THE HOLDER
AND WOULD GIVE RISE TO SPECIAL TAX REPORTING REQUIREMENTS. IF A BENEFICIAL OWNER
OF A PARTNERSHIP INTEREST IS REQUIRED TO RECOGNIZE AN AGGREGATE AMOUNT OF INCOME
OVER THE LIFE OF THE PARTNERSHIP INTEREST THAT EXCEEDS THE AGGREGATE CASH
DISTRIBUTIONS WITH RESPECT THERETO, SUCH EXCESS WILL GENERALLY GIVE RISE TO A
CAPITAL LOSS UPON THE RETIREMENT OF THE PARTNERSHIP INTEREST. IF A BENEFICIAL
OWNER SELLS ITS PARTNERSHIP INTEREST AT A PROFIT OR LOSS, THE TRANSFEREE WILL
HAVE A HIGHER OR LOWER BASIS IN THE PARTNERSHIP INTERESTS THAN THE TRANSFEROR
HAD. THE TAX BASIS OF THE TRUST'S ASSETS WILL NOT BE ADJUSTED TO REFLECT THAT
HIGHER OR LOWER BASIS UNLESS THE TRUST FILES AN ELECTION UNDER SECTION 754 OF
THE CODE.
PARTNERSHIP REPORTING MATTERS
THE OWNER TRUSTEE IS REQUIRED TO (I) KEEP COMPLETE AND
ACCURATE BOOKS OF THE TRUST, (II) FILE A PARTNERSHIP INFORMATION RETURN (IRS
FORM 1065) WITH THE IRS FOR EACH TAXABLE YEAR OF THE TRUST AND (III) REPORT EACH
BENEFICIAL OWNER OF A PARTNERSHIP INTEREST'S ALLOCABLE SHARE OF ITEMS OF TRUST
INCOME AND EXPENSE TO BENEFICIAL OWNERS AND THE IRS ON SCHEDULE K-1. THE TRUST
WILL PROVIDE THE SCHEDULE K-1 INFORMATION TO NOMINEES THAT FAIL TO PROVIDE THE
TRUST WITH THE INFORMATION STATEMENT DESCRIBED BELOW AND SUCH NOMINEES WILL BE
REQUIRED TO FORWARD SUCH INFORMATION TO THE BENEFICIAL OWNERS OF THE PARTNERSHIP
INTERESTS. GENERALLY, BENEFICIAL OWNERS OF A PARTNERSHIP INTERESTS MUST FILE TAX
RETURNS THAT ARE CONSISTENT WITH THE INFORMATION RETURN FILED BY THE TRUST OR BE
SUBJECT TO PENALTIES UNLESS THE BENEFICIAL OWNER OF A PARTNERSHIP INTEREST
NOTIFIES THE IRS OF ALL SUCH INCONSISTENCIES.
UNDER SECTION 6031 OF THE CODE, ANY PERSON THAT HOLDS
PARTNERSHIP INTERESTS AS A NOMINEE AT ANY TIME DURING A CALENDAR YEAR IS
REQUIRED TO FURNISH THE TRUST WITH A STATEMENT CONTAINING CERTAIN INFORMATION ON
THE NOMINEE, THE BENEFICIAL OWNERS AND THE PARTNERSHIP INTERESTS SO HELD. SUCH
INFORMATION INCLUDES (I) THE NAME, ADDRESS AND TAXPAYER IDENTIFICATION NUMBER OF
THE NOMINEE AND (II) AS TO EACH BENEFICIAL OWNER (X) THE NAME, ADDRESS AND
IDENTIFICATION NUMBER OF SUCH PERSON, (Y) WHETHER SUCH PERSON IS A UNITED STATES
PERSON, A TAX-EXEMPT ENTITY OR A FOREIGN GOVERNMENT, AND INTERNATIONAL
ORGANIZATION, OR ANY WHOLLY OWNED AGENCY OR INSTRUMENTALITY OF EITHER OF THE
FOREGOING, AND (Z) CERTAIN INFORMATION ON PARTNERSHIP INTERESTS THAT WERE HELD,
BOUGHT OR SOLD ON BEHALF OF SUCH PERSON THROUGHOUT THE YEAR. IN ADDITION,
BROKERS AND FINANCIAL INSTITUTIONS THAT HOLD PARTNERSHIP INTERESTS THROUGH A
NOMINEE ARE REQUIRED TO FURNISH DIRECTLY TO THE TRUST INFORMATION AS TO
THEMSELVES AND THEIR OWNERSHIP OF PARTNERSHIP INTERESTS. A CLEARING AGENCY
REGISTERED UNDER SECTION 17A OF THE EXCHANGE ACT IS NOT REQUIRED TO FURNISH ANY
SUCH INFORMATION STATEMENT TO THE TRUST. NOMINEES, BROKERS AND FINANCIAL
INSTITUTIONS THAT FAIL TO PROVIDE THE TRUST WITH THE INFORMATION DESCRIBED ABOVE
MAY BE SUBJECT TO PENALTIES.
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
BY THE APPROPRIATE TAXING AUTHORITIES COULD RESULT IN AN ADJUSTMENT OF THE
RETURNS OF THE BENEFICIAL OWNER OF A PARTNERSHIP INTERESTS, AND, UNDER CERTAIN
CIRCUMSTANCES, A BENEFICIAL OWNER OF A PARTNERSHIP INTEREST MAY BE PRECLUDED
FROM SEPARATELY LITIGATING A PROPOSED ADJUSTMENT TO THE ITEMS OF THE TRUST. AN
ADJUSTMENT COULD ALSO RESULT IN AN AUDIT OF THE BENEFICIAL OWNER OF A
PARTNERSHIP INTEREST'S RETURNS AND ADJUSTMENTS OF ITEMS NOTE RELATED TO THE
INCOME AND LOSSES OF THE TRUST.
65
FASIT SECURITIES
IF PROVIDED IN A RELATED PROSPECTUS SUPPLEMENT, AN ELECTION
WILL BE MADE TO TREAT THE TRUST AS A FASIT WITHIN THE MEANING OF CODE SECTION
860L(A). QUALIFICATION AS A FASIT REQUIRES ONGOING COMPLIANCE WITH CERTAIN
CONDITIONS. WITH RESPECT TO EACH SERIES OF SECURITIES FOR WHICH AN ELECTION IS
MADE, DEWEY BALLANTINE LLP, SPECIAL TAX COUNSEL TO THE COMPANY, WILL DELIVER ITS
OPINION TO THE COMPANY THAT (UNLESS OTHERWISE LIMITED IN THE RELATED PROSPECTUS
SUPPLEMENT), ASSUMING COMPLIANCE WITH THE POOLING AND SERVICING AGREEMENT, THE
TRUST WILL BE TREATED AS A FASIT FOR FEDERAL INCOME TAX PURPOSES. A TRUST FOR
WHICH A FASIT ELECTION IS MADE WILL BE REFERRED TO HEREIN AS A "FASIT TRUST."
THE SECURITIES OF EACH CLASS WILL BE DESIGNATED AS "REGULAR INTERESTS" OR
"HIGH-YIELD REGULAR INTERESTS" IN THE FASIT TRUST EXCEPT THAT ONE SEPARATE CLASS
WILL BE DESIGNATED AS THE "OWNERSHIP INTEREST" IN THE FASIT TRUST. THE
PROSPECTUS SUPPLEMENT FOR EACH SERIES OF SECURITIES WILL STATE WHETHER
SECURITIES OF EACH CLASS WILL CONSTITUTE EITHER A REGULAR INTEREST OR A
HIGH-YIELD REGULAR INTEREST (A FASIT REGULAR SECURITY) OR AN OWNERSHIP INTEREST
(A FASIT OWNERSHIP SECURITY). SUCH OPINION SHALL BE ATTACHED ON FORM 8-K TO BE
FILED WITH THE COMMISSION WITHIN FIFTEEN DAYS AFTER THE INITIAL ISSUANCE OF SUCH
SECURITIES OR FILED WITH THE COMMISSION AS A POST-EFFECTIVE AMENDMENT TO THE
PROSPECTUS.
SPECIAL TAX ATTRIBUTES
FASIT SECURITIES HELD BY A REAL ESTATE INVESTMENT TRUST WILL
CONSTITUTE "REAL ESTATE ASSETS" WITHIN THE MEANING OF CODE SECTIONS 856(C)(5)(A)
AND 856(C)(6) AND INTEREST ON THE FASIT REGULAR SECURITIES WILL BE CONSIDERED
"INTEREST ON OBLIGATIONS SECURED BY MORTGAGES ON REAL PROPERTY OR ON INTERESTS
IN REAL PROPERTY" WITHIN THE MEANING OF CODE SECTION 856(C)(3)(B) IN THE SAME
PROPORTION THAT, FOR BOTH PURPOSES, THE ASSETS OF THE FASIT TRUST AND THE INCOME
THEREON WOULD BE SO TREATED. FASIT REGULAR SECURITIES HELD BY A DOMESTIC
BUILDING AND LOAN ASSOCIATION WILL BE TREATED AS "REGULAR INTEREST[S] IN A
FASIT" UNDER CODE SECTION 7701(A)(19)(C)(XI), BUT ONLY IN THE PROPORTION THAT
THE FASIT TRUST HOLDS "LOANS . . . SECURED BY AN INTEREST IN REAL PROPERTY WHICH
IS . . . RESIDENTIAL REAL PROPERTY" WITHIN THE MEANING OF CODE SECTION
7701(A)(19)(C)(V). IF AT ALL TIMES 95% OR MORE OF THE ASSETS OF THE FASIT TRUST
OR THE INCOME THEREON QUALIFY FOR THE FOREGOING TREATMENTS, THE FASIT REGULAR
SECURITIES WILL QUALIFY FOR THE CORRESPONDING STATUS IN THEIR ENTIRETY. FOR
PURPOSES OF CODE SECTION 856(C)(5)(A), PAYMENTS OF PRINCIPAL AND INTEREST ON A
MORTGAGE LOAN THAT ARE REINVESTED PENDING DISTRIBUTION TO HOLDERS OF FASIT
REGULAR SECURITIES SHOULD QUALIFY FOR SUCH TREATMENT. FASIT REGULAR SECURITIES
HELD BY A REGULATED INVESTMENT COMPANY WILL NOT CONSTITUTE "GOVERNMENT
SECURITIES" WITHIN THE MEANING OF CODE SECTION 851(B)(4)(A)(I). FASIT REGULAR
SECURITIES HELD BY CERTAIN FINANCIAL INSTITUTIONS WILL CONSTITUTE AN "EVIDENCE
OF INDEBTEDNESS" WITHIN THE MEANING OF CODE SECTION 582(C)(1).
TAXATION OF BENEFICIAL OWNERS OF FASIT REGULAR SECURITIES
A FASIT TRUST WILL NOT BE SUBJECT TO FEDERAL INCOME TAX EXCEPT
WITH RESPECT TO INCOME FROM PROHIBITED TRANSACTIONS AND IN CERTAIN OTHER
INSTANCES AS DESCRIBED BELOW. THE FASIT REGULAR SECURITIES GENERALLY WILL BE
TREATED FOR FEDERAL INCOME TAX PURPOSES AS NEWLY-ORIGINATED DEBT INSTRUMENTS. IN
GENERAL, INTEREST, ORIGINAL ISSUE DISCOUNT ("OID") AND MARKET DISCOUNT ON A
FASIT REGULAR SECURITY WILL BE TREATED AS ORDINARY INCOME TO THE BENEFICIAL
OWNER, AND PRINCIPAL PAYMENTS (OTHER THAN PRINCIPAL PAYMENTS THAT DO NOT EXCEED
ACCRUED MARKET DISCOUNT) ON AN FASIT REGULAR SECURITY WILL BE TREATED AS A
RETURN OF CAPITAL TO THE EXTENT OF THE BENEFICIAL OWNER'S BASIS ALLOCABLE
THERETO. BENEFICIAL OWNERS MUST USE THE ACCRUAL METHOD OF ACCOUNTING WITH
RESPECT TO FASIT REGULAR SECURITIES, REGARDLESS OF THE METHOD OF ACCOUNTING
OTHERWISE USED BY SUCH BENEFICIAL OWNERS. SEE DISCUSSION OF "DISCOUNT AND
PREMIUM" BELOW.
IN ORDER FOR THE FASIT TRUST TO QUALIFY AS A FASIT, THERE MUST
BE ONGOING COMPLIANCE WITH THE REQUIREMENTS SET FORTH IN THE CODE. THE FASIT
MUST FULFILL AN ASSET TEST, WHICH REQUIRES THAT SUBSTANTIALLY ALL THE ASSETS OF
THE FASIT, AS OF THE CLOSE OF THE THIRD CALENDAR MONTH BEGINNING AFTER THE
"STARTUP DAY" (WHICH FOR PURPOSES OF THIS DISCUSSION IS THE DATE OF THE INITIAL
ISSUANCE OF THE FASIT SECURITIES) AND AT ALL TIMES THEREAFTER, MUST CONSIST OF
CASH OR CASH EQUIVALENTS, CERTAIN DEBT INSTRUMENTS (OTHER THAN DEBT INSTRUMENTS
ISSUED BY THE OWNER OF THE FASIT OR A RELATED PARTY) AND HEDGES (AND CONTRACTS
TO ACQUIRE THE SAME), FORECLOSURE PROPERTY AND REGULAR INTERESTS IN ANOTHER
FASIT OR IN A REMIC. BASED ON IDENTICAL STATUTORY LANGUAGE APPLICABLE TO REMICS,
IT APPEARS THAT THE "SUBSTANTIALLY ALL" REQUIREMENT SHOULD BE MET IF AT ALL
TIMES THE AGGREGATE ADJUSTED BASIS OF THE NONQUALIFIED ASSETS IS LESS THAN ONE
PERCENT OF THE AGGREGATE ADJUSTED BASIS OF ALL THE FASIT'S ASSETS. THE FASIT
PROVISIONS OF THE CODE (SECTIONS 860H THROUGH 860L) ALSO
66
REQUIRE THE FASIT OWNERSHIP INTEREST AND CERTAIN "HIGH-YIELD REGULAR INTERESTS"
(DESCRIBED BELOW) TO BE HELD ONLY BY CERTAIN FULLY TAXABLE DOMESTIC
CORPORATIONS.
PERMITTED DEBT INSTRUMENTS MUST BEAR INTEREST, IF ANY, AT A
FIXED OR QUALIFIED VARIABLE RATE. PERMITTED HEDGES INCLUDE INTEREST RATE OR
FOREIGN CURRENCY NOTIONAL PRINCIPAL CONTRACTS, LETTERS OF CREDIT, INSURANCE,
GUARANTEES OF PAYMENT DEFAULT AND SIMILAR INSTRUMENTS TO BE PROVIDED IN
REGULATIONS, AND WHICH ARE REASONABLY REQUIRED TO GUARANTEE OR HEDGE AGAINST THE
FASIT'S RISKS ASSOCIATED WITH BEING THE OBLIGOR ON INTERESTS ISSUED BY THE
FASIT. FORECLOSURE PROPERTY IS REAL PROPERTY ACQUIRED BY THE FASIT IN CONNECTION
WITH THE DEFAULT OR IMMINENT DEFAULT OF A QUALIFIED MORTGAGE, PROVIDED THE
DEPOSITOR HAD NO KNOWLEDGE OR REASON TO KNOW AS OF THE DATE SUCH ASSET WAS
ACQUIRED BY THE FASIT THAT SUCH A DEFAULT HAD OCCURRED OR WOULD OCCUR.
IN ADDITION TO THE FOREGOING REQUIREMENTS, THE VARIOUS
INTERESTS IN A FASIT ALSO MUST MEET CERTAIN REQUIREMENTS. ALL OF THE INTERESTS
IN A FASIT MUST BE EITHER OF THE FOLLOWING: (A) ONE OR MORE CLASSES OF REGULAR
INTERESTS OR (B) A SINGLE CLASS OF OWNERSHIP INTEREST. A REGULAR INTEREST IS AN
INTEREST IN A FASIT THAT IS ISSUED ON OR AFTER THE STARTUP DAY WITH FIXED TERMS,
IS DESIGNATED AS A REGULAR INTEREST, AND (I) UNCONDITIONALLY ENTITLES THE HOLDER
TO RECEIVE A SPECIFIED PRINCIPAL AMOUNT (OR OTHER SIMILAR AMOUNT), (II) PROVIDES
THAT INTEREST PAYMENTS (OR OTHER SIMILAR AMOUNTS), IF ANY, AT OR BEFORE MATURITY
EITHER ARE PAYABLE BASED ON A FIXED RATE OR A QUALIFIED VARIABLE RATE, (III) HAS
A STATED MATURITY OF NOT LONGER THAN 30 YEARS, (IV) HAS AN ISSUE PRICE NOT
GREATER THAN 125% OF ITS STATED PRINCIPAL AMOUNT, AND (V) HAS A YIELD TO
MATURITY NOT GREATER THAN 5 PERCENTAGE POINTS HIGHER THAN THE RELATED APPLICABLE
FEDERAL RATE (AS DEFINED IN CODE SECTION 1274(D)). IN ORDER TO MEET THE 30 YEAR
MATURITY REQUIREMENT, THE FASIT REGULAR SECURITIES WILL BE RETIRED AND REPLACED,
TO THE EXTENT THEN-OUTSTANDING, WITH NEW REGULAR INTERESTS ON THE 30TH
ANNIVERSARY OF THE DATE OF ISSUANCE OF THE FASIT REGULAR SECURITIES. A REGULAR
INTEREST THAT IS DESCRIBED IN THE PRECEDING SENTENCE EXCEPT THAT IF FAILS TO
MEET ONE OR MORE OF REQUIREMENTS (I), (II) (IV) OR (V) IS A "HIGH-YIELD REGULAR
INTEREST." A HIGH-YIELD REGULAR INTEREST THAT FAILS REQUIREMENT (II) MUST
CONSIST OF A SPECIFIED, NONVARYING PORTION OF THE INTEREST PAYMENTS ON THE
PERMITTED ASSETS, BY REFERENCE TO THE REMIC RULES. AN OWNERSHIP INTEREST IS AN
INTEREST IN A FASIT OTHER THAN A REGULAR INTEREST THAT IS ISSUED ON THE STARTUP
DAY, IS DESIGNATED AN OWNERSHIP INTEREST AND IS HELD BY A SINGLE, FULLY-TAXABLE,
DOMESTIC CORPORATION. AN INTEREST IN A FASIT MAY BE TREATED AS A REGULAR
INTEREST EVEN IF PAYMENTS OF PRINCIPAL WITH RESPECT TO SUCH INTEREST ARE
SUBORDINATED TO PAYMENTS ON OTHER REGULAR INTERESTS OR THE OWNERSHIP INTEREST IN
THE FASIT, AND ARE DEPENDENT ON THE ABSENCE OF DEFAULTS OR DELINQUENCIES ON
PERMITTED ASSETS LOWER THAN REASONABLY EXPECTED RETURNS ON PERMITTED ASSETS,
UNANTICIPATED EXPENSES INCURRED BY THE FASIT OR PREPAYMENT INTEREST SHORTFALLS.
IF AN ENTITY FAILS TO COMPLY WITH ONE OR MORE OF THE ONGOING
REQUIREMENTS OF THE CODE FOR STATUS AS A FASIT DURING ANY TAXABLE YEAR, THE CODE
PROVIDES THAT THE ENTITY OR APPLICABLE POTION THEREOF WILL NOT BE TREATED AS A
FASIT THEREAFTER. IN THIS EVENT, ANY ENTITY THAT HOLDS MORTGAGE LOANS AND IS THE
OBLIGOR WITH RESPECT TO DEBT OBLIGATIONS WITH TWO OR MORE MATURITIES, SUCH AS
THE TRUST FUND, MAY BE TREATED AS A SEPARATE ASSOCIATION TAXABLE AS A
CORPORATION, AND THE FASIT REGULAR SECURITIES MAY BE TREATED AS EQUITY INTERESTS
THEREIN. THE LEGISLATIVE HISTORY TO THE FASIT PROVISIONS INDICATES, HOWEVER,
THAT AN ENTITY CAN CONTINUE TO BE A FASIT IF LOSS OF ITS STATUS WAS INADVERTENT,
IT TAKES PROMPT STEPS TO REQUALIFY AND OTHER REQUIREMENTS THAT MAY BE PROVIDED
IN TREASURY REGULATIONS ARE MET. LOSS OF FASIT STATUS RESULTS IN RETIREMENT OF
ALL REGULAR INTERESTS AND THEIR REISSUANCE. IF THE RESULTING INSTRUMENTS WOULD
BE TREATED AS EQUITY UNDER GENERAL TAX PRINCIPLES, CANCELLATION OF DEBT INCOME
MAY RESULT.
TAXES ON A FASIT TRUST
INCOME FROM CERTAIN TRANSACTIONS BY A FASIT, CALLED PROHIBITED
TRANSACTIONS, ARE TAXABLE TO THE HOLDER OF THE OWNERSHIP INTEREST IN A FASIT AT
A 100% RATE. PROHIBITED TRANSACTIONS GENERALLY INCLUDE (I) THE DISPOSITION OF A
PERMITTED ASSET OTHER THAN FOR (A) FORECLOSURE, DEFAULT, OR IMMINENT DEFAULT OF
A QUALIFIED MORTGAGE, (B) BANKRUPTCY OR INSOLVENCY OF THE FASIT, (C) A QUALIFIED
(COMPLETE) LIQUIDATION, (D) SUBSTITUTION FOR ANOTHER PERMITTED DEBT INSTRUMENT
OR DISTRIBUTION OF THE DEBT INSTRUMENT TO THE HOLDER OF THE OWNERSHIP INTEREST
TO REDUCE OVERCOLLATERALIZATION, BUT ONLY IF A PRINCIPAL PURPOSE OF ACQUIRING
THE DEBT INSTRUMENT WHICH IS DISPOSED OF WAS NOT THE RECOGNITION OF GAIN (OR THE
REDUCTION OF A LOSS) ON THE WITHDRAWN ASSET AS A RESULT OF AN INCREASE IN THE
MARKET VALUE OF THE ASSET AFTER ITS ACQUISITION BY THE FASIT OR (E) THE
RETIREMENT OF A CLASS OF FASIT REGULAR INTERESTS; (II) THE RECEIPT OF INCOME
FROM NONPERMITTED ASSETS; (III) THE RECEIPT OF COMPENSATION FOR SERVICES; OR
(IV) THE RECEIPT OF ANY INCOME DERIVED FROM A LOAN ORIGINATED BY THE FASIT. IT
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IS UNCLEAR THE EXTENT TO WHICH TAX ON SUCH TRANSACTIONS COULD BE COLLECTED FROM
THE FASIT TRUST DIRECTLY UNDER THE APPLICABLE STATUTES RATHER THAN FROM THE
HOLDER OF THE FASIT RESIDUAL SECURITY.
DUE TO THE COMPLEXITY OF THESE RULES, THE ABSENCE OF TREASURY
REGULATIONS AND THE CURRENT UNCERTAINTY AS TO THE MANNER TO THEIR APPLICATION TO
THE TRUST AND TO HOLDERS OF FASIT SECURITIES, IT IS PARTICULARLY IMPORTANT THAT
POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT
OF THEIR ACQUISITION OWNERSHIP AND DISPOSITION OF THE FASIT REGULAR SECURITIES.
DISCOUNT AND PREMIUM
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a BENEFICIAL OWNER'S income as it accrues
(regardless of the BENEFICIAL OWNER'S regular method of accounting) using a
constant yield method; (ii) market discount is treated as ordinary income and
must be included in a BENEFICIAL OWNER'S income as principal payments are made
on the Security (or upon a sale of a Security); and (iii) if a BENEFICIAL OWNER
so elects, premium may be amortized over the life of the Security and offset
against inclusions of interest income. These tax consequences are discussed in
greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities. The Taxpayer
Relief Act of 1997 extends application of Section 1272(a)(6) to the Grantor
Trust Securities for tax years beginning after August 5, 1997. Under these rules
(described in greater detail below), (i) the amount and rate of accrual of
original issue discount on each series of Securities will be based on (x) the
Prepayment Assumption, and (y) in the case of a Security calling for a variable
rate of interest, an assumption that the value of the index upon which such
variable rate is based remains equal to the value of that rate on the Settlement
Date, and (ii) adjustments will be made in the amount of discount accruing in
each taxable year in which the actual prepayment rate differs from the
Prepayment Assumption.
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Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Mortgage Loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
Each BENEFICIAL OWNER must include in gross income the sum of the
"daily portions" of original issue discount on its Security for each day during
its taxable year on which it held such Security. For this purpose, in the case
of an original BENEFICIAL OWNER, the daily portions of original issue discount
will be determined as follows. A calculation will first be made of the portion
of the original issue discount that accrued during each "accrual period." The
Trustee will supply, at the time and in the manner required by the IRS, to
BENEFICIAL OWNERS, brokers and middlemen information with respect to the
original issue discount accruing on the Securities. Unless otherwise disclosed
in the related Prospectus Supplement, the Trustee will report original issue
discount based on accrual periods of one month, each beginning on a payment date
(or, in the case of the first such period, the Settlement Date) and ending on
the day before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The present
value of the remaining distributions referred to in the preceding sentence will
be calculated based on (i) the yield to maturity of the Security, calculated as
of the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. BENEFICIAL OWNERS of
such Securities should consult their own tax advisors concerning the treatment
of such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A BENEFICIAL OWNER that purchases a Security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of such Security (or, in the case of a Security with original issue
discount, its adjusted issue price), will be required to allocate each principal
distribution first to accrued market discount on the Security, and recognize
ordinary income to the extent such distribution does not exceed the aggregate
amount of accrued market discount on such Security not previously included in
income. With respect to
69
Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A
BENEFICIAL OWNER that incurs or continues indebtedness to acquire a Security at
a market discount may also be required to defer the deduction of all or a
portion of the interest on such indebtedness until the corresponding amount of
market discount is included in income. In general terms, market discount on a
Security may be treated as accruing either (i) under a constant yield method or
(ii) in proportion to remaining accruals of original issue discount, if any, or
if none, in proportion to remaining distributions of interest on the Security,
in any case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to BENEFICIAL OWNERS of Securities
information necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a purchaser need not include in income any remaining original issue
discount and may elect, under section 171(c)(2) of the Code, to treat such
premium as "amortizable bond premium." If a BENEFICIAL OWNER makes such an
election, the amount of any interest payment that must be included in such
BENEFICIAL OWNER'S income for each period ending on a Payment Date will be
reduced by the portion of the premium allocable to such period based on the
Premium Security's yield to maturity. SUCH premium amortization should be made
USING CONSTANT YIELD PRINCIPLES. If such election is made by the BENEFICIAL
OWNER, the election will also apply to all bonds the interest on which is not
excludible from gross income ("fully taxable bonds") held by the BENEFICIAL
OWNER at the beginning of the first taxable year to which the election applies
and to all such fully taxable bonds thereafter acquired by it, and is
irrevocable without the consent of the IRS. If such an election is not made, (i)
such a BENEFICIAL OWNER must include the full amount of each interest payment in
income as it accrues, and (ii) the premium must be allocated to the principal
distributions on the Premium Security and, when each such distribution is
received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding such Securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a BENEFICIAL OWNER
would recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to BENEFICIAL OWNERS of such Securities in accordance with the
rules described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a BENEFICIAL OWNER
may elect to include in gross income all "interest" that accrues on the Security
by using a constant yield method. For purposes of the election, the term
"interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
acquisition premium. A BENEFICIAL OWNER should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
70
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
THE INTERNAL REVENUE SERVICE RECENTLY ISSUED FINAL REGULATIONS (THE
"WITHHOLDING REGULATIONS"), WHICH CHANGE CERTAIN OF THE RULES RELATING TO
CERTAIN PRESUMPTIONS CURRENTLY AVAILABLE RELATING TO INFORMATION REPORTING AND
BACKUP WITHHOLDING. THE WITHHOLDING REGULATIONS WOULD PROVIDE ALTERNATIVE
METHODS OF SATISFYING THE BENEFICIAL OWNERSHIP CERTIFICATION REQUIREMENT. THE
WITHHOLDING REGULATIONS ARE EFFECTIVE JANUARY 1, 1999, ALTHOUGH VALID
WITHHOLDING CERTIFICATES THAT ARE HELD ON DECEMBER 31, 1998 REMAIN VALID UNTIL
THE EARLIER OF DECEMBER 31, 1999 OR THE DUE DATE OF EXPIRATION OF THE
CERTIFICATE UNDER THE RULES AS CURRENTLY IN EFFECT.
FOREIGN INVESTORS
THE WITHHOLDING REGULATIONS WOULD REQUIRE, IN THE CASE OF
SECURITIES HELD BY A FOREIGN PARTNERSHIP, THAT (X) THE CERTIFICATION DESCRIBED
ABOVE BE PROVIDED BY THE PARTNERS RATHER THAN BY THE FOREIGN PARTNERSHIP AND (Y)
THE PARTNERSHIP PROVIDE CERTAIN INFORMATION, INCLUDING A UNITED STATES TAXPAYER
IDENTIFICATION NUMBER. SEE "--BACKUP WITHHOLDING" ABOVE. A LOOK-THROUGH RULE
WOULD APPLY IN THE CASE OF TIERED PARTNERSHIPS. NON-U.S. PERSONS SHOULD CONSULT
THEIR OWN TAX ADVISORS REGARDING THE APPLICATION TO THEM OF THE WITHHOLDING
REGULATIONS.
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security, Debt Security or a
REMIC Regular Security to, or on behalf of, a BENEFICIAL OWNER that is not a
U.S. Person generally will be exempt from U.S. federal income and withholding
taxes. The term "U.S. Person" means a citizen or resident of the United States,
a corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. federal income tax regardless of the source of its income, or
a trust if a court within the United States can exercise primary supervision
over its administration and at least one United States fiduciary has the
authority to control all substantial decisions of the trust. This exemption is
applicable provided (a) the BENEFICIAL OWNER is not subject to U.S. tax as a
result of a connection to the United States other than ownership of the
Security, (b) the BENEFICIAL OWNER signs a statement under penalties of perjury
that certifies that such BENEFICIAL OWNER is not a U.S. Person, and provides the
name and address of such BENEFICIAL OWNER, and (c) the last U.S. Person in the
chain of payment to the BENEFICIAL OWNER receives such statement from such
BENEFICIAL OWNER or a financial institution holding on its behalf and does not
have actual knowledge that such statement is false. BENEFICIAL OWNERS should be
aware that the IRS might take the position that this exemption does not apply to
a BENEFICIAL OWNER that also owns 10% or more of the REMIC Residual Securities
of any REMIC trust, or to a BENEFICIAL OWNER that is a "controlled foreign
corporation" described in section 881(c)(3)(C) of the Code.
REMIC Residual Securities AND FASIT OWNERSHIP SECURITIES
Amounts distributed to a BENEFICIAL OWNER of a REMIC Residual Security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30% (or lower treaty rate) withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC Residual Security OR A FASIT OWNERSHIP SECURITY TO A
BENEFICIAL OWNER that is not a U.S. Person generally will be exempt from U.S.
federal income and withholding tax, subject to the same conditions applicable to
distributions on Grantor Trust Securities, Debt Securities and REMIC Regular
Securities, as described above, but only to the extent that the obligations
directly underlying the REMIC OR FASIT Trust that issued the REMIC Residual
Security OR FASIT OWNERSHIP SECURITY (e.g., Mortgage Loans or regular interests
in another REMIC OR FASIT) were issued after July 18, 1984. In no case will any
portion of REMIC OR FASIT income that constitutes an excess inclusion be
entitled to any
71
exemption from the withholding tax or a reduced treaty rate for withholding. See
"--REMIC Securities--Taxation of BENEFICIAL OWNERS of REMIC Residual
Securities--Excess Inclusions" herein.
PARTNERSHIP INTERESTS
DEPENDING UPON THE PARTICULAR TERMS OF THE TRUST AGREEMENT AND
SALE AND SERVICING AGREEMENT, A TRUST MAY 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. IF THE TRUST IS CONSIDERED TO BE ENGAGED IN A TRADE
OR BUSINESS IN THE UNITED STATES FOR SUCH PURPOSES AND THE TRUST IS TREATED AS A
PARTNERSHIP, THE INCOME OF THE TRUST DISTRIBUTABLE TO A NON-U.S. PERSON WOULD BE
SUBJECT TO FEDERAL WITHHOLDING TAX. ALSO, IN SUCH CASES, A NON-U.S. BENEFICIAL
OWNER OF A PARTNERSHIP INTEREST THAT IS A CORPORATION MAY BE SUBJECT TO THE
BRANCH PROFITS TAX. IF THE TRUST IS NOTIFIED THAT A BENEFICIAL OWNER OF A
PARTNERSHIP INTEREST IS A FOREIGN PERSON, THE TRUST MAY WITHHOLD AS IF IT WERE
ENGAGED IN A TRADE OR BUSINESS IN THE UNITED STATES IN ORDER TO PROTECT THE
TRUST FROM POSSIBLE ADVERSE CONSEQUENCES OF A FAILURE TO WITHHOLD. A FOREIGN
HOLDER GENERALLY WOULD BE ENTITLED TO FILE WITH THE IRS A CLAIM FOR REFUND WITH
RESPECT TO WITHHELD TAXES, TAKING THE POSITION THAT NO TAXES WERE DUE BECAUSE
THE TRUST WAS NOT IN A U.S. TRADE OR BUSINESS.
FASIT REGULAR SECURITIES
CERTAIN "HIGH-YIELD" FASIT REGULAR SECURITIES MAY NOT BE SOLD
TO OR BENEFICIALLY OWNED BY NON-U.S. PERSONS. ANY SUCH PURPORTED TRANSFER WILL
BE NULL AND VOID AND, UPON THE TRUSTEE'S DISCOVERY OF ANY PURPORTED TRANSFER IN
VIOLATION OF THIS REQUIREMENT, THE LAST PRECEDING OWNER OF SUCH HIGH-YIELD FASIT
REGULAR SECURITIES WILL BE RESTORED TO OWNERSHIP THEREOF AS COMPLETELY AS
POSSIBLE. SUCH LAST PRECEDING OWNER WILL, IN ANY EVENT, BE TAXABLE ON ALL INCOME
WITH RESPECT TO SUCH HIGH-YIELD FASIT REGULAR SECURITIES FOR FEDERAL INCOME TAX
PURPOSES. THE POOLING AND SERVICING AGREEMENT WILL PROVIDE THAT, AS A CONDITION
TO TRANSFER OF A HIGH-YIELD FASIT REGULAR SECURITY, THE PROPOSED TRANSFEREE MUST
FURNISH AN AFFIDAVIT AS TO ITS STATUS AS A U.S. PERSON AND OTHERWISE AS A
PERMITTED TRANSFEREE.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
GENERAL
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan (a "Plan") and certain individual
retirement arrangements from engaging in certain transactions involving "plan
assets" with persons that are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the Plan, unless a statutory or
administrative exemption applies to the transaction. ERISA and the Code also
prohibit generally certain actions involving conflicts of interest by persons
who are fiduciaries of such Plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons. In addition, investments by Plans are
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
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 Securities without regard to the ERISA considerations discussed
below, subject to the provisions of other applicable federal, state and local
law. Any such plan which is qualified and exempt from taxation under Section
401(a) and 501(a) of the Code, however, is subject to the prohibited transaction
rules set forth in Section 503 of the Code.
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Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan
(including an individual retirement arrangement) that purchased Securities, if
the assets of the Trust were deemed to be assets of the Plan. Under a regulation
(the "Plan Assets Regulation") issued by the United States Department of Labor
(the "DOL"), the assets of the Trust would be treated as plan assets of a Plan
for the purposes of ERISA and the Code only if the Plan acquired an equity
interest in the Trust and none of the exceptions contained in the Plan Assets
Regulation were applicable. An "equity interest" is defined under the Plan
Assets Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. In addition, in John Hancock Mutual Life Insurance Co. v. Harris Trust
and Savings Bank, 510 U.S. 86 (1993), the United States Supreme Court ruled that
assets held in an insurance company's general account may be deemed to be "plan
assets" for ERISA purposes under certain circumstances. Therefore, in the
absence of an exemption, the purchase, sale or holding of a Security by a Plan
(including certain individual retirement arrangements) subject to Section 406 of
ERISA or Section 4975 of the Code might result in prohibited transactions and
the imposition of excise taxes and civil penalties.
CERTIFICATES
The DOL has issued to various underwriters individual prohibited
transaction exemptions (the "Underwriter Exemptions"), which generally exempt
from the application of the prohibited transaction provisions of Section 406(a),
Section 406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and the excise
taxes imposed pursuant to Sections 4975(a) and (b) of the Code, certain
transactions with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of secured receivables, secured loans and other secured obligations that meet
the conditions and requirements of the Underwriter Exemptions. The Underwriter
Exemptions will only be available for Securities that are Certificates.
Among the conditions that must be satisfied in order for the
Underwriter Exemptions to apply to offered certificates are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least
as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating
at the time of such acquisition that is one of the three
highest generic rating categories from Standard & Poor's,
Moody's, Duff & Phelps Credit Rating Co. ("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the
certificates represents not more than reasonable compensation
for underwriting the certificates; the sum of all payments
made to and retained by the originators and the sponsor
pursuant to the assignment of the loans to the trust estate
represents not more than the fair market value of such loans;
the sum of all payments made to and retained by any servicer
represents not more than reasonable compensation for such
person's services under the pooling and servicing agreement
and reimbursement of such person's reasonable expenses in
connection therewith;
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933; and
(7) in the event that all of the obligations used to fund the
trust have not been transferred to the trust on the closing
date, additional obligations of the types specified in the
prospectus supplement and/or pooling and servicing agreement
having an aggregate value equal to no more
73
than 25% of the total principal amount of the certificates
being offered by the trust may be transferred to the trust, in
exchange for amounts credited to the account funding the
additional obligations, within a funding period of no longer
than 90 days or 3 months following the closing date.
The trust estate must also meet the following requirements:
(i) the corpus of the trust estate must consist solely of assets
of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of
Standard & Poor's, Moody's, Fitch or D&P for at least one year
prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of
certificates.
Moreover, the Underwriter Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (iv) immediately after the acquisition, no more
than twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Underwriter Exemptions do not apply to Plans sponsored by the Sponsor, the
Underwriters, the Trustee, the Master Servicer, any other servicer, any obligor
with respect to Mortgage Loans included in the Trust Estate constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the Trust Estate, or any affiliate of such parties (the "Restricted Group").
In addition to the Underwriter Exemptions, the DOL has issued
Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an exemption
for certain transactions involving the sale or exchange of certain residential
mortgage pool pass-through certificates by Plans and for transactions in
connection with the servicing and operation of the mortgage pool.
NOTES
The Underwriter Exemptions will not be available for Securities which
are Notes. However, if the Notes are treated as indebtedness without substantial
equity features, the Trust's assets would not be deemed assets of a Plan. If the
Notes are treated as having substantial equity features, the purchase, holding
and resale of the Notes could result in a transaction that is prohibited under
ERISA or the Code. The acquisition or holding of the Notes by or on behalf of a
Plan could nevertheless give rise to a prohibited transaction, if such
acquisition and holding of Notes by or on behalf of a Plan were deemed to be a
prohibited loan to a party in interest with respect to such Plan. Certain
exemptions from such prohibited transaction rules could be applicable to the
purchase and holding of Notes by a Plan, depending on the type and circumstances
of the plan fiduciary making the decision to acquire such Notes. Included among
these exemptions are: PTCE 84-14, regarding certain transactions effected by
"qualified professional asset managers"; PTCE 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
91-38, regarding certain transactions entered into by bank collective investment
funds; PTCE 95-60, regarding certain transactions entered into by insurance
company general accounts; and PTCE 96-23, regarding certain transactions
effected by "in-house asset managers". Each purchaser and each transferee of a
Note that is treated as debt for purposes of the Plan Assets Regulation may be
required to represent and warrant that its
74
purchase and holding of such Note will be covered by one of the exemptions
listed above or by another Department of Labor Class Exemption.
CONSULTATION WITH COUNSEL
The Prospectus Supplement for each series of Securities will provide
further information which Plans should consider before purchasing the offered
Securities. A Plan fiduciary considering the purchase of Securities should
consult its tax and/or legal advisors regarding whether the assets of the Trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. 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. The sale of Securities to a Plan is in no respect a
representation by the Sponsor or the Underwriters that this investment meets all
relevant requirements with respect to investments by Plans generally or any
particular Plan or that this investment is appropriate for Plans generally or
any particular Plan.
LEGAL INVESTMENT
The related Prospectus Supplement will describe whether or not the
Securities will constitute "mortgage-related securities" within the meaning of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through First Union
Capital Markets Corp. ("First Union") or one or more other firms that may be
designated at the time of each offering of such Securities. The participation of
First Union in any offering will comply with Schedule E to the bylaws of the
National Association of Securities Dealers, Inc. The Prospectus Supplement
relating to each Series of Securities will set forth the specific terms of the
offering of such Series of Securities and of each Class within such Series, the
names of the underwriters, the purchase price of the Securities, the proceeds to
the Depositor from such sale, any securities exchange on which the Securities
may be listed, and, if applicable, the initial public offering prices, the
discounts and commissions to the underwriters and any discounts and concessions
allowed or reallowed to certain dealers. The place and time of delivery of each
Series of Securities will also be set forth in the Prospectus Supplement
relating to such Series. First Union is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters in connection with the Securities will be passed
upon for the Depositor by Dewey Ballantine LLP, New York, New York or such other
counsel identified in the related Prospectus Supplement.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A new Trust will be formed to own the Primary Assets and to issue each
Series of Securities. Each such Trust will have no assets or obligations prior
to the issuance of the Securities and will not engage in any activities other
than those described herein. Accordingly, no financial statements with respect
to such Trusts will be included in this Prospectus or any Prospectus Supplement.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
75
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "supplemental Glossary"
in the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Mortgage Loan and for any other
purposes specified in the related Prospectus Supplement.
"Agreement" means, with respect to a Series of Certificates, the
Pooling and Servicing Agreement or Trust Agreement, and, with respect to a
Series of Notes, the Indenture and the Servicing Agreement, as the context
requires.
"Appraised Value" means, with respect to property securing a Mortgage
Loan, the lesser of the appraised value determined in an appraisal obtained at
origination of the Mortgage Loan or sales price of such property at such time.
"Asset Group" means, with respect to the Primary Assets and other
assets comprising the Trust Fund of a Series, a group of such Primary Assets and
other assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per
annum rate or rates specified in the related Prospectus Supplement for a
particular period or periods as the "Assumed Reinvestment Rate" for funds held
in any fund or account for the Series.
"Available Distribution Amount" means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States
Code 101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city
or cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificate" means the Asset-Backed Certificates.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Securities of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and
regulations (including proposed regulations) or other pronouncements of the
Internal Revenue Service promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
76
"Combined Loan-to-Value Ratio" means, with respect to a Mortgage Loan,
the ratio determined as set forth in the related Prospectus Supplement taking
into account the amounts of any related senior mortgage loans on the related
Mortgaged Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which
all or a portion of the interest accrued thereon is added to the principal
balance of such Security on each Distribution Date, through the Accrual
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Association" means the person(s) appointed or elected by
the Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Loan" means a Mortgage Loan secured by a Mortgage on a
Condominium Unit (together with its appurtenant interest in the common
elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership securities in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units and which is described in Section 216
of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a
Cooperative Dwelling and secured by an assignment by the borrower
(tenant-stockholder) or security interest in shares issued by the applicable
Cooperative.
"Credit Enhancement" means the credit enhancement for a Series, if any,
specified in the related Prospectus Supplement.
"Cut-off Date" means the date designated as such in the related
Prospectus Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Mortgage Loan during a specified period over
the amount of interest required to be paid by an obligor on such Mortgage Loan
on the related Due Date.
"Deposit Agreement" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund or
account, guaranteeing a minimum or a fixed rate of return on the investment of
moneys deposited therein.
77
"Depositor" means Home Equity Securitization Corp.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or Class
in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Credit Enhancer" means the provider of the Credit Enhancement for a
Series specified in the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Mortgage Loan, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of
Notes of a Series, the date no later than which principal thereof will be fully
paid and with respect to a Class of Certificates of a Series, the date after
which no Certificates of such Class will remain outstanding, in each case based
on the assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" means the person or entity in whose name a Security is
registered.
"Home Improvements" means the home improvements financed by a Mortgage
Loan.
"HUD" means the United States Department of Housing and Urban
Development.
"Indenture" means the indenture relating to a Series of Notes between
the Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to Mortgage
Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Mortgage Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely
or primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
78
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Mortgage Loan.
"Liquidation Proceeds" means amounts received by the Servicer in
connection with the liquidation of a Mortgage Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by a Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to a Mortgage Loan, the ratio
determined as set forth in the related Prospectus Supplement.
"Minimum Rate" means the lifetime minimum Loan Rate during the life of
each adjustable rate Loan.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Modification" means a change in any term of a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgaged Property" means residential properties securing a Mortgage
Loan.
"Mortgage Loan" means a loan secured by a Mortgaged Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Mortgage Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of
Securities of a Series on which payments of principal are made in accordance
with a schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Securities" means Securities entitled to receive
payments of principal and interest and an additional return on investment as
described in the related Prospectus Supplement.
"Pass-Through Security" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Security" means Regular Interest Securities and certain
Debt Securities that are subject to acceleration due to prepayment on the
underlying Primary Assets.
79
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing
agreement relating to a Series of Certificates among the Depositor, the Servicer
(if such Series relates to Mortgage Loans) and the Trustee.
"Primary Assets" means the Private Securities, the Mortgage Loans, as
the case may be, which are included in the Trust Fund for such Series. A Primary
Asset refers to a specific Private Security or Mortgage Loan, as the case may
be.
"Principal Balance" means, with respect to a Primary Asset and as of a
Due Date, the original principal amount of the Primary Asset, plus the amount of
any Deferred Interest added to such principal amount, reduced by all payments,
both scheduled or otherwise, received on such Primary Asset prior to such Due
Date and applied to principal in accordance with the terms of the Primary Asset.
"Principal Only Securities" means a Class of Securities entitled solely
or primarily to distributions of principal and identified as such in the
Prospectus Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"PS Agreement" means the pooling and servicing agreement, indenture,
trust agreement or similar agreement pursuant to which a Private Security is
issued.
"PS Servicer" means the servicer of the Underlying Loans.
"PS Sponsor" means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
"PS Trustee" means the trustee designated under a PS Agreement.
"Qualified Insurer" means a mortgage guarantee or insurance company
duly qualified as such under the laws of the states in which the Mortgaged
Properties are located duly authorized and licensed in such states to transact
the applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the
related Prospectus Supplement for a Series for which a REMIC election is made,
to serve as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Mortgage
Loan, beneficial ownership of which has been acquired upon foreclosure, deed in
lieu of foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
80
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount
or percentage specified in the related Prospectus Supplement which is not
included in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Primary Asset.
"Securities" means the Notes or the Certificates.
"Originator" means the originator or acquiror of the Primary Assets to
the Depositor identified in the related Prospectus Supplement for a Series.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the
holders' rights to receive distributions of principal and interest are senior to
the rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Mortgage Loans,
the Person if any, designated in the related Prospectus Supplement to service
Mortgage Loans for that Series, or the successors or assigns of such Person.
"Single Family Property" means property securing a Mortgage Loan
consisting of one-to four-family attached or detached residential housing,
including Cooperative Dwellings.
"Stripped Securities" means Pass-Through Securities representing
interests in Primary Assets with respect to which all or a portion of the
principal payments have been separated from all or a portion of the interest
payments.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Credit Enhancement and all other property and interest
held by or pledged to the Trustee pursuant to the related Agreement for such
Series.
"UCC" means the Uniform Commercial Code.
"Underlying Loans" means loans of the type eligible to be Mortgage
Loans underlying or securing Private Securities.
81
"Variable Interest Security" means a Security on which interest accrues
at a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
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TABLE OF CONTENTS
Page Page
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SUMMARY OF PROSPECTUS 5
RISK FACTORS
ASSET BACKED NOTES AND ASSET BACKED CERTIFICATES, ISSUABLE IN SERIES.............................................1
PROSPECTUS SUPPLEMENT.............................................................................................3
REPORTS TO HOLDERS................................................................................................3
AVAILABLE INFORMATION.............................................................................................3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................................................4
SUMMARY OF PROSPECTUS.............................................................................................5
RISK FACTORS.....................................................................................................17
AN INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT, WHICH MAY RESULT
IN THE HOLDER HOLDING SUCH INVESTMENT TO MATURITY.............................................................17
THE ASSETS OF THE TRUST FUND, AS WELL AS ANY APPLICABLE CREDIT ENHANCEMENT,
WILL BE LIMITED AND, IF SUCH ASSETS AND/OR CREDIT ENHANCEMENT BECOME
INSUFFICIENT TO SERVICE THE RELATED SECURITIES, LOSSES MAY RESULT.............................................17
CREDIT ENHANCEMENT WILL BE LIMITED IN AMOUNT AND SCOPE OF COVERAGE AND MAY
NOT BE SUFFICIENT TO COVER LOSSES.............................................................................17
THE TIMING OF PRINCIPAL PAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE SECURITIES.................18
PREPAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE SECURITIES......................................18
AS A RESULT OF OPTIONAL REDEMPTION OR REPURCHASE OR AUCTION SALE, HOLDERS COULD BE FULLY PAID SIGNIFICANTLY
EARLIER THAN WOULD OTHERWISE BE THE CASE......................................................................19
MORTGAGE LOANS WITH BALLOON AND NON-TRADITIONAL PAYMENT METHODS MAY CREATE GREATER DEFAULT RISK...............19
JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND LOSSES..........................................19
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES.........................................................19
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES, IF PARTICULAR REGIONS EXPERIENCE
DOWNTURNS.....................................................................................................20
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT...................................................................20
ENVIRONMENTAL CONDITIONS ON THE PROPERTY MAY GIVE RISE TO LIABILITY...........................................20
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND INTEREST ON THE MORTGAGE LOANS.21
RATINGS ARE NOT RECOMMENDATIONS. A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY
IMPACT THE RATING OF THE SECURITIES...........................................................................21
A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY IMPACT THE RATING OF THE SECURITIES...21
ERISA MAY RESTRICT THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SECURITIES...................................21
PURCHASE OF MORTGAGE LOANS OR UNDERLYING LOANS FROM AFFILIATES MAY LEAD TO CONFLICTS OF INTEREST..............21
DESCRIPTION OF THE SECURITIES....................................................................................22
GENERAL.......................................................................................................22
PAYMENTS OF INTEREST..........................................................................................22
PAYMENTS OF PRINCIPAL.........................................................................................23
FINAL SCHEDULED DISTRIBUTION DATE.............................................................................23
SPECIAL REDEMPTION............................................................................................23
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION..................................................................24
WEIGHTED AVERAGE LIFE OF THE SECURITIES.......................................................................24
THE TRUST FUNDS..................................................................................................25
GENERAL.......................................................................................................25
THE MORTGAGE LOANS............................................................................................26
PRIVATE SECURITIES............................................................................................29
COLLECTION AND DISTRIBUTION ACCOUNTS..........................................................................30
PRE-FUNDING ACCOUNTS..........................................................................................30
CREDIT ENHANCEMENT...............................................................................................31
SUBORDINATE SECURITIES........................................................................................31
INSURANCE.....................................................................................................31
RESERVE FUNDS.................................................................................................33
MINIMUM PRINCIPAL PAYMENT AGREEMENT...........................................................................33
i
DEPOSIT AGREEMENT.............................................................................................33
SERVICING OF MORTGAGE LOANS......................................................................................33
GENERAL.......................................................................................................33
COLLECTION PROCEDURES; ESCROW ACCOUNTS........................................................................33
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT.......................................................34
ADVANCES AND LIMITATIONS THEREON..............................................................................35
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES..............................................36
REALIZATION UPON DEFAULTED MORTGAGE LOANS.....................................................................37
ENFORCEMENT OF DUE-ON-SALE CLAUSES............................................................................37
SERVICING COMPENSATION AND PAYMENT OF EXPENSES................................................................37
EVIDENCE AS TO COMPLIANCE.....................................................................................38
CERTAIN MATTERS REGARDING THE SERVICER........................................................................38
THE AGREEMENTS...................................................................................................39
ASSIGNMENT OF PRIMARY ASSETS..................................................................................39
REPORTS TO HOLDERS............................................................................................41
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT...............................................................42
THE TRUSTEE...................................................................................................44
DUTIES OF THE TRUSTEE.........................................................................................44
RESIGNATION OF TRUSTEE........................................................................................45
AMENDMENT OF AGREEMENT........................................................................................45
VOTING RIGHTS.................................................................................................45
LIST OF HOLDERS...............................................................................................45
FORM OF SECURITIES............................................................................................46
REMIC ADMINISTRATOR...........................................................................................47
TERMINATION...................................................................................................47
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..........................................................................48
GENERAL.......................................................................................................49
ENFORCEMENT OF THE NOTE.......................................................................................49
SECURITY INTERESTS............................................................................................50
FORECLOSURE ON MORTGAGES......................................................................................50
RIGHTS OF REDEMPTION..........................................................................................51
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES..................................................................52
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS.........................................................................52
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES............................................................53
EQUITABLE LIMITATIONS ON REMEDIES.............................................................................53
APPLICABILITY OF USURY LAWS. TITLE V OF THE DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT OF
1980, ENACTED IN MARCH 1980 ("TITLE V"), PROVIDES THAT STATE USURY LIMITATIONS SHALL NOT APPLY TO CERTAIN
TYPES OF RESIDENTIAL FIRST MORTGAGE LOANS ORIGINATED BY CERTAIN LENDERS AFTER MARCH 31, 1980. SIMILAR FEDERAL
STATUTES WERE IN EFFECT WITH RESPECT TO MORTGAGE LOANS MADE DURING THE FIRST THREE MONTHS OF 1980. THE OTS,
AS SUCCESSOR TO THE FEDERAL HOME LOAN BANK BOARD, IS AUTHORIZED TO ISSUE RULES AND REGULATIONS AND TO PUBLISH
INTERPRETATIONS GOVERNING IMPLEMENTATION OF TIDE V. TIDE V AUTHORIZES ANY STATE TO REIMPOSE INTEREST RATE
LIMITS BY ADOPTING, BEFORE APRIL 1, 1983, A STATE LAW, OR BY CERTIFYING THAT THE VOTERS OF SUCH STATE HAVE
VOTED IN FAVOR OF ANY PROVISION, CONSTITUTIONAL OR OTHERWISE, WHICH EXPRESSLY REJECTS AN APPLICATION OF THE
FEDERAL LAW. FIFTEEN STATES ADOPTED SUCH A LAW PRIOR TO THE APRIL 1, 1983 DEADLINE. IN ADDITION, EVEN WHERE
TITLE V IS NOT SO REJECTED, ANY STATE IS AUTHORIZED BY THE LAW TO ADOPT A PROVISION LIMITING DISCOUNT POINTS
OR OTHER CHARGES ON MORTGAGE LOANS COVERED BY TITLE V. .......................................................53
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940...............................................................54
THE DEPOSITOR....................................................................................................55
GENERAL.......................................................................................................55
USE OF PROCEEDS..................................................................................................55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................................................55
GENERAL.......................................................................................................55
GRANTOR TRUST SECURITIES......................................................................................56
REMIC SECURITIES..............................................................................................57
ii
DEBT SECURITIES...............................................................................................63
DISCOUNT AND PREMIUM..........................................................................................68
BACKUP WITHHOLDING............................................................................................71
FOREIGN INVESTORS.............................................................................................71
STATE TAX CONSIDERATIONS.........................................................................................72
ERISA CONSIDERATIONS.............................................................................................72
LEGAL INVESTMENT.................................................................................................75
PLAN OF DISTRIBUTION.............................................................................................75
LEGAL MATTERS....................................................................................................75
FINANCIAL INFORMATION............................................................................................75
GLOSSARY OF TERMS................................................................................................76
iii
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
Actuarial Mortgage Loan..................................................... 27
Agreement.....................................................................5
ARM Loans................................................................... 18
Available Interest Amount................................................... 23
Balloon Loan................................................................. 9
bankruptcy bond............................................................. 32
Book-Entry Securities....................................................... 46
Business Day................................................................ 12
Capitalized Interest Account................................................ 12
Cede........................................................................ 46
CERCLA...................................................................... 20
Certificate Schedule........................................................ 40
Certificates...............................................................1, 5
Class.........................................................................2
Code........................................................................ 56
Collection Account...........................................................10
Combined Loan-to-Value Ratio..................................................9
Commission....................................................................3
Condominium Units........................................................... 26
Cooperative Dwellings....................................................... 26
Credit Enhancement...........................................................12
Credit Enhancer............................................................. 11
Current Interest Rates....................................................... 9
Custodian................................................................... 40
Cut-Off Date..................................................................8
D&P......................................................................... 73
Debt Securities..........................................................14, 56
Deleted Primary Asset....................................................... 41
Deposit Agreement............................................................13
Depositor.....................................................................1
Depositor Securities........................................................ 55
Distribution Account........................................................ 11
Distribution Date.............................................................2
DOL......................................................................... 73
Eligible Investments.....................................................12, 30
ERISA....................................................................... 15
Escrow Accounts............................................................. 34
Event of Default............................................................ 39
Exchange Act..................................................................4
FASIT....................................................................14, 56
FASIT High-Yield Securities..................................................14
FASIT OWNERSHIP SECURITY.....................................................14
FASIT Regular Securities.....................................................14
FASIT SECURITIES.............................................................56
FDIC........................................................................ 34
FHA......................................................................... 26
FHLMC....................................................................... 53
Final Scheduled Distribution Date.............................................6
First Union................................................................. 75
fully taxable bonds......................................................... 70
Garn-St. Germain Act........................................................ 53
Grantor Trust............................................................... 56
Grantor Trust Securities.................................................... 14
Holders.......................................................................3
Indenture................................................................... 22
i
Indirect Participant........................................................ 46
IRS......................................................................... 58
Issuer........................................................................5
Lifetime Rate Caps............................................................9
Liquidation Proceeds........................................................ 34
Loan Rate.................................................................... 9
Loan Schedule............................................................... 40
Loan-to-Value Ratio...........................................................9
Minimum Principal Payment Agreement.........................................13
Modification................................................................ 37
Mortgage Loans........................................................ 1, 8, 26
MORTGAGED PROPERTY...........................................................35
Notes......................................................................1, 5
Notional Amount...............................................................6
Originator....................................................................1
OTS......................................................................... 53
Owner Trust...................................................................5
Owner Trustee.................................................................6
PAC...........................................................................5
Participants................................................................ 46
PARTNERSHIP..................................................................56
Partnership Interests....................................................14, 56
Physical Certificates....................................................... 46
Plan........................................................................ 73
Plan Assets Regulation...................................................... 73
Pool..........................................................................1
Pooling and Servicing Agreement............................................. 22
Pre-Funded Amount............................................................11
Pre-Funding Account......................................................... 11
Pre-Funding Period...........................................................11
Premium Security............................................................ 70
Prepayment Assumption....................................................... 69
Primary Assets................................................................1
Prospectus SUPPLEMENTS.......................................................1
PS Agreement................................................................ 29
PS Servicer..................................................................10
PS Sponsor...................................................................10
PS Trustee...................................................................10
PTCE........................................................................ 74
Qualifying Substitute Primary Asset......................................... 41
Rating Agency................................................................12
REMIC....................................................................14, 56
REMIC Regular Securities.................................................... 14
REMIC Regulations........................................................... 58
REMIC Residual Securities....................................................14
REMIC Securities............................................................ 56
Reserve Fund................................................................ 13
Restricted Group............................................................ 74
Retained Interests.......................................................... 40
Rule of 78s Mortgage Loan................................................... 27
Securities....................................................................1
Security Registrar.......................................................... 46
Series........................................................................1
Servicer......................................................................1
Servicing Agreement......................................................... 25
Servicing Fee............................................................... 14
Settlement Date............................................................. 59
Simple Interest Mortgage Loan............................................... 27
Single Family MORTGAGED Properties.......................................... 26
SMMEA....................................................................... 15
Special Redemption Date..................................................... 23
ii
Title I Program............................................................. 28
TITLE V..................................................................... 54
Trust Agreement...............................................................5
Trust Fund....................................................................1
Trustee....................................................................5, 6
UCC......................................................................... 46
Underlying Loans..............................................................9
Underwriter Exemptions...................................................... 73
iii
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
Securities and Exchange Commission registration fee.............................................. $295
Printing expenses................................................................................ 35,000
Accounting fees and expenses..................................................................... 30,000
Legal fees and expenses.......................................................................... 200,000
Fees and expenses (including legal fees) for qualifications under state securities laws.......... 10,000
Trustee's fees and expenses...................................................................... 5,000
Rating Agency fees and expenses.................................................................. 40,000
Miscellaneous.................................................................................... 200,000
-------
Total............................................................................................ $520,295
========
All amounts except the Securities and Exchange Commission registration
fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 55-8-50 through 55-8-58 of the revised North Carolina Business
Corporation Act (the "NCBCA") contain specific provisions relating to
indemnification of directors and officers of North Carolina corporations. In
general, the statute provides that (i) a corporation must indemnify a director
or officer who is wholly successful in his defense of a proceeding to which he
is a party because of his status as such, unless limited by the articles of
incorporation, and (ii) a corporation may indemnify a director or officer if he
is not wholly successful in such defense, if it is determined as provided in the
statute that the director or officer meets a certain standard of conduct,
provided when a director or officer is liable to the corporation, the
corporation may not indemnify him. The statute also permits a director or
officer of a corporation who is a party to a proceeding to apply to the courts
for indemnification, unless the articles of incorporation provide otherwise, and
the court may order indemnification under certain circumstances set forth in the
statute. The statute further provides that a corporation may in its articles of
incorporation, by contract or by resolution provide indemnification in addition
to that provided by the statute, subject to certain conditions set forth in the
statute.
The Articles of Incorporation of the Registrant provide that the
personal liability of each director of the corporation is eliminated to the
fullest extent permitted by the provisions of the NCBCA, as presently in effect
or as amended. No amendment, modification or repeal of this provision of the
Articles of Incorporation shall adversely affect any right or protection of a
director that exists at the time of such amendment, modification or repeal.
First Union Corporation maintains directors and officers liability
insurance for the benefit of its subsidiaries, which provides coverage of up to
$80,000,000, subject to certain deductible amounts. In general, the policy
insures (i) the Registrant's directors and, in certain cases, its officers
against loss by reason of any of their wrongful acts, and/or (ii) the Registrant
against loss arising from claims against the directors and officers by reason of
their wrongful acts, all subject to the terms and conditions contained in the
policy.
In connection with an agreement between the Registrant and Peter H.
Sorensen,
4
an independent director of the Registrant, the Registrant has agreed to
indemnify and hold harmless Peter H. Sorensen from any and all loss, claim,
damage or cause of action, including reasonable attorneys' fees related thereto
(collectively, "Claims"), incurred by Peter H. Sorensen in the performance of
his duties as a director; provided, however, that Peter H. Sorensen shall not be
so indemnified for such Claims if they arise from his own negligence or willful
misconduct.
Under agreements which may be entered into by the Registrant, certain
controlling persons, directors and officers of the Registrant may be entitled to
indemnification by underwriters and agents who participate in the distribution
of Securities covered by the Registration Statement against certain liabilities,
including liabilities under the Securities Act.
ITEM 16. EXHIBIT SCHEDULE
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement
1.1 Form of Underwriting Agreement between the Registrant and the
Underwriter named therein, relating to the distribution of the
Securities*
3.1 Certificate of Incorporation of Home Equity Securitization
Corp.*
3.2 By-laws of Home Equity Securitization Corp.*
4.1 Form of Pooling and Servicing Agreement*
4.2 Form of Indenture*
4.3 Form of Sale and Servicing Agreement*
4.4 Form of Mortgage Loan Purchase Agreement*
4.5 Form of Trust Agreement*
5.1 Opinion of Dewey Ballantine LLP as to legality of the
securities being issued
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters
23.3 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1 and
Exhibit 8.1)
24.1 Power of Attorney (included on signature page of this
Pre-Effective Amendment No. 1 to the Registration Statement)
99.1 Form of Prospectus Supplement
99.2 Form of Prospectus Supplement
* Filed in previous filing
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts
or events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities
5
offered (if the total dollar value of securities
offered would not exceed that which was registered)
and any deviation from the low or high and of the
estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20
percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information
with respect to the plan of distribution not
previously disclosed in the registration statement or
any material change to such information in the
registration statement;
provided, however, that paragraphs (i) and (ii) do
not apply if the information required to be included
in the post-effective amendment is contained in
periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
6
(d) The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee to act
under subsection (a) of section 310 of the Trust Indenture Act ("Act") in
accordance with the rules and regulations prescribed by the Commission under
section 305(b)(2) of the Act.
7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Charlotte, North Carolina on the 14th day of
May, 1998.
HOME EQUITY SECURITIZATION CORP.
By: /s/ Wallace Saunders
---------------------------------------
NAME: Wallace Saunders
TITLE Assistant Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 4 to the Registration Statement has been signed by
the following persons in the capacities indicated on May 14, 1998.
SIGNATURE TITLE
By: *
_________________________
NAME: Brian E. Simpson Chairman and President
By: *
__________________________
NAME:.Carolyn Eskridge Senior Vice President
By: *
___________________________
NAME: Peter H. Sorensen Independent Director
*by Wallace Saunders as his true and lawful attorney-in-fact and agent.
8
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(a) Any required financial statements of a provider of credit
enhancement will be included as an appendix to the related
Prospectus Supplement
1.1 Form of Underwriting Agreement between the Registrant and the
Underwriter named therein, relating to the distribution of the
Securities*
3.1 Certificate of Incorporation of Home Equity Securitization
Corp.*
3.2 By-laws of Home Equity Securitization Corp.*
4.1 Form of Pooling and Servicing Agreement*
4.2 Form of Indenture*
4.3 Form of Sale and Servicing Agreement*
5.1 Opinion of Dewey Ballantine LLP as to legality of the
securities being issued
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters
23.3 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1 and
Exhibit 8.1)
24.1 Power of Attorney *
99.1 Form of Prospectus Supplement
99.2 Form of Prospectus Supplement
* Filed in a previous filing
9