AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1998
Registration No.333-64775
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
PRE-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RESIDENTIAL ASSET FUNDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
301 South College Street
NORTH CAROLINA Charlotte, North Carolina 28202-6001 56-2064715
(State or other (Address, including zip code, I.R.S. Employer
jurisdiction of incorporation and telephone number, Identification Number)
or organization) including area code, of
registrant's principal
executive offices)
Marion A. Cowell, Jr., Esq. Copy to:
Executive Vice President, Secretary and Christopher J. DiAngelo
General Counsel Dewey Ballantine LLP
First Union Corporation 1301 Avenue of the Americas
One First Union Center New York, New York 10019-6092
301 South College Street
Charlotte, North Carolina 28202-6001
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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 Proposed Maximum Proposed Maximum Amount of
of securities Amount to be Aggregate Price Per Aggregate Offering Registration
registered Registered Unit Price Fee
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Asset Backed
Securities $1,000,000,000(2) 100%(1) $1,000,000,000(1) $278,000(3)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) In accordance with Rule 429 of the Securities and Exchange Commission's
Rules and Regulations under the Securities Act of 1933 as amended, the
Prospectus included herein is a combined prospectus which also relates in
the Registrant's Registration Statement on Form S-3 (Registration No.
333-44409) (the "Prior Registration Statement"). The amount of securities
eligible to be sold under the Prior Registration Statement ($200,000,000 as
of November 4, 1998) shall be carried forward to this Registration
Statement.
(3) $222,122 is paid pursuant to this Registration Statement. Of the remaining
$55,878 of such amount, $295 was paid in connection with the prior filing
and $55,600 is attributable to the amount carried forward from the Prior
Registration Statement for which a filing fee in the amount of $147,500 was
paid at the time of registration.
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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PROSPECTUS
Asset Backed Notes and Asset Backed Certificates, issuable in Series
Residential Asset Funding Corporation
(Depositor)
Residential Asset Funding Corporation (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)
loans (the "Home Equity Loans") that are secured by mortgages on residential
properties and that may be secured by fixtures, as further described herein,(ii)
manufactured housing conditional sale contracts and installment agreements (the
"Contracts") that are secured by Manufactured Homes, as further described
herein, and (iii) securities backed or secured by Home Equity Loans and/or
Contracts (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 Home Equity Loans and/or Contracts, 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 Home Equity 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. The Contracts will be secured by
security interests taken in the Manufactured Homes.
(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
17.
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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.
--------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by First Union Capital Markets, a division of Wheat First
Securities, Inc. 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 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
November __, 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 Home Equity Loans, Contracts 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 ...........................................Residential Asset Funding Corporation (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
Home Equity Loans, Contracts, or Underlying Loans relating
to the Private Securities, as applicable and/or as
prepayments occur with respect to such Home Equity Loans,
Contracts 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 Home Equity Loans, Contracts 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
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Final Scheduled Distribution Date as a result of the
application of 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 Home Equity Loans,
Contracts 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 Home Equity Loans, Contracts 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 the related Originator, Servicer, Credit Enhancer, or an
affiliate thereof at the price set forth in the related
Agreement (which would not be less than an amount necessary to
pay all principal and interest on the securities outstanding).
Each such redemption or repurchase may occur 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 percentage (which percentage shall not exceed
20%) specified in the related Agreement. 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 failure of the holder of
the optional termination right to exercise such right, the
required party shall solicit bids for the purchase of all Home
Equity Loans and/or Contracts remaining in the Trust. In the
event that satisfactory bids are received (which would not be
less than an amount necessary to pay all principal and interest
on the securities outstanding), the net sale proceeds will be
distributed to Holders, in the same order of priority as
collections received in respect of the Home Equity Loans and/or
Contracts. If satisfactory bids are not received, such party
shall decline to sell the Home Equity Loans and/or Contracts
and shall not be under any obligation to solicit any further
bids or otherwise negotiate any further sale of the Home Equity
Loans and/or Contracts. 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
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requirement that the qualified liquidation takes place over a
period not to exceed 90 days.
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) Home Equity Loans...........................The Primary Assets for a Series will consist, in whole or in
part, of loans which are secured by mortgages on residential
properties and which may be secured by fixtures (the "Home
Equity Loans"). Some Home Equity Loans may be delinquent to
the extent specified in the related Prospectus Supplement.
The percentage of those Home Equity 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 Home Equity 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). The Home Equity Loans, in
addition to being secured by mortgages on real estate, may also
be secured by "fixtures" treated as personal property under
local state law. Although fixtures may turn up more frequently
in the case of loans in which the proceeds are used to fund
home improvements, fixtures as a part of the collateral package
may be a part of either a "home equity" or "purchase money"
loan.
A "home equity" loan is a 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 Home Equity 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
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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 Home Equity Loan, a
"Balloon Loan"). See "RISK FACTORS--Balloon Loans" and
"DESCRIPTION OF THE SECURITIES--Weighted Average Life of the
Securities" herein.
The Home Equity 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. The related Prospectus
Supplement will describe certain characteristics of the Home
Equity Loans for a Series, including, without limitation, and
to the extent relevant: (a) the aggregate unpaid principal
balance of the Home Equity 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 Home Equity Loans; (d) the weighted average
original and remaining term-to-stated maturity of the Home
Equity 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 Home Equity Loans, computed in the manner
described in the related Prospectus Supplement; (f) the
percentage (by principal balance as of the Cut-off Date) of
Home Equity Loans that accrue interest at adjustable or fixed
interest rates; (g) any Credit Enhancement relating to the Home
Equity Loans; (h) the geographic distribution of any Mortgaged
Properties securing the Home Equity Loans; (i) the use and type
of each Mortgaged Property securing a Home Equity Loan; (j) the
lien priority of the Home Equity Loans; and (k) the delinquency
status and year of origination of the Home Equity Loans.
(2) Contracts .............................Each Contract Pool (as defined herein) will consist of fixed or
adjustable rate manufactured housing installment sales
contracts and installment loan agreements. Each Contract may be
secured by a new or used Manufactured Home (as defined herein).
(3) 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 Home Equity
Loans and/or Contracts (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
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pursuant to an effective registration statement and
not purchased as part of the original distribution 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 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 Home Equity 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.
10
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
11
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.
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
12
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 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 Home Equity Loans and/or Contracts
for a Series. In addition, the Servicer may act as custodian
and be responsible for maintaining custody of the Home Equity
Loans and/or Contracts and related documentation on behalf of
the Trustee. Advances with respect to delinquent payments of
principal or interest on a
13
Home Equity Loan and/or Contracts 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 Home Equity
Loans and/or Contracts or from other recoveries relating to
such Home Equity Loan or Contract (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 Home Equity Loans and/or Contracts 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 "SERVICING OF HOME
EQUITY 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 REMICs) 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 conform
to the 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.
14
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 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 Home Equity Loans, Contracts
or Underlying Loans relating to
15
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 "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 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 Home Equity 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 Home
Equity Loans, Contracts 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
Home Equity Loans, Contracts, or Underlying Loans due to conversion of
adjustable-rate 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 Home Equity Loans and/or Contracts. 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 Home Equity Loans and/or Contracts. 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 Home Equity Loans and/or
Contracts than other classes of Securities.
The Home Equity Loans and/or Contracts 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 Home Equity Loans and/or Contracts 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 Home Equity Loan or Loans and/or Contracts), 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 Home Equity Loans and/or Contracts 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 Home Equity Loans and/or
Contracts. The related Prospectus Supplement will specify whether any or all of
the Home Equity Loans contain "due-on-sale" provisions.
Collections on the Home Equity Loans and/or Contracts may vary due to
the level of incidence of delinquent payments and of prepayments. Collections on
the Home Equity Loans and/or Contracts 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 such time as
the aggregate outstanding principal amount of the Primary Assets is less than
the amount or percentage specified in the related Agreement, (such amount or
percentage not to exceed 20% 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.
Home Equity Loans with Balloon and Non-Traditional Payment Methods May Create
Greater Default Risk.
A portion of the aggregate principal balance of the Home Equity Loans
at any time may be Balloon Loans that provide for the payment of the unamortized
principal balance of such Home Equity 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 Home Equity 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 Home Equity Loans may provide for escalating or variable payments
by the borrower under the Home Equity 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 Home
Equity 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 of failure of borrowers to maintain adequately
the Mortgaged Properties or of natural disasters that are not
19
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 home
equity loans generally. The Home Equity 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
home equity 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.
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Security Interests in the Manufactured Homes may not be perfected and the Trust
Fund may not realize upon the full amount due under the related Contract.
Each Contract is secured by a security interest in a Manufactured Home
together with, in the case of land secured contracts, the real estate on which
the related Manufactured home is located (such Contracts, the "Land Secured
Contracts"). Perfection of security interests in the Manufactured Homes and
enforcement of rights to realize upon the value of the Manufactured Homes as
collateral for the Contracts are subject to a number of federal and state laws,
including the Uniform Commercial Code (the "UCC") as adopted in the states in
which the Manufactured Homes are located and such states' certificate of title
statutes, but generally not their real estate laws. Under such federal and state
laws, a number of factors may limit the ability of a holder of a perfected
security interest in Manufactured Homes to realize upon such Manufactured Homes
or may limit the amount realized to less than the amount due under the related
Contract.
In addition, because of the expense and administrative inconvenience
involved, the seller of the Manufactured Home ("Seller") may not amend any
certificates of the title related to any Manufactured Home to change the
lienholder specified therein to the Trustee, and may not execute any transfer
instrument (including, among other instruments, UCC-3 assignments) relating to
any Manufactured Home in favor of the Trustee or note thereon the Trustee's
interest. Such amendment would require, consistent with the law of the related
State, filings at the state or county level for each Contract. As a result, the
Seller will remain the lienholder on the certificate of title relating to the
Manufactured Home. In some states, in the absence of such an amendment,
execution or notation, the assignment to the Trustee of the security interest in
the Manufactured Homes located therein may not be effective or such security
interest may not be perfected. If any otherwise effectively assigned security
interest in favor of the Trustee is not perfected, such assignment of the
security interest to the Trustee may not be effective against creditors of the
Seller to the extent it continues to be specified as lienholder on any
certificate of title or as secured party on any UCC filing, or against a trustee
in bankruptcy of the Seller.
Each Contract (other than a Land Secured Contract) will be "chattel
paper" as defined in the UCC in effect in the jurisdiction in which the related
Manufactured Home was located at origination. Under the UCC as in effect in each
such jurisdiction, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related Agreement,
the Trustee will have possession of the Contracts. In addition, the Seller will
make appropriate filings of UCC-1 financing statements in the office of the
Secretary of State of the state where its principal place of business is located
to give notice of the Trustee's ownership of the Contracts. The Trustee's
interest in the Contracts could, through the fraud or negligence of the Trustee,
be defeated if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment.
Further, because of the expenses and administrative inconvenience
involved, the assignment of mortgages or deeds of trust to the Trustee may not
be recorded with respect to the mortgages or deeds of trust securing each Land
Secured Contract. Recordation of such assignments would require the Seller to
retain counsel in the respective state, and make the appropriate filing at the
local level. The failure to record the assignments to the Trustee of the
mortgage securing Land Secured Contracts may result in the sale of such
Contracts or the Trustee's rights in the land secured by the mortgage being
ineffective against creditors of the Seller or against a trustee in bankruptcy
of the Seller or against a subsequent purchaser of such Contracts from the
Seller, without notice of the sale to the Trustee.
State and Federal Credit Protection Laws May Limit Collection of Principal and
Interest on the Home Equity 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 Home Equity Loans.
The Home Equity 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
Home Equity 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;
21
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 Home Equity Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Home Equity Loan to damages and administrative enforcement.
See "CERTAIN LEGAL ASPECTS OF THE HOME EQUITY 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.
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 Home Equity Loans and/or Contracts, 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.
22
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 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 Home Equity Loans, Contracts 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 Home Equity Loans,
Contracts 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.
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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.
Optional Redemption, Purchase or Termination
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
by the related Originator, Servicer or Credit Enhancer or an affiliate thereof.
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, is less than a
percentage not to exceed 20% 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 (which would not
be less than an amount necessary to pay all principal and interest on the
securities outstanding) 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 Home
Equity 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.
24
There is, however, no assurance that prepayment of the Home Equity
Loans, Contracts 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 Home Equity Loans or Underlying Loans either from time to time or over the
lives of such Home Equity 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
Home Equity Loans, Contracts 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 Home
Equity Loans, Contracts or Underlying Loans, as applicable, for a Series may
have different interest rates. In addition, the weighted average life of the
Securities may be affected by the varying maturities of the Home Equity Loans,
Contracts or Underlying Loans relating to the Private Securities, as applicable.
If any Home Equity Loans, Contracts 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
Home Equity Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession (iv) any Manufactured Home which initially secured a
Contract and which is acquired by repossession and (v) 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. Home Equity Loans and/or Contracts 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.
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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 Home Equity Loans, Contracts and Private Securities, to the
extent and as specified in the related Prospectus Supplement. Some of the Home
Equity Loans and/or Contracts may be delinquent to the extent and as specified
in the related Prospectus Supplement. The percentage of those Home Equity Loans
and/or Contracts 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 Home Equity Loans and/or Contracts
expected to be included in the related Trusts.
The Home Equity Loans
Home Equity Loans. The Primary Assets for a Series may consist, in
whole or in part, of loans (the "Home Equity 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 Home Equity 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 Home Equity Loans will 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).
The Home Equity Loans, in addition to being secured by mortgages on real estate,
may also be secured by "fixtures" treated as personal property under local state
law. Although fixtures may turn up more frequently in the case of loans in which
the proceeds are used to fund home improvements, fixtures as a part of the
collateral package may be a part of either a "home equity" or "purchase money"
loan.
A "home equity" loan is a 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 Home Equity Loans may be (i) "conventional" 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
Home Equity 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 Home Equity 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 Home Equity 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 Home Equity
Loan during a month,
26
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 Home Equity Loan so prepaid.
Payment Terms. The payment terms of the Home Equity 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 Home
Equity Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Home Equity 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 Home Equity 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 Home Equity 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 principal may be due on maturity.
Principal may include interest that has been deferred and added to the
principal balance of the Home Equity Loan.
(c) Monthly Payments of principal and interest may be
fixed for the life of the Home Equity Loan, may increase over a
specified period of time or may change from period to period. Home
Equity 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 Home Equity Loan
or may decline over time, and may be prohibited for the life of the
Home Equity Loan or for certain periods. Certain Home Equity 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 Home Equity Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Home Equity Loans may include "due
on sale" clauses which permit the mortgagee to demand payment of the
entire Home Equity Loan in connection with the sale or certain
transfers of the related Mortgaged Property. Other Home Equity Loans
may be assumable by persons meeting the then applicable underwriting
standards of the Originator.
Amortization of the Home Equity Loans. The Home Equity Loans will
provide for payments that are allocated to principal and interest according to
either the actuarial method (an "Actuarial Home Equity Loan"), the simple
interest method (a "Simple Interest Home Equity Loan") or the "Rule of 78s"
method (a "Rule of 78s Home Equity Loan"), as set forth in the related
Prospectus Supplement. The related Prospectus Supplement will set forth whether
any of the Home Equity Loans will provide for deferred interest or negative
amortization.
An Actuarial Home Equity 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 Home Equity Loan provides for the amortization of the
amount financed under such Home Equity 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 Home Equity 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
27
interest accrues on such Home Equity Loan. As payments are received under a
Simple Interest Home Equity 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 Home Equity 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 Home
Equity Loan is made on or prior to its scheduled due date, the principal balance
of the Home Equity 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 Home Equity Loan will amortize more slowly than
scheduled. If a Simple Interest Home Equity Loan is prepaid, the borrower is
required to pay interest only to the date of prepayment.
Certain of the Home Equity 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 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 equal to 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 Home Equity 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 Home Equity 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 Home Equity 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 Home Equity Loan is
computed in the manner described in the related Prospectus Supplement, taking
into account the amounts of any related senior loans.
Additional Information. The selection criteria which will apply with
respect to the Home Equity 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.
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The Home Equity Loans for a Series may include Home Equity 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 Home Equity 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 Home Equity 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 Home Equity Loans; (b) the range
and weighted average Loan Rate on the Home Equity 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 Home Equity 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 Home
Equity Loans, as applicable; (f) the percentage (by outstanding principal
balance as of the Cut-off Date) of Home Equity 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 Home Equity Loans;
(h) the geographic distribution of any Mortgaged Properties securing the Home
Equity Loans; (i) the percentage of Home Equity 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 Home Equity Loans;
(k) year of origination of the Home Equity Loans; and (l) the delinquency status
of Home Equity Loans, including the duration and history of such delinquencies
and the percentage of the of Home Equity Loans (by principal balance as of the
Cut-off Date) that are delinquent. The related Prospectus Supplement will also
specify any other limitations on the types or characteristics of Home Equity
Loans for a Series.
If specific information respecting the Home Equity 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 Home Equity Loans relating to such
Series will be attached to the Pooling and Servicing Agreement delivered to the
Trustee upon delivery of the Securities.
The Contracts
Contracts. Each Pool of Contracts in a Trust Fund ("Contract Pool")
will consist of conventional manufactured housing installment sales contracts
and installment loan agreements (collectively, the "Contracts") originated by a
manufactured housing dealer in the ordinary course of business and purchased by
the Seller. Each Contract will be secured by Manufactured Homes (as defined
below), each of which will be located in any of the fifty states or the District
of Columbia. The Contracts will be fully amortizing and will bear interest at a
fixed or adjustable annual percentage rate (the "APR" or "Contract Rate"). The
Contract Pool may include Contracts with respect to which a Fixed Retained Yield
has been retained, in which event references herein to Contracts and payments
thereon shall mean the Contracts exclusive of such Fixed Retained Yield. The
Prospectus Supplement for a Series will specify whether there will be any Fixed
Retained Yield in any Contract, and if so, the owner thereof. A "Fixed Retained
Yield" in a Contract represents a specified portion of the interest payable
thereon.
The Seller of the Contracts will represent that the Manufactured Homes
securing the Contracts consist of manufactured homes within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air-conditioning, and electrical systems contained therein;
except that such term shall include any structure which meets all the
requirements of [this] paragraph except the size requirements and with respect
to which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter."
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Manufactured Homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of Contracts with high Loan-to-Value Ratios at origination, that the
market value of a Manufactured Home may be lower than the principal amount
outstanding under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such Series
as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate Principal
Balance"), the range of original terms to maturity of the Contracts in the
Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and net contract rates borne by such
Contracts ("Net Contract Rates"), the weighted average Net Contract Rate at the
Cut-Off Date of such Contracts, the range of such Contracts which had
Loan-to-Value Ratios at the time of origination of the Contracts and the highest
outstanding principal balance at origination of any such Contract.
The "Loan-to-Value Ratio" is the ratio, expressed as a percentage, of
the principal amount of the Contract outstanding at the origination of such loan
divided by the fair market value of the Manufactured Home. The fair market value
of the Manufactured Home securing any Contract is, unless otherwise specified in
the applicable Prospectus Supplement, either (x) the appraised value of the
related Manufactured Home determined in an appraisal obtained by the originator
at origination and (y) the sale price for such property, plus, in either case,
sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges. A
maximum of 5% (by Cut-Off Date Aggregate Principal Balance) of the aggregate
Contracts that are included in a Trust Fund will deviate from the
characteristics that are described in the related Prospectus Supplement.
The Contracts in a Trust Fund will generally have monthly payments due
on the first of each month (each, a "Due Date") and will be fully-amortizing
Contracts. Contracts may have Due Dates which occur on a date other than the
first of each month. The Contract Pools may include adjustable rate Contracts
that provide for payment adjustments to be made less frequently than adjustments
in the Contract Rates. Each adjustment in the Contract Rate which is not made at
the time of a corresponding adjustment in payments (and which adjusted amount of
interest is not paid currently on a voluntary basis by the obligor) will result
in a decrease (if the Contract Rate rises) or an increase (if the Contract Rate
declines) in the rate of amortization of the Contract. Moreover, such payment
adjustments on the Contracts may be subject to certain limitations, as specified
in the Prospectus Supplement, which may also affect the rate of amortization on
the Contract. As a result of such provisions, the amount of interest accrued in
any month may equal or exceed the scheduled monthly payment on the Contract. In
any such month, no principal would be payable on the Contract, and if the
accrued interest exceeded the scheduled monthly payment, such excess interest
due would become "Deferred Interest" that is added to the principal balance of
the Contract. Deferred Interest will bear interest at the Contract Rate until
paid. If such limitations prevent the payments from being sufficient to amortize
fully the Contract by its stated maturity date, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date.
The geographic distribution of Manufactured Homes will be set forth in
the Prospectus Supplement. Each Prospectus Supplement will set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of any Contracts in
the Contract Pool which are secured by Manufactured Homes which have become
permanently affixed to real estate. Each Prospectus Supplement will also set
forth the percentage of the Cut-Off Date Aggregate Principal Balance of the
Contracts in the related Contract Pool representing the refinancing of existing
mortgage indebtedness.
If specific information respecting the Contracts to be included in a
Trust Fund is not known to the Sponsor at the time the Securities of a Series
are initially offered, more general information of the nature described above
will be provided in the Prospectus Supplement and final specific information
will be set forth in a Current Report on Form 8-K to be available to investors
on the date of issuance thereof and to be filed with the Commission promptly
after the initial issuance of such Securities.
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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
Home Equity Loans and/or Contracts (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
and not purchased as part of the original distribution 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 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
31
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 Home Equity 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 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.
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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.
Pool Insurance Policy. The related Prospectus Supplement will describe
any pool insurance policy obtained by the Depositor for the Home Equity Loans
and/or Contracts 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 Home Equity 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 Home Equity Loan or the Manufactured Home underlying a Contract
(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
33
flood insurance policy, if applicable, required to be maintained with respect to
such Mortgaged Property or Manufactured Home, 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 Manufactured Home or (ii)
upon transfer of such Mortgaged Property or Manufactured Home to the special
hazard insurer, the unpaid principal balance of such Home Equity Loan or
Contract at the time of acquisition of such Mortgaged Property by foreclosure or
deed in lieu of foreclosure or repossession of the Manufactured Home, plus
accrued interest to the date of claim settlement and certain expenses incurred
by the Servicer with respect to such Mortgaged Property or Manufactured Home. 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 or Manufactured Home. Any amount paid
as the cost of repair of such Mortgaged Property or Manufactured Home 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 or replacement of the
Manufactured Home with the proceeds described under (i) above is expected to
satisfy the condition under any pool insurance policy that such Mortgaged
Property be restored or Manufactured Home replaced before a claim under such
pool insurance policy may be validly presented with respect to the defaulted
Home Equity Loan or Contract secured by such Mortgaged Property or Manufactured
Home, as applicable. The payment described under (ii) above will render
unnecessary presentation of a claim in respect of such Home Equity Loan or
Contract 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 Home Equity
Loan or Contract 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 Home Equity Loan or the Manufactured Home securing the Contract at an
amount less than the then-outstanding principal balance of such Home Equity Loan
or Contract. The amount of the secured debt could be reduced to such value, and
the holder of such Home Equity Loan or Contract thus would become an unsecured
creditor to the extent the outstanding principal balance of such Home Equity
Loan or Contract exceeds the value so assigned to the Mortgaged Property or the
Manufactured Home by the bankruptcy court. In addition, certain other
modifications of the terms of a Home Equity Loan or Contract can result from a
bankruptcy proceeding. See "CERTAIN LEGAL ASPECTS OF HOME EQUITY 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 Home
Equity Loan or Contract or a reduction by such court of the principal amount of
a Home Equity Loan or Contract 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 Home Equity Loans and/or
Contracts in the Trust Fund for such Series. Such amount will be reduced by
payments made under such bankruptcy bond in respect of such Home Equity Loans
and/or Contracts, and will not be restored.
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
34
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 HOME EQUITY LOANS
General
Customary servicing functions with respect to Home Equity Loans and/or
Contracts 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 Home Equity Loans and/or Contracts 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 Home Equity Loan or
Contract 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 Home Equity Loan or Contract.
The Servicer, to the extent permitted by law, will establish and
maintain escrow or impound accounts ("Escrow Accounts") with respect to Home
Equity Loans and/or Contracts in which payments by obligors to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
will be deposited. Home Equity Loans and/or Contracts 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 Home Equity
Loans and/or Contracts. 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
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Mortgaged Property securing the related Home Equity Loan or Manufactured Home
securing the related Contract 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. 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 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 Manufactured Home 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
(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:
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(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
Home Equity Loans and/or Contracts (including, for this purpose,
Liquidation Proceeds and amounts representing proceeds of insurance
policies covering the related Mortgaged Property or Manufactured Home,
as applicable) 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 or
Manufactured Home 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 Home Equity Loan or Contract, together with
accrued and unpaid interest thereon to the Due Date for such Home
Equity 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 Home Equity Loan or Contract;
(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 Home Equity
Loan or Contract 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 Home Equity Loans and/or Contracts. 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 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 Home Equity Loans and/or Contracts 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
37
nonrecoverable from late collections, proceeds of insurance policies, or
Liquidation Proceeds from the related Home Equity Loan or Contract, 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 Home Equity Loan or Contract 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 or Manufactured
Home 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 Home
Equity Loans and/or Contracts. In general, the standard form of fire and
extended coverage policy will cover physical damage to or destruction of, the
related Mortgaged Property or Manufactured Home 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 Home Equity Loans and/or
Contracts will be underwritten by different hazard insurers and will cover
Mortgaged Properties and Manufactured Homes 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 Home Equity 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 Home Equity Loans or Manufactured Home Securing a Contract 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 or Manufactured
Home, including the improvements on any Mortgaged Property or Manufactured Home,
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 or Manufactured Home, 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
or Manufactured Home and improvements. Since the amount of hazard insurance to
be maintained on the improvements securing the Home Equity Loans and
Manufactured Homes declines as the principal balances owing thereon decrease,
and since the value of the Mortgaged Properties or Manufactured Home 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 or Manufactured
Home.
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
Home Equity Loan or Contract. The Servicer may also maintain on REO Property
that secured a defaulted Home Equity 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 Home Equity Loan, other than pursuant to such applicable
laws and regulations as shall at any time be in force and shall require such
additional insurance.
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 or Manufactured Home, released to the obligor in
38
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 Home Equity Loans
and/or Contracts, 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 Home Equity 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 Home Equity Loans or possession of the
Manufactured Homes securing the Contracts 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, repossession 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
repossession or towards the restoration of the Mortgaged Property or
Manufactured Home unless it determines that (i) such restoration, repossession
or foreclosure will increase the Liquidation Proceeds in respect of the related
Home Equity Loan or Contract 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 Home Equity
Loan or Contract a modification of such Home Equity Loan or Contract (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 Home Equity 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 Home
Equity 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 Home Equity Loan. Any fee collected in connection with an assumption will be
retained by the Servicer as additional servicing compensation. The terms of a
Home Equity 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
39
Mortgaged Property in connection with defaulted Home Equity Loans or
Manufactured Homes in connection with a defaulted Contract, as will be further
specified in the related Prospectus Supplement,.
The Servicer may pay certain expenses incurred in connection with the
servicing of the Home Equity 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 Home Equity Loan or Contract, 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 Home Equity Loan or Contract (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 Home Equity Loans
or Contracts. 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 Home Equity Loan or
Contract 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 Home Equity Loan or Contract,
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 Home Equity Loans and/or Contracts 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
40
similar to those described under "THE AGREEMENTS-- Events of Default; Rights
Upon Events of Default--Pooling and Servicing Agreement; Servicing Agreement"
herein.
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
41
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.
Assignment of Home Equity Loans. The Depositor will, as to each Home
Equity 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 Home Equity 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 Home Equity 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 Home Equity 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 Home Equity 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 Home Equity 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 Home Equity 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 Home Equity Loan is an adjustable rate Home
Equity 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. If any
document required to be in the file relating to the Primary Assets delivered by
the Depositor to the Trustee (or Custodian) is found by the Trustee within a
period not to exceed 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 a period not to exceed
90 days, the Depositor or Originator will, not later than a period not to exceed
90 days 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.
42
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;
43
(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 Home Equity Loans. See "SERVICING OF HOME
EQUITY 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 Home Equity Loans and/or Contracts 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
Home Equity Loans and/or Contracts (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,
44
together with other servicing compensation in the form of assumption fees, late
payment charges or otherwise as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the 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.
45
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders 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
46
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it.
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 Home Equity Loans
and/or Contracts), 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.
47
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.
48
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 re-registration, 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
49
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 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 Trust
Estate.
The mandatory termination may take the form of an auction sale. Within
a certain period following the failure of the holder of the optional termination
right to exercise such right, the required party shall solicit bids for the
purchase of all Home Equity Loans remaining in the Trust. In the event that
satisfactory bids (which would not be less than an amount necessary to pay all
principal and interest on the securities outstanding) are received as specified
in the related Agreement, the net sale proceeds will be distributed to Holders,
in the same order of priority as collections received in respect of the Home
Equity Loans and/or Contracts. If satisfactory bids are not received, such party
shall decline to sell the Home Equity Loans and/or Contracts and shall not be
under any obligation to solicit any further bids or otherwise negotiate any
further sale of the Home Equity Loans and/or Contracts. 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 HOME EQUITY LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
home equity loans and Contracts, 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 Home Equity Loans are situated.
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General -- Home Equity Loans
The Home Equity 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 Home Equity 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 Home Equity 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 Home Equity 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 loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the 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 loan
default by paying arrearages over a number of years.
Court with federal bankruptcy jurisdiction also have indicated that the
terms of a 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 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
51
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
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 loans and fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
Security Interests
Real Estate Mortgages. The Home Equity 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 Home Equity 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 Home Equity 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 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,
52
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 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.
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Junior Mortgages; Rights of Senior Mortgages. The Home Equity 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 Home Equity 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 Home Equity 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 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" 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.
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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 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
loans having higher mortgage rates, may increase the likelihood of refinancing
or other early retirements of such 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 loans originated by certain lenders after March 31, 1980.
Similar federal statutes were in effect with respect to 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 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 Home Equity 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 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
55
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.
General -- Contracts
General
As a result of the assignment of the Contracts to the Trustee, the
Trust Fund will succeed collectively to all of the rights (including the right
to receive payment on the Contracts) and will assume the obligations of the
obligee under the Contracts. Each Contract evidences both (a) the obligation of
the obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. Certain
aspects of both features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Pooling and Servicing Agreement, the Servicer will transfer
physical possession of the Contracts to the Trustee or a designated custodian or
may retain possession of the Contracts as custodian for the Trustee. In
addition, the Servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Contracts. Unless otherwise specified in the related Prospectus Supplement,
the Contracts will not be stamped or marked otherwise to reflect their
assignment from the Sponsor to the Trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the Contracts without notice of such assignment, the Trustee's interest in
Contracts could be defeated.
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Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection pursuant
to the provisions of the UCC is required. The Servicer may effect such notation
or delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the Servicer fails, due to clerical errors, to effect
such notation or delivery, or files the security interest under the wrong law
(for example, under a motor vehicle title statute rather than under the UCC, in
a few states), the securityholders may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
Contracts contain provisions prohibiting the borrower from permanently attaching
the Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Seller and transferred to
the Sponsor. With respect to a Series of Securities and if so described in the
related Prospectus Supplement, the Servicer may be required to perfect a
security interest in the Manufactured Home under applicable real estate laws.
The Servicer will represent that at the date of the initial issuance of the
related Securities it has obtained a perfected first priority security interest
by proper notation or delivery of the required documents and fees with respect
to substantially all of the Manufactured Homes securing the Contracts.
The Sponsor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the securityholders. Unless otherwise
specified in the related Prospectus Supplement, neither the Sponsor nor the
Trustee will amend the Certificates of title to identify the Trustee or the
Trust Fund as the new secured party, and neither the Sponsor nor the Servicer
will deliver the Securities of title to the Trustee or note thereon the interest
of the Trustee. Accordingly, the Servicer (or the seller) which continue to be
named as the secured party on the certificate of title relating to the
Manufactured Homes. In many states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Sponsor's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, such assignment of the
security interest in the Manufactured Home might not be effective or perfected
or that, in the absence of such notation or delivery to the Trustee, the
assignment of the security interest in the Manufactured Home might not be
effective against creditors of the Servicer (or the Seller) or a trustee in
bankruptcy of the Servicer (or the Seller).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Servicer (or
the Seller) on the certificate of title or delivery of the required documents
and fees will be sufficient to protect the securityholders against the rights of
subsequent purchasers of a Manufactured Home or subsequent lenders who take a
security interest in the Manufactured Home. If there are any Manufactured Homes
as to which the security interest assigned to the Trustee is not perfected, such
security interest would be subordinate to, among others, subsequent purchasers
for value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee as the new secured party
on the certificate of title that, through fraud or negligence, the security
interest of the Securityholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
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Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the Pooling and Servicing Agreement, the Servicer is obligated to take
steps, at the Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Seller will represent in the Pooling and
Servicing Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the debted thereunder.
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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 asset the rule to set off remaining amounts due
as a defense against a claim brought by the Trustee against such obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the Contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code. In
the case of some of these laws, the failure to comply with their provisions may
affect the enforceability of the related Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to.
In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St Germain Depository Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the Manufactured
Homes. Consequently, in some states the Servicer may be prohibited from
enforcing a "due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The Seller will represent that all of the Contracts comply with applicable usury
law.
Formaldehyde Litigation with Respect to Contracts
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset in
many building materials, including such components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuits were brought against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. Sponsor is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
The holder of any Contract secured by a Manufactured Home with respect
to which a formaldehyde claim has been successfully asserted may be liable to
the obligor for the amount paid by the obligor on the related Contract and may
be unable to collect amounts still due under the Contract. The successful
assertion of such claim constitutes a breach of a representation or warranty of
the person specified in the related Prospectus Supplement, and the
Securityholders would suffer a loss only to the extent that (i) such person
breached its obligation to repurchase the Contract in the event an obligor is
successful in asserting such a claim, and (ii) such person, the Servicer or the
Trustee were unsuccessful in asserting any claim of contribution or subrogation
on behalf of the Securityholders against the manufacturer or other persons who
were directly liable to the plaintiff for the damages. Typical products
liability insurance policies held by manufacturers and component suppliers of
manufactured homes may not cover liabilities arising from formaldehyde in
manufactured housing, with the result that recoveries from
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such manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
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 Home Equity 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 Home Equity Loan included in a Trust Fund for a Series is relieved
pursuant to the Soldiers' and Sailors' Civil Relief 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 Home Equity Loans, Contracts 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.
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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.
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 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 Home Equity Loans and/or Contracts 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
Home Equity Loans and/or Contracts 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 Home Equity Loans and/or Contracts 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."
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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 Home Equity Loans and/or Contracts
(including amounts 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 Home Equity Loans and/or Contracts 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 Home
Equity Loans and/or Contracts 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.
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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,
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 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 Home Equity 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 Home
Equity Loans, payments on the Home Equity 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.
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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.
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 Home Equity Loan that is used to pay principal on
the REMIC Regular Securities exceeds the REMIC Trust's deduction for unaccrued
original issue
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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 Home Equity Loan
expressed as a percentage of the outstanding principal amount of that Home
Equity 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 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
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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.
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 Home Equity 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
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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
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
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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 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 Home Equity 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
the Securities will be classified as debt secured by the related Home Equity
Loans and/or Contracts. Consequently, the Debt Securities will not be treated as
ownership interests in the Home Equity Loans and/or Contracts or the Trust.
Beneficial owners will be required to report income received
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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, REMIC Securities will possess certain special tax
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.
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 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 Home Equity Loans and/or Contracts.
Special Tax Attributes
As described above, REMIC Securities will possess certain special tax
attributes by virtue of the REMIC 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 Home Equity 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).
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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 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.
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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.
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, 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
Home Equity 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
71
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 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 home equity 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
72
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 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 Home Equity
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
73
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.
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 Depositor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The
Depositor makes no representation, however, that the Home Equity 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. The Trustee will report
original issue discount based on accrual periods of no longer than one year
either (i) 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
or (ii) beginning on the next day following a payment date and ending on 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).
74
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 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.
75
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.
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.
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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., Home Equity 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 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
77
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.
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
78
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 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 Depositor, the
Underwriters, the Trustee, the Master Servicer, any other servicer, any obligor
with respect to Home Equity 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
79
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
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 ("First Union"), a division of Wheat First Securities, Inc. 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
80
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.
81
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. 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 Home Equity Loan and for any other
purposes in servicing such Home Equity Loan.
"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 Home
Equity Loan, the lesser of the appraised value determined in an appraisal
obtained at origination of the Home Equity 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.
82
"Combined Loan-to-Value Ratio" means, with respect to a Home Equity
Loan, the ratio determined as set forth in the related Prospectus Supplement
taking into account the amounts of any related senior 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 Home Equity 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 Home Equity Loan during a specified period
over the amount of interest required to be paid by an obligor on such Home
Equity 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.
83
"Depositor" means Residential Asset Funding Corporation
"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 Home Equity 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 Home
Equity 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 Home
Equity Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Home Equity 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.
84
"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 Home Equity Loan.
"Liquidation Proceeds" means amounts received by the Servicer in
connection with the liquidation of a Home Equity Loan, net of liquidation
expenses.
"Loan Rate" means the interest rate borne by a Home Equity Loan.
"Loan-to-Value Ratio" means, with respect to a Home Equity 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 Home Equity Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgaged Property" means residential properties securing a Home
Equity Loan.
"Home Equity Loan" means a loan secured by a Mortgaged Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Home Equity 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.
"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.
85
"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 Home Equity Loans) and the Trustee.
"Primary Assets" means the Private Securities, the Home Equity 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 Home Equity 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 Home
Equity 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.
"Residual Interest" means a residual interest in a REMIC.
86
"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 Home Equity
Loans, the Person if any, designated in the related Prospectus Supplement to
service Home Equity Loans for that Series, or the successors or assigns of such
Person.
"Single Family Property" means property securing a Home Equity 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 Home Equity
Loans underlying or securing Private Securities.
87
"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.
88
TABLE OF CONTENTS
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
HOME EQUITY 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 MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY.................................20
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND INTEREST ON
THE HOME EQUITY LOANS.........................................................................................21
RATINGS ARE NOT RECOMMENDATIONS. A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD
LIKELY ADVERSELY IMPACT THE RATING OF THE SECURITIES..........................................................22
A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY IMPACT THE RATING OF
THE SECURITIES................................................................................................22
ERISA MAY RESTRICT THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SECURITIES...................................22
DESCRIPTION OF THE SECURITIES....................................................................................22
GENERAL.......................................................................................................22
PAYMENTS OF INTEREST..........................................................................................23
PAYMENTS OF PRINCIPAL.........................................................................................23
FINAL SCHEDULED DISTRIBUTION DATE.............................................................................24
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION..................................................................24
WEIGHTED AVERAGE LIFE OF THE SECURITIES.......................................................................24
THE TRUST FUNDS..................................................................................................25
GENERAL.......................................................................................................25
THE HOME EQUITY LOANS.........................................................................................26
PRIVATE SECURITIES............................................................................................31
COLLECTION AND DISTRIBUTION ACCOUNTS..........................................................................32
PRE-FUNDING ACCOUNTS..........................................................................................32
i
CREDIT ENHANCEMENT...............................................................................................33
SUBORDINATE SECURITIES........................................................................................33
INSURANCE.....................................................................................................33
RESERVE FUNDS.................................................................................................35
MINIMUM PRINCIPAL PAYMENT AGREEMENT...........................................................................35
DEPOSIT AGREEMENT.............................................................................................35
SERVICING OF HOME EQUITY LOANS...................................................................................35
GENERAL.......................................................................................................35
COLLECTION PROCEDURES; ESCROW ACCOUNTS........................................................................35
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT.......................................................36
ADVANCES AND LIMITATIONS THEREON..............................................................................38
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES..............................................38
REALIZATION UPON DEFAULTED HOME EQUITY LOANS..................................................................39
ENFORCEMENT OF DUE-ON-SALE CLAUSES............................................................................39
SERVICING COMPENSATION AND PAYMENT OF EXPENSES................................................................40
EVIDENCE AS TO COMPLIANCE.....................................................................................40
CERTAIN MATTERS REGARDING THE SERVICER........................................................................41
THE AGREEMENTS...................................................................................................41
ASSIGNMENT OF PRIMARY ASSETS..................................................................................42
REPORTS TO HOLDERS............................................................................................43
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT...............................................................44
THE TRUSTEE...................................................................................................46
DUTIES OF THE TRUSTEE.........................................................................................46
RESIGNATION OF TRUSTEE........................................................................................47
AMENDMENT OF AGREEMENT........................................................................................47
VOTING RIGHTS.................................................................................................47
LIST OF HOLDERS...............................................................................................48
FORM OF SECURITIES............................................................................................48
REMIC ADMINISTRATOR...........................................................................................49
TERMINATION...................................................................................................49
CERTAIN LEGAL ASPECTS OF HOME EQUITY LOANS.......................................................................51
GENERAL.......................................................................................................51
ENFORCEMENT OF THE NOTE.......................................................................................51
SECURITY INTERESTS............................................................................................52
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940...............................................................60
THE DEPOSITOR....................................................................................................60
GENERAL.......................................................................................................60
USE OF PROCEEDS..................................................................................................61
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................................................61
GENERAL.......................................................................................................61
GRANTOR TRUST SECURITIES......................................................................................61
REMIC SECURITIES..............................................................................................63
DEBT SECURITIES...............................................................................................69
DISCOUNT AND PREMIUM..........................................................................................73
BACKUP WITHHOLDING............................................................................................76
FOREIGN INVESTORS.............................................................................................76
STATE TAX CONSIDERATIONS.........................................................................................77
ERISA CONSIDERATIONS.............................................................................................77
LEGAL INVESTMENT.................................................................................................80
PLAN OF DISTRIBUTION.............................................................................................80
ii
LEGAL MATTERS....................................................................................................80
FINANCIAL INFORMATION............................................................................................81
GLOSSARY OF TERMS................................................................................................82
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..........................................................................................28
Agreement.........................................................................................................6
APR..............................................................................................................30
ARM Loans........................................................................................................19
Balloon Loan.....................................................................................................10
bankruptcy bond..................................................................................................35
Book-Entry Securities............................................................................................49
Business Day.....................................................................................................13
Capitalized Interest Account.....................................................................................13
Cede.............................................................................................................49
CERCLA...........................................................................................................21
Certificate Schedule.............................................................................................43
Certificates...................................................................................................1, 6
Class.............................................................................................................3
Code.............................................................................................................62
Collection Account...............................................................................................12
Combined Loan-to-Value Ratio.....................................................................................10
Commission........................................................................................................4
Condominium Units................................................................................................27
Contract Rate....................................................................................................30
Contracts.....................................................................................................1, 30
Cooperative Dwellings............................................................................................27
Credit Enhancement...............................................................................................13
Credit Enhancer..................................................................................................12
Current Interest Rates...........................................................................................10
Custodian........................................................................................................43
Cut-Off Date......................................................................................................9
Cut-Off Date Aggregate Principal Balance.........................................................................31
D&P..............................................................................................................79
Debt Securities..............................................................................................15, 62
Deferred Interest................................................................................................31
Deleted Primary Asset............................................................................................44
Deposit Agreement................................................................................................15
Depositor.........................................................................................................1
Depositor Securities.............................................................................................61
Distribution Account.............................................................................................12
Distribution Date.................................................................................................3
DOL..............................................................................................................79
Due Date.........................................................................................................31
Eligible Investments.........................................................................................13, 33
ERISA............................................................................................................16
Escrow Accounts..................................................................................................37
Event of Default.................................................................................................42
Exchange Act......................................................................................................5
FASIT........................................................................................................16, 62
FASIT High-Yield Securities......................................................................................16
FASIT Ownership Security.........................................................................................16
FASIT Regular Securities.........................................................................................16
FASIT Securities.................................................................................................62
i
FDIC.............................................................................................................37
FHA..............................................................................................................27
FHLMC............................................................................................................55
Final Scheduled Distribution Date.................................................................................7
First Union......................................................................................................81
fully taxable bonds..............................................................................................76
Garn-St. Germain Act.............................................................................................55
Grantor Trust....................................................................................................62
Grantor Trust Securities.........................................................................................15
Holders...........................................................................................................4
Indenture........................................................................................................23
Indirect Participant.............................................................................................49
IRS..............................................................................................................64
Issuer............................................................................................................6
Lifetime Rate Caps...............................................................................................10
Liquidation Proceeds.............................................................................................37
Loan Rate........................................................................................................10
Loan Schedule....................................................................................................43
Loan-to-Value Ratio..........................................................................................10, 31
Minimum Principal Payment Agreement..............................................................................14
Modification.....................................................................................................40
Mortgage Loans.............................................................................................1, 9, 27
Notes..........................................................................................................1, 6
Notional Amount...................................................................................................7
Originator........................................................................................................1
OTS..............................................................................................................56
Owner Trust.......................................................................................................6
Owner Trustee.....................................................................................................7
PAC...............................................................................................................6
Participants.....................................................................................................49
Partnership......................................................................................................62
Partnership Interests........................................................................................16, 62
Physical Certificates............................................................................................49
Plan.............................................................................................................79
Plan Assets Regulation...........................................................................................79
Pool..............................................................................................................1
Pooling and Servicing Agreement..................................................................................23
Pre-Funded Amount................................................................................................12
Pre-Funding Account..............................................................................................12
Pre-Funding Period...............................................................................................12
Premium Security.................................................................................................76
Prepayment Assumption............................................................................................75
Primary Assets....................................................................................................1
Prospectus Supplements............................................................................................1
PS Agreement.....................................................................................................32
PS Servicer......................................................................................................11
PS Sponsor.......................................................................................................11
PS Trustee.......................................................................................................11
PTCE.............................................................................................................80
Qualifying Substitute Primary Asset..............................................................................44
Rating Agency....................................................................................................14
REMIC........................................................................................................15, 62
REMIC Regular Securities.........................................................................................15
REMIC Regulations................................................................................................64
REMIC Residual Securities........................................................................................15
REMIC Securities.................................................................................................62
ii
REO Property.....................................................................................................38
Reserve Fund.....................................................................................................14
Restricted Group.................................................................................................80
Retained Interests...............................................................................................43
Rule of 78s Mortgage Loan........................................................................................28
Securities........................................................................................................1
Security Registrar...............................................................................................49
Series............................................................................................................1
Servicer..........................................................................................................1
Servicing Agreement..............................................................................................26
Servicing Fee....................................................................................................15
Settlement Date..................................................................................................65
Simple Interest Mortgage Loan....................................................................................28
Single Family Properties.........................................................................................27
SMMEA............................................................................................................16
Title I Program..................................................................................................29
Title V......................................................................................................56, 60
Trust Agreement...................................................................................................6
Trust Fund........................................................................................................1
Trustee........................................................................................................6, 7
UCC..........................................................................................................49, 57
Underlying Loans.................................................................................................11
Underwriter Exemptions...........................................................................................79
iii
PROSPECTUS
Asset Backed Notes and Asset Backed Certificates, issuable in Series
Residential Asset Funding Corporation
(Depositor)
Residential Asset Funding Corporation (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)
loans (the "Mortgage Loans") that are secured by mortgages on residential
properties and that may be secured by fixtures, as further described herein and
(ii) manufactured housing conditional sale contracts and installment agreements
(the "Contracts") that are secured by Manufactured Homes, as further described
herein, and (iii) securities backed or secured by Mortgage Loans and/or
Contracts (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, and/or Contracts, 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. The Contracts will be secured by
security interests taken in the Manufactured Homes.
(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.
--------------------
For a discussion of material risks associated with an investment in the
Securities, see the information herein under "Risk Factors" beginning on page
17.
--------------------
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.
--------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by First Union Capital Markets, a division of Wheat First
Securities, Inc. 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 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.
--------------------
First Union Capital Markets
November __, 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, Contracts
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.
2
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.
3
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.
4
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 ...........................................Residential Asset Funding Corporation (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
5
"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, Contracts or Underlying Loans relating to
the Private Securities, as applicable and/or as prepayments
occur with respect to such Mortgage Loans, Contracts 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, Contracts 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
6
Scheduled Distribution Date as a result of the application of
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, Contracts 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, Contracts 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 the
related Originator, Servicer, Credit Enhancer, or an affiliate
thereof at the price set forth in the related Agreement (which
would not be less than an amount necessary to pay all principal
and interest on the securities outstanding). Each such
redemption or repurchase may occur 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
percentage (which percentage shall not exceed 20%) specified in
the related Agreement. 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 failure of the holder of
the optional termination right to exercise such right, the
required party shall solicit bids for the purchase of all
Mortgage Loans and/or Contracts remaining in the Trust. In the
event that satisfactory bids are received (which would not be
less than an amount necessary to pay all principal and interest
on the securities outstanding), the net sale proceeds will be
distributed to Holders, in the same order of priority as
collections received in respect of the Mortgage Loans and/or
Contracts. If satisfactory bids are not received, such party
shall decline to sell the Mortgage Loans and/or Contracts and
shall not be under any obligation to solicit any further bids
or otherwise negotiate any further sale of the Mortgage Loans
and/or Contracts. 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
7
limitation, the requirement that the qualified liquidation
takes place over a period not to exceed 90 days.
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 loans which are secured by mortgages on residential
properties and which may be secured by fixtures (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 "purchase money" loans, as distinguished from
"home equity" 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). The Mortgage Loans, in
addition to being secured by mortgages on real estate, may
also be secured by "fixtures" treated as personal property
under local state law. Although fixtures may turn up more
frequently in the case of loans in which the proceeds are used
to fund home improvements, fixtures as a part of the
collateral package may be a part of either a "home equity" or
"purchase money" loan.
A "purchase money" mortgage is a loan the proceeds of which
are used to purchase the related mortgaged property; the
proceeds of a "home equity" loan are not applied to the
purchase of the related mortgaged property.
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
8
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
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) Contracts Each Contract Pool (as defined herein) will consist of fixed
or adjustable rate manufactured housing installment sales
contracts and installment loan agreements. Each Contract
may be secured by a new or used Manufactured Home (as
defined herein).
(3) 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 and/or Contracts (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 and
not purchased as part of the original distribution 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
9
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
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
10
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
11
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.
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
12
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 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 and/or Contracts
for a Series. In addition, the Servicer may act as
custodian and be responsible for maintaining custody of the
Mortgage Loans and/or Contracts and related documentation on
behalf of the Trustee. Advances with respect to delinquent
payments of principal or interest on a Mortgage Loan and/or
Contracts 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
13
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 and/or Contracts
or from other recoveries relating to such Mortgage Loan or
Contract (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 and/or Contracts 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 "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 REMICs) 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 conform to the 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
14
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 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, Contracts 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
15
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 "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 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,
Contracts 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,
Contracts or Underlying Loans due to conversion of adjustable-rate 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 and/or Contracts. 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 and/or Contracts. 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 and/or Contracts than other
classes of Securities.
The Mortgage Loans and/or Contracts 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 and/or Contracts 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 and/or Contracts), 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 and/or Contracts 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 and/or Contracts. The
related Prospectus Supplement will specify whether any or all of the Mortgage
Loans contain "due-on-sale" provisions.
Collections on the Mortgage Loans and/or Contracts may vary due to the
level of incidence of delinquent payments and of prepayments. Collections on the
Mortgage Loans and/or Contracts 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 such time as
the aggregate outstanding principal amount of the Primary Assets is less than
the amount or percentage specified in the related Agreement, (such amount or
percentage not to exceed 20% 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 of failure of borrowers to maintain adequately
the Mortgaged Properties or of natural disasters that are not necessarily
19
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.
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Security Interests in the Manufactured Homes may not be perfected and the Trust
Fund may not realize upon the full amount due under the related Contract.
Each Contract is secured by a security interest in a Manufactured Home
together with, in the case of land secured contracts, the real estate on which
the related Manufactured home is located (such Contracts, the "Land Secured
Contracts"). Perfection of security interests in the Manufactured Homes and
enforcement of rights to realize upon the value of the Manufactured Homes as
collateral for the Contracts are subject to a number of federal and state laws,
including the Uniform Commercial Code (the "UCC") as adopted in the states in
which the Manufactured Homes are located and such states' certificate of title
statutes, but generally not their real estate laws. Under such federal and state
laws, a number of factors may limit the ability of a holder of a perfected
security interest in Manufactured Homes to realize upon such Manufactured Homes
or may limit the amount realized to less than the amount due under the related
Contract.
In addition, because of the expense and administrative inconvenience
involved, the seller of the Manufactured Home ("Seller") may not amend any
certificates of the title related to any Manufactured Home to change the
lienholder specified therein to the Trustee, and may not execute any transfer
instrument (including, among other instruments, UCC-3 assignments) relating to
any Manufactured Home in favor of the Trustee or note thereon the Trustee's
interest. Such amendment would require, consistent with the law of the related
State, filings at the state or county level for each Contract. As a result, the
Seller will remain the lienholder on the certificate of title relating to the
Manufactured Home. In some states, in the absence of such an amendment,
execution or notation, the assignment to the Trustee of the security interest in
the Manufactured Homes located therein may not be effective or such security
interest may not be perfected. If any otherwise effectively assigned security
interest in favor of the Trustee is not perfected, such assignment of the
security interest to the Trustee may not be effective against creditors of the
Seller to the extent it continues to be specified as lienholder on any
certificate of title or as secured party on any UCC filing, or against a trustee
in bankruptcy of the Seller.
Each Contract (other than a Land Secured Contract) will be "chattel
paper" as defined in the UCC in effect in the jurisdiction in which the related
Manufactured Home was located at origination. Under the UCC as in effect in each
such jurisdiction, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related Agreement,
the Trustee will have possession of the Contracts. In addition, the Seller will
make appropriate filings of UCC-1 financing statements in the office of the
Secretary of State of the state where its principal place of business is located
to give notice of the Trustee's ownership of the Contracts. The Trustee's
interest in the Contracts could, through the fraud or negligence of the Trustee,
be defeated if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment.
Further, because of the expenses and administrative inconvenience
involved, the assignment of mortgages or deeds of trust to the Trustee may not
be recorded with respect to the mortgages or deeds of trust securing each Land
Secured Contract. Recordation of such assignments would require the Seller to
retain counsel in the respective state, and make the appropriate filing at the
local level. The failure to record the assignments to the Trustee of the
mortgage securing Land Secured Contracts may result in the sale of such
Contracts or the Trustee's rights in the land secured by the mortgage being
ineffective against creditors of the Seller or against a trustee in bankruptcy
of the Seller or against a subsequent purchaser of such Contracts from the
Seller, without notice of the sale to the Trustee.
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)
21
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.
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/or Contracts, 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.
22
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 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, Contracts 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, Contracts 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.
23
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.
Optional Redemption, Purchase or Termination
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
by the related Originator, Servicer or Credit Enhancer or an affiliate thereof.
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, is less than a
percentage not to exceed 20% 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 (which would not
be less than an amount necessary to pay all principal and interest on the
securities outstanding) 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.
24
There is, however, no assurance that prepayment of the Mortgage Loans,
Contracts 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, Contracts 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, Contracts or Underlying Loans, as applicable, for a Series 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,
Contracts or Underlying Loans relating to the Private Securities, as applicable.
If any Mortgage Loans, Contracts 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) any Manufactured Home which initially
secured a Contract and which is acquired by repossession and (v) 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 and/or Contracts 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.
25
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, Contracts and Private Securities, to the
extent and as specified in the related Prospectus Supplement. Some of the
Mortgage Loans and/or Contracts may be delinquent to the extent and as specified
in the related Prospectus Supplement. The percentage of those Mortgage Loans
and/or Contracts 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 and/or Contracts
expected to be included in the related Trusts.
The Mortgage Loans
Mortgage Loans. The Primary Assets for a Series may consist, in whole
or in part, of 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 "purchase money" loans, as distinguished from "home equity"
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). The Mortgage Loans, in addition to being secured by mortgages on
real estate, may also be secured by "fixtures" treated as personal property
under local state law. Although fixtures may turn up more frequently in the case
of loans in which the proceeds are used to fund home improvements, fixtures as a
part of the collateral package may be a part of either a "home equity" or
"purchase money" loan.
A "purchase money" mortgage is a loan the proceeds of which are used
to purchase the related mortgaged property; the proceeds of a "home equity" loan
are not applied to the purchase of the related mortgaged property.
The Mortgage Loans may be (i) "conventional" 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.
26
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 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
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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 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 equal to 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 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
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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 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.
The Contracts
Contracts. Each Pool of Contracts in a Trust Fund ("Contract Pool")
will consist of conventional manufactured housing installment sales contracts
and installment loan agreements (collectively, the "Contracts") originated by a
manufactured housing dealer in the ordinary course of business and purchased by
the Seller. Each Contract will be secured by Manufactured Homes (as defined
below), each of which will be located in any of the fifty states or the District
of Columbia. The Contracts will be fully amortizing and will bear interest at a
fixed or adjustable annual percentage rate (the "APR" or "Contract Rate"). The
Contract Pool may include Contracts with respect to which a Fixed Retained Yield
has been retained, in which event references herein to Contracts and payments
thereon shall mean the Contracts exclusive of such Fixed Retained Yield. The
Prospectus Supplement for a Series will specify whether there will be any Fixed
Retained Yield in any Contract, and if so, the owner thereof. A "Fixed Retained
Yield" in a Contract represents a specified portion of the interest payable
thereon.
The Seller of the Contracts will represent that the Manufactured Homes
securing the Contracts consist of manufactured homes within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air-conditioning, and electrical systems contained therein;
except that such term shall include any structure which meets all the
requirements of [this] paragraph except the size requirements and with respect
to which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter."
Manufactured Homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of Contracts with high Loan-to-Value Ratios at origination, that
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the market value of a Manufactured Home may be lower than the principal amount
outstanding under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such Series
as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate Principal
Balance"), the range of original terms to maturity of the Contracts in the
Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and net contract rates borne by such
Contracts ("Net Contract Rates"), the weighted average Net Contract Rate at the
Cut-Off Date of such Contracts, the range of such Contracts which had
Loan-to-Value Ratios at the time of origination of the Contracts and the highest
outstanding principal balance at origination of any such Contract.
The "Loan-to-Value Ratio" is the ratio, expressed as a percentage, of
the principal amount of the Contract outstanding at the origination of such loan
divided by the fair market value of the Manufactured Home. The fair market value
of the Manufactured Home securing any Contract is, unless otherwise specified in
the applicable Prospectus Supplement, either (x) the appraised value of the
related Manufactured Home determined in an appraisal obtained by the originator
at origination and (y) the sale price for such property, plus, in either case,
sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges. A
maximum of 5% (by Cut-Off Date Aggregate Principal Balance) of the aggregate
Contracts that are included in a Trust Fund will deviate from the
characteristics that are described in the related Prospectus Supplement.
The Contracts in a Trust Fund will generally have monthly payments due
on the first of each month (each, a "Due Date") and will be fully-amortizing
Contracts. Contracts may have Due Dates which occur on a date other than the
first of each month. The Contract Pools may include adjustable rate Contracts
that provide for payment adjustments to be made less frequently than adjustments
in the Contract Rates. Each adjustment in the Contract Rate which is not made at
the time of a corresponding adjustment in payments (and which adjusted amount of
interest is not paid currently on a voluntary basis by the obligor) will result
in a decrease (if the Contract Rate rises) or an increase (if the Contract Rate
declines) in the rate of amortization of the Contract. Moreover, such payment
adjustments on the Contracts may be subject to certain limitations, as specified
in the Prospectus Supplement, which may also affect the rate of amortization on
the Contract. As a result of such provisions, the amount of interest accrued in
any month may equal or exceed the scheduled monthly payment on the Contract. In
any such month, no principal would be payable on the Contract, and if the
accrued interest exceeded the scheduled monthly payment, such excess interest
due would become "Deferred Interest" that is added to the principal balance of
the Contract. Deferred Interest will bear interest at the Contract Rate until
paid. If such limitations prevent the payments from being sufficient to amortize
fully the Contract by its stated maturity date, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date.
The geographic distribution of Manufactured Homes will be set forth in
the Prospectus Supplement. Each Prospectus Supplement will set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of any Contracts in
the Contract Pool which are secured by Manufactured Homes which have become
permanently affixed to real estate. Each Prospectus Supplement will also set
forth the percentage of the Cut-Off Date Aggregate Principal Balance of the
Contracts in the related Contract Pool representing the refinancing of existing
mortgage indebtedness.
If specific information respecting the Contracts to be included in a
Trust Fund is not known to the Sponsor at the time the Securities of a Series
are initially offered, more general information of the nature described above
will be provided in the Prospectus Supplement and final specific information
will be set forth in a Current Report on Form 8-K to be available to investors
on the date of issuance thereof and to be filed with the Commission promptly
after the initial issuance of such 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 and/or Contracts (the "Underlying Loans") or (b) collateralized
obligations secured by Underlying
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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 and not purchased as part of the original
distribution 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 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;
31
(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 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
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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.
Pool Insurance Policy. The related Prospectus Supplement will describe
any pool insurance policy obtained by the Depositor for the Mortgage Loans
and/or Contracts 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 or the Manufactured Home underlying a Contract (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 Manufactured Home, 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 Manufactured Home or (ii) upon
transfer of such Mortgaged Property or
33
Manufactured Home to the special hazard insurer, the unpaid principal balance of
such Mortgage Loan or Contract 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 or
Manufactured Home. Any amount paid as the cost of repair of such Mortgaged
Property or Manufactured Home 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 or replacement of the
Manufactured Home with the proceeds described under (i) above is expected to
satisfy the condition under any pool insurance policy that such Mortgaged
Property be restored or Manufactured Home replaced before a claim under such
pool insurance policy may be validly presented with respect to the defaulted
Mortgage Loan or Contract secured by such Mortgaged Property or Manufactured
Home, as applicable. The payment described under (ii) above will render
unnecessary presentation of a claim in respect of such Mortgage Loan or Contract
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 or
Contract 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 or the Manufactured Home securing the Contract at an
amount less than the then-outstanding principal balance of such Mortgage Loan or
Contract. The amount of the secured debt could be reduced to such value, and the
holder of such Mortgage Loan or Contract thus would become an unsecured creditor
to the extent the outstanding principal balance of such Mortgage Loan or
Contract exceeds the value so assigned to the Mortgaged Property or the
Manufactured Home by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan or Contract 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 Contract or a reduction by such court of the principal amount
of a Mortgage Loan or Contract 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 and/or
Contracts 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/or Contracts, and will not be restored.
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.
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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 and/or
Contracts 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/or Contracts 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 or Contract
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 or Contract.
The Servicer, to the extent permitted by law, will establish and
maintain escrow or impound accounts ("Escrow Accounts") with respect to Mortgage
Loans and/or Contracts in which payments by obligors to pay taxes, assessments,
mortgage and hazard insurance premiums, and other comparable items will be
deposited. Mortgage Loans and/or Contracts 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 and/or
Contracts. 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 or
Manufactured Home securing the related Contract 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.
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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. 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 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 Manufactured Home 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
(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 and/or Contracts (including, for this purpose,
Liquidation Proceeds and amounts representing proceeds of insurance
policies covering the related Mortgaged Property or Manufactured
36
Home, as applicable) 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 or
Manufactured Home 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 or Contract, 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 or Contract;
(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 or Contract 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 and/or Contracts. 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 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 and/or Contracts 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 or Contract, 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.
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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 or Contract 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 or Manufactured Home 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
and/or Contracts. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Mortgaged
Property or Manufactured Home 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 and/or Contracts will be underwritten by
different hazard insurers and will cover Mortgaged Properties and Manufactured
Homes 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 or Manufactured Home Securing a Contract 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 or Manufactured Home,
including the improvements on any Mortgaged Property or Manufactured Home, 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 or Manufactured Home, 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 or
Manufactured Home and improvements. Since the amount of hazard insurance to be
maintained on the improvements securing the Mortgage Loans and Manufactured
Homes declines as the principal balances owing thereon decrease, and since the
value of the Mortgaged Properties or Manufactured Home 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 or Manufactured Home.
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 or Contract. 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.
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 or Manufactured Home, 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 and/or Contracts,
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
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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 or possession of the Manufactured
Homes securing the Contracts 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, repossession 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 repossession or
towards the restoration of the Mortgaged Property or Manufactured Home unless it
determines that (i) such restoration, repossession or foreclosure will increase
the Liquidation Proceeds in respect of the related Mortgage Loan or Contract
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
or Contract a modification of such Mortgage Loan or Contract (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 or Manufactured
Homes in connection with a defaulted Contract, as will be further specified in
the related Prospectus Supplement,.
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,
39
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 or Contract, 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 or Contract (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 or
Contracts. 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 or
Contract 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 or Contract, 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 and/or Contracts 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.
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)
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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.
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
41
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. If any
document required to be in the file relating to the Primary Assets delivered by
the Depositor to the Trustee (or Custodian) is found by the Trustee within a
period not to exceed 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 a period not to exceed
90 days, the Depositor or Originator will, not later than a period not to exceed
90 days 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.
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
42
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;
(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;
43
(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 and/or Contracts 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 and/or Contracts (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.
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
44
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
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
45
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.
46
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/or Contracts), 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.
47
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.
48
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 re-registration, 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
49
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 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 Trust
Estate.
The mandatory termination may take the form of an auction sale. Within
a certain period following the failure of the holder of the optional termination
right to exercise such right, the required party shall solicit bids for the
purchase of all Mortgage Loans remaining in the Trust. In the event that
satisfactory bids (which would not be less than an amount necessary to pay all
principal and interest on the securities outstanding) are received as specified
in the related 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 and/or Contracts. If satisfactory bids are not received, such party shall
decline to sell the Mortgage Loans and/or Contracts and shall not be under any
obligation to solicit any further bids or otherwise negotiate any further sale
of the Mortgage Loans and/or Contracts. 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 and Contracts, 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.
50
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 loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the 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 loan
default by paying arrearages over a number of years.
Court with federal bankruptcy jurisdiction also have indicated that the
terms of a 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 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
51
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
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 loans and fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the 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 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,
52
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 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.
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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 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" 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.
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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 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
loans having higher mortgage rates, may increase the likelihood of refinancing
or other early retirements of such 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 loans originated by certain lenders after March 31, 1980.
Similar federal statutes were in effect with respect to 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 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 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
55
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.
General -- Contracts
General
As a result of the assignment of the Contracts to the Trustee, the
Trust Fund will succeed collectively to all of the rights (including the right
to receive payment on the Contracts) and will assume the obligations of the
obligee under the Contracts. Each Contract evidences both (a) the obligation of
the obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. Certain
aspects of both features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Pooling and Servicing Agreement, the Servicer will transfer
physical possession of the Contracts to the Trustee or a designated custodian or
may retain possession of the Contracts as custodian for the Trustee. In
addition, the Servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Contracts. Unless otherwise specified in the related Prospectus Supplement,
the Contracts will not be stamped or marked otherwise to reflect their
assignment from the Sponsor to the Trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the Contracts without notice of such assignment, the Trustee's interest in
Contracts could be defeated.
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Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection pursuant
to the provisions of the UCC is required. The Servicer may effect such notation
or delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the Servicer fails, due to clerical errors, to effect
such notation or delivery, or files the security interest under the wrong law
(for example, under a motor vehicle title statute rather than under the UCC, in
a few states), the securityholders may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
Contracts contain provisions prohibiting the borrower from permanently attaching
the Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Seller and transferred to
the Sponsor. With respect to a Series of Securities and if so described in the
related Prospectus Supplement, the Servicer may be required to perfect a
security interest in the Manufactured Home under applicable real estate laws.
The Servicer will represent that at the date of the initial issuance of the
related Securities it has obtained a perfected first priority security interest
by proper notation or delivery of the required documents and fees with respect
to substantially all of the Manufactured Homes securing the Contracts.
The Sponsor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the securityholders. Unless otherwise
specified in the related Prospectus Supplement, neither the Sponsor nor the
Trustee will amend the Certificates of title to identify the Trustee or the
Trust Fund as the new secured party, and neither the Sponsor nor the Servicer
will deliver the Securities of title to the Trustee or note thereon the interest
of the Trustee. Accordingly, the Servicer (or the seller) which continue to be
named as the secured party on the certificate of title relating to the
Manufactured Homes. In many states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Sponsor's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, such assignment of the
security interest in the Manufactured Home might not be effective or perfected
or that, in the absence of such notation or delivery to the Trustee, the
assignment of the security interest in the Manufactured Home might not be
effective against creditors of the Servicer (or the Seller) or a trustee in
bankruptcy of the Servicer (or the Seller).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Servicer (or
the Seller) on the certificate of title or delivery of the required documents
and fees will be sufficient to protect the securityholders against the rights of
subsequent purchasers of a Manufactured Home or subsequent lenders who take a
security interest in the Manufactured Home. If there are any Manufactured Homes
as to which the security interest assigned to the Trustee is not perfected, such
security interest would be subordinate to, among others, subsequent purchasers
for value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee as the new secured party
on the certificate of title that, through fraud or negligence, the security
interest of the Securityholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
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Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the Pooling and Servicing Agreement, the Servicer is obligated to take
steps, at the Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Seller will represent in the Pooling and
Servicing Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the debted thereunder.
58
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 asset the rule to set off remaining amounts due
as a defense against a claim brought by the Trustee against such obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the Contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code. In
the case of some of these laws, the failure to comply with their provisions may
affect the enforceability of the related Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to.
In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St Germain Depository Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the Manufactured
Homes. Consequently, in some states the Servicer may be prohibited from
enforcing a "due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The Seller will represent that all of the Contracts comply with applicable usury
law.
Formaldehyde Litigation with Respect to Contracts
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset in
many building materials, including such components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuits were brought against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. Sponsor is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
The holder of any Contract secured by a Manufactured Home with respect
to which a formaldehyde claim has been successfully asserted may be liable to
the obligor for the amount paid by the obligor on the related Contract and may
be unable to collect amounts still due under the Contract. The successful
assertion of such claim constitutes a breach of a representation or warranty of
the person specified in the related Prospectus Supplement, and the
Securityholders would suffer a loss only to the extent that (i) such person
breached its obligation to repurchase the Contract in the event an obligor is
successful in asserting such a claim, and (ii) such person, the Servicer or the
Trustee were unsuccessful in asserting any claim of contribution or subrogation
on behalf of the Securityholders against the manufacturer or other persons who
were directly liable to the plaintiff for the damages. Typical products
liability insurance policies held by manufacturers and component suppliers of
manufactured homes may not cover liabilities arising from formaldehyde in
manufactured housing, with the result that recoveries
59
from such manufacturers, suppliers or other persons may be limited to their
corporate assets without the benefit of insurance.
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 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, Contracts 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.
60
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.
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 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 and/or Contracts 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 and/or Contracts 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 and/or Contracts 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."
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 and/or Contracts
61
(including amounts 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/or Contracts 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/or Contracts 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,
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
62
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 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.
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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.
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
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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 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
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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.
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
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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
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
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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 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
the Securities will be classified as debt secured by the related Mortgage Loans
and/or Contracts. Consequently, the Debt Securities will not be treated as
ownership interests in the Mortgage Loans and/or Contracts 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, REMIC Securities will possess certain special tax
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.
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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.
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 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 and/or Contracts.
Special Tax Attributes
As described above, REMIC Securities will possess certain special tax
attributes by virtue of the REMIC 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,
69
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 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
70
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.
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, 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
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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 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
is unclear the extent to which tax on such transactions
72
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 Depositor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The
Depositor 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. The Trustee will report
original issue discount based on accrual periods of no longer than one year
either (i) 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
or (ii) beginning on the next day following a payment date and ending on 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
74
aggregate amount of accrued market discount on such Security not previously
included in income. With respect to 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
75
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.
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
76
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 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
77
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.
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
78
(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 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 Depositor, 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
79
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, a division of Wheat First Securities, Inc. ("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.
80
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. 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 in servicing such Mortgage Loan.
"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.
81
"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 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.
82
"Depositor" means Residential Asset Funding Corporation
"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.
83
"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 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.
"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.
84
"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.
"Residual Interest" means a residual interest in a REMIC.
85
"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.
86
"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.
87
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS.........................................................5
RISK FACTORS.................................................................17
DESCRIPTION OF THE SECURITIES................................................23
THE TRUST FUNDS..............................................................26
CREDIT ENHANCEMENT...........................................................34
SERVICING OF MORTGAGE LOANS..................................................36
THE AGREEMENTS...............................................................42
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................................51
THE DEPOSITOR................................................................61
USE OF PROCEEDS..............................................................61
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.....................................62
STATE TAX CONSIDERATIONS.....................................................78
ERISA CONSIDERATIONS.........................................................79
LEGAL INVESTMENT.............................................................81
PLAN OF DISTRIBUTION.........................................................81
LEGAL MATTERS................................................................82
FINANCIAL INFORMATION........................................................82
GLOSSARY OF TERMS............................................................83
i
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..................................................28
Agreement.................................................................6
APR......................................................................30
ARM Loans................................................................19
Balloon Loan.............................................................10
bankruptcy bond..........................................................35
Book-Entry Securities....................................................49
Business Day.............................................................13
Capitalized Interest Account.............................................13
Cede.....................................................................49
CERCLA...................................................................21
Certificate Schedule.....................................................43
Certificates...........................................................1, 6
Class.....................................................................3
Code.....................................................................62
Collection Account.......................................................12
Combined Loan-to-Value Ratio.............................................10
Commission................................................................4
Condominium Units........................................................27
Contract Rate............................................................30
Contracts................................................................30
Cooperative Dwellings....................................................27
Credit Enhancement.......................................................13
Credit Enhancer..........................................................12
Current Interest Rates...................................................10
Custodian................................................................43
Cut-Off Date..............................................................9
Cut-Off Date Aggregate Principal Balance.................................31
D&P......................................................................80
Debt Securities......................................................15, 62
Deferred Interest........................................................31
Deleted Primary Asset....................................................44
Deposit Agreement........................................................14
Depositor.................................................................1
Depositor Securities.....................................................61
Distribution Account.....................................................12
Distribution Date.........................................................3
DOL......................................................................79
Due Date.................................................................31
Eligible Investments.................................................13, 33
ERISA....................................................................16
Escrow Accounts..........................................................36
Event of Default.........................................................41
Exchange Act..............................................................5
FASIT................................................................16, 62
FASIT High-Yield Securities..............................................15
FASIT Ownership Security.................................................15
FASIT Regular Securities.................................................15
FASIT Securities.........................................................62
FDIC.....................................................................37
FHA......................................................................27
i
FHLMC....................................................................55
Final Scheduled Distribution Date.........................................7
First Union..............................................................81
fully taxable bonds......................................................76
Garn-St. Germain Act.....................................................55
Grantor Trust............................................................62
Grantor Trust Securities.................................................15
Holders...................................................................4
Indenture................................................................23
Indirect Participant.....................................................49
IRS......................................................................63
Issuer....................................................................6
Lifetime Rate Caps.......................................................10
Liquidation Proceeds.....................................................37
Loan Rate................................................................10
Loan Schedule............................................................43
Loan-to-Value Ratio..................................................10, 31
Minimum Principal Payment Agreement......................................14
Modification.............................................................40
Mortgage Loans.....................................................1, 9, 27
Notes..................................................................1, 6
Notional Amount...........................................................7
Originator................................................................1
OTS......................................................................56
Owner Trust...............................................................6
Owner Trustee.............................................................7
PAC.......................................................................6
Participants.............................................................49
Partnership..............................................................62
Partnership Interests................................................15, 62
Physical Certificates....................................................49
Plan.....................................................................79
Plan Assets Regulation...................................................79
Pool......................................................................1
Pooling and Servicing Agreement..........................................23
Pre-Funded Amount........................................................12
Pre-Funding Account......................................................12
Pre-Funding Period.......................................................12
Premium Security.........................................................76
Prepayment Assumption....................................................74
Primary Assets............................................................1
Prospectus Supplements....................................................1
PS Agreement.............................................................32
PS Servicer..............................................................11
PS Sponsor...............................................................11
PS Trustee...............................................................11
PTCE.....................................................................80
Qualifying Substitute Primary Asset......................................44
Rating Agency............................................................14
REMIC................................................................15, 62
REMIC Regular Securities.................................................15
REMIC Regulations........................................................64
REMIC Residual Securities................................................15
REMIC Securities.........................................................62
REO Property.............................................................38
Reserve Fund.............................................................14
ii
Restricted Group.........................................................80
Retained Interests.......................................................43
Rule of 78s Mortgage Loan................................................28
Securities................................................................1
Security Registrar.......................................................49
Series....................................................................1
Servicer..................................................................1
Servicing Agreement......................................................26
Servicing Fee............................................................15
Settlement Date..........................................................64
Simple Interest Mortgage Loan............................................28
Single Family Properties.................................................27
SMMEA....................................................................16
Title I Program..........................................................29
Title V..............................................................56, 60
Trust Agreement...........................................................6
Trust Fund................................................................1
Trustee................................................................6, 7
UCC..................................................................49, 57
Underlying Loans.........................................................11
Underwriter Exemptions...................................................79
iii
FORM OF PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 1998)
[_____] Mortgage Loan Trust [series]
[Logo] [Logo] [Logo]
(Originator) (Originator)
RESIDENTIAL ASSET FUNDING CORPORATION
(Depositor)
Mortgage Pass-Through Certificates, Series [series]
----------------------------------------------------------
The certificates will consist of six classes of senior certificates and a single
class of residual certificates. Only the senior certificates are being offered
hereby.
The certificates will evidence in the aggregate all of the beneficial ownership
interests in a trust fund consisting primarily of a pool of fixed-rate,
closed-end, monthly pay, business and consumer purpose home equity loans secured
by first or second lien mortgages or deeds of trust on residential real
properties.
Distributions in respect of principal and interest will be made on the [___] day
of each month or, if the [___] day is not a Business Day, on the next succeeding
Business Day, commencing on [date].
[__________] will issue a financial guaranty insurance policy for the benefit of
the holders of the Class A Certificates pursuant to which it will guarantee
certain payments to the Class A Certificateholders as described herein.
[Logo]
You should read the section entitled "Risk Factors" beginning on page [___]
herein and beginning on page [___] in the prospectus before making a decision to
invest in the certificates.
These certificates represent interest in the trust only and are not interests in
or obligations of any other person. Neither these securities nor the underlying
mortgage loans will be insured or guaranteed by any governmental agency or
instrumentality.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement or the prospectus. Any
representation to the contrary is a criminal offense.
-------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------
Original Certificate Proceeds to
Class Balance Pass-Through Rate Price to Public Underwriting Discount the Depositor
-------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------
Class A-1
Class A-2
Class A-3
Class A-4
Class A-5
Class A-6
TOTAL
-------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------
First Union Capital Markets, Inc.
[date]
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (2) this prospectus supplement, which describes
the specific terms of your series of certificates.
This prospectus supplement does not contain complete information about
the offering of the certificates. Additional information is contained in the
prospectus. You are urged to read both this prospectus supplement and the
prospectus in full. We can not sell the certificates to you unless you have
received both this prospectus supplement and the prospectus.
If the terms of your series of certificates vary between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
The Depositor has filed a registration statement under the Securities
Act of 1933, as amended, with the Securities and Exchange Commission with
respect to the Offered Certificates. This prospectus supplement and prospectus
contain a summary of the material terms of the documents referred to herein and
therein, but neither contains nor will contain all of the information set forth
in the registration statement of which this prospectus is a part. For further
information, reference is made to such registration statement and any amendments
thereof and to the exhibits thereto. Copies of the registration statement may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed charges, or may be
examined free of charge at the Commission's offices, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the regional offices of the Commission located at 7
World Trade Center, Ste. 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661-2511 or
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's web site at http://www.sec.gov.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-2
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS........................................................................2
SUMMARY...........................................................................................................5
THE PARTIES....................................................................................................5
CERTIFICATES OFFERED...........................................................................................5
DESCRIPTION OF CERTIFICATES....................................................................................6
DISTRIBUTIONS, GENERALLY.......................................................................................6
DISTRIBUTIONS OF INTEREST......................................................................................7
DISTRIBUTIONS OF PRINCIPAL.....................................................................................7
CREDIT ENHANCEMENT............................................................................................10
THE MORTGAGE POOL.............................................................................................11
PRE-FUNDING ACCOUNT...........................................................................................12
CAPITALIZED INTEREST ACCOUNT..................................................................................13
SERVICING OF THE MORTGAGE LOANS...............................................................................13
PERIODIC ADVANCES.............................................................................................13
PREPAYMENT INTEREST SHORTFALLS................................................................................13
CIVIL RELIEF ACT INTEREST SHORTFALLS..........................................................................14
SERVICING ADVANCES............................................................................................14
SERVICING FEE.................................................................................................14
OPTIONAL TERMINATION BY THE SERVICER..........................................................................14
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS.................................................................15
ERISA CONSIDERATIONS..........................................................................................15
LEGAL INVESTMENT..............................................................................................15
FEDERAL INCOME TAX STATUS.....................................................................................15
CERTIFICATE RATINGS...........................................................................................16
RISK FACTORS.....................................................................................................17
PREPAYMENTS ON THE MORTGAGE LOANS MAY ADVERSELY AFFECT THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES......17
THE PRE-FUNDING FEATURE OF THE TRUST CREATES A RISK OF PREPAYMENT TO THE CLASS A
CERTIFICATEHOLDERS IF INSUFFICIENT MORTGAGE LOANS ARE AVAILABLE FOR TRANSFER TO THE
TRUST; SUBSEQUENT MORTGAGE LOANS MAY BE OF A DIFFERENT CREDIT QUALITY THAN THE
INITIAL MORTGAGE LOANS........................................................................................19
THE TRUST COULD EXPERIENCE HIGHER DELINQUENCIES THAN TRADITIONAL MORTGAGE LOANS
BECAUSE THEY WERE UNDERWRITTEN USING LESS STRINGENT UNDERWRITING GUIDELINES...................................19
GEOGRAPHIC CONCENTRATION OF THE MORTGAGED PROPERTIES CREATES A RISK OF GREATER
LOSSES IN CONNECTION WITH REGIONAL DISTURBANCES...............................................................20
MORTGAGE LOANS REQUIRING BALLOON PAYMENTS MAY INVOLVE GREATER RISKS OF DEFAULT................................20
THE TRUST MAY BE UNABLE TO RECOVER ON SECOND LIEN MORTGAGE LOANS..............................................21
DECLINE IN REAL ESTATE VALUES COULD LEAD TO HIGHER LOSSES.....................................................22
PREPAYMENTS ON THE MORTGAGE LOANS MAY CAUSE SHORTFALLS........................................................23
THE CLASS A-1 PASS-THROUGH RATE IS LIMITED BY THE MORTGAGE LOAN YIELD.........................................23
TIMING OF REPAYMENT MAY CREATE GREATER RISK OF LOSS TO HOLDERS OF CERTAIN CLASSES.............................23
LENDING LAWS MAY LIMIT ENFORCEMENT AND CREATE LIABILITY.......................................................24
THE MORTGAGE POOL................................................................................................25
DIFFERENCE BETWEEN STATISTICAL CALCULATION DATE AND CLOSING DATE POOLS........................................25
GENERAL.......................................................................................................26
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS.......................................................................34
THE ORIGINATORS, THE SELLER AND THE SERVICER.....................................................................35
GENERAL.......................................................................................................35
S-3
THE ORIGINATORS...............................................................................................35
UNDERWRITING GUIDELINES.......................................................................................35
THE SERVICER..................................................................................................35
DELINQUENCY AND LOAN LOSS EXPERIENCE..........................................................................35
PREPAYMENT AND YIELD CONSIDERATIONS..............................................................................35
DESCRIPTION OF THE CERTIFICATES..................................................................................41
GENERAL.......................................................................................................41
BOOK-ENTRY REGISTRATION.......................................................................................42
CALCULATION OF LIBOR..........................................................................................46
DEFINITIVE CERTIFICATES.......................................................................................47
ASSIGNMENT OF MORTGAGE LOANS..................................................................................48
REPRESENTATIONS AND WARRANTIES OF THE SELLER..................................................................50
PAYMENTS ON THE MORTGAGE LOANS................................................................................52
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES.................................................54
OVERCOLLATERALIZATION PROVISIONS..............................................................................55
FLOW OF FUNDS.................................................................................................57
REPORT TO CERTIFICATEHOLDERS..................................................................................58
AMENDMENT.....................................................................................................58
SERVICING OF THE MORTGAGE LOANS..................................................................................59
THE SERVICER..................................................................................................59
SERVICER REPORTS..............................................................................................59
COLLECTION AND OTHER SERVICING PROCEDURES.....................................................................59
HAZARD INSURANCE..............................................................................................60
REALIZATION UPON DEFAULTED MORTGAGE LOANS.....................................................................61
REMOVAL AND RESIGNATION OF THE SERVICER.......................................................................61
TERMINATION; PURCHASE OF MORTGAGE LOANS.......................................................................63
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS.................................................................64
THE CERTIFICATE INSURANCE POLICY.................................................................................64
THE CERTIFICATE INSURER..........................................................................................68
GENERAL.......................................................................................................68
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE................................................................68
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS........................................................................68
ERISA CONSIDERATIONS.............................................................................................69
LEGAL INVESTMENT.................................................................................................71
PLAN OF DISTRIBUTION.............................................................................................71
EXPERTS..........................................................................................................72
RATINGS..........................................................................................................72
LEGAL MATTERS....................................................................................................73
INDEX OF SIGNIFICANT DEFINITIONS.................................................................................74
S-4
SUMMARY
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the certificates, read carefully this entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the
full description of these calculations, cash flows and other
information in this prospectus supplement and the accompanying
prospectus.
o You can find a listing of the pages where capitalized terms used in
this summary are defined under the caption "Index of Significant
Definitions" beginning on page S-__ in this prospectus supplement and
under the caption "Index of Significant Definitions" beginning on page
__ in the accompanying prospectus.
The Parties
The following are the principal parties to the transaction.
The Trust
[_____] Mortgage Loan Trust [series], a trust to be formed under the laws of the
State of [New York].
The Originators.
[__________] originated or purchased the Mortgage Loans. The Originators will
sell and assign the Mortgage Loans to the Seller, and the Seller will sell and
assign the Mortgage Loans to the Depositor. See "The Originators, the Seller and
the Servicer" in this prospectus supplement.
The Seller
[---------].
The Depositor
Residential Asset Funding Corporation. See "The Depositor" in the prospectus.
The Servicer and Subservicer
[---------].
The Trustee
[----------].
Certificates Offered
The certificates will consist of six classes of senior certificates and one
class of residual certificates. Only the senior certificates are offered hereby.
The certificates will be offered for settlement on or about _____, the Closing
Date.
The Certificates will be issued with the initial Principal Balances,
Pass-Through Rates, expected final payment dates and legal final payment dates
as set forth below:
Original Principal Expected Final Final Scheduled
Class Pass-Through Rate Balance Distribution Date Distribution Date
S-5
Class A-1 LIBOR+__%(1) [$_______]
Class A-2 [$_______]
Class A-3 [$_______]
Class A-4 [$_______]
Class A-5 [$_______]
Class A-6 [$_______]
(1) A rate of interest equal the London interbank offered rate for one-month
United States dollar deposits plus _____% per annum. The rate is calculated
as described under "Description of the Certificates--Calculation of LIBOR."
The rate may not exceed the weighted average Mortgage Interest Rate on the
Mortgage Loans less the sum of the per annum rates at which the Servicing
Fees, the Trustee Fees and the Certificate Insurer premium amounts are
calculated for such Distribution Date.
Description of Certificates
The Certificates will represent the entire beneficial ownership interest in a
trust fund. The assets of the trust fund will consist primarily of a pool of
Mortgage Loans (the "Mortgage Pool"). The Mortgage Loans transferred to the
Trust on the Closing Date are referred to as the "Initial Mortgage Loans" and
the Mortgage Loans transferred on a date subsequent to the Closing Date but
prior to [date] are referred to as the "Subsequent Mortgage Loans." See "The
Mortgage Pool" in this prospectus supplement.
Denominations
The Class A Certificates initially will be issued in book-entry form, in
denominations of $1,000 original certificate principal balance and integral
multiples of $1,000 in excess thereof (except for one Certificate in each Class
which may be issued in a lesser amount).
The Class A Certificates are sometimes referred to in this prospectus supplement
as "Book-Entry Certificates." You will not be entitled to receive a definitive
certificate representing your interest in the trust fund, except under the
limited circumstances described herein. The Book-Entry Certificates initially
will be represented by a single certificate registered in the name of Cede & Co.
("Cede") as the nominee of The Depository Trust Company ("DTC"), which will be
the "Holder" or "Certificateholder" of such Certificates, as such terms are used
herein. The rights of Beneficial Owners may only be exercised through DTC and
its participating organizations, except as otherwise specified herein. See
"Description of the Certificates --Book-Entry Registration" and " -- Definitive
Certificates" in this prospectus supplement.
Distributions, Generally
Distributions on the Certificates will be made on each Distribution Date to the
related Holders of record. Distributions to a Holder will be made in an amount
equal to the product of such Holder's Percentage Interest (as defined herein)
and the amount distributed in respect of such Holder's Class of Certificates on
such Distribution Date.
Distribution Date
Distributions on the Certificates will be made on the [___] day of each month
(or, if such [___] day is not a Business Day, on the next succeeding Business
Day).
Record Date
S-6
All distributions, other than the final distribution on the Certificates, will
be made by or on behalf of the Trustee to the persons in whose names the
Certificates are registered at the close of business on
o with respect to the Fixed Rate Certificates, the last Business Day of the
month preceding the month in which the related Distribution Date occurs and
o with respect to the Adjustable Rate Certificates, the Business Day
immediately preceding the related Distribution Date.
The "Percentage Interest" represented by any Certificate is equal to the
percentage obtained by dividing the Original Certificate Principal Balance of
such Certificate by the Original Certificate Principal Balance of all
Certificates of the same Class. The "Certificate Principal Balance" of any
Certificate is equal to the Original Certificate Principal Balance of such
Certificate less any amounts actually distributed to the Holder of such
Certificate on account of principal.
On each Distribution Date, the Trustee will distribute to the holders of the
Class A Certificates, to the extent of the Available Amount, payments in the
following order of priority:
o First, to the Trustee, the Trustee's Fees.
o Second, to each Class of Class A Certificates, the Class A Interest
Distribution Amount on a pro rata basis without any priority among the
Classes of Class A Certificates.
o Third, to the Class A Certificates, the Class A Principal Distribution
Amount shall be distributed in the order described below under
"Distributions of Principal."
Distributions of Interest
The amount of interest payable with respect to the Class A Certificates on any
Distribution Date, plus any related Carry-Forward Amount, constitutes the "Class
A Interest Distribution Amount." See "Description of the Certificates" in this
prospectus supplement.
Interest will accrue on each Class of Class A Certificates at the applicable
Pass-Through Rate on the related Certificate Principal Balance during the
related Accrual Period (such interest, the "Current Interest").
Mortgage Loan Interest Shortfalls
The amount of interest payable will generally be reduced by an amount equal to
the aggregate of the Prepayment Interest Shortfalls and the Civil Relief Act
Interest Shortfalls (together, the "Mortgage Loan Interest Shortfalls"), if any,
for such Distribution Date, to the extent such Mortgage Loan Interest Shortfalls
are not paid by the Servicer as Compensating Interest. Mortgage Loan Interest
Shortfalls will not be covered by the Certificate Insurance Policy.
Distributions of Principal
The Holders of the Classes of Class A Certificates then entitled to receive
principal, are entitled to receive certain monthly distributions of principal on
each Distribution Date which generally reflect collections of principal during
the related Due Period.
The "Class A Principal Distribution Amount" for any Distribution Date will be
the lesser of:
(a) the excess of (i) the sum, as of such Distribution Date, of (A) the
Available Amount and (B) any Insured Payment over (ii) the sum of the Class A
Interest Distribution Amount, the
S-7
Trustee's Fees and the Reimbursement Amount; and
(b) the sum, without duplication, of:
o all principal in respect of the Mortgage Loans collected during the
calendar month preceding the Distribution Date (the "Due Period"),
o the Principal Balance of each Mortgage Loan that was repurchased on the
related Distribution Date,
o any Substitution Adjustments delivered by the Depositor on the related
Distribution Date in connection with a substitution of a Mortgage Loan,
o the Net Liquidation Proceeds actually collected by the Servicer of all
Mortgage Loans during the prior calendar month (to the extent such Net
Liquidation Proceeds relate to principal),
o with respect to the __________ Distribution Date, moneys released from the
Pre-Funding Account, if any, on [date] (to the extent such funds are less
than ___% of the aggregate Principal Balance of the Mortgage Loans in the
Trust on such date) ,
o the amount of any Subordination Deficit for such Distribution Date,
o the proceeds received by the Trustee on any termination of the Trust (to
the extent such proceeds relate to principal), and
o the amount of any Subordination Increase Amount for such Distribution Date,
to the extent of any Net Monthly Excess Cashflow available for such
purpose;
minus
o the amount of any Subordination Reduction Amount for such Distribution
Date.
In no event will the Class A Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
Class A Certificate Principal Balance.
The subordination provisions of the Trust result in a limited acceleration of
the principal payments to the Holders of the Class of Class A Certificates then
entitled to receive principal, as more fully described under "Description of the
Certificates -- Overcollateralization Provisions" in this prospectus supplement.
Such subordination provisions have the effect of shortening the weighted average
lives of the Class A Certificates by increasing the rate at which principal is
distributed to the Class A Certificateholders. See "Prepayment and Yield
Considerations" in this prospectus supplement and in the prospectus.
The Class A Certificates (other than the Class A-6 Certificates) are "sequential
pay" in that the holders of classes of certificates with higher numerical
designations will generally not be entitled to receive distributions of
principal until the classes with lower numerical designations have been fully
repaid.
The Holders of the Class A-6 Certificates are generally entitled to receive on
each Distribution Date, in respect of principal, payment of the Class A-6
Lockout Distribution Amount for such Distribution Date.
The "Class A-6 Lockout Distribution Amount" for any Distribution Date will be
the product of (i) the applicable Class A-6 Lockout Percentage for such
Distribution Date and (ii) the Class A-6 Lockout Pro-Rata Distribution Amount
for such Distribution Date. The "Class A-6 Lockout Percentage" for each
Distribution Date shall be as follows:
[TABLE]
S-8
The "Class A-6 Lockout Pro Rata Distribution Amount" for any Distribution Date
will equal a percentage of the Class A Principal Distribution Amount for such
Distribution Date. Such percentage is equal to the ratio of the Class A-6
Certificate Principal Balance to the aggregate Certificate Principal Balance of
the Class A Certificates, in each case immediately prior to such Distribution
Date.
During certain periods, no principal payments or a disproportionately small
portion of the Class A Principal Distribution Amount will be distributed on the
Lockout Certificates. During certain other periods, a disproportionately large
portion of the Class A Principal Distribution Amount will be distributed on the
Lockout Certificates. Unless the Certificate Principal Balance of the Class A
Certificates (other than the Lockout Certificates) have been reduced to zero or
unused Pre-Funding Account moneys are distributed to the Holders of the Class A
Certificates as described herein, the Lockout Certificates will not be entitled
to receive any distributions of principal payments prior to the Distribution
Date in __________.
To the extent funds in the Pre-Funding Account are not used to purchase
Subsequent Mortgage Loans by [date], such funds will be distributed to the
Holders of the Class A Certificates pro rata, as principal.
The "Carry-Forward Amount" as of any Distribution Date equals the sum of (a) the
amount, if any, by which (i) the Class A Interest Distribution Amount as of the
immediately preceding Distribution Date exceeded (ii) the amount actually
distributed to the Class A Certificateholders on such Distribution Date on
account of interest and (b) 30-days' interest on such amount at the weighted
average Pass-Through Rate (weighted by the related aggregate Certificate
Principal Balance of each Class) of the Class A Certificates (the "Weighted
Average Class A Pass-Through Rate"). See "Description of Certificates
- --Distributions" in this prospectus supplement.
A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan as to
which the Servicer has determined that all amounts that it expects to recover on
such Mortgage Loan have been recovered (exclusive of any possibility of a
deficiency judgment). Any loss on a Liquidated Mortgage Loan (a "Liquidated Loan
Loss") may or may not be recovered by the Holders of the Class A Certificates on
the Distribution Date which immediately follows the event of loss. However, the
Holders of the Class A Certificates are entitled to receive ultimate recovery
with respect to any Liquidated Loan Losses which occur, receipt of which will be
no later than the Distribution Date occurring after such Liquidated Loan Loss
creates a Subordination Deficit (as described below). Such payment will be in
the form of an Insured Payment if not covered through Net Monthly Excess
Cashflow.
Insured Payments do not include Liquidated Loan Losses until such time as such
aggregate, cumulative Liquidated Loan Losses have created a Subordination
Deficit; provided, however, that the Certificate Insurer is permitted, at its
sole option, but not required, to pay any Liquidated Loan Losses in accordance
with the Certificate Insurance Policy. A "Subordination Deficit" as of any
Distribution Date, is the amount, if any, by which (a) the Class A Certificate
Principal Balance, after taking into account the payment of the Class A
Principal Distribution Amount on such date (except for any payment to be made as
to principal from the proceeds of the Certificate Insurance Policy) exceeds (b)
the aggregate Principal Balance of the Mortgage Loans determined as of the end
of the immediately preceding Due Period.
S-9
The "Principal Balance" of any Mortgage Loan as of any date of determination is
the outstanding principal balance of such Mortgage Loan as of such date of
determination after giving effect to prepayments received prior to the end of
the related Due Period and Deficient Valuations incurred prior to the related
Due Date. The Principal Balance of a Mortgage Loan which becomes a Liquidated
Mortgage Loan on or prior to the related Due Date shall be zero.
Credit Enhancement
The credit enhancement provided for the benefit of the Class A
Certificateholders consists solely of (a) overcollateralization and (b) the
Certificate Insurance Policy.
Overcollateralization.
On the Closing Date, the Trust will issue Class A Certificates with an aggregate
Original Certificate Principal Balance which is approximately ___% less than the
sum of the aggregate Principal Balance of the Initial Mortgage Loans and the
Original Pre-Funded Amount, resulting in initial overcollateralization.
Overcollateralization is created by a limited acceleration of the Class A
Certificates relative to the amortization of the Mortgage Loans. The accelerated
amortization results from the application of certain excess interest to the
payment of principal on the Classes of Class A Certificates then entitled to
receive principal. Once the required level of overcollateralization is reached,
and subject to the provisions described in the next paragraph, the acceleration
feature will cease, unless necessary to maintain the required level of
overcollateralization.
Subject to certain trigger tests, the required level of overcollateralization
may increase or decrease over time. An increase would result in a temporary
period of accelerated amortization of the Class A Certificates to increase the
actual level of overcollateralization to its required level; a decrease would
result in a temporary period of decelerated amortization to reduce the actual
level of overcollateralization to its required level. See "Description of the
Certificates --Overcollateralization Provisions" in this prospectus supplement.
The Certificate Insurance Policy.
The Certificate Insurer will issue the Certificate Insurance Policy with respect
to the Class A Certificates, pursuant to which it will irrevocably and
unconditionally guaranty payment on each Distribution Date of Insured Payments
to the Trustee for the benefit of the Holders of the Class A Certificates.
The Policy generally provides for payments of current interest and ultimate
principal. It also requires that there not be any "negative
overcollateralization;" that the principal balance of the Class A Certificates
be no less than the principal balance of the Mortgage Loans. Therefore, the
"Insured Distribution Amount" for any Distribution Date is the sum of
o the Class A Interest Distribution Amount,
o any Subordination Deficit with respect to such Distribution Date, and
o if such Distribution Date is a Final Scheduled Maturity Date, the
outstanding Certificate Principal Balance for the related Class of Class A
Certificates.
On any Distribution Date, the "Insured Payment" payable by the Certificate
Insurer will be equal to the amount, if any, by which the Insured Distribution
Amount exceeds the Available Amount, less the Trustee's Fees (in each case as of
the related Distribution Date).
S-10
[__________] (the "Certificate Insurer") is a [_____] engaged in the business
of writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. The Certificate Insurer's claims-paying
ability is rated "[___]" by [__________] ("[___]") and "[___]" by [__________]
("[___]"), [___] Investors Service, L.P. ("[___]"), __________ and [__________].
See "The Certificate Insurance Policy" and "The Certificate Insurer" in this
prospectus supplement.
So long as there does not exist a failure by the Certificate Insurer to make a
required payment under the Certificate Insurance Policy, the Certificate Insurer
shall have the right to exercise all rights of the Holders of the Class A
Certificates under the Pooling and Servicing Agreement without any consent of
such Holders, and such Holders may exercise such rights only with the prior
written consent of the Certificate Insurer, except as provided in the Pooling
and Servicing Agreement. In addition, the Certificate Insurer will be entitled
to reimbursement for all Insured Payments.
The Certificate Insurance Policy does not guarantee the Class A Certificates any
specified rate of prepayments. Mortgage Loan Interest Shortfalls will not be
covered under the Certificate Insurance Policy.
The Mortgage Pool
The Mortgage Loans to be included in the trust fund will be primarily
fixed-rate, closed-end, monthly pay, business and consumer purpose home equity
loans secured by first or second mortgages or deeds of trust (the "Mortgages")
on residential real properties (the "Mortgaged Properties").
The Mortgage Loans were originated by _____ and will be sold by the originators
to the Depositor. The Depositor will in turn transfer the Mortgage Loans to the
Trust. Such sales will occur as of _____, and all payments of interest due and
principal received after the close of business on such date will be the property
of the trust. The Mortgage Loans were underwritten in accordance with the
underwriting standards described in this prospectus supplement under "The
Originators, the Seller and the Servicer."
Unless otherwise noted, the statistical information with respect to the pool of
Mortgage Loans in this prospectus supplement is presented as of [the close of
business on] ______, the "Statistical Calculation Date." The aggregate Principal
Balance of the Mortgage Loans as of the Statistical Calculation Date was
$__________ (the "Statistical Calculation Date Aggregate Principal Balance").
All statistical percentages in this prospectus supplement are approximate and
measured by the aggregate Principal Balances of the applicable Mortgage Loans in
relation to the Statistical Calculation Date Aggregate Principal Balance, in
each case as of the Statistical Calculation Date.
The Mortgage Loans have original terms to stated maturity ranging from ___
months to ___ months. The due dates for monthly payments on the Mortgage Loans
occur throughout a month, with _____% occurring on the first day of each month
(each, a "Due Date"). See "The Mortgage Pool" herein.
The majority of the business purpose loans have a prepayment fee clause. Such
prepayment fee clauses generally provide that the mortgagor pay one or more of
the following: (i) a fee equal to a percentage of the outstanding principal
balance of the Mortgage Loan, such percentage having been negotiated at the time
of origination, (ii) a fee which is designed to allow the holder of the Mortgage
Note to earn interest on the Mortgage
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Loan as if the Mortgage Loan remained outstanding until a designated point in
time, or (iii) a fee equal to the amount of interest on the outstanding
principal balance of the Mortgage Loan calculated pursuant to a Rule of 78's
calculation, which has the effect of requiring the mortgagor to pay a greater
amount of interest than would be required to be paid if the actuarial method of
calculating interest was utilized. See "Certain Legal Aspects of the Mortgage
Loans and Contracts -- The Mortgage Loans" in the prospectus.
Approximately _____%, _____% and _____% of the Mortgage Loans by Statistical
Calculation Date Aggregate Principal Balance are secured by Mortgaged Properties
located in __________, __________ and __________, respectively. See "Risk
Factors -- Geographic Concentration" in this prospectus supplement.
The Subsequent Mortgage Loans to be purchased by the Trust, if available, will
be originated or purchased by the Originators, sold by the Originators to the
Seller, sold by the Seller to the Depositor and then sold by the Depositor to
the Trust. The Subsequent Mortgage Loans, as well as all of the Mortgage Loans
following the conveyance of such Subsequent Mortgage Loans to the Trust, must
conform to certain specified characteristics. See "The Mortgage Pool
- --Conveyance of Subsequent Mortgage Loans" in this prospectus supplement.
The Trust will be obligated to purchase the Subsequent Mortgage Loans from time
to time on or before [date], subject to the availability thereof. In connection
with each purchase of Subsequent Mortgage Loans, the Trust will be required to
pay to the Depositor a cash purchase price of 100% of the aggregate Principal
Balance of such Subsequent Mortgage Loans from the Pre-Funding Account. The
Depositor will be obligated to sell Subsequent Mortgage Loans to the Trust and
the Trust will be obligated, subject to the satisfaction of certain conditions
described herein, to purchase such Subsequent Mortgage Loans. The Depositor will
designate as a cut-off date the first day of the month in which such Subsequent
Mortgage Loans will be conveyed by the Depositor to the Trust (each, a
"Subsequent Transfer Date") occurring during the Pre-Funding Period. The Trust
may purchase the Subsequent Mortgage Loans only from the Depositor and not from
any other person. See "The Mortgage Pool -- Conveyance of Subsequent Mortgage
Loans" in this prospectus supplement.
Pre-Funding Account
On the Closing Date, the Trustee will deposit the Original Pre-Funded Amount in
an account held in the name of the Trustee on behalf of the Trust (the
"Pre-Funding Account"). Such Original Pre-Funded Amount will be funded from the
sale of the Class A Certificates, and may be used to acquire Subsequent Mortgage
Loans during the period (the "Pre-Funding Period") from the Closing Date until
the earliest of (i) the date on which the amount on deposit in the Pre-Funding
Account is less than $__________, (ii) the date on which an Event of Default
occurs under the terms of the Pooling and Servicing Agreement, or (iii) [date].
The amount on deposit in the Pre-Funding Account will be reduced during the
Pre-Funding Period by the amount thereof used to purchase Subsequent Mortgage
Loans in accordance with the terms of the Pooling and Servicing Agreement. The
Depositor expects that the Original Pre-Funded Amount will be reduced to less
than $__________ by [date]. To the extent funds in the Pre-Funding Account are
not expected to be used to purchase Subsequent Mortgage Loans by [date], such
funds will be used to prepay the principal of the Class A Certificates, pro
rata, on the __________
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Distribution Date. In the event that the funds remaining in the Pre-Funding
Account on [date] (i) exceed ___% of the aggregate Principal Balance of the
Mortgage Loans in the Trust on such date, such funds will be used to prepay the
principal of the Class A Certificates, pro rata, in a special distribution on
such date, or (ii) are less than ___% of the aggregate Principal Balance of the
Mortgage Loans in the Trust on such date, such funds will be distributed in
accordance with the provisions of the Pooling and Servicing Agreement.
Capitalized Interest Account
On the Closing Date, the Trustee will be required to deposit a portion of the
proceeds of the sale of the Class A Certificates in an account (the "Capitalized
Interest Account") held in the name of the Trustee on behalf of the Trust. The
amount deposited therein will be used, as necessary, by the Trustee during the
Pre-Funding Period to fund the aggregate amount of interest accruing during the
related Accrual Period at the Weighted Average Class A Pass-Through Rate on the
amount by which the Class A Certificate Principal Balance exceeds the aggregate
Principal Balance of the Mortgage Loans in the Trust. Any amounts remaining in
the Capitalized Interest Account on the Distribution Date which follows the end
of the Pre-Funding Period and not used for such purposes are required to be paid
directly to the Seller on such Distribution Date.
Servicing of the Mortgage Loans
The Servicer will be obligated to service and administer the Mortgage Loans in
accordance with the Pooling and Servicing Agreement and to cause the Mortgage
Loans to be serviced with the same care as it customarily employs in servicing
and administering mortgage loans for its own account, in accordance with
accepted mortgage servicing practices of prudent lending institutions, and
giving due consideration to the Certificate Insurer's and the
Certificateholders' reliance on the Servicer.
Periodic Advances
Subject to the Servicer's good faith determination that such advances are likely
to be recoverable, the Servicer is required to make advances ("Periodic
Advances") with respect to delinquent payments of interest (at a rate equal to
the interest rate on the related Mortgage Note (the "Mortgage Interest Rate"),
less the Servicing Fee (as defined herein)). Such Periodic Advances by the
Servicer are reimbursable to the Servicer subject to certain conditions and
restrictions, and are intended to provide both sufficient funds for the payment
of interest to the Holders of the Class A Certificates, plus an additional
amount intended to maintain a specified level of overcollateralization and to
pay the Trustee's Fees and the premium due the Certificate Insurer.
Notwithstanding the Servicer's good faith determination that a Periodic Advance
was recoverable when made, if the Servicer determines, in its good faith
judgment, that such advance is not ultimately recoverable, the Servicer will be
entitled to reimbursement therefor from the trust fund. See "Description of the
Certificates -- Payments on the Mortgage Loans" in this prospectus supplement.
Prepayment Interest Shortfalls
Not later than the close of business on the ___th day of each month (each, a
"Servicer Distribution Date"), the Servicer is required to remit to the Trustee
an amount equal to the lesser of (a) the aggregate of the Prepayment Interest
Shortfalls for the related Distribution Date resulting from principal
prepayments in full during the related Due Period and (b) its aggregate
Servicing Fees received in the related Due Period (such lesser amount, the
"Compensating Interest"), and shall not have the right to reimbursement
therefor.
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With respect to any Distribution Date, the "Prepayment Interest Shortfall" will
be an amount equal to the excess, if any, of (a) 30-days' interest on the
outstanding principal balance of such Mortgage Loans at a per annum rate equal
to the related Mortgage Interest Rate (or at such lower rate as may be in effect
for such Mortgage Loan because of application of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Civil Relief Act"), any reduction as
a result of a bankruptcy proceeding (a "Deficient Valuation") and/or any
reduction by a court of the monthly payment due on such Mortgage Loan (a "Debt
Service Reduction")), minus the rate at which the Servicing Fee is calculated,
over (b) the amount of interest actually remitted by the related mortgagor
(each, a "Mortgagor") in connection with such principal prepayment in full, less
the Servicing Fee for such Mortgage Loan in such month. Insured Payments do not
cover Prepayment Interest Shortfalls.
Civil Relief Act Interest Shortfalls
The reduction, if any, in interest payable on the Mortgage Loans attributable to
Civil Relief Act Interest Shortfalls will be borne by the Class A
Certificateholders and will not be covered by payments from the Servicer, the
Certificate Insurance Policy or otherwise. See "Risk Factors -- Limitations on
Interest Payments and Foreclosures" in this prospectus supplement.
Servicing Advances
Subject to the Servicer's good faith determination that such advance is
recoverable and that a prudent mortgage lender would make a like advance if it
or an affiliate owned the related Mortgage Loan, the Servicer is required to
advance amounts with respect to the Mortgage Loans ("Servicing Advances")
constituting "out-of-pocket" costs and expenses relating to (a) the preservation
and restoration of the Mortgaged Property, (b) enforcement proceedings,
including foreclosures, (c) expenditures relating to the purchase or maintenance
of a first lien not included in the trust fund on the Mortgaged Property, and
(d) certain other customary amounts described in the Pooling and Servicing
Agreement. Such Servicing Advances by the Servicer are reimbursable to the
Servicer subject to certain conditions and restrictions. In the event that,
notwithstanding the Servicer's good faith determination at the time such
Servicing Advance was made, that it would be recoverable, in the event such
Servicing Advance becomes a nonrecoverable in the Servicer's judgment, the
Servicer will be entitled to reimbursement therefor from the trust fund.
Servicing Fee
The Servicer is entitled to a servicing fee of _____% per annum of the Principal
Balance of each Mortgage Loan (the "Servicing Fee"), calculated and payable
monthly from the interest portion of scheduled monthly payments, liquidation
proceeds and certain other proceeds.
Optional Termination by the Servicer
The Servicer may, at its option, terminate the Trust by purchasing all of the
Mortgage Loans and REO Properties on the Distribution Date (the first date on
which such event occurs, the "Clean-up Call Date") on which the aggregate
Principal Balance of the Mortgage Loans is less than _____% of the sum of (a)
the aggregate Principal Balance of the Initial Mortgage Loans as of the Cut-Off
Date (the "Cut-Off Date Aggregate Principal Balance") and (b) the Original
Pre-Funded Amount. The price of such purchase must equal the sum of
o 100% of the aggregate Principal Balance of each outstanding Mortgage Loan
and each REO Property,
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o the greater of (i) the aggregate amount of accrued and unpaid interest on
the Mortgage Loans through the related Due Period and (ii) 30-days' accrued
interest thereon computed at a rate equal to the related Mortgage Interest
Rate, less the Servicing Fee, and
o any unreimbursed amounts due to the Certificate Insurer and any accrued and
unpaid Insured Payments.
No such termination is permitted without the prior written consent of the
Certificate Insurer if it would result in a draw on the Certificate Insurance
Policy. See "Servicing of the Mortgage Loans -- Termination; Purchase of
Mortgage Loans" in this prospectus supplement.
Optional Purchase of Defaulted Mortgage Loans
The Seller, or any affiliate of the Seller, has the option, but is not
obligated, to purchase from the trust fund any Mortgage Loan 90 days or more
delinquent at a purchase price equal to the outstanding Principal Balance
thereof as of the date of purchase, plus all accrued and unpaid interest on such
Principal Balance, computed at the related Mortgage Interest Rate (net of the
related Servicing Fee if [__________] is the Servicer) plus the amount of any
unreimbursed Servicing Advances made by the Servicer with respect to such
Mortgage Loan in accordance with the provisions specified in the Pooling and
Servicing Agreement.
ERISA Considerations
A fiduciary of any employee benefit plan or other retirement arrangement subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
the Internal Revenue Code of 1986, as amended (the "Code"), should carefully
review with its legal advisors whether the purchase or holding of Class A
Certificates could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. The U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-32, to the Underwriter
(the "Exemption"). The Exemption generally exempts from the application of
certain of the prohibited transaction provisions of ERISA, and the excise taxes
imposed on such prohibited transactions by Section 4975(a) and (b) of the Code
and Section 502(i) of ERISA, transactions relating to the purchase, sale and
holding of pass-through certificates such as the Class A Certificates and the
servicing and operation of asset pools such as the trust fund, provided that
certain conditions are satisfied. The Class A Certificates may not be purchased
by Plans (as defined herein) until the end of the Pre-Funding Period. On or
after such date, a fiduciary of any Plan should carefully review with its legal
advisors whether the purchase or holding of Class A Certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or the
Code. See "ERISA Considerations" in this prospectus supplement.
Legal Investment
The Class A Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Federal Income Tax Status
An election will be made to treat the trust fund as a real estate mortgage
investment conduit (a "REMIC") for federal income tax purposes. The Class A
Certificates will be designated as the "regular interests" in the REMIC, and the
Class R Certificates will be designated as the sole "residual interest" in the
REMIC.
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The Class A Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial Owners of the Class A
Certificates will be required to report income thereon in accordance with the
accrual method of accounting. See "Certain Federal Income Tax Considerations" in
this prospectus supplement and "Certain Federal Income Tax Consequences--REMIC
Securities" in the prospectus.
Certificate Ratings
The Class A Certificates will be rated not lower than [___] by [___] and [___]
by [___] (each, a "Rating Agency," and together, the "Rating Agencies") taking
into account the Certificate Insurance Policy issued with respect to such
Certificates. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. The ratings do not address the possibility that
Class A Certificateholders may suffer a lower than anticipated yield. See
"Ratings" in this prospectus supplement and "Prepayment and Yield
Considerations" in the prospectus.
S-16
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Class A Certificates.
Prepayments on the Mortgage Loans May Adversely Affect the Yield to Maturity on
the Class A Certificates
Borrowers may prepay their loans at any time and may be required to pay
a prepayment fee if permitted by applicable law and if so provided in the
applicable mortgage note. The majority of the business purpose Mortgage Loans
contain substantial prepayment fees. The consumer purpose Mortgage Loans
generally do not contain prepayment fees. The rate of prepayments of the
Mortgage Loans cannot be predicted and may be affected by a wide variety of
economic, social and other factors, including state and federal income tax
policies, interest rates and the availability of alternative financing.
Therefore, we can give no assurance as to the level of prepayments that the
Trust will experience. The Seller is not aware of any publicly available studies
on the effects of changes in interest rates on prepayment rates for loans such
as the business purpose Mortgage Loans.
A number of factors, in addition to the prepayment fees, may impact on
the prepayment behavior of a pool of loans such as the Mortgage Loans. One such
factor is that the principal balance of the Mortgage Loans is relatively small.
A small principal balance may be easier for a borrower to prepay than a large
balance and therefore a higher prepayment rate may result for a loan pool such
as the Mortgage Pool. In addition, in order to refinance a first priority
mortgage loan, the borrower must generally repay any subordinate mortgage loans.
However, a small principal balance may make refinancing a Mortgage Loan at a
lower interest rate less attractive to the borrower as the perceived impact to
the borrower of lower interest rates on the size of the monthly payment may not
be significant. Other factors that might be expected to affect the prepayment
rate include general economic conditions and the general interest rate
environment, possible future changes affecting the deductibility for federal
income tax purposes of interest payments on home equity loans, the amounts of,
and interest rates on, the underlying senior mortgage loans, and the tendency of
borrowers to use first priority mortgage loans as long-term financing for home
purchase and junior mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, the Mortgage Loans may
experience a higher rate of prepayment than traditional fixed rate mortgage
loans.
Prepayments may result from 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"
clauses and liquidations due to default, as well as the receipt of proceeds from
physical damage. In addition, repurchases from the Trust of Mortgage Loans
required to be made by the Seller under the Pooling and Servicing Agreement will
have the same effect on the Class A Certificateholders as a prepayment of the
related Mortgage Loans. Prepayments and such repurchases will also accelerate
the actual final maturity of the Class A Certificates. All of the Mortgage Loans
contain "due-on-sale" provisions, and the Servicer will enforce such provisions
to the extent permitted by applicable law. In addition, if the Seller is unable
to cure documentation defects or provide Qualified
S-17
Substitute Mortgage Loans (as defined herein) for the affected Mortgage Loans,
affected Mortgage Loans will be repurchased, and the Class A Certificateholders
will experience a principal prepayment.
Except as otherwise described herein, distributions of principal will
be made to the Classes of Class A Certificates according to the priorities
described herein, rather than on a pro rata basis among such Classes. The timing
of commencement of principal distributions to each Class of the Class A
Certificates and the weighted average life of each such Class will be affected
by the rates of prepayment on the Mortgage Loans experienced both before and
after the commencement of principal distributions on each such class. Moreover,
because the Lockout Certificates do not receive (unless the Certificate
Principal Balance of the Class A Certificates, other than the Lockout
Certificates, have been reduced to zero or unused Pre-Funding Account moneys are
distributed to the Holders of the Class A Certificates as described herein) any
portion of principal payments prior to the Distribution Date occurring in
__________ and thereafter will receive (unless the Certificate Principal Balance
of the Class A Certificates, other than the Lockout Certificates, have been
reduced to zero) a disproportionately small or large portion of principal
payments, the weighted average life of the Lockout Certificates will be longer
or shorter than would otherwise be the case, and the effect on the market value
of the Lockout Certificates of changes in market interest rates or market yields
for similar securities may be greater or lesser than for the other Classes of
Class A Certificates entitled to principal distributions.
In general, if prevailing interest rates fall significantly below the
interest rates for similar loans at the time of origination, fixed rate mortgage
loans may be subject to higher prepayment rates than if prevailing rates remain
at or above those at the time such Mortgage Loans were originated. Should
prepayments on the Mortgage Loans increase because of such interest rate
reductions, the average life and final maturity of the Class A Certificates may
be shortened. See "Prepayment and Yield Considerations."
The weighted average life of a pool of loans is the average amount of
time that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because it is
expected that there will be prepayments and defaults on the Mortgage Loans, the
actual weighted average life of the Class A Certificates is expected to vary
substantially from the weighted average remaining term to stated maturity of the
Mortgage Loans as set forth herein under "The Mortgage Pool -- General." Certain
information, based on specified prepayment assumptions, as to the possible
weighted average life of the Class A Certificates is set forth herein under
"Prepayment and Yield Considerations."
The Originators maintain only limited records of the historical
prepayment experience of its portfolio of loans which the Originators believe do
not provide meaningful information with respect to the Mortgage Loans. The
Originators are not aware of any publicly available reliable information
regarding prepayment experience of mortgage loans such as the business purpose
Mortgage Loans. In any event, we can give no assurance that prepayments on the
Mortgage Loans will conform to any historical experience and no prediction can
be made as to the actual prepayment experience on the Mortgage Loans.
S-18
The Pre-Funding Feature of the Trust Creates a Risk of Prepayment to the Class A
Certificateholders if Insufficient Mortgage Loans Are Available For Transfer to
the Trust; Subsequent Mortgage Loans May Be of a Different Credit Quality than
the Initial Mortgage Loans
If the principal amount of eligible Mortgage Loans available during the
Pre-Funding Period and sold to the Trust is less than 100% of the Original
Pre-Funded Amount, the Depositor will have insufficient Mortgage Loans to sell
to the Trust, thereby resulting in a prepayment of principal to Holders of the
Class A Certificates as described herein. In addition, any conveyance of
Subsequent Mortgage Loans is subject to the following conditions, among others:
(i) each such Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the Unaffiliated Seller's Agreement (as defined herein)
and the Pooling and Servicing Agreement; (ii) the Seller will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interests of the Holders of the Class A Certificates and the Certificate
Insurer; (iii) the Depositor will deliver certain opinions of counsel with
respect to the validity of the conveyance of such Subsequent Mortgage Loans; and
(iv) the Mortgage Loans at that time, including the Subsequent Mortgage Loans to
be conveyed by the Depositor, will satisfy the criteria set forth in the Pooling
and Servicing Agreement, as described herein under "The Mortgage Pool --
Conveyance of Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account will
not be fully applied to the purchase of Subsequent Mortgage Loans by the Trust
by the end of the Pre-Funding Period, such remaining amount will be applied as a
prepayment of principal paid to the Holders of the Class A Certificates, pro
rata, on the __________ Distribution Date or as a special distribution on [date]
as described herein. The amount of any such prepayment will be applied to the
Class A Certificates. Although no assurances can be given, the Depositor expects
that the principal amount of Subsequent Mortgage Loans sold to the Trust will
require the application of substantially all amounts on deposit in the
Pre-Funding Account and that there will be no material principal prepayment to
the Holders of the Class A Certificates.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Mortgage
Loans may have been originated by the Originators, purchased by the Seller, and
purchased by the Depositor using credit criteria different from those which were
applied to the Initial Mortgage Loans and may be of a different credit quality.
Therefore, following the transfer of Subsequent Mortgage Loans to the Trust, the
aggregate characteristics of the Mortgage Loans then held in the Trust may vary
from those of the Initial Mortgage Loans included in the trust fund. See "The
Mortgage Pool--Conveyance of Subsequent Mortgage Loans".
The Trust Could Experience Higher Delinquencies than Traditional Mortgage Loans
Because They Were Underwritten Using Less Stringent Underwriting Guidelines
The Originators market loans, in part, to borrowers who, for one reason
or another, are not able, or do not wish, to obtain financing from traditional
sources such as commercial banks. To the extent that such loans may be
considered to be of a riskier nature than loans made by traditional sources of
financing, the Holders of the Certificates may be deemed to be at greater risk
than if the Mortgage Loans were made to other types of borrowers.
S-19
As described herein, the Originators' underwriting standards generally
are less stringent than those of the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") with respect to
a borrower's credit history and in certain other respects. A borrower's
non-perfect credit history may not preclude the Originators from making a loan.
As a result of this approach to underwriting, the Mortgage Loans in the Mortgage
Pool may experience higher rates of delinquencies, defaults and foreclosures
than mortgage loans underwritten in a manner which is more similar to the FNMA
and FHLMC guidelines.
Geographic Concentration of the Mortgaged Properties Creates a Risk of Greater
Losses in Connection with Regional Disturbances
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on loans
generally. Any concentration of the Mortgage Loans in such a region may present
risk considerations in addition to those generally present for similar mortgage
backed securities without such concentration. The Originators originate or
purchase their loans primarily on the eastern seaboard of the United States.
This practice may subject the Mortgage Pool to the risk that a downturn in the
economy in this area of the country would more greatly affect the Mortgage Pool
than if the Mortgage Pool were more diversified. In particular, approximately
_____%, _____% and _____% of the Mortgage Loans by Statistical Calculation Date
Aggregate Principal Balance are secured by Mortgaged Properties located in
__________, __________ and __________, respectively. Because of the relative
geographic concentration of the Mortgage Loans within __________ and __________,
losses on the Mortgage Loans may be higher than would be the case if the
Mortgage Loans were more geographically diversified. For example, certain of the
Mortgaged Properties may be more susceptible to certain types of special
hazards, such as earthquakes and other natural disasters and major civil
disturbances, than residential properties located in other parts of the country.
In addition, the economies of ________ and ________ may be adversely affected to
a greater degree than the economies of other areas of the country by certain
regional developments. If the __________ and __________ residential real estate
markets experience an overall decline in property values after the dates of
origination of the respective Mortgage Loans, then the rates of delinquencies,
foreclosures and losses on the Mortgage Loans may be expected to increase and
such increase may be substantial.
Mortgage Loans Requiring Balloon Payments May Involve Greater Risks of Default
As of the Statistical Calculation Date, the Mortgage Loans have been
originated at fixed interest rates for fixed terms ranging from ___ to ___
months. As of the Statistical Calculation Date, approximately _____% of the
Mortgage Loans are not fully amortized over their terms and instead require
substantial balloon payments on their maturity dates (the "Balloon Loans"). See
"The Mortgage Pool." Because the principal balance of such Mortgage Loans does
not fully amortize over the term of the Mortgage Loan, such Mortgage Loans may
involve greater risks of default than Mortgage Loans whose principal balance is
fully amortized over the term of the Mortgage Loan. The borrower's ability to
pay the balloon amount due at maturity of such a Mortgage Loan will depend on
the borrower's ability to obtain adequate refinancing or funds from other
sources to repay the Mortgage Loan.
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The Originators believe that the Mortgage Loans are or will be
adequately collateralized and that, in light of the collateralization and the
relatively small average size of the Mortgage Loans, the borrowers will have the
ability to obtain adequate refinancing or secure funds from other sources. See
"The Mortgage Pool." However, the Originators have had only a very limited
historical default experience with respect to its portfolio when loans with
balloon payments come due and the Originators do not believe that the experience
provides meaningful information with respect to the Mortgage Loans.
Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delays could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by Class A Certificateholders could occur.
The Trust May Be Unable to Recover on Second Lien Mortgage Loans
General economic conditions have an impact on the ability of borrowers
to repay loans. Loss of earnings, illness and other similar factors may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the event
of a bankruptcy of a mortgagor, it is possible that the Trust could experience a
loss with respect to such mortgagor's Mortgage Loan. In conjunction with a
mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to the Trust, any remaining balance
on such Mortgage Loan may not be recoverable.
As of the Statistical Calculation Date, approximately _____% of the
Mortgage Loans are secured by Second Liens or Multiple Liens (each, as defined
below) which are subordinate to the rights of the mortgagee under related first
mortgages. See "The Mortgage Pool." As a result, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the principal balance of such a Mortgage Loan only to the extent that the
claims, if any, of each related first mortgagee are satisfied in full, including
any related foreclosure costs. In addition, a mortgagee of a second mortgage may
not foreclose on the Mortgaged Property securing such mortgage unless it
forecloses subject to the related first mortgage, in which case it must either
pay the entire amount of each first mortgage to the applicable mortgagee at or
prior to the foreclosure sale or undertake the obligation to make payments on
each senior mortgage in the event of default thereunder. In servicing business
and consumer purpose home equity loans in its portfolio, it is the Servicer's
practice to satisfy or reinstate each such first mortgage at or prior to the
foreclosure sale only to the extent that it determines any amount so paid will
be recoverable from future payments and collections on the related loans or
otherwise. The Trust will have no source of funds to satisfy any first mortgage
or make payments due to any first mortgagee.
An overall decline in the residential real estate market could
adversely affect the values of the Mortgaged Properties such that the
outstanding principal balances, together with the primary senior financing
thereon, equals or exceeds the value of the Mortgaged Properties. Such a decline
would adversely affect the position of a second mortgagee before having such an
effect on that of the related first mortgagee. A rise in interest rates over a
period of time and the general condition of the Mortgaged Property as well as
other factors may have the effect of reducing the value of the Mortgaged
Property
S-21
from the appraised value at the time the Mortgage Loan was originated. If there
is a reduction in value of the Mortgaged Property, the ratio of the amount of
the Mortgage Loan to the value of the Mortgaged Property may increase over what
it was at the time the Mortgage Loan was originated. Such an increase may reduce
the likelihood of liquidation or other proceeds being sufficient to satisfy the
Mortgage Loan after satisfaction of any first liens.
Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delays could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by Class A Certificateholders. An action to
foreclose on the Mortgaged Property securing a Mortgage Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Servicer to foreclose on or sell the
Mortgaged Property or to obtain Net Liquidation Proceeds sufficient to repay all
amounts due on the related Mortgage Loan. In addition, the Servicer will be
entitled to deduct from collections received during the preceding Due Period all
expenses reasonably incurred in attempting to recover amounts due on Liquidated
Mortgage Loans and not yet repaid, including payments to first lienholders,
legal fees and costs of legal action, real estate taxes and maintenance and
preservation expenses, thereby reducing collections available to Class A
Certificateholders. See "The Originators, the Seller and the Servicer --
Delinquency and Loan Loss Experience" and "Description of the Certificates."
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted loan having a small remaining principal balance as it would in
the case of a defaulted loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the outstanding principal balance of the small loan than would be the case
with the defaulted loan having a large remaining principal balance. Because the
average outstanding principal balance of the Mortgage Loans is relatively small,
Net Liquidation Proceeds on Liquidated Mortgage Loans may be small as a
percentage of the principal balance of a Mortgage Loan.
Decline in Real Estate Values Could Lead to Higher Losses
We can give no assurance that the values of the Mortgaged Properties
have remained or will remain at their levels as of the dates of origination of
the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans (and, in the case of Second Liens and Multiple
Liens (each as defined herein) the outstanding balance of the related first
mortgage) become equal to or greater than the value of the Mortgaged Properties,
the actual rates of delinquencies, foreclosures and losses on these Mortgaged
Properties could be higher than losses now generally experienced in the mortgage
lending industry.
S-22
Prepayments on the Mortgage Loans May Cause Shortfalls
The scheduled monthly payment dates with respect to the Mortgage Loans
occur throughout a month. When a principal prepayment in full is made on a
Mortgage Loan, the Mortgagor is charged interest only up to the date of such
prepayment, instead of for a full month. However, such principal receipts will
only be passed through to the Certificateholders once a month, on the
Distribution Date which follows the calendar month in which such prepayment was
received by the Servicer. The Servicer is obligated to pay, without any right of
reimbursement, those shortfalls in interest collections payable on the Class A
Certificates that are attributable to the difference between the interest paid
by a mortgagor in connection with a prepayment in full and 30-days' interest (in
such case at the related Mortgage Interest Rate, less the Servicing Fee, such
shortfalls being "Prepayment Interest Shortfalls"), but only to the extent of
the Servicing Fee for the related Due Period (any such payment, "Compensating
Interest"). Prepayment Interest Shortfalls and Civil Relief Act Interest
Shortfalls will not be covered by payments under the Certificate Insurance
Policy.
Prepayment Interest Shortfalls that are not paid by the Servicer as
Compensating Interest, together with Civil Relief Act Interest Shortfalls, will
be allocated among the Holders of Class A Certificates on a pro rata basis to
reduce the interest otherwise payable on the Class A Certificates. See
"Description of the Certificates -- Flow of Funds" in this prospectus
supplement.
The Class A-1 Pass-Through Rate Is Limited by the Mortgage Loan Yield
The Class A-1 Pass-Through Rate is based upon the value of an
adjustable index (one-month LIBOR), while the Mortgage Interest Rates on the
Mortgage Loans are fixed. Consequently, the interest which becomes due on such
Mortgage Loans (net of the Servicing Fees, the Trustee Fees and the Certificate
Insurer premium amounts) during any Due Period may be less than the amount of
interest that would accrue at one-month LIBOR plus the margin on the Class A-1
Certificates during the related Accrual Period, and will be limited to such
lower amount. The Class A-1 Certificates do not contain any "carry-forward" or
"catch-up" feature if the amount of interest paid is so limited.
Timing of Repayment May Create Greater Risk of Loss to Holders of Certain
Classes
Because principal distributions are paid to certain Classes of Class A
Certificates before other such Classes, Holders of Classes of Class A
Certificates having a later priority of payments bear a greater risk of losses
(because such Certificates will represent an increasing percentage interest in
the trust fund during the period prior to the commencement of distributions of
principal thereon) than Holders of Classes having earlier priorities for
distribution of principal. In particular, with respect to the Lockout
Certificates, during certain periods, no principal payments or a
disproportionately small portion of the Class A Principal Distribution Amount
will be distributed on the Lockout Certificates, and during certain other
periods, a disproportionately large portion of the Class A Principal
Distribution Amount will be distributed on the Lockout Certificates. Unless the
Certificate Principal Balance of the Class A Certificates (other than the
Lockout Certificates) has been reduced to zero or unused Pre-Funding Account
moneys are distributed to the Holders of the Class A Certificates as described
herein, the
S-23
Lockout Certificates will not be entitled to receive any distributions of
principal payments prior to the Distribution Date in October 2000.
Lending Laws May Limit Enforcement and Create Liability
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and may require licensing of the
Originators. In addition, many states have other laws, such as consumer
protection laws, unfair and deceptive practices acts and debt collection
practices acts which may apply to the origination or collection of the Mortgage
Loans. Depending on the provisions of the applicable law, violations of these
laws 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 Trust to
damages and administrative enforcement. See "Certain Legal Aspects of the
Mortgage Loans and Contracts" in the prospectus.
The Mortgage Loans are also subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder as to
consumer purpose Mortgage Loans, which require certain disclosures to the
borrowers regarding the terms of such Mortgage Loans; (ii) the Equal Credit
Opportunity Act and Regulation B promulgated thereunder as to the business and
consumer purpose Mortgage Loans, 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 as to the business and consumer purpose Mortgage Loans, which regulates the
use and reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Trust to damages and
administrative enforcement. In addition, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act") or
similar state legislation, the interest charged and the ability of the Servicer
to foreclose on loans to certain Mortgagors may be limited. Generally, under the
Civil Relief Act, a mortgagor who enters military service after the origination
of such mortgagor's mortgage loan (including a mortgagor who was in reserve
status and is called to active duty after origination of the mortgage loan),
shall not be charged interest (including fees and charges) above an annual rate
of 6% during the period of such mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. The Civil Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Civil Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans that may be affected by the Civil Relief
Act. Application of the Civil Relief Act would adversely affect, for an
indeterminate period of time until cessation of active duty status, the ability
of the Servicer to collect full amounts of interest on certain of the Mortgage
Loans to which it applies, if any. Any shortfall in interest collections on any
Mortgage Loan resulting from the application of the Civil Relief Act (such
shortfall, a "Civil Relief Act Interest Shortfall") will result in a reduction
of the amounts distributable to the Class A Certificateholders, and would not be
covered by Periodic Advances or the Certificate Insurance Policy.
S-24
The Servicer is not obligated to offset any of the Servicing Fee against, or to
provide any other funds to cover, any Civil Relief Act Interest Shortfall. In
addition, the Civil Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status and, under certain circumstances,
during an additional period thereafter. See "Certain Legal Aspects of the
Mortgage Loans and Contracts" in the prospectus.
It is possible that some of the consumer purpose Mortgage Loans will be
subject to the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Riegle Act") which incorporates the Home Ownership and Equity
Protection Act of 1994. The Riegle Act adds certain additional provisions to the
Truth in Lending Act which additions are reflected in Regulation Z, the
implementing regulation of the Truth in Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
certain non-purchase money mortgage loans with high interest rates or high
upfront fees and charges. In general, mortgage loans within the purview of the
Riegle Act have annual percentage rates 10 percentage points over the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. These provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of the
creditor would generally be subject to all claims and defenses that the consumer
could assert against the creditor, including, without limitation, the right to
rescind the mortgage loan.
THE MORTGAGE POOL
Difference between Statistical Calculation Date and Closing Date Pools
The statistical information presented in this prospectus supplement
concerning the Mortgage Loans is based on the pool as of __________ (such date,
the "Statistical Calculation Date"). The pool aggregated $__________ as of the
Statistical Calculation Date. The Depositor expects that the actual pool as of
the Closing Date will represent approximately $__________ in Mortgage Loans. The
additional Mortgage Loans will represent Mortgage Loans acquired or to be
acquired by the Depositor on or prior to the Closing Date. In addition, with
respect to the pool as of the Statistical Calculation Date as to which
statistical information is presented herein, some amortization of the pool will
occur prior to the Closing Date. Moreover, certain Mortgage Loans included in
the pool as of the Statistical Calculation Date may prepay in full, or may be
determined not to meet the eligibility requirements for the final pool, and may
not be included in the final pool. As a result of the foregoing, the statistical
distribution of characteristics as of the Closing Date for the final Mortgage
Loan pool will vary somewhat from the statistical distribution of such
characteristics as of the Statistical Calculation Date as presented in this
prospectus supplement, although such variance will not be material. In the event
that the Depositor does not, as of the Closing Date, have the full amount of
Mortgage Loans which the Depositor expects to sell to the Trust on such date,
the Seller will increase the size of the Pre-Funding Account and the Capitalized
Interest Account. Unless otherwise noted, all statistical percentages in this
prospectus supplement are measured by Statistical Calculation Date Aggregate
Principal Balance.
S-25
General
Additional Mortgage Loans (the "Subsequent Mortgage Loans") are
intended to be purchased by the Trust from the Depositor from time to time on or
before [date] from funds on deposit in the Pre-Funding Account. The Initial
Mortgage Loans and the Subsequent Mortgage Loans are referred to herein
collectively as the "Mortgage Loans." The Subsequent Mortgage Loans to be
purchased by the Trust, if available, will be originated or purchased by the
Originators, sold by the Originators to the Seller, sold by the Seller to the
Depositor and then sold by the Depositor to the Trust. The Pooling and Servicing
Agreement will provide that the Mortgage Loans, following the conveyance of the
Subsequent Mortgage Loans, must in the aggregate conform to certain specified
characteristics described below under " -- Conveyance of Subsequent Mortgage
Loans."
Unless otherwise noted, all statistical percentages in this prospectus
supplement are approximate and are measured by the aggregate Principal Balance
of the related Mortgage Loans in relation to the Statistical Calculation Date
Aggregate Principal Balance, in each case, as of the Statistical Calculation
Date.
The Mortgage Loans will be predominantly business or consumer purpose
residential home equity loans used (x) to refinance an existing mortgage loan,
(y) to consolidate debt, or (z) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property in order to provide funds
for (i) working capital for business, (ii) business expansion, (iii) equipment
acquisition, or (iv) personal acquisitions. The Mortgaged Properties securing
the Mortgage Loans consist primarily of single-family residences (which may be
detached, part of a two-to four-family dwelling, a condominium unit or a unit in
a planned unit development). The Mortgaged Properties may be owner-occupied
(which includes second and vacation homes) and non-owner occupied investment
properties. As of the Statistical Calculation Date, the pool of Mortgage Loans
consists of approximately _____% of Mortgage Loans secured by first lien
mortgages ("First Liens") on the related Mortgaged Properties, approximately
_____% of Mortgage Loans secured by second lien mortgages ("Second Liens") on
the related Mortgaged Properties and approximately _____% of Mortgage Loans
secured by liens on more than one Mortgaged Property, one of which is a second
lien mortgage ("Multiple Liens").
As of the Statistical Calculation Date, each of the Mortgage Loans had
remaining terms to maturity of no greater than ___ months and had a Mortgage
Interest Rate of at least _____% per annum.
The Combined Loan-to-Value Ratios ("CLTVs") described herein were
calculated based upon the appraised values of the related Mortgaged Properties
at the time of origination (the "Appraised Values"). We can give no assurance
that such appraised values of the Mortgaged Properties have remained or will
remain at their levels on the dates of origination of the related Mortgage
Loans. If property values decline such that the outstanding balances of the
Mortgage Loans, together with the outstanding balances of any first liens,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those heretofore experienced by the Servicer, as set forth below under "The
Originators, the Seller and the Servicer --Delinquency and Loan Loss
Experience," and in the mortgage lending industry.
S-26
As of the Statistical Calculation Date, the Mortgage Loans consist of
___ Mortgage Loans under which the related Mortgaged Properties are located in
___ states, as set forth herein. As of the Statistical Calculation Date, the
Mortgage Loans had an aggregate Principal Balance of $__________, the minimum
Principal Balance of any of the Mortgage Loans was $__________, the maximum
principal balance thereof was $__________, and the average principal balance of
the Mortgage Loans was $__________. As of the Statistical Calculation Date,
Mortgage Interest Rates on the Mortgage Loans ranged from _____% to _____% per
annum, and the weighted average Mortgage Interest Rate of the Mortgage Loans was
approximately _____% per annum. As of the Statistical Calculation Date, the
original term to stated maturity of the Mortgage Loans ranged from ___ months to
___ months, the remaining term to stated maturity ranged from ___ months to ___
months, the weighted average original term to stated maturity was approximately
___ months and the weighted average remaining term to stated maturity was
approximately ___ months. As of the Statistical Calculation Date, no Mortgage
Loan had a stated maturity later than __________. Approximately _____% of the
aggregate Principal Balance of the Mortgage Loans as of the Statistical
Calculation Date require monthly payments of principal that will fully amortize
the Mortgage Loans by their respective maturity dates, and approximately _____%
of the aggregate Principal Balance of the Mortgage Loans are Balloon Loans. The
weighted average CLTV of the Mortgage Loans as of the Statistical Calculation
Date was approximately _____%. As of the Statistical Calculation Date, Mortgage
Loans representing, in the aggregate, approximately _____% of the aggregate
Principal Balance of the Mortgage Loans were secured by First Lien mortgages and
approximately _____% of the aggregate Principal Balance of the Mortgage Loans
were secured by Second Lien and Multiple Lien mortgages.
S-27
GEOGRAPHIC DISTRIBUTION
Aggregate
Number of Principal Balance as of the % of Statistical Calculation Date
State Mortgage Loans Statistical Calculation Date Aggregate Principal Balance
----- -------------- ---------------------------- ---------------------------
TOTAL................
DISTRIBUTION OF CLTV RATIOS
Aggregate
Range of Number of Principal Balance as of the % of Statistical Calculation Date
CLTV Ratios Mortgage Loans Statistical Calculation Date Aggregate Principal Balance
----------- -------------- ---------------------------- ---------------------------
TOTAL
S-28
DISTRIBUTION OF MORTGAGE RATES
Aggregate % of Statistical Calculation
Range of Number of Principal Balance as of Date
Mortgage Rates Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
-------------- -------------- -------------------------------- ---------------------------
TOTAL
S-29
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
(in months)
Range of Aggregate
Original Terms Number of Principal Balance as of % of Statistical Calculation Date
(in months) Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
----------- -------------- -------------------------------- ---------------------------
TOTAL.................
DISTRIBUTION OF REMAINING TERMS TO MATURITY
(in months)
Range of Aggregate % of Statistical Calculation
Remaining Terms Number of Principal Balance as of Date
(in months) Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
----------- -------------- -------------------------------- ---------------------------
TOTAL.................
S-30
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
Aggregate
Range of Original Number of Principal Balance as of % of Statistical Calculation Date
Principal Balances Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
------------------ -------------- -------------------------------- ---------------------------
TOTAL................
S-31
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Aggregate
Range of Current Number of Principal Balance as of % of Statistical Calculation Date
Principal Balances Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
------------------ -------------- -------------------------------- ---------------------------
TOTAL.........................
S-32
DISTRIBUTION BY LIEN STATUS
Aggregate
Number of Principal Balance as of % of Statistical Calculation Date
Lien Status Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
----------- -------------- -------------------------------- ---------------------------
TOTAL................
DISTRIBUTION BY AMORTIZATION TYPE
Aggregate
Number of Principal Balance as of % of Statistical Calculation Date
Amortization Type Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
----------------- -------------- -------------------------------- ---------------------------
TOTAL................
DISTRIBUTION OF OCCUPANCY STATUS
Aggregate
Number of Principal Balance as of % of Statistical Calculation Date
Occupancy Status Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
---------------- -------------- -------------------------------- ---------------------------
TOTAL................
DISTRIBUTION OF PROPERTY TYPES
Aggregate
Number of Principal Balance as of % of Statistical Calculation Date
Property Type Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
------------- -------------- -------------------------------- ---------------------------
TOTAL..................
S-33
DISTRIBUTION BY COLLATERAL CLASS
Aggregate
Number of Principal Balance as of % of Statistical Calculation Date
Collateral Class Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
---------------- -------------- -------------------------------- ---------------------------
TOTAL..................
DISTRIBUTION BY PURPOSE
Aggregate
Number of Principal Balance as of % of Statistical Calculation Date
Purpose Mortgage Loans the Statistical Calculation Date Aggregate Principal Balance
------- -------------- -------------------------------- ---------------------------
TOTAL..................
Conveyance of Subsequent Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $__________ aggregate Principal Balance of Subsequent Mortgage
Loans. Accordingly, the statistical characteristics of the Mortgage Pool will
vary upon the acquisition of Subsequent Mortgage Loans.
The obligation of the Trust to purchase the Subsequent Mortgage Loans
on a Subsequent Transfer Date is subject to the following requirements: (i) such
Subsequent Mortgage Loan may not be ___ or more days contractually delinquent;
(ii) the original term to maturity of such Subsequent Mortgage Loan may not
exceed ___ months; (iii) such Subsequent Mortgage Loan must have a Mortgage
Interest Rate of at least _____%; (iv) the purchase of the Subsequent Mortgage
Loans is consented to by the Certificate Insurer and the Rating Agencies; (v)
the Principal Balance of any such Subsequent Mortgage Loan may not exceed
$__________; (vi) no more than ___% of such Subsequent Mortgage Loans may be
second liens; (vii) no such Subsequent Mortgage Loan shall have a CLTV of more
than, (a) for consumer purpose loans, ___%, and (b) for business purpose loans,
___%; (viii) no more than ___% of such Subsequent Mortgage Loans may be Balloon
Loans; (ix) no more than ___% of such Subsequent Mortgage Loans may be secured
by mixed-use properties, commercial properties, or four or more unit multifamily
properties; (x) no more than ___% of such Subsequent Mortgage Loans may be
secured by commercial properties; and (xi) following the purchase of such
Subsequent Mortgage Loans by the Trust, the Mortgage Loans (including the
Subsequent Mortgage Loans) (a) will have a weighted average Mortgage Interest
Rate, (I) for consumer purpose loans, of at least _____% and (II) for business
purpose loans, of at least _____%; and (b) will have a weighted average CLTV of
not more than (I) for consumer purpose loans, _____%, and (II) for business
purpose loans, _____%. The Pooling and Servicing Agreement will provide that any
of such requirements may be waived or modified in any respect upon prior written
consent of the Certificate Insurer.
S-34
THE ORIGINATORS, THE SELLER AND THE SERVICER
General
[insert]
The Originators
[insert]
Underwriting Guidelines
[insert]
The Servicer
[insert]
Delinquency and Loan Loss Experience
[insert]
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans, including for this purpose
voluntary payment in full of Mortgage Loans prior to stated maturity,
liquidations due to defaults, casualties and condemnations, and repurchases of
or substitutions for Mortgage Loans by [__________] or an affiliate of
[__________] as required or permitted under the Pooling and Servicing Agreement
or the Unaffiliated Seller's Agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates at the time of origination,
mortgage loans may be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time such mortgage loans were originated.
Conversely, if prevailing interest rates rise appreciably above the interest
rates at the time of origination, mortgage loans may experience a lower
prepayment rate than if prevailing rates remain at or below those at the time
such mortgage loans were originated. However, we can give no assurance that the
Mortgage Loans will conform to the prepayment
S-35
experience of conventional mortgage loans or to any past prepayment experience
or any published prepayment forecast. We can give no assurance as to the level
of prepayments on Mortgage Loans that the trust fund will experience.
As indicated above, if purchased at other than par, the yield to
maturity on a Class A Certificate will be affected by the rate of the payment of
principal on the Mortgage Loans. If the actual rate of payments on the Mortgage
Loans is slower than the rate anticipated by an investor who purchases a Class A
Certificate at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans is faster than the rate anticipated by an investor who purchases
a Class A Certificate at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield. Because the Lockout Certificates
do not receive (unless the Certificate Principal Balances of the Class A
Certificates, other than the Lockout Certificates, have been reduced to zero or
unused Pre-Funding Account moneys are distributed to the Holders of the Class A
Certificates as described herein) any portion of principal payments prior to the
Distribution Date occurring in __________ and will receive (unless the
Certificate Principal Balances of the Class A Certificates, other than the
Lockout Certificates, have been reduced to zero) a disproportionately small or
large portion of the Class A Principal Distribution Amount thereafter, the
weighted average life of the Lockout Certificates will be longer or shorter than
would otherwise be the case, and the effect on the market value of the Lockout
Certificates of changes in market interest rates or market yields for similar
securities may be greater or lesser than for the other Classes of Class A
Certificates entitled to principal distributions.
The final distribution date is expected to be __________ for the Class
A-1 Certificates, __________ for the Class A-2 Certificates, __________ for the
Class A-3 Certificates, __________ for the Class A-4 Certificates, __________
for the Class A-5 Certificates and __________ for the Class A-6 Certificates
(each, a "Final Scheduled Maturity Date"). Each such Final Scheduled Maturity
Date was calculated using the following methodolgy assumptions: (i) with respect
to the Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates and the Class A-4 Certificates, (x) the Modeling Assumptions (as
defined below), (y) 0% of the Prepayment Assumption (as defined below) and (z)
no Net Monthly Excess Cashflow is applied as an accelerated payment of principal
on the Class A Certificates, and (ii) with respect to the Class A-5 Certificates
and the Class A-6 Certificates, such Final Scheduled Maturity Date is 13 months
after the final stated maturity date of the Mortgage Loan having the latest
maturity date, assuming a Subsequent Mortgage Loan having a final stated
maturity date of __________ is purchased by the Trust. The weighted average life
of the Class A Certificates is likely to be shorter than would be the case if
payments actually made on the Mortgage Loans conformed to the foregoing
assumptions, and the final Distribution Date with respect to any Class of the
Class A Certificates could occur significantly earlier than the Final Scheduled
Maturity Date because (i) prepayments (including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the like) on Mortgage
Loans are likely to occur, (ii) with respect to the Class A-5 Certificates and
the Class A-6 Certificates, thirteen months have been added to obtain the Final
Scheduled Maturity Date above, (iii) the overcollateralization provisions of the
Trust result in the application of excess interest to the payment of principal
and (iv) the Servicer may cause a liquidation of the Trust Fund when the
aggregate outstanding principal amount of the Mortgage
S-36
Loans is less than ___% of the sum of (a) the Cut-Off Date Aggregate Principal
Balance and (b) the Original Pre-Funded Amount.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor. The weighted average
life of the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this prospectus supplement
("Home Equity Prepayment" or "HEP") is a prepayment assumption (the "Prepayment
Assumption") which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans for the
life of such mortgage loans. 23% HEP assumes a constant prepayment rate of 2.3%
per annum of the then outstanding principal balance of the Mortgage Loans in the
first month of the life of the Mortgage Loans and an additional 2.3% per annum
in each month thereafter up to and including the tenth month. Beginning in the
eleventh month and in each month thereafter during the life of the Mortgage
Loans, 23% HEP assumes a constant prepayment rate of 23% per annum. As used in
the table below, 0% Prepayment Assumption assumes prepayment rates equal to 0%
of the Prepayment Assumption, i.e., no prepayments on the mortgage loans having
the characteristics described below. The Prepayment Assumption does not purport
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
related Mortgage Loans.
The following table has been prepared on the basis of the following
assumptions (collectively, the "Modeling Assumptions"):
(i) The Mortgage Loans prepay at the indicated percentage of the
Prepayment Assumption, (ii) distributions on the Certificates are received in
cash on the [___] day of each month commencing in __________, (iii) no defaults
or delinquencies in, or modifications, waivers or amendments respecting the
payment by the mortgagors of principal and interest on the Mortgage Loans occur,
(iv) scheduled payments are assumed to be received on the last day of each month
commencing in __________ (or as set forth in the following table) and
prepayments represent payments in full of individual Mortgage Loans and are
assumed to be received on the last day of each month, commencing in __________
(or as set forth in the following table) and include 30-days' interest thereon,
(v) the Class A-1 Pass-Through Rate remains constant at _____% per annum, (vi)
the Certificates are purchased on [date], (vii) the Specified Subordinated
Amount is as set forth in the Pooling and Servicing Agreement, and (viii) the
Mortgage Pool consists of thirteen Mortgage Loans having the following
characteristics:
Original Remaining Remaining
Principal Mortgage Amortizing Term Amortizing Term Term to Maturity
Balance ($) Interest Rate (%) (in months) (in months) (in months)
----------- ----------------- ----------- ----------- -----------
S-37
Original Remaining Remaining
Principal Mortgage Amortizing Term Amortizing Term Term to Maturity
Balance ($) Interest Rate (%) (in months) (in months) (in months)
----------- ----------------- ----------- ----------- -----------
(1) Assumes transfer to the Trust in __________ with the characteristics set
forth above. Scheduled payments are assumed to be received on the last day
of each month commencing in__________ . Prepayments are assumed to be
received on the last day of each month commencing in __________ and include
30-days' interest thereon.
(2) Assumes transfer to the Trust in __________ with the characteristics set
forth above. Scheduled payments are assumed to be received on the last day
of each month commencing in __________. Prepayments are assumed to be
received on the last day of each month commencing in __________ and include
30-days' interest thereon.
During the first Due Period, interest is assumed to be available for payment to
the Class A Certificates at a rate of _____% per annum.
During the first two Due Periods, interest is assumed to be available for
payment to the Class A Certificates at a rate of _____% per annum.
Based upon the foregoing Modeling Assumptions, the tables below
indicate the weighted average life and earliest retirement date of the Class A
Certificates assuming that the Mortgage Loans prepay according to the indicated
percentages of the Prepayment Assumption.
Weighted Average Lives
Class A-1 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
- ---------------------------------- --------------------------------- ---------------------
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Class A-2 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
- ---------------------------------- --------------------------------- ---------------------
Class A-3 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
- ---------------------------------- --------------------------------- ---------------------
Class A-4 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
- ---------------------------------- --------------------------------- ---------------------
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Class A-5 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
- ---------------------------------- --------------------------------- ---------------------
Class A-6 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
- ---------------------------------- --------------------------------- ---------------------
(1) The weighted average life of each Class of Class A Certificates is
determined by (a) multiplying the amount of each principal payment by
the number of years from the Closing Date to the related Distribution
Date; (b) adding the results; and (c) dividing the sum by the Original
Certificate Principal Balance.
(2) Determined assuming no early termination of the Trust Fund occurs.
----------------------
We can give no assurance that prepayments will occur or, if they do
occur, that they will occur at any percentage of HEP.
None of the Certificate Insurer, the Trust, the Trustee, the Seller,
the Depositor, the Originators or the Servicer will be liable to any
Certificateholder or Holder for any loss or damage incurred by such
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Certificateholder or Holder as a result of any difference in the rate of return
received by such Certificateholder or Holder as compared to the applicable
Pass-Through Rate, with respect to any Holder of Class A Certificates upon
reinvestments of the funds received in connection with any premature repayment
of principal on the Certificates, including any such repayment resulting from
any prepayment by the Mortgagor, any liquidation of such Mortgage Loan, or any
repurchase of or substitution for any Mortgage Loan by the Seller or the
Servicer.
DESCRIPTION OF THE CERTIFICATES
General
The Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates, the Class A-5 Certificates and the
Class A-6 Certificates (collectively, the "Class A Certificates") will be issued
by the Trust. In addition to the Class A Certificates, the Trust will also issue
the Class R Certificates. The Class R Certificates have been designated as the
single "residual interest" for purposes of the Code. The Class R Certificates
are not being offered hereby.
Each Class A Certificate represents a certain fractional undivided
ownership interest in the Trust Fund created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein. The Trust Fund consists of (a) the Mortgage Loans, together
with the mortgage files relating thereto and all collections thereon and
proceeds thereof collected after the Cut-Off Date (other than monthly payments
due on each Mortgage Loan up to and including any Due Date occurring on or prior
to __________), (b) such assets as from time to time are identified as REO
Property and collections thereon and proceeds thereof, (c) assets that are
deposited in the Accounts (as defined herein), including amounts on deposit in
the Accounts and invested in accordance with the Pooling and Servicing Agreement
("Permitted Investments"), (d) the Trustee's rights with respect to the Mortgage
Loans under all insurance policies required to be maintained pursuant to the
Pooling and Servicing Agreement and any insurance proceeds, (e) Liquidation
Proceeds and (f) released mortgaged property proceeds. In addition, the Seller
will cause the Certificate Insurer to issue the Certificate Insurance Policy
under which it will guarantee payments to the Class A Certificateholders as
described herein.
Book-Entry Registration
The Class A Certificates will be issued only in book-entry form, in
denominations of $1,000 initial principal balance and integral multiples of
$1,000 in excess thereof, except that one Class A Certificate of each Class may
be issued in a different amount.
The Beneficial Owners may elect to hold their Class A Certificates
through DTC in the United States, or CEDEL or Euroclear if they are participants
in such systems ("Participants"), or indirectly through organizations which are
Participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates per Class of Class A Certificates which in the aggregate
equal the Certificate Principal Balance of such Class A Certificates and will
initially be registered in the name of Cede, the nominee of DTC. CEDEL and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective
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depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Chase will act as
depositary for CEDEL and Morgan will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing principal amounts
of $1,000. Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Holder" of such Class A Certificates will be Cede, as
nominee of DTC. Beneficial Owners will not be Holders as that term is used in
the Pooling and Servicing Agreement. Beneficial Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations Participants and to facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entries, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers
(including the Underwriter), banks, trust companies and clearing corporations.
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Certificates, such as the Class A Certificates, among Participants
on whose behalf it acts with respect to the Book-Entry Certificates and to
receive and transmit distributions of principal of and interest on the
Book-Entry Certificates. Participants and Indirect Participants with which
Beneficial Owners have accounts with respect to the Book-Entry Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Beneficial Owners.
Beneficial Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Trustee, or a paying agent on
behalf of the Trustee, through DTC Participants. DTC will forward such
distributions to its Participants, which thereafter will forward them to
Indirect Participants or Beneficial Owners. Beneficial Owners will not be
recognized by the Trustee,
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the Servicer or any paying agent as Certificateholders, as such term is used in
the Pooling and Servicing Agreement, and Beneficial Owners will be permitted to
exercise the rights of Certificateholders only indirectly through DTC and its
Participants.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- REMIC Securities" in the prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
S-43
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 31 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede, as nominee of DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each DTC
Participant will be responsible for disbursing such payment to the Beneficial
Owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede, as nominee of DTC.
Distributions with respect to Class A Certificates held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with
S-44
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a Beneficial
Owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Trustee to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Depositor and the Servicer that it will take any
action permitted to be taken by a Certificateholder under the Pooling and
Servicing Agreement only at the direction of one or more Participants to whose
accounts with DTC the Book-Entry Certificates are credited. Additionally, DTC
has advised the Depositor that it will take such actions with respect to
specified percentages of voting rights only at the direction of and on behalf of
Participants whose holdings of Book-Entry Certificates evidence such specified
percentages of voting rights. DTC may take conflicting actions with respect to
percentages of voting rights to the extent that Participants whose holdings of
Book-Entry Certificates evidence such percentages of voting rights authorize
divergent action.
None of the Depositor, the Servicer, the Certificate Insurer or the
Trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Calculation of LIBOR
On the fifth business day preceding each Distribution Date or, in the
case of the [date] Distribution Date, on the second business day preceding the
Closing Date (each such date, an "Interest Determination Date"), the Trustee
will determine the London interbank offered rate for one-month U.S. dollar
deposits ("LIBOR") for the next Accrual Period for the Adjustable Rate
Certificates on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar deposits, as such rates appear on the Reuters Screen LIBO
Page, as of 11:00 a.m. (London time) on such Interest Determination Date. As
used in this section, "business day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City; "Reuters
Screen LIBO Page" means the display designated as
S-45
page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as
may replace the LIBO page on that service for the purpose of displaying London
interbank offered rates of major banks); and "Reference Banks" means leading
banks selected by the Trustee and engaged in transactions in Eurodollar deposits
in the international Eurocurrency market (i) with an established place of
business in London, (ii) whose quotations appear on the Reuters' Screen LIBO
Page on the Interest Determination Date in question, (iii) which have been
designated as such by the Trustee and (iv) not controlling, controlled by, or
under common control with, the Servicer or the Trustee.
On each Interest Determination Date, LIBOR for the related Accrual
Period for the Adjustable Rate Certificates will be established by the Trustee
as follows:
If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the related Accrual Period for the
Adjustable Rate Certificates shall be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple of
1/16%).
If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, LIBOR for the related Actual Period for the
Adjustable Rate Certificates shall be the higher of (x) LIBOR as determined on
the previous Interest Determination Date and (y) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum that the Trustee determines
to be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 1/16%) of the one-month U.S. dollar lending rates
which New York City banks selected by the Trustee are quoting on the relevant
Interest Determination Date to the principal London offices of leading banks in
the London interbank market or, in the event that the Trustee can determine no
such arithmetic mean, (ii) the lowest one-month U.S. dollar lending rate which
New York City banks selected by the Trustee are quoting on such Interest
Determination Date to leading European banks.
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Adjustable Rate Certificates for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
Definitive Certificates
The Class A Certificates, which will be issued initially as Book-Entry
Certificates, will be converted to Definitive Certificates and reissued to
Beneficial Owners or their nominees, rather than to DTC or its nominee, only if
(a) the Depository or the Servicer advises the Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as depository
with respect to the Book-Entry Certificates and the Depository or the Servicer
is unable to locate a qualified successor or (b) the Trustee, at its option,
elects to terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all Participants of the availability
through DTC of Definitive Certificates. Upon delivery of Definitive
Certificates, the Trustee will reissue the Book-Entry Certificates as Definitive
Certificates to Beneficial Owners. Distributions of principal of, and interest
on, the Book-Entry
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Certificates will thereafter be made by the Trustee, or a paying agent on behalf
of the Trustee, directly to holders of Definitive Certificates in accordance
with the procedures set forth in the Pooling and Servicing Agreement.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Assignment of Mortgage Loans
Pursuant to an Unaffiliated Seller's Agreement among the Originators,
the Depositor and the Seller (the "Unaffiliated Seller's Agreement"), the
Originators will sell, transfer, assign, set over and otherwise convey the
Mortgage Loans without recourse to the Seller and the Seller will sell,
transfer, assign, set over and otherwise convey the Mortgage Loans, including
all principal outstanding as of, and interest due after, the Cut-Off Date
without recourse to the Depositor on the Closing Date. Pursuant to the Pooling
and Servicing Agreement, the Depositor will sell, transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust for the benefit of the
Certificateholders and the Certificate Insurer all right, title and interest in
and to each Mortgage Loan, including all principal outstanding as of, and
interest accrued after, the Cut-Off Date. Each such transfer will convey all
right, title and interest in and to (a) principal outstanding as of the Cut-Off
Date, and (b) interest due on each such Mortgage Loan after the Cut-Off Date;
provided, however, that the Seller will not convey, and the Seller reserves and
retains all its right, title and interest in and to, (i) principal (including
principal prepayments in full and curtailments (i.e., partial prepayments))
received on each such Mortgage Loan on or prior to the Cut-Off Date and (ii)
interest due on each Mortgage Loan on or prior to the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Trustee on the Closing Date the following documents
(collectively, with respect to each Mortgage Loan, the "Trustee's Mortgage
File") with respect to each Mortgage Loan:
(a) The original Mortgage Note, endorsed without recourse in
blank by the related Originator, including all intervening endorsements
showing a complete chain of endorsement;
(b) The related original Mortgage with evidence of recording
indicated thereon or a copy thereof certified by the applicable
recording office;
(c) The recorded mortgage assignment(s), or copies thereof
certified by the applicable recording office, if any, showing a
complete chain of assignment from the originator of the related
Mortgage Loan to the related Originator (which assignment may, at such
Originator's option, be combined with the assignment referred to in
clause (d) below);
(d) A mortgage assignment in recordable form (which, if
acceptable for recording in the relevant jurisdiction, may be included
in a blanket assignment or assignments) of each Mortgage from the
related Originator to the Trustee;
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(e) Originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of a
Mortgage or Mortgage Note have been modified or such Mortgage or
Mortgage Note has been assumed; and
(f) An original title insurance policy (or (A) a copy of the
title insurance policy, or (B) a binder thereof or copy of such binder
together with a certificate from the Originator that the original
Mortgage has been delivered to the title insurance company that issued
such binder for recordation).
Pursuant to the Pooling and Servicing Agreement, the Trustee agrees to
execute and deliver on or prior to the Closing Date an acknowledgment of receipt
of the Certificate Insurance Policy and, for each Mortgage Loan, the original
Mortgage Note, item (a) above, with respect to the Mortgage Loans (with any
exceptions noted). The Trustee agrees, for the benefit of the Certificateholders
and the Certificate Insurer, to review (or cause to be reviewed) each Trustee's
Mortgage File within 30-days after the Closing Date (or, with respect to any
Qualified Substitute Mortgage Loan, within 30-days after the receipt by the
Trustee thereof) and to deliver a certification generally to the effect that, as
to each Mortgage Loan listed in the Mortgage Loan Schedule, (a) all documents
required to be delivered to it pursuant to the Pooling and Servicing Agreement
are in its possession, (b) each such document has been reviewed by it and has
not been mutilated, damaged, torn or otherwise physically altered, appears
regular on its face and relates to such Mortgage Loan, and (c) based on its
examination and only as to the foregoing documents, certain information set
forth on the Mortgage Loan Schedule accurately reflects the information set
forth in the Trustee's Mortgage File delivered on such date.
If the Trustee, during the process of reviewing the Trustee's Mortgage
Files, finds any document constituting a part of a Trustee's Mortgage File which
is not executed, has not been received or is unrelated to the Mortgage Loans, or
that any Mortgage Loan does not conform to the requirements above or to the
description thereof as set forth in the Mortgage Loan Schedule, the Trustee
shall promptly so notify the Servicer, the Seller and the Certificate Insurer in
writing with details thereof. The Seller agrees to use reasonable efforts to
cause to be remedied a material defect in a document constituting part of a
Trustee's Mortgage File of which it is so notified by the Trustee. If, however,
within 60 days after the Trustee's notice to it respecting such defect the
Seller has not caused to be remedied the defect and the defect materially and
adversely affects the interest of the Holders in the Mortgage Loan or the
interests of the Certificate Insurer, the Seller or the related Originator will
either (a) substitute in lieu of such Mortgage Loan a Qualified Substitute
Mortgage Loan and, if the then outstanding principal balance of such Qualified
Substitute Mortgage Loan is less than the principal balance of such Mortgage
Loan as of the date of such substitution plus accrued and unpaid interest
thereon, deliver to the Servicer as part of the related monthly remittance
remitted by the Servicer the amount of any such shortfall (the "Substitution
Adjustment") or (b) purchase such Mortgage Loan at a price equal to the
outstanding principal balance of such Mortgage Loan as of the date of purchase,
plus the greater of (i) all accrued and unpaid interest thereon and (ii)
30-days' interest thereon, computed at the related Mortgage Interest Rate, net
of the Servicing Fee if the Servicer is effecting the repurchase, plus the
amount of any unreimbursed Servicing Advances made by the Servicer, which
purchase price shall be deposited in the Certificate Account on the next
succeeding Servicer Distribution Date after deducting therefrom any amounts
received in respect of
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such repurchased Mortgage Loan or Loans and being held in the Certificate
Account for future distribution to the extent such amounts have not yet been
applied to principal or interest on such Mortgage Loan (see " -- Flow of Funds"
below); provided, however, that the Seller may not purchase any Mortgage Loan
that is not in default or as to which no default is imminent pursuant to clause
(b) preceding unless the Seller has theretofore caused to be delivered to the
Trustee an opinion of counsel knowledgeable in federal income tax matters which
states that such a purchase would not constitute a prohibited transaction under
the Code.
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans substituted for a
deleted Mortgage Loan and which, among other things, (i) relates or relate to a
detached one-family residence or to the same type of residential dwelling as the
deleted Mortgage Loan and in each case has or have the same or a better lien
priority as the deleted Mortgage Loan and has the same occupancy status or is an
owner-occupied Mortgaged Property, (ii) matures or mature no later than (and not
more than one year earlier than) the deleted Mortgage Loan, (iii) has or have a
Loan-to-Value Ratio ("LTV") or LTVs at the time of such substitution no higher
than the LTV of the deleted Mortgage Loan, (iv) has or have a CLTV or CLTVs at
the time of such substitution no higher than the CLTV of the deleted Mortgage
Loan, (v) has or have a principal balance or principal balances (after
application of all payments received on or prior to the date of substitution)
not substantially less and not more than the principal balance of the deleted
Mortgage Loan as of such date, (vi) satisfies or satisfy the criteria set forth
from time to time in the definition of "qualified replacement mortgage" at
Section 860G(a)(4) of the Code (or any successor statute thereto), (vii) has or
have a mortgage interest rate of at least the same interest rate as the deleted
Mortgage Loan and (viii) complies or comply as of the date of substitution with
each representation and warranty set forth in the Pooling and Servicing
Agreement.
Representations and Warranties of the Seller
The Seller will represent, among other things, with respect to each
Mortgage Loan, as of the Closing Date, the following:
1. The information set forth in the Mortgage Loan Schedule
with respect to each Mortgage Loan is true and correct;
2. All of the original or certified documentation constituting
the Trustee's Mortgage Files (including all material documents related
thereto) has been or will be delivered to the Trustee on the Closing
Date or as otherwise provided in the Unaffiliated Seller's Agreement;
3. The Mortgaged Property consists of a single parcel of real
property separately assessed for tax purposes, upon which is erected a
detached or an attached one-family residence or a detached two-to- six
family dwelling, or an individual condominium unit in a low-rise
condominium, or an individual unit in a planned unit development, or a
commercial property, or a mixed use or multiple purpose property. Such
residence, dwelling or unit is not (i) a unit in a cooperative
apartment, (ii) a property constituting part of a syndication, (iii) a
time share unit,
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(iv) a property held in trust, (v) a mobile home, (vi) a manufactured
dwelling, (vii) a log-constructed home, or (viii) a recreational
vehicle;
4. Each Mortgage is a valid first or second lien on a fee
simple (or its equivalent under applicable state law) estate in the
real property securing the amount owed by the Mortgagor under the
Mortgage Note subject only to (i) the lien of current real property
taxes and assessments which are not delinquent, (ii) any related first
mortgage loan, (iii) covenants, conditions and restrictions, rights of
way, easements and other matters of public record as of the date of
recording of such Mortgage, such exceptions appearing of record being
acceptable to mortgage lending institutions generally in the area
wherein the property subject to the Mortgage is located or specifically
reflected in the appraisal obtained in connection with the origination
of the related Mortgage Loan obtained by the Seller and (iv) other
matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be
provided by such Mortgage;
5. Immediately prior to the transfer and assignment by the
Seller to the Depositor, the Seller had good title to, and was the sole
owner of each Mortgage Loan, free of any interest of any other person,
and the Seller has transferred all right, title and interest in each
Mortgage Loan to the Depositor;
6. Each Mortgage Loan conforms, and all such Mortgage Loans in
the aggregate conform, to the description thereof set forth in this
prospectus supplement; and
7. All of the Mortgage Loans were originated in accordance
with the underwriting criteria set forth in this prospectus supplement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
any of the Certificateholders, the Seller, the Servicer, any Subservicer, the
Certificate Insurer, or the Trustee that any of the representations and
warranties contained in the Pooling and Servicing Agreement have been breached
in any material respect as of the Closing Date, with the result that the
interests of the Certificateholders in the related Mortgage Loan or the
interests of the Certificate Insurer were materially and adversely affected
(notwithstanding that such representation and warranty was made to the Seller's
best knowledge and the Seller lacked knowledge of such breach), the party
discovering such breach is required to give prompt written notice to the other
parties. Subject to certain provisions of the Pooling and Servicing Agreement,
within 60 days of the earlier to occur of the Seller's or the applicable
Originator's discovery or its receipt of notice of any such breach, the Seller
or the related Originator will (a) promptly cure such breach in all material
respects, (b) remove each Mortgage Loan which has given rise to the requirement
for action by the Seller or the related Originator, substitute one or more
Qualified Substitute Mortgage Loans and, if the outstanding principal balance of
such Qualified Substitute Mortgage Loans as of the date of such substitution is
less than the outstanding principal balance, plus accrued and unpaid interest
thereon, of the replaced Mortgage Loans as of the date of substitution, deliver
to the Trust Fund as part of the amounts remitted by the Servicer on such
Distribution Date the amount of such shortfall, or (c) purchase such Mortgage
Loan at a price equal to the principal balance of such Mortgage Loan as of the
date of purchase plus the greater of (i) all accrued and unpaid interest thereon
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and (ii) 30-days' interest thereon computed at the Mortgage Interest Rate, net
of the Servicing Fee if [__________] is the Servicer, plus the amount of any
unreimbursed Servicing Advances made by the Servicer, and deposit such purchase
price into the Certificate Account on the next succeeding Servicer Distribution
Date after deducting therefrom any amounts received in respect of such
repurchased Mortgage Loan or Mortgage Loans and being held in the Certificate
Account for future distribution to the extent such amounts have not yet been
applied to principal or interest on such Mortgage Loan; provided, however, that
any substitution of one or more Qualified Substitute Mortgage Loans pursuant to
clause (b) preceding must be effected not later than two years after the Closing
Date unless the Trustee and the Certificate Insurer receive an opinion of
counsel that such substitution would not constitute a prohibited transaction for
purposes of the REMIC provisions of the Code. In addition, the Seller and the
related Originator shall be obligated to indemnify the Trustee, the
Certificateholders and the Certificate Insurer for any third-party claims
arising out of a breach by the Seller of representations or warranties regarding
the Mortgage Loans. The obligation of the Seller and the related Originator to
cure such breach or to substitute or purchase any Mortgage Loan and to indemnify
constitute the sole remedies respecting a material breach of any such
representation or warranty to the Certificateholders, the Trustee and the
Certificate Insurer.
Payments on the Mortgage Loans
The Pooling and Servicing Agreement provides that the Servicer for the
benefit of the Certificateholders shall establish and maintain a Collection
Account (the "Collection Account"), which will generally be (i) an account
maintained with a depository institution or trust company whose long term
unsecured debt obligations are rated by each Rating Agency in one of its two
highest rating categories at the time of any deposit therein or (ii) trust
accounts maintained with a depository institution acceptable to each Rating
Agency (any such account, an "Eligible Account"). The Pooling and Servicing
Agreement permits the Servicer to direct any depository institution maintaining
the Collection Account to invest the funds in the Collection Account in one or
more Permitted Investments (as defined herein) that mature, unless payable on
demand, no later than the Business Day preceding the date on which the Servicer
is required to transfer the Servicer Remittance Amount from the Collection
Account to the Certificate Account, as described below.
The Servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following payments
received and collections made by it after the Cut-Off Date (other than in
respect of Monthly Payments on the Mortgage Loans due on each Mortgage Loan up
to and including any Due Date occurring on or prior to __________): (i) all
payments on account of principal, including prepayments of principal ("Principal
Prepayments"); (ii) all payments on account of interest on the Mortgage Loans,
(iii) all Liquidation Proceeds and all Insurance Proceeds to the extent such
proceeds are not to be applied to the restoration of the related Mortgaged
Property or released to the related borrower in accordance with the express
requirements of law or in accordance with prudent and customary servicing
practices; (iv) all Net REO Proceeds; (v) all other amounts required to be
deposited in the Collection Account pursuant to the Pooling and Servicing
Agreement; and (vi) any amounts required to be deposited in connection with net
losses realized on investments of funds in the Collection Account.
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The Trustee will be obligated to set up an account (the "Certificate
Account", and together with the Collection Account, the "Accounts"), which is
required to be an Eligible Account, into which the Servicer will deposit or
cause to be deposited the Servicer Remittance Amount on the 10th day of each
month (the "Servicer Distribution Date").
The "Servicer Remittance Amount" for a Servicer Distribution Date is
equal to the sum, without duplication, of (i) all collections of principal and
interest on the Mortgage Loans (including Principal Prepayments, Net REO
Proceeds and Liquidation Proceeds, if any) collected by the Servicer during the
prior calendar month, (ii) all Periodic Advances made by the Servicer with
respect to payments due to be received on the Mortgage Loans on the related Due
Date and (iii) any other amounts required to be placed in the Collection Account
by the Servicer pursuant to the Pooling and Servicing Agreement but excluding
the following:
(a) amounts received on particular Mortgage Loans, with
respect to which the Servicer has previously made an unreimbursed
Periodic Advance, as late payments of interest, or as Net Liquidation
Proceeds, to the extent of such unreimbursed Periodic Advance;
(b) amounts received on a particular Mortgage Loan with
respect to which the Servicer has previously made an unreimbursed
Servicing Advance, to the extent of such unreimbursed Servicing
Advance;
(c) for such Servicer Distribution Date, the aggregate
Servicing Fee;
(d) all net income from Permitted Investments that is held in
the Collection Account for the account of the Servicer;
(e) all amounts in respect of late fees, assumption fees,
prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
(g) certain other amounts which are reimbursable to the
Servicer, as provided in the Pooling and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be withdrawn
by the Servicer from the Collection Account on or prior to each Servicer
Distribution Date.
"Foreclosure Profits" as to any Servicer Distribution Date, are the
excess, if any, of (i) Net Liquidation Proceeds in respect of each Mortgage Loan
that became a Liquidated Mortgage Loan during the month immediately preceding
the month of such Servicer Distribution Date over (ii) the sum of such unpaid
Principal Balance of each such Liquidated Mortgage Loan plus accrued and unpaid
interest on the unpaid Principal Balance from the Due Date to which interest was
last paid by the Mortgagor.
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"Insurance Proceeds" are proceeds paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan to the extent such proceeds are not
applied to the restoration of the related Mortgaged Property or released to the
related Mortgagor. "Insurance Proceeds" do not include "Insured Payments."
"Liquidation Expenses" as to any Liquidated Mortgage Loan are all
expenses incurred by the Servicer in connection with the liquidation of such
Mortgage Loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed Servicing Advances. In no event may Liquidation
Expenses with respect to a Liquidated Mortgage Loan exceed the related
Liquidation Proceeds.
"Liquidated Loan Loss" as to any Liquidated Mortgage Loan is the
excess, if any, of (i) the unpaid Principal Balance of such Liquidated Mortgage
Loan plus accrued and unpaid interest on such unpaid Principal Balance from the
Due Date to which interest was last paid by the Mortgagor over (ii) the sum of
the Net Liquidation Proceeds and the amount of any previously unreimbursed
Periodic Advances in respect of such Mortgage Loan.
"Liquidation Proceeds" are amounts (other than Insurance Proceeds)
received by the Servicer in connection with (i) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(ii) the liquidation of a defaulted Mortgage Loan through a trustee's sale,
foreclosure sale, REO Disposition or otherwise.
"Net Foreclosure Profits" as to any Servicer Distribution Date, are the
excess, if any, of (i) the aggregate Foreclosure Profits with respect to such
Servicer Distribution Date over (ii) Liquidated Loan Losses with respect to such
Servicer Distribution Date.
"Net Liquidation Proceeds" as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the Servicer.
"Net REO Proceeds" as to any REO Property, are REO Proceeds net of any
related expenses of the Servicer.
"REO Proceeds" are monies received in respect of any REO Property
(including, without limitation, proceeds from the rental of the related
Mortgaged Property).
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as Servicer under the Pooling and
Servicing Agreement, the Servicer shall be entitled with respect to each
Mortgage Loan to the Servicing Fee, which shall be payable monthly from amounts
on deposit in the Collection Account. The "Servicing Fee" shall be an amount
equal to interest at one-twelfth of the Servicing Fee Rate for such Mortgage
Loan on the outstanding Principal Balance of such Mortgage Loan. The "Servicing
Fee Rate" with respect to each Mortgage Loan will be _____% per annum. In
addition, the Servicer shall be entitled to receive, as additional servicing
compensation, to the extent permitted by applicable law and the related Mortgage
Notes, any late payment charges, assumption fees, prepayment fees or similar
items. The Servicer shall also be entitled to withdraw from the Collection
Account any net interest or other income earned on deposits therein. The
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Servicer shall pay all expenses incurred by it in connection with its servicing
activities under the Pooling and Servicing Agreement and shall not be entitled
to reimbursement therefor except as specifically provided in the Pooling and
Servicing Agreement.
The Servicer may recover Periodic Advances and Servicing Advances to
the extent permitted by the Mortgage Loans or, if not recovered from the
Mortgagor on whose behalf such Servicing Advance or Periodic Advance was made,
from late collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the Mortgagor or otherwise relating to the Mortgage Loan. In the
event a Periodic Advance or a Servicing Advance becomes a Nonrecoverable
Advance, the Servicer may be reimbursed for such advance from the Certificate
Account.
The Servicer shall not be required to make any Periodic Advance or
Servicing Advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable Servicing Advance (a "Nonrecoverable Advance"). A Periodic
Advance or Servicing Advance is "nonrecoverable" if in the good faith judgment
of the Servicer, such Periodic Advance or Servicing Advance is not ultimately
recoverable.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, starting with the __________ Distribution
Date, the Net Monthly Excess Cashflow, if any, be applied on each Distribution
Date as an accelerated payment of principal on the Class of Class A Certificates
then entitled to distributions of principal, but only to the limited extent
hereafter described. The "Net Monthly Excess Cashflow" for a Distribution Date
is equal to the excess of (x) the amount on deposit in the Certificate Account
(exclusive of the amount of any Insured Payment and the Servicing Fee) on such
Distribution Date (such amount being the "Available Amount" for such
Distribution Date) over (y) the sum of (i) the sum of the Class A Interest
Distribution Amount and the Class A Principal Distribution Amount (calculated
for this purpose without regard to any Subordination Increase Amount or portion
thereof included therein), (ii) any Reimbursement Amount (as defined herein) or
other amount owed to the Certificate Insurer and (iii) the Trustee's Fees.
This application has the effect of accelerating the amortization of the
Class A Certificates relative to the amortization of the Mortgage Loans. To the
extent that any Net Monthly Excess Cashflow is not so used, the Pooling and
Servicing Agreement provides that it will be paid to the Holders of the Class R
Certificates.
With respect to any Distribution Date, the excess, if any, of (x) the
sum of the aggregate Principal Balances of the Mortgage Loans as of the close of
business on the last day of the preceding calendar month over (y) the Class A
Certificate Principal Balance as of such Distribution Date (and following the
making of all distributions on such Distribution Date (other than with respect
to any Subordination Increase Amount for such Distribution Date)) is the
"Subordinated Amount" as of such Distribution Date. The Pooling and Servicing
Agreement requires that, starting with the __________ Distribution Date, the Net
Monthly Excess Cashflow will be applied as an accelerated payment of principal
on the Class A
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Certificates until the Subordinated Amount has increased to the level required
by the Pooling and Servicing Agreement. Any amount of Net Monthly Excess
Cashflow actually applied as an accelerated payment of principal is a
"Subordination Increase Amount." The required level of the Subordinated Amount
with respect to a Distribution Date is the "Specified Subordinated Amount" with
respect to such Distribution Date. Initially, the Subordinated Amount will be an
amount equal to approximately _____% of the sum of the Cut-Off Date Aggregate
Principal Balance and the Original Pre-Funded Amount.
In the event that the required level of the Specified Subordinated
Amount is permitted to decrease or "step down" on a Distribution Date in the
future, the Pooling and Servicing Agreement provides that a portion of the
principal which would otherwise be distributed to the Holders of the Class A
Certificates on such Distribution Date shall be distributed to the Holders of
the Class R Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Class A Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
With respect to any Distribution Date, the difference, if any, between (a) the
Subordinated Amount that would apply on such Distribution Date after taking into
account all distributions to be made on such Distribution Date (except for any
distributions of related Subordination Reduction Amounts as described in this
sentence) and (b) the Specified Subordinated Amount is the "Excess Subordinated
Amount" with respect to such Distribution Date. If, on any Distribution Date,
the Excess Subordinated Amount is, or, after taking into account all other
distributions to be made on such Distribution Date would be, greater than zero
(i.e., the Subordinated Amount is or would be greater than the related Specified
Subordinated Amount), then any amounts relating to principal which would
otherwise be distributed to the Holders of the Class A Certificates on such
Distribution Date shall instead be distributed to the Holders of the Class R
Certificates, in an amount equal to the lesser of (x) the Excess Subordinated
Amount and (y) the amount available for distribution on account of principal
with respect to the Class A Certificates on such Distribution Date; such amount
being the "Subordination Reduction Amount" for such Distribution Date.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all amounts collected on account of principal (other than any such amount
applied to the payment of a Subordination Reduction Amount) during the prior Due
Period will be distributed to the Holders of the Class A Certificates on such
Distribution Date. If any Mortgage Loan became a Liquidated Mortgage Loan during
such prior Due Period, the Net Liquidation Proceeds related thereto and
allocated to principal may be less than the Principal Balance of the related
Mortgage Loan; the amount of any such insufficiency is a "Liquidated Loan Loss."
In addition, the Pooling and Servicing Agreement provides that the principal
balance of any Mortgage Loan which becomes a Liquidated Mortgage Loan shall then
equal zero. The Pooling and Servicing Agreement does not contain any rule which
requires that the amount of any Liquidated Loan Loss be distributed to the
Holders of the Class A Certificates on the Distribution Date which immediately
follows the event of loss; i.e., the Pooling and Servicing Agreement does not
require the current recovery of losses. However, the occurrence of a Liquidated
Loan Loss will reduce the Subordinated Amount, which, to the extent that such
reduction causes the Subordinated Amount to be less than the Specified
Subordinated Amount applicable to the related Distribution Date, will require
the payment of a Subordination Increase Amount on such Distribution Date (or, if
insufficient funds are available on such Distribution Date, on subsequent
Distribution Dates, until the Subordinated Amount equals the related Specified
Subordinated Amount). The effect of the foregoing is to allocate losses to the
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Holders of the Class R Certificates by reducing, or eliminating entirely,
payments of Monthly Excess Cashflow and of Subordination Reduction Amounts which
such Holders would otherwise receive.
Overcollateralization and the Certificate Insurance Policy. The Pooling
and Servicing Agreement defines a "Subordination Deficit" with respect to a
Distribution Date to be the amount, if any, by which (x) the aggregate
Certificate Principal Balance of the Class A Certificates as of such
Distribution Date, and following the making of all distributions to be made on
such Distribution Date (except for any payment to be made as to principal from
proceeds of the Certificate Insurance Policy), exceeds (y) the aggregate
Principal Balances of the Mortgage Loans as of the close of business on the last
day of the related Due Period. The Pooling and Servicing Agreement requires the
Trustee to make a claim for an Insured Payment under the Certificate Insurance
Policy not later than the third Business Day prior to any Distribution Date as
to which the Trustee has determined that a Subordination Deficit will occur for
the purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Holders of the Class A Certificates on such Distribution Date.
Additionally, under the terms of the Pooling and Servicing Agreement, the
Certificate Insurer will have the option to cause Net Monthly Excess Cashflow to
be applied without regard to any limitation upon the occurrence of certain
trigger events, or in the event of an event of default under the Insurance
Agreement (as defined herein). However, investors in the Class A Certificates
should realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no distributions of principal.
Flow of Funds
On each Distribution Date, the Trustee shall distribute, to the extent
of funds, including any Insured Payments, on deposit in the Certificate Account,
as follows:
(a) to the Trustee, an amount equal to the fees then due
to it (the "Trustee's Fees");
(b) from amounts then on deposit in the Certificate
Account (excluding any Insured Payments) to the
Certificate Insurer the lesser of (x) the excess of
(i) the amount then on deposit in the Certificate
Account over (ii) the Insured Distribution Amount for
such Distribution Date and (y) the amount of all
Insured Payments and other amounts due to the
Certificate Insurer pursuant to the Insurance
Agreement (including the premium amount) which have
not been previously paid (the "Reimbursement Amount")
as of such Distribution Date;
(c) from amounts then on deposit in the Certificate
Account, to the Class A Certificateholders an amount
equal to the Class A Interest Distribution Amount;
(d) from amounts then on deposit in the Certificate
Account, to the Class A Certificateholders an amount
equal to the Class A Principal Distribution Amount;
and
(e) following the making by the Trustee of all
allocations, transfers and disbursements described
above, from amounts then on deposit in the
Certificate
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Account, the Trustee shall distribute to the Holders
of the Class R Certificates, the amount remaining on
such Distribution Date, if any.
Report to Certificateholders
Pursuant to the Pooling and Servicing Agreement, on each Distribution
Date the Trustee will deliver to the Servicer, the Certificate Insurer, each
Certificateholder and the Depositor a written report containing information
including, without limitation, the amount of the distribution on such
Distribution Date, the amount of such distribution allocable to principal and
allocable to interest, the aggregate outstanding principal balance of the Class
A Certificates as of such Distribution Date, the amount of any Insured Payment
included in such distributions on such Distribution Date and such other
information as required by the Pooling and Servicing Agreement.
Amendment
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Servicer and the Trustee by written agreement, upon the prior
written consent of the Certificate Insurer, without notice to, or consent of,
the Certificateholders, to cure any ambiguity, to correct or supplement any
provisions herein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Pooling and
Servicing Agreement which shall not be inconsistent with the provisions of the
Pooling and Servicing Agreement; provided, that such action shall not, as
evidenced by an opinion of counsel delivered to, but not obtained at the expense
of, the Trustee, adversely affect in any material respect the interests of any
Certificateholder; and provided, further, that no such amendment shall reduce in
any manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on any Certificate without the
consent of the Holder of such Certificate, or change the rights or obligations
of any other party to the Pooling and Servicing Agreement without the consent of
such party.
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Servicer and the Trustee with the consent of the Certificate
Insurer, and the Holders of the majority of the Percentage Interest in the Class
A Certificates and Class R Certificates for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the Pooling
and Servicing Agreement or of modifying in any manner the rights of the Holders;
provided, however, that no such amendment shall be made unless the Trustee
receives an opinion of counsel, at the expense of the party requesting the
change, that such change will not adversely affect the status of the Trust as a
REMIC or cause a tax to be imposed on the REMIC; and provided further, that no
such amendment shall reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans which are required to be distributed on any
Certificate without the consent of the Holder of such Certificate or reduce the
percentage for each Class whose Holders are required to consent to any such
amendment without the consent of the Holders of 100% of each Class of
Certificates affected thereby.
The Unaffiliated Seller's Agreement contains substantially similar
restrictions regarding amendment.
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SERVICING OF THE MORTGAGE LOANS
The Servicer
[__________] will act as the Servicer of the Mortgage Pool.
[__________] will act as subservicer with respect to a portion of the Mortgage
Loans. See "The Originators, the Seller, the Servicer and the Subservicer."
Servicer Reports
The Servicer is required to deliver to the Certificate Insurer, the
Trustee, [___] and [___], not later than __________ of each year an officer's
certificate stating that (i) the Servicer has fully complied with the servicing
provisions of the Pooling and Servicing Agreement, (ii) a review of the
activities of the Servicer during the preceding calendar year and of performance
under the Pooling and Servicing Agreement has been made under such officer's
supervision, and (iii) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations under the Pooling and
Servicing Agreement for such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof including the steps being taken by the
Servicer to remedy such default. The first such officer's certificate shall be
delivered by the Servicer in _____.
Not later than __________ of each year, the Servicer, at its expense,
is required to cause to be delivered to the Certificate Insurer, the Trustee,
[___] and [___] from a firm of independent certified public accountants (who may
also render other services to the Servicer) a statement to the effect that such
firm has examined certain documents and records relating to the servicing of the
Mortgage Loans during the preceding calendar year (or such longer period from
the Closing Date to the end of the following calendar year) and that, on the
basis of such examination conducted substantially in compliance with generally
accepted auditing standards and the requirements of the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC, such servicing has been conducted in compliance with the
Pooling and Servicing Agreement except for such significant exceptions or errors
in records that, in the opinion of such firm, generally accepted auditing
standards and the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for FHLMC require it to report, in which
case such exceptions and errors shall be so reported.
Collection and Other Servicing Procedures
The Servicer will be responsible for making reasonable efforts to
collect all payments called for under the Mortgage Loans and will, consistent
with the Pooling and Servicing Agreement, follow such collection procedures as
it follows with respect to loans which are comparable to the Mortgage Loans.
Consistent with the above, the Servicer may, in its discretion, (i) waive any
late payment charge and (ii) arrange with a Mortgagor a schedule for the
liquidation of delinquencies, subject to the provisions of the Pooling and
Servicing Agreement.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated to accelerate the maturity of the
Mortgage Loan, unless it reasonably believes it is unable to
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enforce that Mortgage Loan's "due-on-sale" clause under applicable law. If it
reasonably believes it may be restricted for any reason from enforcing such a
"due-on-sale" clause, the Servicer may enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note.
Any fee collected by the Servicer for entering into an assumption
agreement will be retained by the Servicer as additional servicing compensation.
For a description of circumstances in which the Servicer may be unable to
enforce "due-on-sale" clauses, see "Certain Legal Aspects of the Mortgage Loans
and Contracts -- The Mortgage Loans --'Due-on-Sale' Clauses" in the prospectus.
In connection with any such assumption, the Mortgage Interest Rate borne by the
mortgage note relating to each Mortgage Loan ("Mortgage Note") may not be
decreased.
Hazard Insurance
The Servicer is required to cause to be maintained for each Mortgaged
Property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum insurable
value of such Mortgaged Property or (b) the principal balance of such Mortgage
Loan plus the outstanding balance of any mortgage loan senior to such Mortgage
Loan, but in no event may such amount be less than is necessary to prevent the
borrower from becoming a coinsurer thereunder. As set forth above, all amounts
collected by the Servicer under any hazard policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with the Servicer's normal servicing procedures), to
the extent they constitute Net Liquidation Proceeds or Insurance Proceeds, will
ultimately be deposited in the Certificate Account. The ability of the Servicer
to assure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard insurance
policy, or upon the extent to which information in this regard is furnished to
the Servicer by a borrower. The Pooling and Servicing Agreement provides that
the Servicer may satisfy its obligation to cause hazard policies to be
maintained by maintaining a blanket policy issued by an insurer acceptable to
the Rating Agencies insuring against losses on the Mortgage Loans. If such
blanket policy contains a deductible clause, the Servicer is obligated to
deposit in the Certificate Account the sums which would have been deposited
therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive.
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The hazard insurance policies covering the Mortgaged Properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements less physical depreciation or (ii)
such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
Since residential properties, generally, have historically appreciated
in value over time, if the amount of hazard insurance maintained on the
improvements securing the Mortgage Loans were to decline as the principal
balances owing thereon decreased, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in the opinion of the Servicer, no satisfactory arrangements can
be made for the collection of delinquent payments. In connection with such
foreclosure or other conversion, the Servicer will follow such practices as it
deems necessary or advisable and as are in keeping with the Servicer's general
loan servicing activities and the Pooling and Servicing Agreement, provided the
Servicer will not expend its own funds in connection with foreclosure or other
conversion, correction of a default on a senior mortgage or restoration of any
property unless such foreclosure, correction or restoration is determined to
increase Net Liquidation Proceeds. Any Mortgaged Property so acquired by the
Trust is required to be disposed of in accordance with applicable federal income
tax regulations and consistent with the status of the Trust as a REMIC.
Removal and Resignation of the Servicer
The Certificate Insurer may, pursuant to the Pooling and Servicing
Agreement, remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clause (g) or (h) below and the
Trustee, only at the direction of the Certificate Insurer or the majority
certificateholders, with the consent of the Certificate Insurer (in the case of
any direction of the majority Certificateholders), may remove the Servicer upon
the occurrence and continuation beyond the applicable cure period of an event
described in clause (a), (b), (c), (d), (e) or (f) below:
(a) any failure by the Servicer to remit to the Trustee any
payment required to be made by the Servicer under the terms of the
Pooling and Servicing Agreement which continues unremedied for one (1)
Business Day after the date upon which written notice of such failure,
requiring the same to be remedied, shall have been given to the
Servicer and the Certificate Insurer by the Trustee or to the Servicer
and the Trustee by the Certificate Insurer or the Class A
Certificateholders evidencing Percentage Interests of at least 25%;
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(b) the failure by the Servicer to make any required Servicing
Advance which failure continues unremedied for a period of one (1)
Business Day after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the
Servicer by the Trustee or to the Servicer and the Trustee by any
Certificateholder or the Certificate Insurer;
(c) any failure on the part of the Servicer duly to observe or
perform in any material respect any other of the covenants or
agreements on the part of the Servicer contained in this Agreement, or
the failure of any representation and warranty set forth in the Pooling
and Servicing Agreement, which continues unremedied for a period of
30-days after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the
Servicer by the Depositor or the Trustee, or to the Servicer and the
Trustee by any Certificateholder or the Certificate Insurer;
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any present
or future federal or state bankruptcy, insolvency or similar law or for
the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Servicer and such decree
or order shall have remained in force, undischarged or unstayed for a
period of 60 days;
(e) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the Servicer or of or relating to all or
substantially all of the Servicer's property;
(f) the Servicer shall admit in writing its inability to pay
its debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors, or voluntarily suspend payment of its
obligations;
(g) the delinquency or loss experience of the Mortgage Loan
pool exceeds certain levels specified in the Pooling and Servicing
Agreement; or
(h) The Certificate Insurer shall notify the Trustee of any
event of default under the Insurance Agreement.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the Servicer, [__________] (if [__________] is
not the Servicer), the Certificate Insurer and the Trustee, or upon the
determination that the Servicer's duties thereunder are no longer permissible
under applicable law and such incapacity cannot be cured by the Servicer without
the incurrence, in the reasonable judgment of the Certificate Insurer, of
unreasonable expense. No such resignation shall become effective until a
successor has assumed the Servicer's responsibilities and obligations in
accordance with the Pooling and Servicing Agreement.
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Upon removal or resignation of the Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Periodic Advances and Servicing Advances and
certain other advances unless it determines reasonably and in good faith that
such advances would not be recoverable. If, however, the Trustee is unwilling or
unable to act as Successor Servicer, or if the majority Certificateholders (with
the consent of the Certificate Insurer) or the Certificate Insurer so requests,
the Trustee shall appoint, or petition a court of competent jurisdiction to
appoint, in accordance with the provisions of the Pooling and Servicing
Agreement and subject to the approval of the Certificate Insurer, any
established mortgage loan servicing institution acceptable to the Certificate
Insurer having a net worth of not less than $__________ as the Successor
Servicer in the assumption of all or any part of the responsibilities, duties or
liabilities of the Servicer.
Pursuant to the Pooling and Servicing Agreement, the Servicer covenants
and agrees to act as the Servicer for an initial term from the Closing Date to
__________, which term will be extendable by the Certificate Insurer by notice
to the Trustee for successive terms of three (3) calendar months each, until the
termination of the Trust Fund. The Servicer will, upon its receipt of each such
notice of extension (a "Servicer Extension Notice") become bound for the
duration of the term covered by such Servicer Extension Notice to continue as
the Servicer subject to and in accordance with the other provisions of the
Pooling and Servicing Agreement. If as of the fifteenth ([___]) day prior to the
last day of any term of the Servicer the Trustee shall not have received any
Servicer Extension Notice from the Certificate Insurer, the Trustee will, within
five (5) days thereafter, give written notice of such non-receipt to the
Certificate Insurer and the Servicer. The Certificate Insurer has agreed to
extend each three month term of the Servicer, in the absence of an Event of
Default under the Pooling and Servicing Agreement.
The Trustee and any other Successor Servicer in such capacity is
entitled to the same reimbursement for advances and no more than the same
servicing compensation as the Servicer. See " -- Servicing and Other
Compensation and Payment of Expenses" above.
Termination; Purchase of Mortgage Loans
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Periodic Advances of same by the Servicer), or the disposition of all funds with
respect to the last Mortgage Loan and the remittance of all funds due under the
Pooling and Servicing Agreement and the payment of all amounts due and payable
to the Certificate Insurer and the Trustee or (b) mutual consent of the
Servicer, the Certificate Insurer and all Certificateholders in writing;
provided, however, that in no event will the Trust established by the Pooling
and Servicing Agreement terminate later than twenty-one years after the death of
the last surviving lineal descendant of the person named in the Pooling and
Servicing Agreement.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the Servicer may, at its option and at
its sole cost and expense, terminate the Pooling and Servicing Agreement on any
date on which the aggregate Principal Balance of the Mortgage Loans is less than
10% of the sum of (a) the Cut-Off Date Aggregate Principal Balance and (b) the
Original Pre-Funded Amount, by purchasing, on the next succeeding Distribution
Date, all of the
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outstanding Mortgage Loans and REO Properties at a price equal to the sum of (a)
100% of the Principal Balance of each outstanding Mortgage Loan and each REO
Property, (b) the greater of (i) the aggregate amount of accrued and unpaid
interest on the Mortgage Loans through the related Due Period and (ii) 30-days'
accrued interest thereon computed at a rate equal to the Mortgage Interest Rate,
in each case net of the Servicing Fee, and (c) any unreimbursed amounts due to
the Certificate Insurer under the Pooling and Servicing Agreement, the Insurance
Agreement and, without duplication, accrued and unpaid Insured Payments. Any
such purchase shall be accomplished by deposit into the Certificate Account of
the purchase price specified above. No such termination is permitted without the
prior written consent of the Certificate Insurer if it would result in a draw on
the Certificate Insurance Policy.
Optional Purchase of Defaulted Mortgage Loans
[__________] or any affiliate of [__________] has the option to
purchase from the Trust Fund any Mortgage Loan which is 90 days or more
delinquent at a purchase price equal to the outstanding principal balance of
such Mortgage Loan as of the date of purchase, plus all accrued and unpaid
interest on such principal balance, computed at the Mortgage Interest Rate, plus
the amount of any unreimbursed Servicing Advances made by the Servicer with
respect to such Mortgage Loan, in accordance with the provisions specified in
the Pooling and Servicing Agreement.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the Certificate Insurance Policy
does not purport to be complete and is qualified in its entirety by reference to
the Certificate Insurance Policy. A form of the Certificate Insurance Policy may
be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will deliver the Certificate Insurance Policy to the Trustee for the
benefit of the Class A Certificateholders. Under the Certificate Insurance
Policy, the Certificate Insurer will irrevocably and unconditionally guarantee
payment on each Distribution Date to the Trustee for the benefit of the Holders
of the Class A Certificates, as applicable, of the Insured Distribution Amounts
with respect to the Class A Certificates calculated in accordance with the
original terms of the Class A Certificates when issued and without regard to any
amendment or modification of the Class A Certificates or the Pooling and
Servicing Agreement except amendments or modifications to which the Certificate
Insurer has given its prior written consent. The Insured Distribution Amounts
for each Distribution Date will be the sum of (i) the Class A Interest
Distribution Amount with respect to such Distribution Date, (ii) the
Subordination Deficit, if any, for such Distribution Date, and (iii) with
respect to the Distribution Date which is a Final Scheduled Maturity Date, the
outstanding Certificate Principal Balance of the related Class A Certificates
(without duplication to the amount specified in clause (ii)). In addition, with
respect to any Distribution Date occurring on a date when an event of default
under the Insurance Agreement (described below) has occurred and is continuing
or a date on or after the first date on which a claim is made under the
Certificate Insurance Policy, the Certificate Insurer at its sole option, may
pay any or all of the outstanding Certificate Principal Balance of the Class A
Certificates. Mortgage Loan Interest Shortfalls will not be covered by payments
under the Certificate Insurance Policy.
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Payment of claims under the Certificate Insurance Policy will be made
by the Certificate Insurer following Receipt by the Certificate Insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New York
City time, on the second Business Day following Receipt of such notice for
payment, and (b) 12:00 noon, New York City time, on the relevant Distribution
Date.
If any payment of an amount guaranteed by the Certificate Insurer
pursuant to the Certificate Insurance Policy is avoided as a preference payment
under applicable bankruptcy, insolvency, receivership or similar law the
Certificate Insurer will pay such amount out of the funds of the Certificate
Insurer on the later of (a) the date when due to be paid pursuant to the Order
referred to below or (b) the first to occur of (i) the fourth Business Day
following Receipt by the Certificate Insurer from the Trustee of (A) a certified
copy of the order of the court or other governmental body which exercised
jurisdiction to the effect that a Class A Certificateholder is required to
return principal or interest distributed with respect to a Class A Certificate
during the term of the Certificate Insurance Policy because such distributions
were avoidable preferences under applicable bankruptcy law (the "Order"), (B) a
certificate of the Class A Certificateholder(s) that the Order has been entered
and is not subject to any stay, and (C) an assignment duly executed and
delivered by the Class A Certificateholder(s), in such form as is reasonably
required by the Certificate Insurer and provided to the Class A
Certificateholder(s) by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Class A Certificateholder(s)
relating to or arising under the Class A Certificates against the debtor which
made such preference payment or otherwise with respect to such preference
payment, or (ii) the date of Receipt by the Certificate Insurer from the Trustee
of the items referred to in clauses (A), (B) and (C) above if, at least four
Business Days prior to such date of Receipt, the Certificate Insurer shall have
Received written notice from the Trustee that such items were to be delivered on
such date and such date was specified in such notice. Such payment shall be
disbursed to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order and not to the Trustee or any Class A
Certificateholder directly (unless a Class A Certificateholder has previously
paid such amount to the receiver, conservator, debtor-in-possession or trustee
in bankruptcy named in the Order, in which case such payment shall be disbursed
to the Trustee for distribution to such Class A Certificateholder upon proof of
such payment reasonably satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, means actual delivery to the Certificate Insurer and to its
fiscal agent appointed by the Certificate Insurer at its option, if any, prior
to 12:00 p.m., New York City time, on a Business Day; delivery either on a day
that is not a Business Day or after 12:00 p.m., New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Certificate Insurance Policy by the Trustee is not
in proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been Received, and the Certificate Insurer or the fiscal
agent shall promptly so advise the Trustee and the Trustee may submit an amended
notice.
Under the Certificate Insurance Policy, "Business Day" means any day
other than (i) a Saturday or Sunday or (ii) a day on which banking institutions
in the City of New York, New York or the State of New York, are authorized or
obligated by law or executive order to be closed. The Certificate Insurer's
obligations under the Certificate Insurance Policy to make Insured Payments
shall be discharged to the
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extent funds are transferred to the Trustee as provided in the Certificate
Insurance Policy, whether or not such funds are properly applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each Class
A Certificateholder to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Certificates to the
extent of any payment by the Certificate Insurer under the Certificate Insurance
Policy. To the extent the Certificate Insurer makes Insured Payments, either
directly or indirectly (as by paying through the Trustee), to the Class A
Certificateholders, the Certificate Insurer will be subrogated to the rights of
the Class A Certificateholders, as applicable, with respect to such Insured
Payment and shall be deemed to the extent of the payments so made to be a
registered Class A Certificateholder for purposes of payment.
Claims under the Certificate Insurance Policy will rank equally with
any other unsecured debt and unsubordinated obligations of the Certificate
Insurer except for certain obligations in respect of tax and other payments to
which preference is or may become afforded by statute. Claims against the
Certificate Insurer under the Certificate Insurance Policy constitute pari passu
claims against the general assets of the Certificate Insurer. The terms of the
Certificate Insurance Policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
Depositor. The Certificate Insurance Policy may not be cancelled or revoked
prior to payment in full of the Class A Certificates. The Certificate Insurance
Policy is governed by the laws of the State of New York. The Certificate
Insurance Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate
Insurer agrees under the Certificate Insurance Policy not to assert, and waives,
for the benefit of each Class A Certificateholder, all its rights (whether by
counterclaim, setoff or otherwise) and defense (including, without limitation,
the defense of fraud), whether acquired by subrogation, assignment or otherwise,
to the extent that such rights and defenses may be available to the Certificate
Insurer to avoid payment of its obligations under the Certificate Insurance
Policy in accordance with the express provisions of the Certificate Insurance
Policy.
Unless the Certificate Insurer has failed to make a required payment
under the Certificate Insurance Policy, the Certificate Insurer shall be deemed
to be the Certificateholders for all purposes (other than with respect to
payment on the Certificates), will be entitled to exercise all rights of the
Class A Certificateholders thereunder, without the consent of such
Certificateholders, and the Class A Certificateholders may exercise such rights
only with the prior written consent of the Certificate Insurer. In addition, the
Certificate Insurer will, as a third party beneficiary to the Pooling and
Servicing Agreement and the Unaffiliated Seller's Agreement, have, among others,
the following rights: (i) the right to give notices of breach or to terminate
the rights and obligations of the Servicer under the Pooling and Servicing
Agreement in the event of an Event of Default by the Servicer and to institute
proceedings against the Servicer; (ii) the right to consent to or direct any
waivers of defaults by the Servicer; (iii) the right to remove the Trustee
pursuant to the Pooling and Servicing Agreement; (iv) the right to direct the
actions of the Trustee during the continuation of a Servicer default; (v) the
right to require the Seller to repurchase Mortgage Loans for breach of
representation and warranty or defect in documentation; (vi) the right to direct
foreclosures upon the failure of the Servicer to do so in accordance with the
Pooling and
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Servicing Agreement; (vii) the right to direct all matters relating to a
bankruptcy or other insolvency proceeding involving the Seller; and (viii) the
right to direct the Trustee to investigate certain matters. The Certificate
Insurer's consent will be required prior to, among other things, (i) the removal
of the Trustee, (ii) the appointment of any successor Trustee or Servicer or
(iii) any amendment to the Pooling and Servicing Agreement.
The Depositor, the Seller, the Servicer and the Certificate Insurer
will enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Servicer will agree to reimburse, with interest, the
Certificate Insurer for amounts paid pursuant to claims under the Certificate
Insurance Policy. The Servicer will further agree to pay the Certificate Insurer
all reasonable charges and expenses which the Certificate Insurer may pay or
incur relative to any amounts paid under the Certificate Insurance Policy or
otherwise in connection with the transaction and to indemnify the Certificate
Insurer against certain liabilities. Except to the extent provided therein,
amounts owing under the Insurance Agreement will be payable solely from the
Trust Fund. An "event of default" under the Insurance Agreement will constitute
an Event of Default under the Pooling and Servicing Agreement and allow the
Certificate Insurer, among other things, to direct the Trustee to terminate the
Servicer. See "Servicing of the Mortgage Loans -- Removal and Resignation of the
Servicer" herein. An "event of default" under the Insurance Agreement includes
(i) the Originators', the Seller's, the Depositor's or the Servicer's failure to
pay when due any amount owed under the Insurance Agreement or certain other
documents, (ii) the inaccuracy or incompleteness in any material respect of any
representation or warranty of the Originators, the Seller, the Depositor or the
Servicer in the Insurance Agreement, the Pooling and Servicing Agreement or
certain other documents, (iii) the Originators', the Seller's, the Depositor's
or the Servicer's failure to perform or to comply with any covenant or agreement
in the Insurance Agreement, the Pooling and Servicing Agreement and certain
other documents, (iv) a finding or ruling by a governmental authority or agency
that the Insurance Agreement, the Pooling and Servicing Agreement or certain
other documents are not binding on the Originators, the Seller, the Depositor or
the Servicer, (v) the Originators', the Seller's, the Depositor's or the
Servicer's failure to pay its debts in general or the occurrence of certain
events of insolvency or bankruptcy with respect to the Seller or the Servicer,
and (vi) the occurrence of certain "performance test violations" designed to
measure the performance of the Mortgage Loans.
THE CERTIFICATE INSURER
The following information has been obtained from [__________] and has
not been verified by the Seller, [__________], [__________], the Depositor or
the Underwriter. No representation or warranty is made by the Seller,
[__________], [__________] or the Underwriter with respect thereto.
General
[insert]
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents described in the prospectus under
"Incorporation of Certain Information by Reference," the financial statements of
the Certificate Insurer included in, or as exhibits to, the following documents,
which have been filed with the Securities and Exchange Commission (the
"Commission") by [__________], are hereby incorporated by reference in the
registration statement (as defined in the accompanying prospectus) of which this
prospectus supplement and the prospectus form a part:
[insert]
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Trust as a REMIC for federal
income tax purposes. Dewey Ballantine, special tax counsel to the Depositor,
will deliver its opinion that, assuming compliance with the Pooling and
Servicing Agreement, the Trust will be treated as a REMIC for federal income tax
purposes. The Class A Certificates will be designated as "regular interests" in
the REMIC, and the Class R Certificates will be designated as the sole "residual
interest" in the REMIC. The Class R Certificates are "Residual Certificates" for
purposes of the prospectus.
The Certificates possess certain special tax attributes by virtue of
the REMIC provisions of the Code. See "Certain Federal Income Tax Consequences
- -- REMIC Securities" in the prospectus. The Small Business Job Protection Act of
1996 repeals the bad debt reserve method of accounting for mutual savings banks
and domestic building and loan associations for tax years beginning after
December 31, 1995. As a result, section 593(d) of the Code is no longer
applicable to treat REMIC regular interests, including the Certificates, as
"qualifying real property loans."
The Class A Certificates generally will be treated as debt instruments
for federal income tax purposes. Beneficial owners (or registered holders, in
the case of Definitive Certificates) of the Class A Certificates will be
required to report income on such Certificates in accordance with the accrual
method of accounting.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), (b) plans described in section
4975(e)(1) of the Code, including individual retirement accounts or Keogh plans,
(c) any entities whose underlying assets include plan assets by reason of a
plan's investment in such entities (each a "Plan") and (d) persons who have
certain specified relationships to such Plans ("Parties-in-Interest" under ERISA
and "Disqualified Persons" under the Code). Section 406 of ERISA prohibits Plans
from engaging in certain transactions involving the assets of such Plans with
Parties in Interest with respect to such Plans, unless a statutory or
administrative exemption is applicable to the transaction. Excise taxes under
Section 4975 of the Code, penalties under Section 502 of ERISA and other
penalties may be imposed on Plan fiduciaries and Parties-in-Interest (or
Disqualified Persons) that engage in
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"prohibited transactions" involving assets of a Plan. Individual retirement
arrangements and other plans that are not subject to ERISA, but are subject to
Section 4975 of the Code, and Disqualified Persons with respect to such
arrangements and plans, also may be subject to excise taxes and other penalties
if they engage in prohibited transactions. Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the Plans investing in the general account (e.g.,
through the purchase of an annuity contract). ERISA also imposes certain duties
on persons who are fiduciaries of Plans subject to ERISA.
The Department of Labor (the "DOL") has issued a regulation (the "Plan
Asset Regulation") describing what constitutes the assets of a Plan when the
Plan acquires an equity interest in another entity. The Plan Asset Regulation
states that, unless an exemption described in the regulation is applicable, the
underlying assets of an entity in which a Plan makes an equity investment will
be considered, for purposes of ERISA, to be the assets of the investing Plan.
Pursuant to the Plan Asset Regulation, if the assets of the Trust were deemed to
be plan assets by reason of a Plan's investment in any Class A Certificates,
such plan assets would include an undivided interest in any assets held in such
Trust. Therefore, in the absence of an exemption, the purchase, sale or holding
of any Class A Certificate by a Plan 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.
On [date], the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption ____ (the
"Exemption"), from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale by a Plan
of certificates in pass-through trusts that meet the conditions and requirements
of the Exemption. Among the conditions that must be satisfied for the Exemption
to apply are the following:
1. The Acquisition of the Class A Certificates by a Plan is on
terms (including the price for the Class A Certificates) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
2. The rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust Fund;
3. The Class A Certificates acquired by the Plan have received
a rating at the time of such acquisition that is in one of the three
highest generic rating categories from any of [___], [___], [___], or
[___];
4. The sum of all payments made to the Underwriter in
connection with the distribution of the Class A Certificates represents
not more than reasonable compensation for underwriting the Class A
Certificates. The sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for the
Servicer's services under the Pooling and Servicing Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith;
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5. The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below); and
6. The Plan investing in the Class A Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933.
The Trust Fund also must meet the following requirements:
a. The corpus of the Trust Fund must consist solely of assets
of the type which have been included in other investment pools;
b. certificates in such other investment pools must have been
rated in one of the three highest rating categories of [___], [___],
[___] or [___] for at least one year prior to the Plan's acquisition of
certificates; and
c. certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of Class A Certificates.
In order for the Exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes the
Plan to acquire Class A Certificates, the Exemption requires, among other
matters, that: (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 Fund is acquired by persons independent of the Restricted Group (as
defined below); (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5 percent or less of the fair market value of the obligations
contained in the Trust Fund; (iii) the Plan's investment in Class A Certificates
does not exceed twenty-five percent (25%) of all of the certificates outstanding
at the time of the acquisition and (iv) immediately after the acquisition, no
more than twenty-five percent (25%) of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity.
The Exemption does not apply to certain prohibited transactions in the
case of Plans sponsored by the Underwriter, the Trustee, the Servicer, any
obligor with respect to more than 5% of the fair market value of the Mortgage
Loans included in the Trust Fund, any entity deemed to be a "sponsor" of the
Trust Fund as such term is defined in the Exemption, or any affiliate of any
such party (the "Restricted Group").
Prior to the date on which the Pre-Funding Period expires, Plans will
not be permitted to purchase the Class A Certificates. On or after such date,
the Exemption may be available for the purchase of Class A Certificates by
Plans. Before purchasing a Class A Certificate, a fiduciary of an ERISA Plan
should make its own determination as to the availability of the exemptive relief
provided in the Exemption and whether the conditions of any such exemption will
be applicable to the Class A Certificates. Any fiduciary of an ERISA Plan
considering whether to purchase a Class A Certificate
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should also carefully review with its own legal advisors the applicability of
the fiduciary duty and prohibited transaction provisions of ERISA and the Code
to such investment.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such a governmental plan may be subject
to a federal, state, or local law, which is, to a material extent, similar to
the provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under Similar Law.
The sale of Certificates to a Plan is in no respect a representation by
the Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular ERISA Plan.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA").
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
as of [date] (the "Underwriting Agreement") between the Depositor and First
Union Capital Markets, Inc. (the "Underwriter"), the Depositor has agreed to
sell to the Underwriter and the Underwriter has agreed to purchase from the
Depositor the Class A Certificates.
The Depositor is obligated to sell, and the Underwriter is obligated to
purchase, all of the Class A Certificates offered hereby if any are purchased.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Certificates purchased by the Underwriter for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Underwriter may effect such transactions by selling such
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter or purchasers of the Class A Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Class A Certificates purchased by the Underwriter may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriter and any profit on the resale of Class A Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act.
In connection with the offering of the Class A Certificates, the
Underwriter and its affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Class A Certificates. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such person may bid for or purchase
the Class A Certificates for the purpose of stabilizing its market price. Any of
the transactions described in this paragraph may result
S-70
in the maintenance of the price of the Class A Certificates at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are taken, may be
discontinued at any time without notice.
For further information regarding any offer or sale of the Class A
Certificates pursuant to this prospectus supplement and the prospectus, see
"Plan of Distribution" in the prospectus.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
First Union Capital Markets, Inc. is an affiliate of the Depositor.
EXPERTS
The consolidated balance sheets of [__________] and subsidiaries as of
[dates] and the related consolidated statements of income, changes in
shareholder's equity, and cash flows for each of the three years in the period
ended [date], incorporated by reference in this prospectus supplement, have been
incorporated herein in reliance on the report of [_________], independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
RATINGS
It is a condition to the original issuance of the Class A Certificates
that they will receive ratings of "[___]" by [___] and "[___]" by [___]. The
ratings assigned to the Class A Certificates will take into account the
claims-paying ability of the Certificate Insurer. Explanations of the
significance of such ratings may be obtained from [__________], [address] and
[___] Rating Services, [address]. Such ratings will be the views only of such
rating agencies. We can give no assurance that any such ratings will continue
for any period of time or that such ratings will not be revised or withdrawn.
Any such revision or withdrawal of such ratings may have an adverse effect on
the market price of the Class A Certificates.
LEGAL MATTERS
Certain legal matters in connection with the Class A Certificates will
be passed upon for the Originators, the Seller and the Servicer by [__________],
and for the Depositor and the Underwriter by Dewey Ballantine LLP, New York, New
York.
S-71
INDEX OF SIGNIFICANT DEFINITIONS
Accounts....................................................52
Appraised Values............................................26
Available Amount............................................54
Balloon Loans...............................................20
Business Day................................................64
Capitalized Interest Account................................13
Carry-Forward Amount.........................................9
Cede.........................................................6
CEDEL Participants..........................................43
Certificate Account.........................................52
Certificate Insurer.........................................11
Certificate Principal Balance................................7
Civil Relief Act........................................14, 24
Civil Relief Act Interest Shortfall.........................24
Class A Certificates........................................41
Class A Interest Distribution Amount.........................7
Class A Principal Distribution Amount........................7
Class A-6 Lockout Distribution Amount........................8
Class A-6 Lockout Pro Rata Distribution Amount...............9
Clean-up Call Date..........................................14
CLTVs.......................................................26
Code........................................................15
Collection Account..........................................51
Commission..................................................67
Compensating Interest...................................13, 23
Cooperative.................................................44
Current Interest.............................................7
Debt Service Reduction......................................14
Deficient Valuation.........................................14
Definitive Certificate......................................42
Depositor....................................................5
Disqualified Persons........................................67
Distribution Date............................................6
DOL.........................................................68
DTC..........................................................6
Due Date....................................................11
Due Period...................................................8
Eligible Account............................................51
ERISA...................................................15, 67
Euroclear Operator..........................................44
Euroclear Participants......................................44
European Depositaries.......................................42
Excess Subordinated Amount..................................55
Exemption...............................................15, 68
FHLMC.......................................................20
Final Scheduled Maturity Date...............................36
Financial Intermediary......................................42
First Liens.................................................26
Fitch.......................................................11
FNMA........................................................20
Foreclosure Profits.........................................52
HEP.........................................................37
Holder......................................................42
Home Equity Prepayment......................................37
Indirect Participants.......................................42
Initial Mortgage Loans.......................................6
Insurance Agreement.........................................66
Insurance Proceeds..........................................53
Interest Determination Date.................................45
LIBO........................................................46
LIBOR.......................................................45
Liquidated Loan Loss.................................9, 53, 55
Liquidated Mortgage Loan.....................................9
Liquidation Expenses........................................53
Liquidation Proceeds........................................53
LTV.........................................................49
Modeling Assumptions........................................37
Moody's.....................................................11
Mortgage Interest Rate......................................13
Mortgage Loan Interest Shortfalls............................7
Mortgage Loans..............................................26
Mortgage Note...............................................59
Mortgage Pool................................................6
Mortgaged Properties........................................11
Mortgages...................................................11
Mortgagor...................................................14
Multiple Liens..............................................26
Net Foreclosure Profits.....................................53
Net Liquidation Proceeds....................................53
Net Monthly Excess Cashflow.................................54
Net REO Proceeds............................................53
Nonrecoverable Advance......................................54
Originators..................................................5
Participants................................................41
Parties-in-Interest.........................................67
Percentage Interest..........................................7
Periodic Advances...........................................13
Permitted Investments.......................................41
Plan........................................................67
Plan Asset Regulation.......................................68
Pre-Funding Account.........................................12
Pre-Funding Period..........................................12
Prepayment Assumption.......................................37
Prepayment Interest Shortfalls..............................23
Principal Balance...........................................10
Principal Prepayments.......................................51
Qualified Substitute Mortgage Loan..........................49
Rating Agencies.............................................16
Rating Agency...............................................16
Receipt.....................................................64
Received....................................................64
Record Date..................................................6
Reference Banks.............................................46
S-72
Reimbursement Amount........................................56
Relevant Depositary.........................................42
REMIC.......................................................15
REO Proceeds................................................53
Reserve Interest Rate.......................................46
Restricted Group............................................69
Reuters Screen LIBO Page....................................45
Riegle Act..................................................25
Rules.......................................................42
Second Liens................................................26
Seller.......................................................5
Servicer Distribution Date..............................13, 52
Servicer Extension Notice...................................62
Servicer Remittance Amount..................................52
Servicing Advances..........................................14
Servicing Fee...........................................14, 53
Servicing Fee Rate..........................................53
Similar Law.................................................70
SMMEA.......................................................70
Specified Subordinated Amount...............................55
Standard & Poor's...........................................11
Statistical Calculation Date................................25
Statistical Calculation Date Aggregate Principal Balance....11
Subordinated Amount.........................................54
Subordination Deficit....................................9, 56
Subordination Increase Amount...............................55
Subordination Reduction Amount..............................55
Subsequent Mortgage Loans................................6, 26
Subsequent Transfer Date....................................12
Substitution Adjustment.....................................48
Successor Servicer..........................................62
Terms and Conditions........................................44
Trust........................................................5
Trustee......................................................5
Trustee's Fees..............................................56
Trustee's Mortgage File.....................................47
Unaffiliated Seller's Agreement.............................47
Underwriter.................................................70
Underwriting Agreement......................................70
Weighted average life.......................................37
S-73
================================================================
No dealer, salesman or other person has been authorized to
give any information or to make any representations not
contained in this prospectus and, if given or made, such
information or representations must not be relied upon as
having been authorized by the Depositor or by the
Underwriter. This prospectus supplement and the prospectus do
not constitute an offer to sell, or a solicitation of an offer
to buy, the securities offered hereby by anyone in any
jurisdiction in which such an offer or solicitation is not
authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it
is unlawful to make any such offer or solicitation. Neither
the delivery of this prospectus supplement and the prospectus
nor any sale made hereunder shall, under any circumstances,
create an implication that information herein or therein is
correct as of any time since the date of this prospectus
supplement or the prospectus.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Incorporation of Certain Information by Reference....._____
Summary..............................................._____
Risk Factors.........................................._____
The Mortgage Pool....................................._____
The Originators, the Seller and the Servicer ........._____
Prepayment and Yield Considerations..................._____
Description of the Certificates......................._____
Servicing of the Mortgage Loans......................._____
The Certificate Insurance Policy......................_____
The Certificate Insurer..............................._____
Certain Federal Income Tax Considerations............._____
ERISA Considerations.................................._____
Legal Investment......................................_____
Plan of Distribution.................................._____
Experts..............................................._____
Ratings..............................................._____
Legal Matters........................................._____
Index of Significant Definitions......................_____
PROSPECTUS
[Table of Contents]
Until ninety days from the date of this prospectus supplement,
all dealers
effecting transactions in the Class A Certificates, whether or
not participating
in this distribution, may be required to deliver this prospectus
supplement and
the prospectus. This is in addition to the
obligation of dealers to deliver a prospectus supplement and
the prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================
================================================================
[_____] Mortgage Loan Trust [series]
[__________]
(Servicer)
&
Residential Asset Funding Corporation
(Depositor)
[$----------]
Adjustable Rate Class A-1 Certificates
[$----------]
[___%] Class A-2 Certificates
[$----------]
[___%] Class A-3 Certificates
[$__________]
[___%] Class A-4 Certificates
[$__________]
[___%] Class A-5 Certificates
[$__________]
[___%] Class A-6 Certificates
Mortgage Pass-Through Certificates,
Series [series]
__________________
PROSPECTUS SUPPLEMENT
__________________
First Union Capital Markets, Inc.
[date]
================================================================
FORM OF PROSPECTUS SUPPLEMENT (To Prospectus Dated __, 1998) [$_______]
[________] Mortgage Loan Trust [series] Residential Asset Funding Corporation
Depositor The [________] Mortgage Loan Trust [series] will issue [number]
classes of certificates representing undivided ownership interests in the trust.
The assets of the trust will consist primarily of two pools of residential
mortgage loans.
- --------------------------------------------------------------------------------
You should read the section entitled "Risk Factors" starting on page __ in this
prospectus supplement and page __ of the prospectus and consider these factors
before deciding to invest in the Certificates.
The certificates represent interests in the trust only and are not interests in
or obligations of any other person. [Neither the certificates nor the underlying
mortgage loans will be insured or guaranteed by any governmental agency or
instrumentality or any other person.]
- --------------------------------------------------------------------------------
The Certificates
o Of the [number] of certificates issued by the trust, only the [ten] classes
of certificates set forth in the table below are offered hereby.
o Payments of principal and interest on the certificates will be made on the
[___] day of each month or the first business day thereafter, commencing on
[date].
Credit Enhancement
o The certificates are issued in descending alphabetical order. Each class of
certificates with a lower alphabetical designation is subordinate to all
classes having a higher alphabetical designation. Subordination of a class of
certificates provides credit enhancement for each class of certificates
having a higher alphabetical designation.
o Credit enhancement will also be provided by the application of excess
interest, or the difference between interest collected on the mortgage loans
and the interest payable on the certificates plus certain trust fees and
expenses. Any losses realized by the trust will be absorbed first by excess
interest.
o In addition to subordination and the application of excess interest, credit
enhancement is also provided by "overcollateralization," or the excess of the
mortgage loan principal balances over the aggregate principal balances of the
certificates. Overcollateralization is created by the application of certain
excess interest to the payment of principal on the certificates. The required
level of overcollateralization may, subject to certain floors, caps and
triggers, increase or decrease over time.
--------------------------------------------------------------------------------------------------------------------------------
Original Certificate Proceeds to
Class Balance Pass-Through Rate Price to Public Underwriting Discount the Depositor
-------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------
Class A-1
Class A-2
Class A-3
Class A-4
Class A-5
Class A-6
Class A-7
Class M-1
Class M-2
Class M-3
TOTAL
--------------------------------------------------------------------------------------------------------------------------------
First Union Capital Markets, Inc.
The date of this prospectus supplement is [date]
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (2) this prospectus supplement, which describes
the specific terms of your series of certificates.
This prospectus supplement does not contain complete information about
the offering of the certificates. Additional information is contained in the
prospectus. You are urged to read both this prospectus supplement and the
prospectus in full. We can not sell the certificates to you unless you have
received both this prospectus supplement and the prospectus.
If the terms of your series of certificates vary between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
The Depositor has filed a registration statement under the Securities
Act of 1933, as amended, with the Securities and Exchange Commission with
respect to the Offered Certificates. This prospectus supplement and prospectus
contain a summary of the material terms of the documents referred to herein and
therein, but neither contains nor will contain all of the information set forth
in the registration statement of which this prospectus is a part. For further
information, reference is made to such registration statement and any amendments
thereof and to the exhibits thereto. Copies of the registration statement may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed charges, or may be
examined free of charge at the Commission's offices, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the regional offices of the Commission located at 7
World Trade Center, Ste. 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661-2511 or
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's web site at http://www.sec.gov.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
S-1
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.............................................................1
SUMMARY...........................................................................................................1
The Offered Certificates.......................................................................................1
Credit Enhancement.............................................................................................4
The Mortgage Loans.............................................................................................6
Servicing......................................................................................................7
Federal Income Tax Aspects.....................................................................................9
ERISA Considerations...........................................................................................9
Legal Investment Considerations................................................................................9
Certain Legal Matters..........................................................................................9
Ratings........................................................................................................9
RISK FACTORS.....................................................................................................10
Prepayments May Adversely Affect the Yield to Maturity of the Offered Certificates............................10
Owners of Subordinate Certificates Face a Greater Risk of Suffering a Loss....................................11
Limited Documentation May Create Greater Risk of Loss.........................................................11
Underwriting Guidelines, May Create Risk or Greater Delinquencies and Losses..................................12
Geographic Concentration May Create Risk or Greater Delinquencies and Losses..................................12
Second Lien Mortgage Loans May Delay Payments to Certificateholders or Cause Greater Losses...................13
Prepayments May Create Interest Shortfalls....................................................................14
Consumer Protection and Other Laws May Restrict the Servicer's Ability to Foreclose
on the Mortgage Loans.........................................................................................14
Unaffiliated Seller or Depositor Insolvency Could Cause a Delay in Distributions on
the Certificates..............................................................................................16
Servicing Transfers related to Purchased Mortgage Loans could cause Higher Delinquencies......................16
THE MORTGAGE LOAN POOL...........................................................................................16
General.......................................................................................................16
Fixed Rate Group..............................................................................................16
Adjustable Rate Group.........................................................................................25
Interest Payments on the Mortgage Loans.......................................................................35
THE UNAFFILIATED SELLER..........................................................................................35
THE SERVICER.....................................................................................................35
THE SUB-SERVICER.................................................................................................35
Underwriting Guidelines.......................................................................................36
Servicing.....................................................................................................36
USE OF PROCEEDS..................................................................................................36
PREPAYMENT AND YIELD CONSIDERATIONS..............................................................................36
Projected Prepayments and Yields for Offered Certificates.....................................................36
Payment Delay Feature of Offered Certificates.................................................................36
ADDITIONAL INFORMATION...........................................................................................36
DESCRIPTION OF THE OFFERED CERTIFICATES..........................................................................36
General.......................................................................................................36
Distribution Dates............................................................................................36
Distributions.................................................................................................36
Interest Distributions........................................................................................36
Principal Distributions.......................................................................................36
Credit Enhancement............................................................................................36
S-2
Definitions...................................................................................................36
Calculation of LIBOR..........................................................................................36
Report to Owners of Certificates..............................................................................36
Book Entry Registration of the Offered Certificates...........................................................36
Certain Activities............................................................................................36
THE POOLING AND SERVICING AGREEMENT..............................................................................36
Formation of the Trust........................................................................................36
Assignment of the Loans; Representations and Warranties.......................................................36
Servicing of the Mortgage Loans...............................................................................36
Removal and Resignation of Servicer...........................................................................36
Governing Law.................................................................................................36
Termination of the Trust......................................................................................36
Optional Termination..........................................................................................36
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..........................................................................36
REMIC Elections...............................................................................................36
ERISA CONSIDERATIONS.............................................................................................36
RATINGS..........................................................................................................36
LEGAL INVESTMENT CONSIDERATIONS..................................................................................36
UNDERWRITING.....................................................................................................36
CERTAIN LEGAL MATTERS............................................................................................36
INDEX OF SIGNIFICANT DEFINITIONS.................................................................................36
ANNEX I..........................................................................................................36
S-3
SUMMARY
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the certificates, read carefully this entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the
full description of these calculations, cash flows and other
information in this prospectus supplement and the accompanying
prospectus.
o You can find a listing of the pages where capitalized terms used in
this summary are defined under the caption "Index of Significant
Definitions" beginning on page S-__ in this prospectus supplement and
under the caption "Index of Significant Definitions" beginning on page
__ in the accompanying prospectus.
The Offered Certificates
Each Class of Offered Certificates will have an original Certificate
Principal Balance, will accrue interest at a Pass-Through Rate and have a
Final Scheduled Distribution Date as follows:
Original Certificate Final Scheduled Distribution
Class Pass-Through Rate Balance Date(4)
- ------------------------------- --------------------------- ------------------------ ------------------------------
Class A-1 Certificates (1)(2) [$_______]
Class A-2 Certificates [___%](2) [$_______]
Class A-3 Certificates [___%](2) [$_______]
Class A-4 Certificates [___%](2) [$_______]
Class A-5 Certificates [___%](2) [$_______]
Class A-6 Certificates (3) [$_______]
Class A-7 Certificates [___%](2) [$_______]
Class M-1 Certificates [___%](2) [$_______]
Class M-2 Certificates [___%](2) [$_______]
Class M-3 Certificates [___%](2) [$_______]
(1) On any Distribution Date, the "Class A-1 Pass-Through Rate" will be equal
to a rate equal to the sum of one-month LIBOR plus [__%] per annum.
(2) The Pass-Through Rate with respect to all of the Offered Certificates,
other than the Class A-6 Certificates, will on any Distribution Date be
equal to the lesser of (x) the Pass-Through Rate for such Class set forth
above and (y) the Available Funds Cap Rate for the Fixed Rate Group
applicable to such Distribution Date.
(3) On each Distribution Date, the "Class A-6 Pass-Through Rate" will be
equal to the least of (x) one-month LIBOR plus [__%] per annum (the
"Class A-6 Formula Pass-Through Rate"), (y) the Available Funds Cap Rate
for the Adjustable Rate Group applicable to such Distribution Date and
(z) [__%] per annum.
(4) Each such date has been determined as described herein under "Prepayment
and Yield Considerations." The actual last Distribution Date for each
Class of Certificates will occur significantly earlier than such dates.
See 'Prepayment and Yield Considerations" herein.
S-1
The Certificates will consist of the Offered Certificates, the Class B
Certificates (the "Class B Certificates"), the Class C Certificates (the
"Class C Certificates") and the Class R Certificates (the "Class R
Certificates"), each a "Class". The Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") among
the Servicer, the Unaffiliated Seller, the Depositor, the Backup Servicer and
the Trustee. Only the Offered Certificates are offered hereby.
The Certificates will represent beneficial undivided ownership interests in a
trust fund (the "Trust Fund") consisting of two pools (each such pool, a
"Group") of fixed- and adjustable-rate, closed-end, monthly pay, generally
fully amortizing mortgage loans secured by first or second lien mortgages or
deeds of trust on one-to-four family residential properties to be conveyed to
the Trust on the Closing Date.
Certain Designations
The "Class A Certificates" are the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the
Class A-5 Certificates, the Class A-6 Certificates and the Class A-7
Certificates. The "Mezzanine Certificates" are the Class M-1 Certificates,
the Class M-2 Certificates and the Class M-3 Certificates.
The Class A Certificates and the Mezzanine Certificates are herein referred
to as the "Offered Certificates." The Mezzanine Certificates, the Class B
Certificates and the Class C Certificates are referred to herein as the
"Subordinate Certificates." The Class A Certificates (other than the Class
A-6 Certificates), the Mezzanine Certificates and the Class B Certificates
are collectively referred to as the "Fixed Rate Group Certificates" and the
Class A-6 Certificates are referred to as the "Adjustable Rate Group
Certificates." The Class A-1 Certificates and the Class A-6 Certificates are
collectively referred to herein as the "Variable Rate Certificates."
The Trust
[________] Mortgage Loan Trust [series] (the "Trust"), a common law trust
formed under the Pooling and Servicing Agreement. On [date] (the "Closing
Date"), [________] (the "Unaffiliated Seller") will sell the Mortgage Loans
to Residential Asset Funding Corporation (the "Depositor"). The Depositor
will then deposit the Mortgage Loans into the Trust. The Unaffiliated Seller
has acquired the Mortgage Loans from one or more third party originators
(each, an "Originator"). [A substantial portion of the Mortgage Loans were
purchased by the Unaffiliated Seller as a pool (the "Purchased Pool") from a
well-known mortgage originator (the "Independent Originator") and the
remainder were originated by, and purchased from, the Unaffiliated Seller's
correspondents under its [underwriting program].
[________________], a national banking association (the "Trustee"), will
serve as Trustee of the Trust. The Trustee's principal executive offices are
located at [address].
Distributions, Generally
Distributions on the Certificates will be made on the twenty-fifth day of
each calendar month, or if such day is not a business day, the next
succeeding business day (each, a "Distribution Date") commencing [date], to
the Owners of record. See "Description of the Offered Certificates --
General" herein. The Owners of record shall be such Owners as of the last day
of the calendar month immediately preceding the calendar month in which such
Distribution Date occurs, (except in the case of the [________] Distribution
Date which shall be such Owners as of the close of business on the Closing
Date) whether or not such day is a business day (each a "Record Date").
Distributions to an Owner will be made in an amount equal to the product of
such Owner's Percentage Interest (as defined herein) and the amount
distributed in respect of such Owner's Class of Certificates on such
Distribution Date.
S-1
The "Percentage Interest" represented by any Certificate will be equal to the
percentage obtained by dividing the original Certificate Principal Balance of
such Certificate by the original Certificate Principal Balance of all
Certificates of the same Class. The "Certificate Principal Balance" of any
Certificate is equal to the principal balance of such Certificate on the date
of issuance less any amounts actually distributed to the Owner of such
Certificate on account of principal or allocated to such Certificate on
account of Realized Losses (as defined herein).
Distributions of Interest
For each Distribution Date, the interest due with respect to the Offered
Certificates (other than the Variable Rate Certificates) will be the interest
which has accrued thereon at the related Pass-Through Rate during the
calendar month immediately preceding the month in which the Distribution Date
occurs and the interest due with respect to the Variable Rate Certificates
will be the interest which has accrued thereon at the related Pass-Through
Rate during the period from the [___] day of the month immediately preceding
the month in which such Distribution Date occurs (or the Closing Date with
respect to the [________] Distribution Date) to the [__] day of the month in
which such Distribution Date occurs. Each period referred to in the prior
sentence relating to the accrual of interest is the "Accrual Period" for the
Offered Certificates.
On each Distribution Date, to the extent of funds available for interest
distributions as described herein under "Description of the Offered
Certificates -- Interest Distributions," interest will be distributed with
respect to each Class of Offered Certificates in an amount equal to the
interest accrued on the related Class Certificate Principal Balance for the
related Accrual Period at the related Pass-Through Rate (such amount, the
"Current Interest").
All calculations of interest on the Offered Certificates (other than the
Variable Rate Certificates) will be made on the basis of a 360-day year
assumed to consist of twelve 30-day months. All calculations of interest on
the Variable Rate Certificates will be made on the basis of the actual number
of days elapsed in the related Accrual Period and a year of 360 days.
LIBOR Shortfalls on the Class A-6 Certificates
Although the Class A-6 Certificates and the underlying Mortgage Loans each
bear interest at a variable rate, the indexes upon which such rates are based
are not the same. The Pass-Through Rate for the Class A-6 Certificates is
based on one-month LIBOR, while the underlying Mortgage Loans bear interest
at rates generally based upon six-month LIBOR.
In addition, such rates generally adjust on different dates. The Pass-Through
Rate on the Class A-6 Certificates adjusts every month, while the interest
rates on the underlying Mortgage Loans generally adjust every six months.
These differences in the basis of the interest rates create a risk that
changes in market interest rates could create an interest shortfall on the
Class A-6 Certificates. This "LIBOR Shortfall Amount" for to the Class A-6
Certificates and a Distribution Date is the excess, if any, of
o the interest then due on the Class A-6 calculated at the Class A-6 Formula
Pass-Through Rate over
o the interest then due on the Class A-6 Certificates calculated at the
Available Funds Cap Rate for the Adjustable Rate Group.
If, on any Distribution Date, there is a LIBOR Shortfall Amount, certain
amounts otherwise distributable with respect to the Class C Certificates and
Class R Certificates will instead be allocated to payment of the LIBOR
Shortfall Amount. If the full amount of the LIBOR Shortfall Amount is not
paid on a Distribution Date, then the unpaid amount will be paid out of the
Excess Cashflow Amount (as defined herein). If the Servicer exercises its
right to an Optional Termination (as defined herein), the LIBOR Shortfall
Amount may not be
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paid in full. The ratings of the Class A-6 Certificates do not address the
likelihood of the payment of any LIBOR Shortfall Amount.
The "Available Funds Cap Rate" for a Group as to any Distribution Date, is an
amount, expressed as a per annum rate, equal to
(i) the sum of
(x) the aggregate amount of interest due and collected (or advanced) on
all of the Mortgage Loans in the related Group for the related
Remittance Period and
(y) the excess of
(A) the aggregate amount of interest due and collected (or advanced) on
all of the Mortgage Loans in the related Group for the related
Remittance Period over
(B) the aggregate of the Servicing Fee and the Trustee Fee, in each
case relating to such Group and such Distribution Date and, in the
case of the Fixed Rate Group, the Current Interest with respect to
the Class A Certificates (other than the Class A-6 Certificates),
the Class M Certificates and the Class B Certificates, and in the
case of the Adjustable Rate Group, the Current Interest with
respect to the Class A-6 Certificates minus
(ii)the aggregate of the Servicing Fee and the Trustee Fee, in each case
relating to such Group, on such Distribution Date.
Distributions of Principal
On each Distribution Date, to the extent of funds available for principal
distributions as described herein under "Description of the Offered
Certificates -- Principal Distributions," principal will be distributed with
respect to each Class of Offered Certificates then entitled to receive
distributions of principal in an aggregate amount for all such Classes equal
to the Principal Distribution Amount for such Distribution Date.
The "Principal Distribution Amount" for any Distribution Date will equal the
sum of (i) the Aggregate Collected Principal Amount (and with respect to any
Distribution Date on which a Trigger Event is not in effect, less the
Overcollateralization Reduction Amount, if any) and (ii) the Extra Principal
Distribution Amount, if any, for such Distribution Date. As to any
Distribution Date, the "Aggregate Collected Principal Amount" will equal the
aggregate of the Collected Principal Amounts with respect to each of the
Groups for the related Remittance Period.
The "Collected Principal Amount" for any Distribution Date and Group will
equal the sum of the following amounts (without duplication), in each case,
to the extent actually received by the Trustee on or prior to the related
Remittance Date:
o the principal portion of all scheduled and unscheduled (other than the
principal portion of any prepaid installments) monthly payments on the
Mortgage Loans in such Group due during the related Remittance Period;
o the principal portion of all scheduled monthly payments on the Mortgage
Loans in such Group advanced by the Servicer during the related Remittance
Period;
o the scheduled principal balance of each Mortgage Loan in such Group that
was repurchased by the Unaffiliated Seller or purchased by the Servicer on
the related Remittance Date;
o any Substitution Amounts delivered by the Unaffiliated Seller on the
related Remittance Date in connection with a substitution of a Mortgage
Loan in such Group (to the extent such Substitution Amounts relate to
principal);
o Net Liquidation Proceeds (as defined herein) for each Mortgage Loan in such
Group which became a Liquidated Mortgage Loan during the related Remittance
Period; and
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o the proceeds relating to principal of any termination of the Trust.
A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan as to
which the Servicer has determined in its reasonable judgment that all amounts
that it expects to recover on such Mortgage Loan have been recovered
(exclusive of any possibility of a deficiency judgment).
As to any Distribution Date, the "Overcollateralization Reduction Amount" is
an amount equal to the lesser of (x) the excess, if any, of (i) the
Overcollateralization Amount for such Distribution Date (assuming that 100%
of the Aggregate Collected Principal Amount is distributed as principal on
the Offered Certificates on such Distribution Date) over (ii) the Required
Overcollateralization Amount for such Distribution Date and (y) the Aggregate
Collected Principal Amount for such Distribution Date.
The "Extra Principal Distribution Amount" with respect to any Distribution
Date is an amount equal to the lesser of (i) the Overcollaterization
Deficiency Amount for such Distribution Date and (ii) the Excess Interest
Amount for such Distribution Date.
Denominations
The Offered Certificates are issuable in book entry form in minimum
denominations of original principal amounts of $1,000 and integral multiples
thereof.
Book-Entry Registration of the Offered Certificates
The Offered Certificates initially will be issued in book-entry form. Persons
acquiring beneficial ownership interests in such Offered Certificates may
elect to hold their interests through The Depository Trust Company in the
United States, or Cedel Bank, societe anonyme or The Euroclear System in
Europe.
So long as the Offered Certificates are in book-entry form, such Certificates
will be evidenced by one or more Certificates registered in the name of Cede
& Co., as the nominee of the related depository. The interests of the Owners
of such Certificates will be represented by book-entries on the records of
the related depository and participating members thereof. No beneficial owner
will be entitled to receive a definitive certificate representing such
person's interest, except in the event that definitive certificates are
issued under the limited circumstances described herein.
All references in this prospectus supplement to any Offered Certificates
reflect the rights of beneficial owners only as such rights may be exercised
through the related depository and its participating organizations for so
long as such Offered Certificates are held by them. See "Description of the
Offered Certificates--Book-Entry Registration of the Offered Certificates"
herein and in Annex I hereto.
Reports to Owners
In connection with each distribution and annually, Certificateholders will be
furnished with statements containing information with respect to principal
and interest payments and the related Trust Fund, as described herein and in
the applicable prospectus supplement for such Series. Any financial
information contained in such reports will not have been examined or reported
upon by an independent public accountant. See "Servicing of the Loans--
Reports to Certificateholders" in the prospectus. The Servicer for each
Series relating to Mortgage Loans will furnish periodic statements setting
forth certain specified information to the related Trustee and, in addition,
annually will furnish such Trustee with a statement from a firm of
independent public accounts with respect to the examination of certain
documents and records relating to the servicing of the Mortgage Loans in the
related Trust Fund. See "Servicing of the Loans-- Reports to the Trustee" and
"Evidence as to Compliance" in the prospectus. Copies of the monthly and
annual statements provided by the Servicer to the Trustee will be furnished
to Certificateholders of each Series upon request addressed to Residential
Asset Funding Corporation, ______________________.
Credit Enhancement
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The credit enhancement provided for the benefit of the Owners of the Offered
Certificates consists of (x) the application of Excess Interest, (y) the
overcollateralization mechanics which utilize the internal cash flows of the
Trust and (z) the subordination of the Subordinate Certificates.
Realized Losses
A "Realized Loss" with respect to a Liquidated Mortgage Loan is any shortfall
between
o any amounts (including the proceeds of any Insurance Policy) recovered by
the Servicer in connection with a Liquidated Mortgage Loan, net of expenses
which are incurred by the Servicer in connection with the liquidation and
net of unreimbursed Servicing Advances, unreimbursed Delinquency Advances
and accrued and unpaid Servicing Fees ("Net Liquidation Proceeds") and
o the principal balance of such Mortgage Loan.
Application of Excess Interest
Any Realized Loss will, in the first instance, be covered by the application
of excess interest. Excess interest on any Distribution Date will generally
be equal to the amount of Available Funds constituting interest less
Trustee's Fees and amounts of interest payable to the Certificateholders.
Overcollateralization
Additional credit enhancement is created by accelerating the amortization of
the Certificates relative to the amortization of the Mortgage Loans until an
overcollateralization target is met. The accelerated amortization is achieved
by the application of certain excess interest to the payment of principal on
the Certificates then entitled to receive principal distributions. This
acceleration feature creates overcollateralization in an amount equal to the
excess of the aggregate scheduled principal balances of the Mortgage Loans
over the aggregate Certificate Principal Balances of the Offered
Certificates, the Class B Certificates and the Class C Certificates. Once the
required level of overcollateralization is reached, and subject to the
provisions described in the next paragraph, the acceleration feature will
cease, unless necessary to maintain the required level of
overcollateralization.
The amount of overcollateralization will be reduced by the amount of any
Realized Loss that is not absorbed by Excess Interest Amounts, as described
above.
Subject to certain floors, caps and triggers, the required level of
overcollateralization may increase or decrease over time. An increase would
result from a temporary period of accelerated amortization of the Offered
Certificates to increase the actual level of overcollateralization to its
required level; a decrease would result from a temporary period of
decelerated amortization to reduce the actual level of overcollateralization
to its required level.
See "Description of the Offered Certificates -- Overcollateralization
Provisions" herein.
Subordination of the Subordinate Certificates
Classes of Certificates that have a lower alphabetical designation are
subordinated to each Class of Certificates that have a higher alphabetical
designation. If, on a Distribution Date, the amount of any Realized Loss
exceeds the Excess Interest Amount and any overcollateralization, the
Certificate Principal Balance of the Class of Subordinate Certificates then
outstanding with the lowest priority Class designation will be reduced by the
amount of such excess. Any such reduction will constitute an "Applied
Realized Loss" for the applicable Class. The amount that any Class is reduced
as a result of an Applied Realized Loss will not accrue interest. Such
amount, however, may be paid on a future Distribution Date to the extent
funds are available therefor as provided herein under "Description of the
Offered Certificates--Interest Distributions" and "--Credit Enhancement."
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Distributions on the Class C Certificates will be made only in periods in
which (x) all Realized Losses have been fully funded and (y) the
Overcollateralization Amount is equal to or greater than the Required
Overcollateralization Amount applicable to such period.
The Mortgage Loans
The Mortgage Loans consist of closed-end, monthly pay, generally fully
amortizing mortgage loans (the "Mortgage Loans") secured by first or second
lien mortgages or deeds of trust (the "Mortgages") on single-family homes
(which may be condominiums, manufactured homes or one-to-four family
residences), including investment properties (the "Mortgaged Properties").
The Mortgage Loans are not insured by either primary or pool mortgage
insurance policies. The Mortgage Loans are not guaranteed by the Servicer,
the Unaffiliated Seller, the Trustee, the Depositor, any Originator or any of
their respective affiliates or any other person. The Mortgage Loans are
required to be serviced by the Servicer in accordance with the terms of the
Pooling and Servicing Agreement and with reasonable care, using that degree
of skill and attention that the Servicer exercises with respect to comparable
mortgage loans that it services for itself and others. See "The Pooling and
Servicing Agreement" herein.
Unless otherwise noted, all statistical percentages in this prospectus
supplement are approximate and are measured by the aggregate scheduled unpaid
principal balance of the Mortgage Loans as of the Cut-Off Date (the "Original
Aggregate Principal Balance").
The Original Aggregate Principal Balance of the Mortgage Loans to be conveyed
to the Trust on the Closing Date is $---------------.
The Mortgage Loans will be divided into two pools (each, a "Group") of loans.
One pool will consist of only fixed-rate Mortgage Loans (the "Fixed Rate
Group") and the other pool will consist of only adjustable-rate Mortgage
Loans (the "Adjustable Rate Group").
Fixed Rate Group.
All of the Mortgage Loans in the Fixed Rate Group have interest rates (each a
"Mortgage Rate") that are fixed (the "Fixed Rate Mortgage Loans"). Certain
statistical information with respect to the Fixed Rate Mortgage Loans is set
forth below.
-------------------------------------------------------------
Statistical Properties of the Mortgage Loans
in the Fixed Rate Group as of the Cut-Off Date
-------------------------------------------------------------
Number of Mortgage Loans
-------------------------------------------------------------
Aggregate Principal Balance $_________
-------------------------------------------------------------
Weighted average Principal Balance $_________
-------------------------------------------------------------
Weighted average Mortgage Rate __%
-------------------------------------------------------------
Weighted average remaining term (mo.)
-------------------------------------------------------------
Mortgaged Property located in [state] __%
-------------------------------------------------------------
Mortgaged Property located in [state] __%
-------------------------------------------------------------
Mortgaged Property located in [state] __%
-------------------------------------------------------------
First lien mortgages or deeds of trust __%
-------------------------------------------------------------
Second lien mortgages of deeds of trust __%
-------------------------------------------------------------
Originated by [Independent Originator] __%
-------------------------------------------------------------
Originated by correspondents under
[underwriting program] __%
-------------------------------------------------------------
Weighted average CLTV __%
-------------------------------------------------------------
Fully amortizing Mortgage Loans __%
-------------------------------------------------------------
Balloon Mortgage Loans __%
-------------------------------------------------------------
Percentages in the above table are determined by weighted average of the
principal balances of such Mortgage Loans. The Combined Loan-to-Value Ratio
("CLTV") of a Mortgage Loan is equal to the ratio (expressed as a percentage)
of (x) the sum of the (i) principal balance of the Mortgage Loan as of the
Cut-Off Date and (ii) the outstanding principal balances of any senior
mortgage loans (computed at the date of
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origination of the Mortgage Loan or, if available, the current principal
balance) to (y) the appraised value of the Mortgaged Property at the time of
origination of the Mortgage Loan or, with respect to Mortgage Loans in the
Purchased Pool, a more recent broker price opinion, if available.
Adjustable Rate Group.
All of the Mortgage Loans in the Adjustable Rate Group have Mortgage Rates
that are adjustable (the "Adjustable Rate Mortgage Loans"). Certain
statistical information with respect to the Fixed Rate Mortgage Loans is set
forth below.
-------------------------------------------------------------
Statistical Properties of the Mortgage Loans
in the Fixed Rate Group as of the Cut-Off Date
-------------------------------------------------------------
Number of Mortgage Loans
-------------------------------------------------------------
Aggregate Principal Balance $________
-------------------------------------------------------------
Weighted average Principal Balance $________
-------------------------------------------------------------
Weighted average Mortgage Rate __%
-------------------------------------------------------------
Weighted average gross margin __%
-------------------------------------------------------------
Weighted average lifetime rate cap __%
-------------------------------------------------------------
Weighted average lifetime rate floor __%
-------------------------------------------------------------
Weighted average remaining term (mo.)
-------------------------------------------------------------
Mortgaged Property located in [state] __%
-------------------------------------------------------------
Mortgaged Property located in [state] __%
-------------------------------------------------------------
Mortgaged Property located in [state] __%
-------------------------------------------------------------
First lien mortgages or deeds of trust __%
-------------------------------------------------------------
Originated by [Independent Originator] __%
-------------------------------------------------------------
Originated by correspondents under
[underwriting program] __%
-------------------------------------------------------------
Weighted average CLTV __%
-------------------------------------------------------------
Fully amortizing Mortgage Loans __%
-------------------------------------------------------------
Percentages in the above table are determined by weighted average of the
principal balances of such Mortgage Loans.
Servicing
[________________], a [__________] (the "Servicer") will responsible for
servicing the Mortgage Loans. The Servicer's principal executive offices are
located at [address], and its phone number is [number]. The Servicer will
enter into a Sub-Servicing Agreement (the "Sub-Servicing Agreement") with
[_______________], a [_______________] (the "Sub-Servicer"). The
Sub-Servicer's principal executive offices are located at [address], and its
phone number is [number].
Delinquency Advances and Compensating Interest
The Servicer will be obligated to make advances (each a "Delinquency
Advance") with respect to delinquent payments of interest (calculated at the
related Mortgage Rate less the sum of the rate at which the Servicing Fee (as
defined herein) and the Trustee Fee (the sum of such rates, the
"Administrative Rate") on each Mortgage Loan, but only to the extent (i)
necessary to pay any shortfall in Current Interest for the Offered
Certificates (such amount, the "Total Current Interest") arising because of
the insufficiency of Available Funds and (ii) that such Delinquency Advances,
in good faith and in the Servicer's reasonable judgment, are recoverable from
the related Mortgage Loan. Delinquency Advances are reimbursable from (i)
future collections on the Mortgage Loan which gave rise to the Delinquency
Advance, (ii) Liquidation Proceeds (as defined herein) for such Mortgage
Loan, (iii) from certain excess moneys which would otherwise be paid to the
Owners of the Class C Certificates and (iv) from amounts on deposit in the
Principal and Interest Account once such Delinquency Advance is deemed
"nonrecoverable".
In addition, the Servicer also will be required to deposit into the account
holding collections on the Mortgage Loans (the "Principal and Interest
Account"), with respect to any full Prepayment received on a Mortgage Loan
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during the related Remittance Period, out of its own funds without any right
of reimbursement therefor, Compensating Interest. "Compensating Interest" is
equal to the difference between (x) 30 days' interest at such Mortgage Loan's
Mortgage Rate (less the Administrative Rate) on the principal balance of such
Mortgage Loan as of the first day of the related Remittance Period and (y) to
the extent not previously advanced, the interest (less an amount calculated
at the Administrative Rate) paid by the Mortgagor with respect to such
Mortgage Loan during such Remittance Period; provided, however, that the
Servicer: (i) will only pay Compensating Interest to the extent that there is
a shortfall in the amount of Available Funds necessary to pay the Total
Current Interest, (ii) will not be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate
Servicing Fee received by the Servicer for such Remittance Period and (iii)
will not be required to cover shortfalls in collections of interest due to
curtailments or partial prepayments. Any excess of the full amount of the
Compensating Interest due over the related Servicing Fee may result in a
shortfall of interest payable to the Offered Certificates or the Subordinate
Certificates.
Any failure by the Servicer to remit to the Trustee a Delinquency Advance or
Compensating Interest to the extent required under the Pooling and Servicing
Agreement will constitute an event of default under the Pooling and Servicing
Agreement (each, a "Servicer Event of Default"), in which case, upon the
removal of the Servicer, the Trustee or the successor servicer will be
obligated to make such advances in accordance with the terms of the Pooling
and Servicing Agreement. See "Servicing of the Loans-- Advances and
Limitations Thereon" in the prospectus.
Monthly Servicing Fee and Trustee's Fee
[________________], as Servicer, will retain a fee, payable on each Servicer
Remittance Date (as defined herein), and equal to _____% per annum (the
"Servicing Fee"), payable monthly at one-twelfth the annual rate, of the
aggregate outstanding principal balance of all Mortgage Loans as of the first
day of the related Remittance Period.
On each Servicer Remittance Date, the Trustee will be entitled to receive a
"Trustee Fee" equal to the product of (x) one-twelfth of _____% and (y) the
aggregate outstanding principal balance of all Mortgage Loans as of the first
day of the related Remittance Period.
Optional Termination
The Servicer, at its option, acting directly or through a permitted designee,
will have the right, in certain circumstances, to purchase from the Trust all
the Mortgage Loans then held by the Trust, at a price at least sufficient to
cause the payment in full of the amounts then outstanding on the Class A
Certificates, the Mezzanine Certificates, the Class B Certificates and the
Class C Certificates, on any Remittance Date on or after the Remittance Date
on which the then-outstanding aggregate principal balance of the Mortgage
Loans in the Trust has declined to _____% or less of the Original Aggregate
Principal Balance (the "Optional Termination Date").
Within 90 days following the Optional Termination Date, if the Servicer, or
an affiliate of the Servicer, has not exercised its optional termination
right by such date, the Trustee shall solicit bids for the purchase (the
"Auction Sale") of all Mortgage Loans remaining in the Trust. In the event
that satisfactory bids are received as described in the Pooling and Servicing
Agreement, the net sale proceeds will be distributed to the Owners of the
Certificates, 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 the 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
S-8
to exceed 90 days. See "The Pooling and Servicing Agreement -- Optional
Termination" herein.
Optional Repurchase of Defaulted Mortgage Loans
The Servicer or its designee has the option, but is not obligated, to
purchase from the Trust Fund any Mortgage Loan which is more than 60 days
delinquent, up to _____% by aggregate original Principal Balance of the
Original Aggregate Principal Balance of all Mortgage Loans, at a purchase
price equal to the outstanding Principal Balance thereof as of the date of
purchase, plus all accrued and unpaid interest on such Principal Balance,
computed at the related Mortgage Interest Rate (net of the related Servicing
Fee) plus the amount of any unreimbursed Servicing Advances (without
duplication) made by the Servicer with respect to such Mortgage Loan in
accordance with the provisions specified in the Pooling and Servicing
Agreement.
Federal Income Tax Aspects
For federal income tax purposes, one or more elections will be made to treat
the Trust as a "real estate mortgage investment conduit" (the "REMIC"). Each
Class of Offered Certificates, the Class B Certificates and the Class C
Certificates will be designated as "regular interests" in the REMIC and will
be treated as debt instruments of the Trust for federal income tax purposes.
The REMIC will issue the Class R Certificates, which will be designated as
the sole class of "residual interests" in the REMIC. See "Certain Federal
Income Tax Consequences" herein and in the prospectus.
ERISA Considerations
As discussed under "ERISA Considerations" herein, the acquisition by Benefit
Plan Investors (as defined herein) of the Certificates could result in
prohibited transactions under ERISA and Section 4975 of the Code.
Accordingly, the Certificates may not be purchased by Benefit Plan Investors.
Legal Investment Considerations
[The Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first lien mortgage loans may not be
legally authorized to invest in the Offered Certificates.]
Certain Legal Matters
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Unaffiliated Seller and the Servicer
by [__________], and for the Depositor and the Underwriter by Dewey
Ballantine LLP, New York, New York.
Ratings
It is a condition of the original issuance of the Offered Certificates that
the Offered Certificates receive the following ratings:
Class [Rating Agency] [Rating Agency]
Class A
Class M-1
Class M-2
Class M-3
[____] and [____] are collectively referred to herein as the "Rating
Agencies. A security rating is not a recommendation to buy, sell or hold
securities, and may be subject to revision or withdrawal at any time by the
assigning entity. See "Ratings" herein.
S-9
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following factors (as well as the factors set forth under "Risk Factors" in the
prospectus) in connection with the purchase of the Offered Certificates.
Prepayments May Adversely Affect the Yield to Maturity of the Offered
Certificates
Borrowers may prepay their loans at any time and generally are not
required to pay a prepayment fee. The rate of prepayments of the Mortgage Loans
cannot be predicted and may be affected by a wide variety of economic, social
and other factors, including state and federal income tax policies, interest
rates and the availability of alternative financing. Therefore, we can give no
assurance as to the level of prepayments that the Trust will experience.
A number of factors, in addition to prepayment fees, may impact on the
prepayment behavior of a pool of loans such as the Mortgage Loans. One such
factor is the principal balance of the Mortgage Loans. A small principal balance
may be easier for a borrower to prepay than a large balance and therefore may
have a higher prepayment rate. In addition, in order to refinance a first
priority mortgage loan, the borrower generally must repay any subordinate
mortgage loans. However, a small principal balance may make refinancing a
Mortgage Loan at a lower interest rate less attractive to the borrower as the
perceived impact to the borrower of lower interest rates on the size of the
monthly payment may not be significant. Other factors that might be expected to
affect the prepayment rate include general economic conditions and the general
interest rate environment, possible future changes affecting the deductibility
for federal income tax purposes of interest payments on mortgage loans, the
amounts of, and interest rates on, the underlying senior mortgage loans, and the
tendency of borrowers to use first priority mortgage loans as long-term
financing for home purchase and second mortgage loans as shorter-term financing
for a variety of purposes, including home improvement, education expenses and
purchases of consumer durables such as automobiles.
Prepayments may result from 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"
clauses and liquidations due to default, as well as the receipt of proceeds from
physical damage. In addition, repurchases from the Trust of Mortgage Loans
required to be made by the Unaffiliated Seller under the Pooling and Servicing
Agreement will have the same effect on the Owners of the Offered Certificates as
a prepayment of the related Mortgage Loans. Prepayments and such repurchases
also will accelerate the Final Scheduled Distribution Date of the Offered
Certificates. All of the Mortgage Loans contain "due-on-sale" provisions, and
the Servicer generally will enforce such provisions to the extent permitted by
applicable law. In addition, if the Unaffiliated Seller is unable to cure
documentation defects or provide a replacement Mortgage Loan for the affected
Mortgage Loans, affected Mortgage Loans will be repurchased, and the Owners of
the Offered Certificates then entitled to receive principal distributions will
experience a principal prepayment. See "Certain Legal Aspects of the Mortgage
Loans" herein.
In general, if prevailing interest rates fall significantly below the
interest rates for similar loans at the time of origination, fixed rate mortgage
loans may be subject to higher prepayment rates than if prevailing rates remain
at or above those at the time such Mortgage Loans were originated. Should
prepayments on the Mortgage Loans increase because of such interest rate
reductions, the average life and final maturity of the Offered Certificates
(other than the Class A-6 Certificates) may be shortened. See "Prepayment and
Yield Considerations."
S-10
The weighted average life of a pool of loans is the average amount of
time that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because it is
expected that there will be prepayments and defaults on the Mortgage Loans, the
actual weighted average life of the Offered Certificates is expected to vary
substantially from the weighted average remaining term to stated maturity of the
Mortgage Loans as set forth herein under "The Mortgage Pool -- General." Certain
information, based on specified prepayment assumptions, as to the possible
weighted average life of the Offered Certificates is set forth herein under
"Prepayment and Yield Considerations."
The Unaffiliated Seller has only limited records of the historical
prepayment experience of its portfolio of loans which the Unaffiliated Seller
believes does not provide meaningful information with respect to the Mortgage
Loans. In any event, no assurance can be given that prepayments on the Mortgage
Loans will conform to any historical experience and no prediction can be made as
to the actual prepayment experience on the Mortgage Loans.
Owners of Subordinate Certificates Face a Greater Risk of Suffering a Loss
The rights of the Owners of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Owners of the Class A Certificates, and the rights of the Owners
of each Class of Subordinate Certificates to receive such distributions will be
further subordinated to such rights of the Owners of the Class or Classes of
Subordinate Certificates with higher priority Class designations, in each case,
to the extent described herein. The subordination described above is intended to
increase the likelihood of regular receipt by the Owners of Certificates with a
higher payment priority, of the full amount of monthly distributions allocable
to them and to afford such Owners protection against losses. As a result, the
yield on each Class of Offered Certificates, in order of payment priority, will
be progressively more sensitive to the rate, timing and severity of Realized
Losses on the Mortgage Loans and other shortfalls in Available Funds. Investors
in the Offered Certificates, and particularly the Subordinate Certificates,
should carefully consider the related risks, including the risk that such
investors may suffer a loss on their investments.
The Subordinate Certificates will not be entitled to any principal
distributions until the Stepdown Date, at the earliest. In addition, the
Subordinate Certificates also are subject to limitations on distributions of
principal upon the occurrence of certain delinquency and loss trigger events.
Consequently, the weighted average lives of the Subordinate Certificates will be
longer than would be the case if distributions of principal were to be allocated
on a pro rata basis among the Class A Certificates and the Subordinate
Certificates. As a result of the longer weighted average lives of the
Subordinate Certificates, the Owners of such Certificates have a greater risk of
suffering a loss on their investments.
Limited Documentation May Create Greater Risk of Loss
_____% by current aggregate Principal Balance of the Mortgage Loans
were purchased by the Unaffiliated Seller from the Independent Originator. Only
limited information was available concerning the origination and servicing of
the Mortgage Loans prior to such purchase, and none of the Servicer, the
Unaffiliated Seller or the Depositor were able independently to verify such
information as has been obtained and included herein. The Purchased Pool
consists of mortgage loans originated by the Independent Originator which were
not included in one of the Independent Originator's regular securitizations
because the mortgage loans did not meet the specified criteria for such
securitizations at that time or due to other unrelated factors. A majority of
the Mortgaged Properties securing the Mortgage Loans in the Purchased Pool are
located in the states of New Jersey, New York, California and Massachusetts. As
described below under "Geographic Concentration", the losses on the Purchased
Pool may be higher than if such Mortgage Loans were more
S-11
geographically diversified. In addition, a majority of the Mortgage Loans in the
Purchased Pool were originated in 1988 through 1990 and thus are well seasoned.
Since the time of origination of the Purchased Pool, property values in the
states of New Jersey, New York, California and Massachusetts generally have
declined. Thus, the loan-to-value ratios of the Mortgage Loans in the Purchased
Pool may have risen since the time of origination.
None of the Servicer, the Unaffiliated Seller or the Depositor have
been able to obtain historical loss and delinquency statistics with respect to
loans originated and serviced by the Independent Originator which they consider
reliable and, accordingly, no such statistics are included herein. The
Unaffiliated Seller is making certain representations and warranties regarding
the Mortgage Loans and is obligated to repurchase such Mortgage Loans as to
which there is a breach of such representations or warranties which materially
adversely affects the value of, or interest of the Trust in, such Mortgage Loan.
However, there is no assurance that such remedies will cure all problems that
may arise by reason of the limited information or documentation available with
respect to the Mortgage Loans and their origination and prior servicing. Such
problems could include failure of the Mortgage Loans to have been originated in
compliance with applicable law, industry standards, or the Independent
Originator's own underwriting standards, or failure of the Mortgage Loans to
have been serviced by the Independent Originator in accordance with such laws
and standards, as well as problems which, because of the limited information
available, currently cannot be determined.
Underwriting Guidelines, May Create Risk or Greater Delinquencies and Losses
_____% by current aggregate Principal Balance of the Mortgage Loans
were purchased by the Unaffiliated Seller through an affiliate from third party
correspondents under the Unaffiliated Seller's [underwriting program].
Substantially all of these Mortgage Loans were purchased by the Unaffiliated
Seller pursuant to the Mortgage Loan underwriting guidelines of its
[underwriting program]. Due to the limited operating history of the Unaffiliated
Seller as a purchaser of newly originated Mortgage Loans, no assurance can be
given concerning the performance of the Mortgage Loans purchased by the
Unaffiliated Seller under the [underwriting program]. The Unaffiliated Seller
markets loans, in part, to borrowers who, for one reason or another, are not
able, or do not wish, to obtain financing from traditional sources such as
commercial banks. To the extent that such loans may be considered to be of a
riskier nature than loans made by traditional sources of financing, the Owners
of the Certificates may be deemed to be at greater risk than if the Mortgage
Loans were made to other types of borrowers.
As described herein, the Unaffiliated Seller's underwriting standards
generally reflect the guidelines of the Federal Home Loan Mortgage Corporation
("FHLMC") except with regard to certain features, like CLTV's and borrower
down-payments and in certain other respects. As a result of these differences,
the Mortgage Loans in the Mortgage Loan Pool may experience higher rates of
delinquencies, defaults and foreclosures than mortgage loans underwritten in a
manner which is more similar to the FNMA and FHLMC guidelines.
Geographic Concentration May Create Risk or Greater Delinquencies and Losses
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on loans
generally. Any concentration of the Mortgage Loans in such a region may present
risks in addition to those generally present for similar mortgage backed
securities without such concentration. In particular, approximately ______%,
______%, ______% and ______% of the Mortgage Loans by current aggregate
Principal Balance are secured by Mortgaged Properties located in the states of
___________________, ___________________, ___________________ and
___________________, respectively. Because of the relative geographic
concentration of the Mortgage Loans within
S-12
New Jersey, New York, California and Massachusetts, losses on the Mortgage Loans
may be higher than would be the case if the Mortgage Loans were more
geographically diversified. For example, certain of the Mortgaged Properties may
be more susceptible to certain types of special hazards, such as natural
disasters and major civil disturbances, than residential properties located in
other parts of the country. In addition, the economies of ___________________,
___________________, ___________________ and ___________________ may be
adversely affected to a greater degree than the economies of other areas of the
country by certain regional developments. Property values of residential real
estate in ___________________, ___________________, ___________________ and
___________________ have experienced declines in the past. If the
___________________, ___________________, ___________________ and
___________________ residential real estate markets experience an overall
decline, then the rates of delinquencies, foreclosures and losses on the
Mortgage Loans may be expected to increase and such increase may be substantial.
Second Lien Mortgage Loans May Delay Payments to Certificateholders or Cause
Greater Losses
As of the Cut-Off Date, approximately ______% by current aggregate
Principal Balance of the Mortgage Loans are secured by second liens which are
subordinate to the rights of the mortgagee under related senior mortgages. See
"The Mortgage Pool." As a result, the proceeds from any liquidation, insurance
or condemnation proceedings will be available to satisfy the principal balance
of such a second Mortgage Loan only to the extent that the claims, if any, of
the first mortgagee are satisfied in full, including any related foreclosure
costs. In addition, a mortgagee of a second mortgage may not foreclose on the
Mortgaged Property securing such mortgage unless it forecloses subject to the
related first mortgage, in which case it must either pay the entire amount of
the first mortgage to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on the first mortgage in the
event of default thereunder. In servicing second lien loans in its portfolio, it
is the Servicer's practice to satisfy or reinstate each such senior mortgage at
or prior to the foreclosure sale only to the extent that it determines any
amount so paid will be recoverable from future payments and collections on the
related loans or otherwise. The Trust will have no source of funds to satisfy
any senior mortgage or make payments due to any senior mortgagee.
General economic conditions have an impact on the ability of borrowers
to repay loans. Loss of earnings, illness and other similar factors may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the event
of bankruptcy of a mortgagor, it is possible that the Trust could experience a
loss with respect to such mortgagor's Mortgage Loan. In conjunction with a
mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to the Trust, any remaining balance
on such Mortgage Loan may not be recoverable.
An overall decline in the residential real estate market could
adversely affect the values of the Mortgaged Properties such that the
outstanding principal balances, together with the primary senior financing
thereon, equals or exceeds the value of the Mortgaged Properties. Such a decline
would adversely affect the position of a second mortgagee before having such an
effect on that of the related first mortgagee. A rise in interest rates over a
period of time and the general condition of the Mortgaged Property as well as
other factors may have the effect of reducing the value of the Mortgaged
Property from the appraised value at the time the Mortgage Loan was originated.
If there is a reduction in value of the Mortgaged Property, the ratio of the
amount of the Mortgage Loan to the value of the Mortgaged Property may increase
over what it was at the time the Mortgage Loan was originated. Such an increase
may reduce the likelihood of liquidation or other proceeds being sufficient to
satisfy the Mortgage Loan after satisfaction of any senior liens.
S-13
Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delays could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by the Owners of the Offered Certificates. An action
to foreclose on the Mortgaged Property securing a Mortgage Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Servicer to foreclose on or sell the
Mortgaged Property or to obtain proceeds on such a sale ("Liquidation Proceeds")
sufficient to repay all amounts due on the related Mortgage Loan. In addition,
the Servicer will be entitled to deduct from collections received during the
preceding Remittance Period all expenses reasonably incurred in attempting to
recover amounts due on Liquidated Mortgage Loans and not yet repaid, including
payments to senior lienholders, legal fees and costs of legal action, real
estate taxes and maintenance and preservation expenses, thereby reducing
collections available to the Owners of the Offered Certificates. See
"Description of the Offered Certificates" herein.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted loan having a small remaining principal balance as it would in
the case of a defaulted loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the outstanding principal balance of the small loan than would be the case
with the defaulted loan having a large remaining principal balance. If the
average outstanding principal balance of the Mortgage Loans is relatively small,
Net Liquidation Proceeds (as defined herein) on Liquidated Mortgage Loans may be
small as a percentage of the principal balance of a Mortgage Loan.
Prepayments May Create Interest Shortfalls
The scheduled monthly payment dates with respect to the Mortgage Loans
occur throughout a month. When a Prepayment in full is made on a Mortgage Loan,
the Mortgagor is charged interest only up to the date of such Prepayment,
instead of for a full month. However, such principal receipts will only be
passed through to the Owners of the Offered Certificates once a month, on the
Distribution Date which follows the calendar month in which such Prepayment was
received by the Servicer. The Servicer is obligated to pay, without any right of
reimbursement, those shortfalls in interest collections payable on the Offered
Certificates that are attributable to the difference between the interest paid
by a Mortgagor in connection with a prepayment in full and 30 days' interest
(such payment being "Compensating Interest"); provided, however, that the
Servicer will only pay Compensating Interest to the extent that there is a
shortfall in the amount of Available Funds necessary to pay the Total Current
Interest and will not be required to pay Compensating Interest with respect to
any Remittance Period in an amount in excess of the aggregate Servicing Fee
received by the Servicer for such Remittance Period or to cover shortfalls in
collections of interest due to curtailments or partial prepayments. Any excess
of the full amount of the Compensating Interest due over the related Servicing
Fee may result in a reduction of the amount of interest payable to the
Subordinate Certificates and to the extent of any excess remaining to the Class
A Certificates.
Consumer Protection and Other Laws May Restrict the Servicer's Ability to
Foreclose on the Mortgage Loans
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and may require licensing of the
Originators. In addition, many states have other laws, such as consumer
protection laws, unfair and deceptive practices acts and debt collection
practices acts which may apply to the origination or collection of the
S-14
Mortgage Loans. Depending on the provisions of the applicable law, violations of
these laws 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 Trust to
damages and administrative enforcement. See "Certain Legal Aspects of the
Mortgage Loans and Contracts" in the prospectus.
The Mortgage Loans are also subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder as to the
Mortgage Loans, which require certain disclosures to the borrowers regarding the
terms of such Mortgage Loans; (ii) the Equal Credit Opportunity Act and
Regulation B promulgated thereunder as to the Mortgage Loans, 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 as to the Mortgage Loans, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Trust to damages and
administrative enforcement. In addition, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act"), or
similar state legislation, the interest charged and the ability of the Servicer
to foreclose on loans to certain Mortgagors may be limited. Generally, under the
Civil Relief Act, a mortgagor who enters military service after the origination
of such mortgagor's mortgage loan (including a mortgagor who was in reserve
status and is called to active duty after origination of the mortgage loan),
shall not be charged interest (including fees and charges) above an annual rate
of 6% during the period of such mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. The Civil Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Civil Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans that may be affected by the Civil Relief
Act. Application of the Civil Relief Act would adversely affect, for an
indeterminate period of time until cessation of active duty status, the ability
of the Servicer to collect full amounts of interest on certain of the Mortgage
Loans to which it applies, if any. Any shortfall (such shortfall, a "Civil
Relief Act Interest Shortfall") in interest collections on any Mortgage Loan
resulting from the application of the Civil Relief Act will result in a
reduction of the amounts distributable to the Owners of the Subordinate
Certificates and potentially to the Owners of the Mezzanine Certificates and the
Class A Certificates. The Servicer is not obligated to offset any of the
Servicing Fee against, or to provide any other funds to cover, any Civil Relief
Act Interest Shortfall. In addition, the Civil Relief Act imposes limitations
which would impair the ability of the Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status and, under
certain circumstances, during an additional period thereafter. See "Certain
Legal Aspects of the Mortgage Loans" herein.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act adds certain additional provisions to the Truth in Lending Act
which additions are reflected in Regulation Z, the implementing regulation of
the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to certain non-purchase money
mortgage loans with high interest rates or high upfront fees and charges. In
general, mortgage loans within the purview of the Riegle Act have annual
percentage rates 10 percentage points over the yield on Treasury Securities of
comparable maturity and/or fees and points which
S-15
exceed the greater of 8% of the total loan amount or $400. These provisions of
the Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of the
creditor would generally be subject to all claims and defenses that the consumer
could assert against the creditor, including, without limitation, the right to
rescind the mortgage loan.
Unaffiliated Seller or Depositor Insolvency Could Cause a Delay in Distributions
on the Certificates
The Unaffiliated Seller believes that the transfer of the Mortgage
Loans by the Unaffiliated Seller to the Depositor and by the Depositor to the
Trust constitutes a sale by the Unaffiliated Seller to the Depositor and by the
Depositor to the Trust and, accordingly, that such Mortgage Loans will not be
part of the assets of the Unaffiliated Seller or the Depositor in the event of
the insolvency of the Unaffiliated Seller or the Depositor, as the case may be,
and will not be available to the creditors of the Unaffiliated Seller or the
Depositor, as the case may be. However, in the event of an insolvency of the
Unaffiliated Seller or the Depositor, it is possible that a bankruptcy trustee
or a creditor of the Unaffiliated Seller or the Depositor may argue that the
transaction between the Unaffiliated Seller and the Depositor or between the
Depositor and the Trust was a pledge of such Mortgage Loans in connection with a
borrowing by the Depositor or the Trust, as the case may be, rather than a true
sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee, the Unaffiliated Seller, the
Depositor and the Rating Agencies will have received an opinion of Dewey
Ballantine LLP, special counsel to the Depositor, with respect to the true sale
of the Mortgage Loans by the Unaffiliated Seller to the Depositor and by the
Depositor to the Trust, in form and substance satisfactory to the Rating
Agencies.
Servicing Transfers related to Purchased Mortgage Loans could cause Higher
Delinquencies
Most of the Mortgage Loans were purchased by the Unaffiliated Seller
from a single third-party originator. As described herein, the Unaffiliated
Seller will make certain representations and warranties regarding all of the
Mortgage Loans and, in the event of a breach of any such representation or
warranty that materially and adversely affects the value of such Mortgage Loans,
the Unaffiliated Seller will be required either to cure such breach or
substitute or repurchase the related Mortgage Loan or Mortgage Loans. Upon the
purchase of mortgage loans from third-party originators, the servicing must be
transferred from the third-party originator or current servicer to the Servicer.
During the time of such transfer, it is possible that delays in the receipt of
collections on such mortgage loans could occur resulting in a higher level of
delinquencies during such period.
THE MORTGAGE LOAN POOL
General
Unless otherwise noted, all references to statistical percentages in
this prospectus supplement appearing "as of the Cut-Off Date," together with all
dollar amount references herein to aggregate unpaid principal balances appearing
"as of the Cut-Off Date" have been calculated using the aggregate scheduled
unpaid principal balances of the Mortgage Loans as of the close of business on
the Cut-Off Date (the "Original Aggregate Principal Balance").
Fixed Rate Group
S-16
This subsection describes generally certain characteristics of the pool
of Mortgage Loans in the Fixed Rate Group. The Fixed Rate Group consists of
______ of fixed-rate Mortgage Loans evidenced by promissory notes (the "Notes")
secured by deeds of trust, security deeds or mortgages on the Mortgaged
Properties, ______%, ______%, ______% and ______% by current principal balance
of Mortgage Loans in the Fixed Rate Group of which are located in the states of
___________________, ___________________, ___________________ and
___________________, respectively. The Mortgaged Properties securing the
Mortgage Loans in the Fixed Rate Group consist of single-family residences
(which may be condominiums, manufactured homes or one-to-four family residences)
and multifamily properties, including investment properties. The Mortgaged
Properties may be owner-occupied (which includes vacation homes), second homes
or non-owner occupied investment properties. The Fixed Rate Group consists of
_____% by principal balance of Mortgage Loans in the Fixed Rate Group as of the
Cut-Off Date are secured by first lien mortgages on the related Mortgaged
Properties and _______% by principal balance of Mortgage Loans in the Fixed Rate
Group as of the Cut-Off Date are secured by second liens on the related
Mortgaged Properties.
None of the Mortgage Loans in the Fixed Rate Group were more than 60
days delinquent as of the Cut-Off Date.
_______% by principal balance of Mortgage Loans in the Fixed Rate Group
as of the Cut-Off Date require monthly payments of principal that will fully
amortize the Mortgage Loans by their respective stated maturity dates, and
_______% by principal balance of Mortgage Loans in the Fixed Rate Group as of
the Cut-Off Date are Balloon Loans. As of the Cut-Off Date, _______% by
principal balance of Mortgage Loans in the Fixed Rate Group as of the Cut-Off
Date have "step-up" Mortgage Rates. These Mortgage Loans have fixed Mortgage
Rates which are increased by a weighted average margin of _______% (one such
Mortgage Loan "steps-up" by _______%).
As of the Cut-Off Date, the Fixed Rate Mortgage Loans had Mortgage
Rates ranging from _______% to _______% per annum, with a weighted average
Mortgage Rate of _______% per annum.
As of the Cut-Off Date, the Mortgage Loans in the Fixed Rate Group had
original terms to stated maturity ranging from _______ months to _______ months;
had remaining terms to stated maturity of _______ months to _______ months; had
a weighted average original term to stated maturity of _______ months; and had a
weighted average remaining term to stated maturity of _______ months.
The Mortgage Loans in the Fixed Rate Group had CLTV's ranging from
_______% to _______%; the weighted average CLTV of the Mortgage Loans was
_______%.
The following tables describe the Mortgage Loans in the Fixed Rate
Group and the related Mortgaged Properties as of the Cut-Off Date. Some of the
aggregate percentages in the following tables may not total 100% due to
rounding.
S-17
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Fixed Rate Group
Aggregate
Number of Unpaid % of Aggregate Unpaid
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
S-18
DISTRIBUTION OF ORIGINAL TERMS
Fixed Rate Group
Range of Months Aggregate % of Aggregate
From Origination Number of Unpaid Unpaid
to Stated Maturity Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Fixed Rate Group
Range of Months Aggregate
Remaining to Number of Unpaid % of Aggregate Unpaid
Stated Maturity Mortgage Loans Principal Balance Principal Balance
- --------------- -------------- ----------------- -----------------
S-19
SEASONING
Fixed Rate Group
Aggregate % of Aggregate
Range of Months Number of Unpaid Unpaid
Elapsed Since Origination Mortgage Loans Principal Balance Principal Balance
- ------------------------- -------------- ----------------- -----------------
$
Total...........................
S-20
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Original Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
------------------------------- -------------- ----------------- -----------------
Total.............................
S-21
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Current Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
------------------------------ -------------- ----------------- -----------------
S-22
DISTRIBUTION OF GROSS MORTGAGE RATES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Gross Mortgage Rates (%) Mortgage Loans Principal Balance Principal Balance
------------------------ -------------- ----------------- -----------------
S-23
DISTRIBUTION OF CLTV'S
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of CLTV's (%) Mortgage Loans Principal Balance Principal Balance
------------------- -------------- ----------------- -----------------
The CLTV's shown above were calculated based upon the appraised values
of the Mortgaged Properties at the time of origination or, with respect to
Mortgage Loans in the Purchased Pool, a more recent broker price opinion, if
available (the "Appraised Values"), the principal balance of the Mortgage Loan
as of the Cut-Off Date and the senior liens, if any, at the time of origination
or, if available, the current senior lien. No assurance can be given that such
Appraised Values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If
property values decline such that the outstanding balances of the Mortgage
Loans, together
S-24
with the outstanding balances of any senior Mortgage Loans, become equal to or
greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those heretofore
experienced by the Servicer and by the mortgage lending industry in general.
DISTRIBUTION OF PROPERTY TYPES
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
------------- -------------- ----------------- -----------------
DISTRIBUTION OF OCCUPANCY STATUS
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
------------- -------------- ----------------- -----------------
Adjustable Rate Group
This subsection describes generally certain characteristics of the pool
of Mortgage Loans in the Adjustable Rate Group. The Adjustable Rate Group
consists of _____ of adjustable-rate loans evidenced by Notes secured by
Mortgages
S-25
on the Mortgaged Properties, _____%, _____%, _____% and _____% by principal
balance of Mortgage Loans in the Adjustable Rate Group as of the Cut-Off Date of
which are located in the states of ____________, ____________, ____________ and
____________, respectively. The Mortgaged Properties securing the Mortgage Loans
in the Adjustable Rate Group consist of single-family residences (which may be
condominiums, manufactured homes or one-to-four family residences) and
multifamily properties, including investment properties. The Mortgaged
Properties may be owner-occupied (which includes vacation homes), second homes
or non-owner occupied investment properties. All of the Mortgage Loans in the
Adjustable Rate Group are secured by first lien mortgages on the related
Mortgaged Properties.
None of the Mortgage Loans in the Adjustable Rate Group were more than
60 days delinquent as of the Cut-Off Date.
As of the Cut-Off Date, the Adjustable Rate Mortgage Loans had Mortgage
Rates ranging from ______% to ______% per annum, with a weighted average
Mortgage Rate of ______% per annum. The Adjustable Rate Mortgage Loans had gross
margins ranging from ______% to ______%, with a weighted average gross margin of
______%; lifetime rate caps, ranging from ______% to ______%, with a weighted
average lifetime rate cap of ______% (for the Adjustable Rate Mortgage Loans
which have caps); and lifetime rate floors ranging from ______% to ______%, with
a weighted average lifetime rate floor of ______% (where the gross margin was
used for Adjustable Rate Mortgage Loans without floors).
As of the Cut-Off Date, the Mortgage Loans in the Adjustable Rate Group
had original terms to stated maturity of ______ months; had remaining terms to
stated maturity ranging from ______ months to ______ months; had a weighted
average original term to stated maturity of ______ months; and had a weighted
average remaining term to stated maturity of ______ months.
The Mortgage Loans in the Adjustable Rate Group had CLTV's ranging from
______% to ______% and the weighted average CLTV of the Mortgage Loans was
______%.
The following tables describe the Mortgage Loans in the Adjustable Rate
Group and the related Mortgaged Properties as of the Cut-Off Date. Some of the
aggregate percentages in the following tables may not total 100% due to
rounding.
S-26
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Adjustable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
DISTRIBUTION OF ORIGINAL TERMS
Adjustable Rate Group
Range of Months Aggregate % of Aggregate
From Origination Number of Unpaid Unpaid
To Stated Maturity Mortgage Loans Principal Balance Principal Balance
------------------ -------------- ----------------- -----------------
S-27
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Adjustable Rate Group
Range of Months Aggregate % of Aggregate
Remaining To Number of Unpaid Unpaid
Stated Maturity Mortgage Loans Principal Balance Principal Balance
--------------- -------------- ----------------- -----------------
S-28
SEASONING
Adjustable Rate Group
Aggregate % of Aggregate
Range of Months Number of Unpaid Unpaid
Elapsed Since Origination Mortgage Loans Principal Balance Principal Balance
------------------------- -------------- ----------------- -----------------
S-29
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
Adjustable Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Original Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
------------------------------- -------------- ----------------- -----------------
S-30
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Adjustable Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Current Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
------------------------------ -------------- ----------------- -----------------
S-31
DISTRIBUTION OF GROSS MORTGAGE RATES
Adjustable Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Gross Mortgage Rates (%) Mortgage Loans Principal Balance Principal Balance
------------------------ -------------- ----------------- -----------------
DISTRIBUTION OF GROSS MARGINS
Adjustable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of Gross Margins (%) Mortgage Loans Principal Balance Principal Balance
-------------------------- -------------- ----------------- -----------------
S-32
DISTRIBUTION OF LIFETIME RATE CAPS
Adjustable Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Lifetime Rate Caps (%) Mortgage Loans Principal Balance Principal Balance
---------------------- -------------- ----------------- -----------------
Total............................
DISTRIBUTION OF LIFETIME RATE FLOORS*
Adjustable Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Lifetime Rate Floor (%) Mortgage Loans Principal Balance Principal Balance
----------------------- -------------- ----------------- -----------------
Total............................
*Mortgage Loans without floors were assumed to have floors equal to the related
gross margin.
S-33
DISTRIBUTION OF CLTV'S
Adjustable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of CLTV's (%) Mortgage Loans Principal Balance Principal Balance
------------------- -------------- ----------------- -----------------
Total............................
The CLTV's shown above were calculated based upon the appraised values
of the Mortgaged Properties at the time of origination or, with respect to
Mortgage Loans in the Purchased Pool, a more recent broker price opinion, if
available (the "Appraised Values"), the principal balance of the Mortgage Loan
as of the Cut-Off Date and the senior liens, if any, at the time of origination
or, if available, the current senior lien. No assurance can be given that such
Appraised Values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If
property values decline such that the outstanding balances of the Mortgage
Loans, together with the outstanding balances of any senior Mortgage Loans,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those heretofore experienced by the Servicer and by the mortgage lending
industry in general.
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DISTRIBUTION OF PROPERTY TYPES
Adjustable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
------------- -------------- ----------------- -----------------
DISTRIBUTION OF OCCUPANCY STATUS
Adjustable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
------------- -------------- ----------------- -----------------
Interest Payments on the Mortgage Loans
The Mortgage Loans in the Trust are Actuarial Loans. An "Actuarial
Loan" provides for amortization of the loan over a series of fixed level payment
monthly installments. Each monthly installment consists of an amount of interest
equal to 1/12 of the coupon of the loan multiplied by the unpaid principal
balance of the loan, and an amount of principal equal to the remainder of the
monthly payment. Scheduled monthly payments made by obligors on Actuarial Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest.
THE UNAFFILIATED SELLER
[description of Unaffiliated Seller]
THE SERVICER
[description of Servicer]
THE SUB-SERVICER
[description of Sub-Servicer]
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Underwriting Guidelines
[insert]
Servicing
[insert]
USE OF PROCEEDS
The Unaffiliated Seller will sell the Mortgage Loans to the Depositor
and the Depositor will sell the Mortgage Loans to the Trust concurrently with
the delivery of the Certificates. Net proceeds from the sale of the Offered
Certificates will be applied by the Trust to the purchase of the Mortgage Loans
from the Depositor. Such net proceeds will represent the purchase price to be
paid by the Depositor to the Unaffiliated Seller for the Mortgage Loans.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on a Certificate
Owner's yield resulting from the timing of the settlement date and those
considerations discussed below under "Payment Delay Feature of the
Certificates"), the yield to maturity on an Offered Certificate will be directly
related to the rate of payment of principal of the Mortgage Loans, including for
this purpose voluntary payment in full of Mortgage Loans prior to stated
maturity (a "Prepayment"), liquidations due to defaults, casualties and
condemnations, and repurchases of Mortgage Loans by the Unaffiliated Seller. The
actual rate of principal prepayments on pools of mortgage loans is influenced by
a variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of mortgage loans at any time
because of specific factors relating to the mortgage loans in the particular
pool, including, among other things, the age of the mortgage loans, the
geographic locations of the properties securing the loans, the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans, the greater the effect
on an investor's yield to maturity. As a result, the effect on an investor's
yield of principal prepayments occurring at a rate higher (or lower) than the
rate anticipated by the investor during the period immediately following the
issuance of the Offered Certificates will not be offset by a subsequent like
reduction (or increase) in the rate of principal prepayments. Investors must
make their own decisions as to the appropriate prepayment assumptions to be used
in deciding whether to purchase any of the Offered Certificates. Neither the
Unaffiliated Seller nor the Depositor makes any representations or warranties as
to the rate of prepayment or the factors to be considered in connection with
such determination.
Projected Prepayments and Yields for Offered Certificates
If purchased at other than par, the yield to maturity on an Offered
Certificate will be affected by the rate of payment of principal of the Mortgage
Loans. If the actual rate of payments on the Mortgage Loans is slower than the
rate anticipated by an investor who purchases an Offered Certificate at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Mortgage Loans is
faster than the rate
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anticipated by an investor who purchases an Offered Certificate at a premium,
the actual yield to such investor will be lower than such investor's anticipated
yield.
______% by current aggregate principal balance of the Mortgage Loans
are Fixed Rate Mortgage Loans. The rate of prepayments with respect to fixed
rate mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on such mortgage loans. Conversely, if prevailing interest rates rise
appreciably above the interest rates on fixed rate mortgage loans, such mortgage
loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below the interest rates on such mortgage loans.
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The Final Scheduled Distribution Date for each Class of the
Offered Certificates is as follows:
Final Scheduled
Class Distribution Date
----------------------- -----------------
Class A-1 Certificates:
Class A-2 Certificates:
Class A-3 Certificates:
Class A-4 Certificates:
Class A-5 Certificates:
Class A-6 Certificates:
Class A-7 Certificates:
Class M-1 Certificates:
Class M-2 Certificates:
Class M-3 Certificates:
The Final Scheduled Distribution Date for each Class of Offered
Certificates is calculated as of the date on which the related original
Certificate Principal Balance, as set forth under the Modeling Assumptions
described below, less all amounts previously distributed as principal, would be
reduced to zero, plus 13 months, assuming that no Prepayments are received on
the Mortgage Loans, that scheduled payments of principal and interest on each
Mortgage Loan are timely received, that no Realized Losses occur on the Mortgage
Loans, that the Pass-Through Rate for each Certificate is as listed under the
Modeling Assumptions, and that there is no optional termination by the party
named in the Pooling and Servicing Agreement of the Trust. The weighted average
life of each Class of Offered Certificates is likely to be shorter, and the
actual final Distribution Date with respect to each Class of Offered
Certificates could occur significantly earlier than the Final Scheduled
Distribution Date because (i) Prepayments are likely to occur which shall be
applied to the payment of the Certificate Principal Balance of the Offered
Certificates and (ii) the Servicer may cause a termination of the Trust when the
aggregate outstanding principal balance of the Mortgage Loans in the Trust has
declined to _______ or less of the Original Aggregate Principal Balance and if
the Servicer does not exercise such right, the Trustee shall offer the Mortgage
Loans in an auction sale.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. This prospectus supplement uses two models for
prepayment assumptions (the "Prepayment Assumption"). The model for the Offered
Certificates (other than the Variable Rate Certificates) is the "Home Equity
Prepayment" or "HEP" model which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. 16% HEP assumes a constant prepayment
rate of 1.6% per annum of the then outstanding principal balance of the Mortgage
Loans in the first month of the life of the Mortgage Loans and an additional
1.6% per annum in each month thereafter up to and including the tenth month.
Beginning in the eleventh month and in each month thereafter during the life of
the Mortgage Loans, 16% HEP assumes a constant prepayment rate of 16% per annum.
As used in the table below, 0% Prepayment Assumption assumes prepayment rates
equal to 0% of the Prepayment Assumption, i.e., no prepayments on the mortgage
loans having the characteristics described below.
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The model for the Variable Rate Certificates is the "Constant
Prepayment Rate" or "CPR" which represents an assumed annualized rate of
prepayment relative to the then-outstanding principal balance on a pool of new
mortgage loans. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption, i.e., no prepayments
on the mortgage loans having the characteristics described below.
The Prepayment Assumptions do not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the related Mortgage Loans.
The tables entitled "Weighted Average Lives" have been prepared on the
basis of the following assumptions (collectively, the "Modeling Assumptions"):
(i) the Mortgage Loans prepay at the indicated percentage of the related
Prepayment Assumption; (ii) distributions on the Offered Certificates are
received, in cash, on the [___] day of each month; (iii) no defaults or
delinquencies in, or modifications, waivers or amendments respecting, the
payment by the Mortgagors of principal and interest on the Mortgage Loans occur;
(iv) scheduled payments are assumed to be received on the first day of each
month commencing in [________] (or as set forth in the following table) and
prepayments represent payment in full of individual Mortgage Loans and are
assumed to be received on the last day of each month, commencing in
_______________ (or as set forth in the following table) and include 30 days'
interest thereon; (v) the Offered Certificates are purchased on
___________________; (vi) the original Certificate Principal Balance and
Pass-Through Rate of the Class A-1 Certificates are equal to [$_______] and
________%, respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-2 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-3 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-4 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-5 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-6 Certificates are equal to [$_______] and
6.280%, respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-7 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class M-1 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class M-2 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class M-3 Certificates are equal to [$_______] and
[_____%], respectively, and the original Certificate Principal Balance and
Pass-Through Rate of the Class B Certificates are equal to $________________ and
________%, respectively; (vii) one-month LIBOR is equal to ___________%; (viii)
the indices for the Adjustable Rate Mortgage Loans are, for six-month LIBOR,
_______%, for one year CMT, ________%, for three year CMT, _______%, for five
year CMT, _______% and for the six-month Treasury bill, ______%, (ix) the
Trustee's Fee is equal to ______% per annum and (x) the Trust Fund consists of
Mortgage Loans having the following characteristics:
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Weighted Weighted
Weighted Average Average
Average Remaining Remaining Weighted
Weighted Mortgage Term to Term to Average
Pool Principal Average Rate Net of Amortization Balloon Seasoning
Type Number Balance Mortgage Rate Servicing Fee (months) (months) (months)
---- ------ ------- ------------- ------------- -------- -------- --------
Weighted
Average Weighted
Weighted Net Weighted Average First Reset
Pool Average Lifetime Average Net Interest Reset Frequency
Type Number Gross Margin Cap Lifetime Floor Adjustment Cap (months) (months) Index Code
---- ------ ------------ -------- -------------- -------------- -------- -------- ----------
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate will be repaid to the investor. The weighted average life of
the Offered Certificates will be influenced by the rate at which principal
payments on the Mortgage Loans are paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments, liquidations due to default or early termination of the Trust). The
weighted average lives of the Offered Certificates also will be influenced by
the overcollateralization of the Offered Certificates because collections
payable to the Class B Certificates as principal are limited by the Pooling and
Servicing Agreement and are applied as principal prepayments to the Offered
Certificates then entitled to receive principal distributions until the
outstanding aggregate principal balance of the Offered Certificates is less than
the aggregate outstanding principal balance of the Mortgage Loans by the
Required Overcollateralization Amount. These prepayments have the effect of
accelerating the amortization of the Offered Certificates, thereby shortening
their respective weighted average lives.
Based on the foregoing Modeling Assumptions, the tables below indicate
the weighted average life of each Class of the Offered Certificates, assuming
that the Mortgage Loans prepay according to the indicated percentages of the
related Prepayment Assumption:
Prepayment Assumptions*
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Base Case Assumption I Assumption II Assumption III Assumption IV Assumption V
- --------- ------------ ------------- -------------- ------------- ------------
*As a percentage of the specified base case.
Weighted Average Lives
Class A-1
Weighted
Prepayment Average Life Earliest
Assumption (CPR) (Years)(1) Retirement Date(2)
---------------- ---------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class A-2
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- ---------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
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Class A-3
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- ---------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class A-4
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life (Years)(1) Date(2)
---------------- --------------- -------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class A-5
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life (Years)(1) Date(2)
---------------- --------------- -------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
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Class A-6
Prepayment Weighted Average Earliest Retirement
Assumption (CPR) Life (Years)(1) Date(2)
---------------- --------------- -------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class A-7
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life (Years)(1) Date(2)
---------------- --------------- -------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class M-1
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life (Years)(1) Date(2)
---------------- --------------- -------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
S-43
Class M-2
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life (Years)(1) Date(2)
---------------- --------------- -------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class M-3
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life (Years)(1) Date(2)
---------------- --------------- -------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
There is no assurance that prepayments will occur, or, if they do
occur, that they will occur at any constant percentage or in accordance with any
of the aforementioned Prepayment Assumptions.
Payment Delay Feature of Offered Certificates
The effective yield to the Owners of the Offered Certificates (other
than the Variable Rate Certificates) will be lower than the yield otherwise
produced by the related Pass-Through Rate and the purchase price of such
Certificates because principal and interest distributions will not be payable to
such holders until at least the [___] day of the month following the month of
accrual (without any additional distributions of interest or earnings thereon in
respect of such delay).
ADDITIONAL INFORMATION
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed and incorporated by reference to the
registration statement, together with the Pooling and Servicing Agreement with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the mortgage pool, such removal or addition will be noted in
the current
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report on Form 8-K. Also, the Depositor intends to file certain additional yield
tables and other computational materials with respect to the Certificates with
the Commission in a report on Form 8-K. Such tables and materials were prepared
at the request of certain prospective investors, based on assumptions provided
by, and satisfying the special requirements of, such prospective investors. Such
tables and assumptions may be based on assumptions that differ from the Modeling
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Certificates will consist of the Class A-1 Certificates, the Class
A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the
Class A-5 Certificates, the Class A-6 Certificates, the Class A-7 Certificates,
the Class M-1 Certificates, the Class M-2 Certificates, the Class M-3
Certificates, the Class B Certificates, the Class C Certificates and the Class R
Certificates. The Certificates will be issued by [________] Mortgage Loan Trust
[series], a trust to be organized under the laws of the State of New York. Only
the Offered Certificates are offered hereby. The Class B Certificates, the Class
C Certificates and the Class R Certificates are not being offered hereby. The
Offered Certificates together with the Class B Certificates, the Class C
Certificates and the Class R Certificates are herein referred to as the
"Certificates."
Persons in whose name a Certificate is registered in the register
maintained by the Trustee are the "Owners" of the Certificates. For so long as
the Offered Certificates are in book-entry form with DTC, the only "Owner" of
the Offered Certificates as the term "Owner" is used in the Pooling and
Servicing Agreement will be Cede. No Beneficial Owner will be entitled to
receive a definitive certificate representing such person's interest in the
Trust, except in the event that physical Certificates are issued under limited
circumstances set forth in the Pooling and Servicing Agreement. All references
herein to the Owners of Offered Certificates shall mean and include the rights
of beneficial owners of Offered Certificates held through DTC, as such rights
may be exercised through DTC and its participating organizations, except as
otherwise specified in the Pooling and Servicing Agreement.
Distribution Dates
The Pooling and Servicing Agreement will require that the Trustee
create and maintain a Certificate Account (the "Certificate Account"). All funds
in the Certificate Account shall be invested and reinvested by the Trustee for
the benefit of the Servicer, in investments permitted under the Pooling and
Servicing Agreement ("Eligible Investments").
Three Business Days prior to the related Distribution Date (the
"Remittance Date") the Servicer is required to withdraw from the Principal and
Interest Account and remit to the Trustee, for deposit in the Certificate
Account, the Monthly Remittance Amount. The "Monthly Remittance Amount" is equal
to (a) the sum of (i) the balance on deposit in the Principal and Interest
Account as of the close of business on the related Determination Date, (ii) all
Delinquency Advances and Compensating Interest (collectively, the "Advances")
and (iii) certain amounts required to be deposited by the Servicer in the
Certificate Account, including Loan Purchase Prices and amounts necessary to
remedy the shortfall in principal balance of any replacement Mortgage Loan
("Substitution Amounts"), reduced by (b) the sum of (i) scheduled payments on
the Mortgage Loans collected but due after the related Due Date, (ii)
reinvestment income on amounts in the Principal and Interest Account, (iii) all
amounts reimbursable to the Servicer, and (iv) the Servicing Fee. The "Due
Dates" occur throughout the month with respect to any Distribution Date. The
"Determination Date" is the ____th day of
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the month in which such Distribution Date occurs or, if such day is not a
business day, the immediately succeeding business day. "Remittance Period" means
the calendar month immediately preceding the month in which the related
Remittance Date occurs. See "The Pooling and Servicing Agreement -- Payments on
Mortgage Loans and Contracts" in the prospectus.
The Servicer will be obligated to apply amounts otherwise payable to
it as servicing compensation in any month to cover any shortfalls in collections
(such payment, "Compensating Interest") of one full month's interest at the
applicable net Mortgage Rate resulting from principal prepayments in full;
provided, however, that the Servicer will only pay Compensating Interest to the
extent that there is a shortfall in the amount of Available Funds necessary to
pay the Total Current Interest and will not be required to pay Compensating
Interest with respect to any Remittance Period in an amount in excess of the
aggregate Servicing Fee received by the Servicer for such Remittance Period. The
Servicer is not obligated to cover any shortfalls in collections of interest for
prepayments in part. Such prepayments in part are applied to reduce the
outstanding principal balance of the related Mortgage Loan as of the Due Date in
the month of prepayment.
Distributions
Distributions on the Certificates will be made on each Distribution
Date to Owners of record of the Certificates as of the immediately preceding
Record Date in an amount equal to the product of such Owner's Percentage
Interest and the amount distributed in respect of such Owner's Class of such
Certificates on such Distribution Date. The "Percentage Interest" represented by
any Offered Certificate will be equal to the percentage obtained by dividing the
Original Certificate Principal Balance of such Offered Certificate by the
Original Certificate Principal Balance of all Certificates of the same Class.
Interest Distributions
On each Distribution Date, the Trustee will withdraw the Interest
Remittance Amount for each Group from amounts on deposit in the Certificate
Account and apply such amounts in the following order of priority, in each case,
to the extent of the funds remaining therefor:
(a) The Interest Remittance Amount shall be applied as follows:
(i) to the Trustee, the Trustee Fee for each Group and
Distribution Date;
(ii) to the Class A Certificates, the related Class Current
Interest for such Distribution Date on a pro rata basis among such
Classes;
(iii) any remaining amounts shall be applied in the
following order of priority:
(A) to the Class M-1 Certificates the related
Current Interest;
(B) to the Class M-2 Certificates the related
Current Interest;
(C) to the Class M-3 Certificates the related
Current Interest;
(D) to the Class B Certificates the related
Current Interest;
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(b) any remaining interest amounts shall constitute the
"Excess Interest Amount" for such Distribution Date and shall be
allocated as described herein under "--Credit Enhancement."
The foregoing discussion contained defined terms which are described
herein under "--Definitions."
Principal Distributions
On each Distribution Date, the Trustee will withdraw the Aggregate
Collected Principal Amount from amounts on deposit in the Certificate Account
and apply such amount together with any Extra Principal Distribution Amount in
the following order of priority, in each case, to the extent of the funds
remaining therefor:
(a) Amounts up to the Principal Distribution Amount as follows:
(i) from the Class A Principal Distribution Amount,
concurrently, (x) to the Class A-6 Certificates, the Class A-6
Principal Distribution Amount, until the Class Certificate Principal
Balance thereof has been reduced to zero, and (y) to the Class A
Certificates (other than the Class A-6 Certificates), the Fixed Rate
Group Principal Allocation, allocated in the following order of
priority:
(1) to the Class A-7 Certificates, the Class A-7
Principal Distribution Amount, until the Class Certificate
Principal Balance thereof has been reduced to zero; and
(2) sequentially, to the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 and Class A-7 Certificates, in that
order, until the respective Class Certificate Principal
Balances thereof have been reduced to zero;
(ii) from any amount remaining, to the Class M-1, Class M-2,
Class M-3 and Class B Certificates on a pro rata basis; and
(b) Any remaining principal amounts shall be included in the
Excess Interest Amount and shall be allocated as described herein under
"--Credit Enhancement"; provided, however, that if a Cumulative Loss Trigger
Event is in effect, such amount shall be distributed sequentially, to the Class
B, Class M-3, Class M-2 and Class M-1 Certificates, in that order, until the
respective Class Certificate Principal Balances thereof have been reduced to
zero.
Notwithstanding the priority set forth in clause (i) above, if the
aggregate Class Certificate Principal Balance of the Class M Certificates and
the Class B Certificates is reduced to zero, the Class A Principal Distribution
Amount will be distributed concurrently to each Class of Senior Certificates on
a pro rata basis in accordance with their respective Class Certificate Principal
Balances.
The foregoing discussion contained defined terms which are described
herein under "--Definitions."
Credit Enhancement
General. The credit enhancement provided for the benefit of the Owners
of the Offered Certificates consists of (x) subordination of the Subordinate
Certificates, (y) the application of the Excess Interest Amount to fund Realized
Losses and (z) the overcollateralization mechanics which utilize the internal
cash flows of the Trust as described below.
Subordination of the Subordinate Certificates. The rights of the Owners
of the Mezzanine Certificates, the Class B Certificates, the Class C
Certificates and the Class R Certificates to receive distributions with respect
to the Mortgage
S-47
Loans will be subordinated, to the extent described herein, to the rights of the
Owners of the Class A Certificates. This subordination is intended to enhance
the likelihood of regular receipt by the Owners of the Class A Certificates of
the full amount of their monthly payments of interest and principal and to
afford such Owners protection against Realized Losses on Liquidated Mortgage
Loans.
In addition, the rights of the Owners of the Class M-2 Certificates,
the Class M-3 Certificates, the Class B Certificates, the Class C Certificates
and the Class R Certificates are subordinated, to the extent described herein,
to the rights of the Owners of the Class A Certificates and the Class M-1
Certificates. The rights of the Owners of the Class M-3 Certificates, the Class
B Certificates, the Class C Certificates and the Class R Certificates are
subordinated, to the extent described herein, to the rights of the Owners of the
Class A Certificates and the Class M-1 Certificates and the Class M-2
Certificates.
The rights of the Owners of the Class B Certificates, the Class C
Certificates and the Class R Certificates are subordinated, to the extent
described herein, to the rights of the Owners of the Class A Certificates and
the Mezzanine Certificates.
Allocation of Realized Losses. To the extent that the Net Liquidation
Proceeds with respect to any Liquidated Mortgage Loan are less than 100% of the
outstanding principal balance thereof, such shortfall is a "Realized Loss". "Net
Liquidation Proceeds" are any amounts (including the proceeds of any Insurance
Policy) recovered by the Servicer in connection with a Liquidated Loan, net of
expenses which are incurred by the Servicer in connection with the liquidation
and net of unreimbursed Servicing Advances, unreimbursed Delinquency Advances
and accrued and unpaid Servicing Fees. The Collected Principal Amount includes
the Net Liquidation Proceeds in respect of principal received upon liquidation
of a Liquidated Mortgage Loan. If such Net Liquidation Proceeds are less than
the unpaid principal balance of such Mortgage Loan, the Pool Balance will
decline more than the aggregate Class Certificate Principal Balance of the
Offered Certificates. If such difference is not covered by the
Overcollateralization Amount or the application of the Excess Interest Amount,
the Class of Subordinate Certificates then outstanding with the lowest priority
Class designation will bear such loss.
If, following the distributions on a Distribution Date, the aggregate
Certificate Principal Balance of the Offered Certificates exceeds the Pool
Balance, i.e., the Certificates are undercollateralized, the Class Certificate
Principal Balance of the Class of Mezzanine Certificates or the Class B
Certificates then outstanding with the lowest priority Class designation will be
reduced by the amount of such excess. Any such reduction will constitute an
Applied Realized Loss Amount for the applicable Class and interest will not
accrue on such amount. Such amount, however, may be paid on a future
Distribution Date to the extent funds are available therefor as provided herein
under "Description of the Offered Certificates--Interest Distributions and
- --Credit Enhancement."
Overcollateralization Provisions. The weighted average
Mortgage Rate, net of the Servicing Fee and Trustee Fee, for the Mortgage Loans
generally is expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates, thus generating certain excess interest
collections which, in the absence of losses, will not be necessary to fund
interest distributions on the Offered Certificates. The Pooling and Servicing
Agreement provides that this excess interest be applied, to the extent
available, to make accelerated payments of principal (i.e. the Extra Principal
Distribution Amount) to the Class or Classes then entitled to receive
distributions of principal. Such application will cause the aggregate Class
Certificate Balance to amortize more rapidly than the Mortgage Loans, resulting
in
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overcollateralization. This excess interest for a Remittance Period, together
with interest on the Overcollateralization Amount itself, is the "Excess
Interest Amount."
The target level of overcollateralization for any Distribution Date is
the Required Overcollateralization Amount. The Required Overcollateralization
Amount is initially (i.e., prior to the Stepdown Date) $_____________. Since the
actual level of the Overcollateralization Amount is essentially zero as of the
Closing Date, in the early months of the transaction, subject to the
availability of the Excess Interest Amounts, Extra Principal Distribution
Amounts will be paid, with the result that the Overcollateralization Amount is
expected to increase to the level of the Required Overcollateralization Amount.
If, once the Required Overcollateralization Amount has been reached,
Realized Losses not accounted for by an application of the Excess Interest
Amount occur, such Realized Losses will result in an Overcollateralization
Deficiency (since it will reduce the Pool Balance without giving rise to a
corresponding reduction of the aggregate Class Certificate Balance). The
cashflow priorities of the Trust Fund require that, in this situation, an Extra
Principal Distribution Amount be paid (subject to the availability of any Excess
Cashflow Amount in subsequent months) for the purpose of re-establishing the
Overcollateralization Amount at the then-required Required Overcollateralization
Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not
in effect, the Required Overcollateralization Amount may be permitted to
decrease or "step-down." If the Required Overcollateralization Amount is
permitted to "step-down" on a Distribution Date, the Pooling and Servicing
Agreement permits a portion of the Aggregate Collected Principal Amount for such
Distribution Date not to be passed through as a distribution of principal on
such Distribution Date. This has the effect of decelerating the amortization of
the Offered Certificates relative to the Pool Balance, thereby reducing the
actual level of the Overcollateralization Amount to the new, lower Required
Overcollateralization Amount. This portion of the Aggregate Collected Principal
Amount not distributed as principal on the Offered Certificates therefore
releases overcollateralization from the Trust Fund. The amounts of such releases
are the "Overcollateralization Reduction Amounts."
On any Distribution Date, the sum on the Excess Interest
Amount and the Overcollateralization Reduction Amount is the "Excess Cashflow
Amount," which is required to be applied in the following order of priority on
such Distribution Date:
(a) to the Owners of the Class A-6 Certificates, to fund any LIBOR
Shortfall Amount;
(b) to fund the Extra Principal Distribution Amount of such
Distribution Date;
(c) to fund the Class M-1 Realized Loss Amortization Amount for such
Distribution Date;
(d) to fund the Class M-2 Realized Loss Amortization Amount for such
Distribution Date;
(e) to fund the Class M-3 Realized Loss Amortization Amount for such
Distribution Date;
(f) to fund the Class B Realized Loss Amortization Amount for such
Distribution Date; and
(g) any amounts remaining shall be distributed to the Owners of the
Class C Certificates; and
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(h) any amounts remaining thereafter shall be distributed to the Owners
of the Class R Certificates.
Definitions
For purposes of the foregoing, the following terms have the respective
meanings set forth below:
Accrual Period: For each Distribution Date with respect to the Offered
Certificates (other than the Variable Rate Certificates), the calendar month
immediately preceding the month in which the Distribution Date occurs. For each
Distribution Date with respect to the Variable Rate Certificates, the period
from the [___] day of the month immediately preceding the month in which such
Distribution Date occurs (or the Closing Date with respect to the [________]
Distribution Date) to the [__] day of the month in which such Distribution Date
occurs.
Aggregate Collected Principal Amount: As to any Distribution Date, the
sum of the respective Collected Principal Amounts for each Group.
Applied Realized Loss Amount: As to any Distribution Date, the excess,
if any, of the aggregate Certificate Principal Balance of each Class of
Certificates then outstanding (after application of all distributions for such
Distribution Date) over the Pool Balance for both Groups.
Available Funds: As to any Distribution Date, the sum, without
duplication, of the following amounts with respect to the Mortgage Loans: (i)
the Aggregate Collected Principal Amount for the related Remittance Period, (ii)
scheduled payments of interest on the Mortgage Loans received by the Servicer
prior to the Determination Date (net of amounts representing the Servicing Fee
with respect to each Mortgage Loan and reimbursement for Delinquency Advances
and Servicing Advances); (iii) payments from the Servicer in connection with (a)
Delinquency Advances and (b) Compensating Interest and (iv) amounts received by
the Trustee in respect of interest in connection with the termination of the
Trust with respect to the Mortgage Loans as provided in the Agreement
Available Funds Cap Rate: For a Group as to any Distribution Date, is
an amount, expressed as a per annum rate, equal to (i) the sum of (x) the
aggregate amount of interest due and collected (or advanced) on all of the
Mortgage Loans in the related Group for the related Remittance Period and (y)
the excess of (A) the aggregate amount of interest due and collected (or
advanced) on all of the Mortgage Loans in the related Group for the related
Remittance Period over (B) the aggregate of the Servicing Fee and the Trustee
Fee, in each case relating to such Group and such Distribution Date and, in the
case of the Fixed Rate Group, the Current Interest with respect to the Class A
Certificates (other than the Class A-6 Certificates), the Class M Certificates
and the Class B Certificates, and in the case of the Adjustable Rate Group, the
Current Interest with respect to the Class A-6 Certificates minus (ii) the
aggregate of the Servicing Fee and the Trustee Fee, in each case relating to
such Group, on such Distribution Date.
Class A Principal Distribution Amount: As to any Distribution Date, (A)
for each Distribution Date before the Stepdown Date or after the Stepdown Date
with respect to which Distribution Date a Trigger Event has occurred and is
continuing, 100% of the Principal Distribution Amount or (ii) for each
Distribution Date after the Stepdown Date with respect to which no Trigger Event
has occurred and is continuing, the product of (x) the Principal Distribution
Amount for such Distribution Date and (y) a fraction, the numerator of which is
the Class A Certificate Principal Balance immediately prior to such Distribution
Date and the denominator of which is the aggregate Certificate Principal Balance
of all Certificates.
S-50
Class A-6 Principal Distribution Amount: As to any Distribution Date,
the lesser of: (A) the greater of (i) the product of (x) the Class A Principal
Distribution Amount for such Distribution Date and (y) a fraction, the numerator
of which is the Class Certificate Principal Balance of the Class A-6
Certificates immediately prior to such Distribution Date, and the denominator of
which is the aggregate Class Certificate Principal Balance of all of the Class A
Certificates immediately prior to such Distribution Date, and (ii) the excess,
if any, of (x) the Class Certificate Principal Balance of the Class A-6
Certificates immediately prior to such Distribution Date over (y) the Principal
Balance of the Adjustable Rate Group as of the last day of the related Due
Period; or (B) the Class A Principal Distribution Amount.
Class A-7 Percentage: As to any Distribution Date, the applicable
percentage set forth below:
Distribution Dates Percentages
------------------ -----------
[___]................................................ [__%]
[___]................................................ [__%]
[___]................................................ [__%]
[___]................................................ [__%]
[___]................................................ [__%]
Class A-7 Principal Distribution: As to any Distribution Date, the
lesser of (A) the product of (i) the applicable Class A-7 Percentage and (ii)
the product of (x) the Fixed Rate Group Principal Allocation and (y) a fraction,
the numerator of which is the Class Certificate Principal Balance of the Class
A-7 Certificates immediately prior to such Distribution Date, and the
denominator of which is the aggregate Class Certificate Principal Balance of the
Senior Certificates immediately prior to such Distribution Date, and (B) the
Fixed Rate Group Principal Allocation.
Class B Applied Realized Loss Amount: As to the Class B Certificates
and as of any Distribution Date, the lesser of (x) the Class Certificate Balance
thereof (after taking into account the distribution of the Principal
Distribution Amount on such Distribution Date, but prior to the application of
the Class B Applied Realized Loss Amount, if any, on such Distribution Date) and
(y) the Applied Realized Loss Amount as of such Distribution Date.
Class B Realized Loss Amortization Amount: As to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount with respect to the Class B Certificates as of such
Distribution Date and (y) the excess of (i) the Excess Cashflow Amount over (ii)
the sum of the Extra Principal Distribution Amount, the Class M-1 Realized Loss
Amortization Amount, the Class M-2 Realized Loss Amortization Amount, the Class
M-3 Realized Loss Amortization Amount, in each case for such Distribution Date.
Class M-1 Applied Realized Loss Amount: As to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-1 Applied Realized Loss Amount, if any on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount as
of such Distribution date over (ii) the sum of the Class M-2 Applied Realized
Loss Amount, the Class M-3 Applied Realized Loss Amount and the Class B Applied
Realized Loss Amount, in each case as of such Distribution Date.
Class M-1 Realized Loss Amortization Amount: As to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount with respect to the Class M-1 Certificates as of such
Distribution Date
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and (y) the excess of (i) the Excess Cashflow Amount over (ii) the Extra
Principal Distribution Amount, in each case for such Distribution Date.
Class M-2 Applied Realized Loss Amount: As to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-2 Applied Realized Loss Amount, if any on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the Class M-3 Applied Realized
Loss Amount and the Class B Applied Realized Loss Amount, in each case as of
such Distribution Date.
Class M-2 Realized Loss Amortization Amount: As to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount with respect to the Class M-2 Certificates as of such
Distribution Date and (y) the excess of (i) the Excess Cashflow Amount over (ii)
the sum of the Extra Principal Distribution Amount and the Class M-1 Realized
Loss Amortization Amount, in each case for such Distribution Date.
Class M-3 Applied Realized Loss Amount: As to the Class M-3
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-3 Applied Realized Loss Amount, if any on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the Class B Applied Realized Loss
Amount, in each case as of such Distribution Date.
Class M-3 Realized Loss Amortization Amount: As to the Class M-3
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount with respect to the Class M-3 Certificates as of such
Distribution Date and (y) the excess of (i) the Excess Cashflow Amount over (ii)
the sum of the Extra Principal Distribution Amount, the Class M-1 Realized Loss
Amortization Amount and the Class M-2 Realized Loss Amortization, in each case
for such Distribution Date.
Collected Principal Amount: For any Distribution Date and Group, the
sum of the following amounts (without duplication):
(a) the principal portion of all scheduled and unscheduled monthly payments
on the Mortgage Loans due during the related Remittance Period, to the
extent actually received by the Trustee on or prior to the related
Remittance Date or to the extent actually advanced by the Servicer on
or prior to the related Remittance Date including the principal portion
of all full and partial principal prepayments made by the respective
Mortgagors during the related Remittance Period;
(b) the scheduled principal balance of each Mortgage Loan that either was
repurchased by the Unaffiliated Seller or purchased by the Servicer on
the related Remittance Date, to the extent such scheduled principal
balance is actually received by the Trustee on or prior to the related
Remittance Date;
(c) any Substitution Amounts delivered by the Unaffiliated Seller on the
related Remittance Date in connection with a substitution of a Mortgage
Loan (to the extent such Substitution Amounts relate to principal), to
the extent such Substitution Amounts are actually received by the
Trustee on or prior to the related Remittance Date;
S-52
(d) Net Liquidation Proceeds to the extent received by the Trustee on or
prior to the related Remittance Date for each Mortgage Loan which
became a Liquidated Mortgage Loan during the related Remittance Period;
and
(e) the proceeds received by the Trustee of any termination of the Trust
(to the extent such proceeds relate to principal).
Cumulative Loss Percentage: The percentage of all Realized Losses as a
percentage of the Original Aggregate Principal Balance of the Mortgage Loans.
Cumulative Loss Trigger Event: A Cumulative Loss Trigger Event has
occurred if (i) the Cumulative Loss Percentage for a specified period exceeds
the applicable percentage set forth below and (ii) the 60+ Delinquency
Percentage exceeds two times the original (prior to the Stepdown Date)
percentage used to determine the Required Overcollateralization Amount:
Distribution Dates Loss Percentages
------------------ ----------------
[___]................................................ [__%]
[___]................................................ [__%]
[___]................................................ [__%]
[___]................................................ [__%]
[___]................................................ [__%]
Current Interest: As to any Distribution Date and Class of
Certificates, interest for the related Accrual Period at the related Certificate
Rate on the related Class Certificate Principal Balance.
Excess Interest Amount: As to any Distribution Date, the excess of (x)
the Interest Remittance Amount for both Groups over (y) the sum of (i) the
aggregate of the Class Current Interest for the Class A Certificates, (ii) the
Current Interest for the Mezzanine Certificates and Class B Certificates and
(ii) the Trustee Fee for both Groups.
Extra Principal Distribution Amount: As to any Distribution Date, the
lesser of (x) the Excess Interest Amount for such Distribution Date and (y) the
Overcollateralization Deficiency Amount for such Distribution Date.
Fixed Rate Group Principal Allocation: As to any Distribution Date, the
excess of (i) the Class A Principal Distribution Amount for such Distribution
Date over (ii) the Class A-6 Principal Distribution Amount for such Distribution
Date.
Interest Remittance Amount: As to either Group and any Distribution
Date, the portion of the Available Funds for such Group that constitutes amounts
in respect of interest.
Liquidated Mortgage Loan: As to any Distribution Date, a Mortgage Loan
with respect to which the Servicer has determined, in accordance with the
servicing procedures specified in the Agreement, as of the end of the preceding
Due Period, that all Liquidation Proceeds which it expects to recover with
respect to such Mortgage Loan (including the disposition of the related REO)
have been received (other than amounts recoverable through deficiency
judgments).
S-53
Original Credit Support Percentage: As to any Class of Senior
Certificates or Subordinate Certificates, the applicable percentage set forth
below:
Senior
Class M-1
Class M-2
Class M-3
Class B
Overcollateralization Amount: As to any Distribution Date, the excess,
if any, of (i) the Pool Balance as of the end of the related Remittance Period
over (ii) the aggregate Class Certificate Principal Balance of the Certificates
after giving effect to the distribution of the Aggregate Collected Principal
Amount on such Distribution Date.
Overcollateralization Deficiency Amount: As to any Distribution Date,
the excess, if any, of (x) the Required Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Class Certificate Balances of all
Classes of Offered Certificates resulting from the distribution of the Aggregate
Collected Principal Amount (but not the Extra Principal Distribution Amount) on
such Distribution Date, but prior to taking in to account any Applied Realized
Loss Amounts on such Distribution Date.
Overcollateralization Reduction Amount: As to any Distribution Date,
the lesser of (i) the Aggregate Collected Principal Amount for such Distribution
Date and (ii) the excess, if any, of (x) the Overcollateralization Amount
(assuming 100% of the Aggregate Collected Principal Amount is distributed on the
Offered Certificates) over (y) the Required Overcollateralization Amount.
Pool Balance: With respect to any date, the aggregate of the Principal
Balances of all Mortgage Loans in both Groups as of such date.
Principal Balance: As to any Mortgage Loan and any day, other than a
Liquidated Mortgage Loan, the Principal Balance as of the Cut-Off Date, minus
all collections credited against the Principal Balance of any such Mortgage
Loan. For purposes of this definition, a Liquidated Mortgage Loan shall be
deemed to have a Principal Balance equal to the Principal Balance of the related
Mortgage Loan immediately prior to the final recovery of related Liquidation
Proceeds and a Principal Balance of zero thereafter.
Principal Distribution Amount: As to any Distribution Date, the sum of
(i) the Aggregate Collected Principal Amount (and with respect to any
Distribution Date on which a Trigger Event is not in effect, less the
Overcollateralization Reduction Amount, if any) and (ii) the Extra Principal
Distribution Amount.
Remittance Period: As to any Distribution Date, the calendar month
preceding such Distribution Date.
Required OC Percentage: As of any date of determination, the percentage
then applicable in clause (b)(i) of the calculation of the Required
Overcollateralization Amount.
Required Overcollateralization Amount: As to any Distribution Date (a)
prior to the Stepdown Date, the product of ______% and the Original Aggregate
Principal Balance of the Mortgage Loans; (b) on and after the Stepdown Date, (i)
S-54
if no Trigger Event is in effect, the lesser of (A) ______% of the Pool Balance
as of the end of the related Remittance Period and (B) ______% of the Original
Aggregate Principal Balance of the Mortgage Loans or (ii) if a Trigger Event or
a Cumulative Loss Trigger Event is in effect, the Required Overcollateralization
Amount will equal the Required Overcollateralization Amount in effect as of the
Distribution Date immediately preceding the date on which the Trigger Event
first occurred.
Senior Enhancement Percentage: As to any Distribution Date, the
percentage equivalent of a fraction, the numerator of which is the sum of (i)
the aggregate Class Certificate Principal Balance of the Class A, Class M and
Class B Certificates minus the Certificate Principal Balance of the Class with
the highest priority and (ii) the Overcollateralization Amount, in each case
after giving effect to the distribution of the Principal Distribution Amount on
such Distribution Date, and the denominator of which is the Pool Balance as of
the last day of the related Due Period.
60+ Delinquency Percentage: A fraction expressed as a percentage, the
numerator of which is (i) with respect to any Distribution Date prior to the
______________ Distribution Date, ____% of the aggregate Principal Balance of
the Mortgage Loans that are more than 60 days delinquent; (ii) with respect to
the ________________ Distribution Date and the Distribution Dates prior to the
December 2003 Distribution Date, ____% of the aggregate Principal Balance of the
Mortgage Loans that are more than 60 days delinquent; and (iii) with respect to
the ______________________ Distribution Date and all the Distribution Dates
thereafter, _____% of the aggregate Principal Balance of the Mortgage Loans that
are more than 60 days delinquent and the denominator of which is the Pool
Balance, in each case as determined as of the last day of the related Remittance
Period.
Stepdown Date: The later to occur of (x) the Distribution Date in
_______________, and (y) the first Distribution Date on which the Senior
Enhancement Percentage (assuming 100% of the Aggregate Collected Principal
Amount is distributed on the Offered Certificates) is at least equal to the sum
of (i) two times the Original Credit Support Percentage for the Senior
Certificates and (ii) the Required OC Percentage.
Stepped Up Percentage: 100% minus the percentage equivalent of a
fraction, the numerator of which is two times the Delinquency Amount and the
denominator of which is the Pool Balance as of the last day of the related Due
Period; provided that the Stepped Up Percentage will not be less than 0.
Trigger Event: A Trigger Event shall have occurred and be continuing,
if at any time, (x) the percentage equivalent of a fraction, the numerator of
which is the aggregate Principal Balance of all Mortgage Loans that are more
than 60 days delinquent, including REO properties and Mortgage Loans in
foreclosure and the denominator of which is the Pool Balance as of the last day
of the related Due Period exceeds (y) ___% of the Senior Enhancement Percentage.
Unpaid Realized Loss Amount: For any Class of Mezzanine Certificates or
the Class B Certificates and as to any Distribution Date, the excess of (x) the
aggregate cumulative amount of related Applied Realized Loss Amounts with
respect to such Class for all prior Distribution Dates over (y) the aggregate,
cumulative amount of related Realized Loss Amortization Amounts with respect to
such Class for all prior Distribution Dates.
Calculation of LIBOR
With respect to each Distribution Date, 1-Month LIBOR will equal the
interbank offered rate for one-month United States dollar deposits in the London
market as quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to (i) the Closing Date with respect to the
[________] Distribution Date or (ii) the
S-55
first day of the related Accrual Period with respect to all other Distribution
Dates. "Telerate Page 3750" means the display designated as page 3750 on the
Telerate Service (or such other page as may replace page 3750 on that service
for the purpose of displaying London interbank offered rates of major banks). If
such rate does not appear on such page (or such other page as may replace that
page on that service, or if such service is no longer offered, such other
service for displaying LIBOR or comparable rates as may be selected by the
Trustee after consultation with the Servicer), the rate will be the Reference
Bank Rate. The "Reference Bank Rate" will be determined on the basis of the
rates at which deposits in U.S. Dollars are offered by the reference banks
(which shall be three major banks that are engaged in transactions in the London
interbank market, selected by the Trustee after consultation with the Servicer)
as of 11:00 A.M., London time, on the day that is two LIBOR Business Days prior
to the immediately preceding Distribution Date to prime banks in the London
interbank market for a period of one month in amounts approximately equal to the
Class Certificate Principal Balance of the Variable Rate Certificates. The
Trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate will be the arithmetic mean of the quotations. If on such
date fewer than two quotations are provided as requested, the rate will be the
arithmetic mean of the rates quoted by one or more major banks in New York City,
selected by the Trustee after consultation with the Servicer, as of 11:00 A.M.,
New York City time, on such date for loans in U.S. Dollars to leading European
banks for a period of one month in amounts approximately equal to the Class
Certificate Principal Balance of the Variable Rate Certificates. If no such
quotations can be obtained, the rate will be LIBOR for the prior Distribution
Date. "LIBOR Business Day" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the State of New York or in the
city of London, England are required or authorized by law to be closed.
Report to Owners of Certificates
Pursuant to the Pooling and Servicing Agreement, on each Distribution
Date the Trustee will deliver to the Servicer, each Owner of a Certificate and
the Depositor a written report containing information, including, without
limitation, the amount of the distribution on such Distribution Date, the amount
of such distribution allocable to principal and allocable to interest, the
aggregate Certificate Principal Balance of the Offered Certificates as of such
Distribution Date and such other information as required by the Pooling and
Servicing Agreement.
Book Entry Registration of the Offered Certificates
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests
("Beneficial Owners") may elect to hold their Book-Entry Certificates directly
through The Depository Trust Company ("DTC") in the United States, or Cedel
Bank, societe anonyme ("CEDEL") or The Euroclear System ("Euroclear") in Europe
if they are participants of such systems ("Participants"), or indirectly through
organizations which are Participants. The Book-Entry Certificates will be issued
in one or more certificates per class of Offered Certificates which in the
aggregate equal the principal balance of such Offered Certificates and will
initially be registered in the name of Cede & Co., the nominee of DTC. CEDEL and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for CEDEL and Chase will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations representing
principal amounts of $1,000 and in integral multiples in excess thereof. Except
as described below, no Beneficial Owner will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are
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issued, it is anticipated that the only "Owner" of such Book-Entry Certificates
will be Cede & Co., as nominee of DTC. Beneficial Owners will not be Owners as
that term is used in the Pooling and Servicing Agreement. Beneficial Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Taxation of Certain Foreign Investors" and "-- Backup
Withholding" in the prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium, office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear Securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
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The Euroclear Operator is a branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such
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actions on its behalf through DTC. DTC may take actions, at the direction of the
related Participants, with respect to some Offered Certificates which conflict
with actions taken with respect to other Offered Certificates.
None of the Depositor, the Unaffiliated Seller, the Servicer or the
Trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Unaffiliated Seller advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as a
nominee and depository with respect to the Book-Entry Certificates and the
Unaffiliated Seller or the Trustee is unable to locate a qualified successor,
(b) the Unaffiliated Seller, at its sole option, elects to terminate a
book-entry system through DTC or (c) DTC, at the direction of the Beneficial
Owners representing a majority of the outstanding Percentage Interests of the
Offered Certificates, advises the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of the Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Servicing of the Loans-- Reports To
Certificateholders" in the prospectus for information regarding reports to the
Owners.
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THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this prospectus supplement, there is set forth below a
summary of certain other provisions of the Pooling and Servicing Agreement.
Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant
to the Pooling and Servicing Agreement. On such date, the Unaffiliated Seller
will sell without recourse the Mortgage Loans to the Depositor, the Depositor
will sell without recourse the Mortgage Loans to the Trust and the Trust will
issue the Certificates to the Owners thereof pursuant to the Pooling and
Servicing Agreement.
The property of the Trust shall include all money, instruments and
other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the Owners, and all
proceeds thereof, including, without limitation, (i) the Mortgage Loans, (ii)
such amounts, including Eligible Investments, as from time to time may be held
by the Trustee in the Certificate Account and by the Servicer in the Principal
and Interest Account (except as otherwise provided in the Pooling and Servicing
Agreement), to be created pursuant to the Pooling and Servicing Agreement, (iii)
any property, the ownership of which has been effected on behalf of the Trust as
a result of foreclosure or acceptance by the Servicer of a deed in lieu of
foreclosure and that has not been withdrawn from the Trust, (iv) any insurance
policies relating to the Mortgage Loans and any rights of the Unaffiliated
Seller under any insurance policies, (v) Net Liquidation Proceeds with respect
to any Liquidated Mortgage Loan, and (vi) the rights of the Unaffiliated Seller
against any Originator pursuant to the related Master Loan Transfer Agreement
(collectively, the "Trust Fund").
The Offered Certificates will not represent an interest in, or an
obligation of, nor will the Mortgage Loans be guaranteed by, any Originator, the
Unaffiliated Seller, the Depositor, the Servicer or the Trustee.
Assignment of the Loans; Representations and Warranties
On the Closing Date, the Depositor will sell, transfer, convey and
assign the Loans to the Trustee, without recourse, together with (i) all rights
to any payments received in respect of any of the Mortgage Loans after the
Cut-Off Date other than late receipts of scheduled monthly payments on the
Actuarial Loans that were due prior to the Cut-Off Date and (ii) all scheduled
monthly payments in respect of the Actuarial Loans that were due on or after the
Cut-Off Date but received prior to the Cut-Off Date. The Mortgage Loans will be
described on a schedule attached to the Pooling and Servicing Agreement (the
"Schedule of Mortgage Loans").
In connection with the sale of the Mortgage Loans on the Closing Date,
the Unaffiliated Seller will be required to deliver to the Trustee the
promissory notes evidencing the Loans, the related mortgages or deeds of trust
or other documents evidencing a lien on the Mortgaged Property and certain other
documents relating to the Loans. The Trustee will agree, for the benefit of the
Owners of the related Offered Certificates, to review each such file within 60
days after the Closing Date to ascertain whether all required documents (or
certified copies of documents) have been executed and received.
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In addition to the foregoing, the Servicer, is required to submit for
recording, within 180 days of the Closing Date (or, if original recording
information is unavailable, within such later period as is permitted by the
Pooling and Servicing Agreement) assignments of the Mortgages to the Trustee in
the appropriate jurisdictions.
Under an agreement (the "Loan Purchase Agreement") between the
Unaffiliated Seller and the Depositor for the sale of the Loans from the
Unaffiliated Seller to the Depositor, the Unaffiliated Seller will agree that in
the event of a breach of any representation or warranty made by it which
materially and adversely affects the value of, or the interests of the Owners of
the Offered Certificates in, any Mortgage Loan transferred by the Unaffiliated
Seller (any such Loan being a "Defective Loan"), the Unaffiliated Seller will
repurchase the Defective Loan at a price equal to the then outstanding principal
balance of such Loan and accrued and unpaid interest thereon, together with any
outstanding Advances (without duplication) (the "Repurchase Price").
Under the Pooling and Servicing Agreement, the Depositor will assign
all of its right, title and interest in such representations and warranties
(including the Unaffiliated Seller's repurchase obligations) to the Trustee.
None of the Depositor or the Trustee will make any representations or warranties
with respect to the Mortgage Loans and neither will have any obligations to
repurchase, or make substitutions for Defective Loans.
Servicing of the Mortgage Loans
Pursuant to the Pooling and Servicing Agreement, the Servicer will be
required to service and administer the Mortgage Loans assigned to the Trust as
more fully set forth below.
Unless otherwise specified herein or in the Pooling and Servicing
Agreement with respect to specific obligations of the Servicer, the Servicer
shall service and administer the Mortgage Loans in accordance with the
servicing, collection and investor reporting systems and procedures set forth in
the Servicer's current servicing guide (the "Servicing Standards").
The duties of the Servicer include, without limitation, collecting and
posting of all payments, responding to inquiries by obligors or by federal,
state or local government authorities with respect to the Mortgage Loans,
investigating delinquencies, reporting tax information to obligors in accordance
with its customary practices and all applicable law, accounting for collections
and furnishing monthly and annual statements to the Trustee with respect to
distributions and making Delinquency Advances, Servicing Advances and
Compensating Interest to the extent described herein.
The Servicer (i) may execute and deliver any and all instruments of
satisfaction or cancellation, or of partial or full release or discharge and all
other comparable instruments, with respect to the Mortgage Loans and with
respect to the related Mortgaged Property, (ii) may consent to any modification
of the terms of any Note not expressly prohibited hereby if the effect of any
such modification will not materially and adversely affect the security afforded
by the related Mortgaged Property or reduce the amount of, or slow (other than
as permitted by the Pooling and Servicing Agreement) the timing of receipt of,
any payments required thereunder and (iii) may institute foreclosure proceedings
or obtain a deed-in-lieu of foreclosure so as to convert the ownership of such
Mortgaged Property, and to hold or cause to be held title to such Mortgaged
Property, in the name of the Servicer on behalf of the Trust.
The Pooling and Servicing Agreement permits the Servicer to modify and
extend the maturity of a Balloon Loan which matures and which is not otherwise
paid in full at such maturity date by the related Obligor; provided, that the
rescheduled final maturity date of such Mortgage Loan is not one year beyond the
original maturity date, the related
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Mortgage Rate is not decreased and the obligor does not receive any additional
proceeds. Such modified and extended Balloon Loans will be permitted to remain
in the Trust.
The Servicer may perform any of its servicing responsibilities with
respect to all or certain of the Mortgage Loans through a sub-servicer as it may
from time to time designate, but no such designation of a sub-servicer shall
serve to release the Servicer from any of its obligations under the Pooling and
Servicing Agreement. The Mortgage Loans will initially be serviced by the
Sub-Servicer pursuant to a sub-servicing agreement with the Servicer.
Upon removal or resignation of the Servicer, the Backup Servicer will
be required to serve as successor servicer. If the Backup Servicer is prevented
by law from acting as successor servicer, the Trustee may solicit bids for a
successor servicer, and pending the appointment of a successor servicer as a
result of soliciting such bids, the Trustee will be required to serve as
successor servicer. If the Trustee is unable to obtain a qualifying bid, the
Trustee will be required to appoint, or petition a court of competent
jurisdiction to appoint, an eligible successor. Any such successor servicer
shall assume all of the related responsibilities, duties or liabilities of the
Servicer on the date on which it becomes the Servicer, but shall not assume any
of the liabilities incurred prior to such date.
Collection of Certain Loan Payments. The Servicer shall, as required by
the Servicing Standards, make all reasonable efforts to collect payments called
for under the terms and provisions of the Mortgage Loans, and shall, to the
extent such procedures shall be consistent with the Pooling and Servicing
Agreement, follow such collection procedures with respect to the Mortgage Loans
as it follows with respect to comparable mortgage loans in its own servicing
portfolio; provided, that the Servicer shall always at least follow collection
procedures that are consistent with or better than the Servicing Standards.
Consistent with the foregoing, the Servicer may in its discretion, generally (i)
waive any assumption fees, late payment charges, charges for checks returned for
insufficient funds, prepayment fees, if any, or other fees which may be
collected in the ordinary course of servicing the Mortgage Loans, (ii) if an
obligor is in default or if default is reasonably foreseeable because of an
obligor's financial condition, arrange with the obligor a schedule for the
payment of delinquent payments due on the Mortgage Loan; provided, however, the
Servicer may not reschedule the payment of delinquent payments more than three
times in any twelve consecutive months with respect to any obligor or (iii)
modify payments of monthly principal and interest on any Mortgage Loan becoming
subject to the terms of the Civil Relief Act, in accordance with the Servicer's
general policies relating to comparable loans subject to the Civil Relief Act.
The Servicer is required to establish and maintain an account in its
name for the benefit of the Trust (such account, the "Lockbox Account") into
which all collections (other than Delinquency Advances and amounts relating to
Compensating Interest) are to be deposited by the close of business on the next
business day following the business day on which such collections are received.
The Servicer shall instruct, or cause any sub-servicer to instruct, all
obligors to make payments only to the Lockbox Account, unless, due to special
collection circumstances such payment must be made to the Servicer, in which
event such amounts shall be deposited by the Servicer in the Lockbox Account.
The Servicer shall instruct the Lockbox Bank to remit all amounts received for
deposit in the Lockbox Account to the Principal and Interest Account on the next
business day following receipt of such amounts.
Not later than _________________ time on the ____________ calendar day
of each month (or the immediately succeeding business day if such calendar day
falls on a Saturday or a Sunday or a holiday), the Servicer shall deliver or
cause to be delivered to the Trustee a monthly servicing report (the "Servicing
Report") on computer readable magnetic
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tape or diskette. This report shall also contain (i) a summary report of
Mortgage Loan payment activity for such month, (ii) exception payment reports
for Mortgage Loans with respect to which scheduled payments due in such month
were not made and (iii) a trial balance in the form of a computer tape.
Delinquency Advances and Servicing Advances. If, at or prior to the end
of each Remittance Period, the interest portion of any monthly payment due on
any Mortgage Loan during such Remittance Period has not been received and
transferred to the Principal and Interest Account, the Servicer shall, to the
extent that such Delinquency Advance is necessary to pay any shortfall in Total
Current Interest arising because of the insufficiency of Available Funds, make
an advance to the Principal and Interest Account (a "Delinquency Advance") by
the related Servicer Remittance Date in an amount equal to the amount of the
interest portion of such delinquent monthly payment not later than the related
Servicer Remittance Date; provided, however, that the Servicer will not be
required to make any such Delinquency Advance if it determines in reasonable
good faith that such Delinquency Advance would not be recoverable from
collections with respect to such Mortgage Loan. For purposes of the Pooling and
Servicing Agreement, the delinquent interest portion of such monthly payment
shall be deemed to include an amount equal to the interest portion of such
monthly payment that would have been due on a Mortgage Loan in respect of which
the related Mortgage Property has been repossessed or foreclosed upon and which
has not yet become a Liquidated Mortgage Loan.
The Servicer will advance all "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations with respect to the
Mortgage Loans, including, but not limited to, the cost of (i) preservation
expenses on the Mortgaged Property Loan Collateral, (ii) any enforcement or
judicial proceedings, including foreclosures, and any reasonable legal expenses
in connection with the assertion by an obligor of any claim or defense that the
obligor may have had against the originator in connection with the sale,
financing or construction of such obligor's home and which the obligor asserts
against the Servicer and (iii) the management and liquidation of "REO" property,
but in each case shall only pay such costs and expenses to the extent the
Servicer reasonably believes such costs and expenses will be recovered from the
related Mortgage Loan and will increase Net Liquidation Proceeds on the related
Mortgage Loan. Each such expenditure, exclusive of overhead, will constitute a
"Servicing Advance."
If, with respect to any Distribution Date and as a result of
Prepayments in full received with respect to the Mortgage Loans held in the
Trust during the related Remittance Period, the amount of interest due on such
Mortgage Loans is decreased such that the Available Funds are insufficient to
fund the full amount of the Total Current Interest due on such Distribution
Date, the Servicer will be required to remit to the Principal and Interest
Account the lesser of (x) the amount of such insufficiency due to such
Prepayments and (y) the aggregate Servicing Fee due to the Servicer on such
Distribution Date with respect to such Trust. The Servicer will be required to
remit such amount (each such amount, "Compensating Interest") not later than the
related Servicer Remittance Date.
Maintenance of Insurance. The Servicer shall cause to be maintained
with respect to each Mortgage a hazard insurance policy with a generally
acceptable carrier that provides for fire and extended coverage, and which
provides for a recovery by the Servicer on behalf of the Trustee and its
assignees of insurance proceeds relating to such Mortgage Loan, in an amount not
less than the least of (i) the outstanding principal balance of the Mortgage
Loan, (ii) the minimum amount required to compensate for damage or loss on a
replacement cost basis and (iii) the full insurable value of the improvements
which are a part of the related Mortgage Property, but in any case not less than
the amount necessary to avoid the application of any co-insurance clause.
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If the Mortgage Loan relates to Mortgaged Property located in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards and if such loan has been specifically identified
as being in such an area in the Schedule of Mortgage Loans or other writing
delivered to the Servicer by the Originator, the Servicer shall cause to be
maintained with respect thereto a flood insurance policy in a form meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable carrier in an amount that provides for coverage, and
which provides for a recovery by the Servicer on behalf of the related Trust of
insurance proceeds relating to such Mortgage Loan, in an amount not less than
the least of (i) the outstanding principal balance of the Mortgage Loan, (ii)
the minimum amount required to fully compensate for damage or loss to the
improvements which are a part of the related Mortgaged Property on a replacement
cost basis and (iii) the maximum amount of insurance that is available under the
Flood Disaster Protection Act of 1973, but in each case in an amount not less
than such amount as is necessary to avoid the application of any co-insurance
clause contained in the related hazard insurance policy.
In the event that the Servicer shall obtain and maintain a blanket
policy insuring against fire, flood and hazards of extended coverage on all of
the Mortgage Loans, then, to the extent such policy names the Servicer as loss
payee and provides coverage in an amount equal to the aggregate principal
balance of the Mortgage Loans without co-insurance, the Servicer shall be deemed
conclusively to have satisfied its obligations with respect to fire, flood and
hazard insurance coverage. Such blanket policy may contain a deductible clause,
in which case the Servicer shall, in the event that there shall have been a loss
which would have been covered by such policy, deposit in the Principal and
Interest Account from the Servicer's own funds the difference, if any, between
the amount that would have been payable under a policy described in the
preceding paragraph and the amount paid under such blanket policy.
Due-on-Sale Clauses; Assumption and Substitution Agreements. When any
Mortgaged Property has been or is about to be conveyed by the obligor (whether
by absolute conveyance or by contract of sale, and whether or not the obligor
remains liable), the Servicer shall, to the extent it has knowledge of such
conveyance or prospective conveyance, exercise the related Trust's rights to
accelerate the maturity of the related Loan under any "due-on-sale" clause
contained in the related Mortgage Loan or Note; provided, that the Servicer
shall not exercise any such right if the "due-on-sale" clause, in the reasonable
belief of the Servicer, is not enforceable under applicable law or if the
Servicer is prohibited by law from doing so.
The Servicer may also allow for an assumption agreement in the case of
a defaulted Mortgage Loan, or a Mortgage Loan as to which a default is imminent,
under the same standards as set forth above in the first paragraph under
"Collection of Certain Mortgage Payments", and subject to certain limitations on
the aggregate amount of Mortgage Loans subject to such assumptions, as set forth
in the Agreement.
Realization Upon Defaulted Loans. The Servicer shall, consistent with
the Servicing Standards, foreclose upon or otherwise comparably effect the
ownership in the name of the Servicer on behalf of the Trust of the Mortgaged
Property relating to defaulted a Mortgage Loan as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such foreclosure or other conversion, the Servicer shall exercise such
rights and powers vested in it hereunder, and use the same degree of care and
skill in their exercise or use, as prudent mortgage lenders would exercise or
use under the circumstances in the conduct of their own affairs, including, but
not limited to, advancing funds for the payment of taxes and insurance premiums.
The foregoing is subject to the proviso that the Servicer shall not advance its
own funds unless it shall reasonably believe in good faith that it is
recoverable and doing so will increase Net Liquidation Proceeds on the Mortgage
Loans. Notwithstanding the foregoing, with respect to any Mortgage Loan as to
which the Servicer has received notice of, or has actual knowledge of, the
presence of any toxic or hazardous substance on
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the related Mortgaged Property (a "Potentially Hazardous Property"), the
Servicer shall not, on behalf of the Trust, either (i) obtain title to such
Mortgaged Property as a result of or in lieu of foreclosure or otherwise, or
(ii) otherwise acquire possession of, or take any other action with respect to,
such Mortgaged Property, if, as a result of any such action, the Trust would be
considered to hold title to, be a "mortgagee-in-possession" of, or to be an
"owner" or "operator" of, such Mortgaged Property within the meaning of the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA") from time to time, or any comparable law. The Servicer shall
not be required to make Advances with respect to a Mortgage Loan relating to a
Potentially Hazardous Property. In the event the Servicer requires any
professional guidance with respect to CERCLA, the Servicer may, at its own
expense, obtain an opinion of counsel experienced in CERCLA matters, and shall
be fully protected in relying on any such opinion of counsel.
The Servicer shall determine with respect to each defaulted Mortgage
Loan when it has recovered, whether through trustee's sale, foreclosure sale or
otherwise, all amounts (other than from deficiency judgments) it expects to
recover from or on account of such defaulted Mortgage Loan, whereupon such
Mortgage Loan shall become a "Liquidated Mortgage Loan".
Optional Purchase of Defaulted Mortgage Loans. The Servicer or its
designee has the option to purchase from the Trust Fund any Mortgage Loan which
is more than 60 days delinquent, up to ____% by aggregate Principal Balance of
the Original Aggregate Principal Balance of all Mortgage Loans, at a purchase
price equal to the outstanding principal balance of such Mortgage Loan as of the
date of purchase, plus all accrued and unpaid interest on such principal
balance, computed at the Mortgage Interest Rate, plus the amount of any
unreimbursed Servicing Advances (without duplication) made by the Servicer with
respect to such Mortgage Loan, in accordance with the provisions specified in
the Pooling and Servicing Agreement.
Servicing Compensation. As compensation for its activities the Servicer
shall be entitled to the Servicing Fee and certain ancillary servicing income
such as late charges, insufficient funds charges, modification and assumption
fees, penalties, etc., from amounts available therefor in the Principal and
Interest Account. The Servicer is also entitled to receive, monthly, the net
investment earnings on amounts on deposit in the Principal and Interest Account,
and is responsible for any losses on such investments without any right of
reimbursement with respect to such losses.
The right to receive the Servicing Fee may not be transferred (except
to the Sub-Servicer) in whole or in part except in connection with the transfer
of all of the Servicer's responsibilities and obligations under the Pooling and
Servicing Agreement.
Removal and Resignation of Servicer
The Trustee, at the direction of the majority of the Owners of the
Offered Certificates may, pursuant to the Pooling and Servicing Agreement,
remove the Servicer upon the occurrence and continuation beyond the applicable
cure period of any of the following events:
(i) any failure by the Servicer (a) to deposit to the
Principal and Interest Account all collections received by the Servicer
directly within two Business Days following the Business Day on which
such amounts are received and are determined by the Servicer to relate
to the Mortgage Loans (unless not required by the terms of the Pooling
and Servicing Agreement) or (b) to deposit to the Principal and
Interest Account Delinquency Advances and Compensating Interest as
required by the Pooling and Servicing Agreement by the related Servicer
Remittance Date; or
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(ii) failure on the part of the Servicer to observe or perform
any term, covenant or agreement in the Pooling and Servicing Agreement
(other than those covered by clause (a) above), which materially
adversely affects the rights of the Owners of the Certificates and
which continues unremedied for 30 days after the date on which written
notice of such failure, requiring the same to be remedied, shall have
been given to the Servicer by the Trustee, or the Owners of the Offered
Certificates who hold Certificates evidencing in aggregate greater than
25% of the Certificate Principal Balance of the outstanding Offered
Certificates; or
(iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding
the insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Servicer and certain
actions by the Servicer indicating its insolvency or inability to pay
its obligations; or
(iv) the Servicer shall fail to deliver a report expressly
required by the Pooling and Servicing Agreement, and the continuance of
such failure for a period of three Business Days after the date upon
which written notice of such failure shall have been given to the
Servicer by the Trustee (except that such three Business Day period
shall be deemed not to run as to any portion of such report during such
time as the Servicer's failure to provide such information is for cause
or inability beyond its control and the Servicer provides the Trustee
with an officer's certificate of the Servicer to such effect).
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except upon the determination that the Servicer's duties thereunder are no
longer permissible under applicable law and such incapacity cannot be cured by
the Servicer. No such resignation shall become effective until a successor has
assumed the Servicer's responsibilities and obligations in accordance with the
Pooling and Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee will be
required to serve as successor servicer. If the Trustee is prevented by law from
acting as successor servicer, the Trustee may solicit bids for a successor
servicer, and pending the appointment of a successor servicer as a result of
soliciting such bids, the Trustee will be required to serve as successor
servicer. If the Trustee is unable to obtain a qualifying bid, the Trustee will
be required to appoint, or petition a court of competent jurisdiction to
appoint, an eligible successor. Any such successor servicer shall assume all of
the related responsibilities, duties or liabilities of the Servicer on the date
on which it becomes the Servicer, but shall not assume any of the liabilities
incurred prior to such date.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
of all amounts required to be paid such Owners upon the later to occur of (a)
the final payment or other liquidation (or any advance made with respect
thereto) of the last Mortgage Loan or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate or (ii)
any time when a Qualified Liquidation (as defined in the Pooling and Servicing
Agreement) of the Trust Estate is effected.
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Optional Termination
As Provided in the Pooling and Servicing Agreement. The Pooling and
Servicing Agreement provides that a party to be named therein, at its option,
acting directly or through one or more permitted designees, may determine to
purchase from the Trust all of the Mortgage Loans and other property then held
by the Trust, and thereby effect early retirement of the Certificates, on any
Remittance Date when the aggregate outstanding principal balances of the
Mortgage Loans has declined to ____% or less of the Original Aggregate Principal
Balance.
Auction Sale. The Pooling and Servicing Agreement requires that, within
ninety days following the Optional Termination Date, if the Servicer, or an
affiliate of the Servicer, has not exercised its optional termination right by
such date, the Trustee solicit bids for the purchase of all Mortgage Loans
remaining in the Trust. In the event that satisfactory bids are received as
described in the Pooling and Servicing Agreement, the net sale proceeds will be
distributed to the Owners of the Certificates, 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.
Upon Loss of REMIC Status. Following a final determination by the
Internal Revenue Service, or by a court of competent jurisdiction, in each case
from which no appeal is taken within the permitted time for such appeal, or if
any appeal is taken, following a final determination of such appeal from which
no further appeal can be taken to the effect that any REMIC held by the Trust
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination, the Owners of a majority in
Percentage Interest represented by the Class of Offered Certificates then
outstanding may direct the Trustee on behalf of the Trust to adopt a plan of
complete liquidation as contemplated by Section 860F(a)(4) of the Code, and
thereby effect the early retirement of the Certificates. The purchase price for
any purchase of the property of the Trust Estate shall be equal to the sum of
(x) the greater of (i) 100% of the aggregate principal balances of the Mortgage
Loans as of the Due Date which immediately follows the last day of the related
Remittance Period immediately preceding the day of purchase minus amounts
remitted from the Principal and Interest Account representing collections of
principal on the Mortgage Loans during the related Remittance Period, and (ii)
the fair market value of such Mortgage Loans (disregarding accrued interest),
(y) one month's interest on such amount computed at the weighted average
Pass-Through Rate of the Offered Certificates and (z) the aggregate amount of
any unreimbursed Delinquency Advances and any Delinquency Advances which the
Servicer has theretofore failed to remit.
Upon receipt of such notice or direction from the majority of the
Owners of the Offered Certificates, the Trustee will be required to notify the
Owners of the Class B Certificates of such election to liquidate or such
determination to purchase, as the case may be (the "Termination Notice"). The
Owners of a majority of the Percentage Interest of the Class B Certificates then
outstanding may, within sixty (60) days from the date of receipt of the
Termination Notice (the "Purchase Option Period"), at their option, purchase
from the Trust all (but not fewer than all) Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the Trust Estate at a purchase
price equal to the aggregate principal balances of all Mortgage Loans as of the
last day of the Remittance Period immediately preceding the date of such
purchase, plus one month's interest on such amount at the weighted average
Pass-Through Rate and plus the aggregate amount of any unreimbursed Delinquency
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Advances and any Delinquency Advances which the Servicer has theretofore failed
to remit. If, during the Purchase Option Period, the Owners of the Class B
Certificates have not exercised the option described in the immediately
preceding sentence, then upon the expiration of the Purchase Option Period in
the event that the Owners of the Offered Certificates have given the Trustee the
direction described above, the Trustee will be required to sell the Mortgage
Loans and distribute the proceeds of the liquidation of the Trust Estate, each
in accordance with the plan of complete liquidation, such that, if so directed,
the liquidation of the Trust Estate, the distribution of the proceeds of the
liquidation and the termination of the Pooling and Servicing Agreement occur no
later than the close of the sixtieth (60th) day, or such later day as the Owners
of the Offered Certificates permit or direct in writing, after the expiration of
the Purchase Option Period. In connection with such purchase, the Servicer will
be required to remit to the Trustee all amounts then on deposit in the Principal
and Interest Account for deposit to the Certificate Account, which deposit will
be deemed to have occurred immediately preceding such purchase.
Following a Final Determination, the Owners of a majority of the
Percentage Interest of the Class B Certificates then outstanding may, at their
option and upon delivery to the Trustee of an opinion of counsel experienced in
federal income tax matters which opinion shall be reasonably satisfactory in
form and substance to the Owners of a majority of the Percentage Interests
represented by the Offered Certificates then outstanding, to the effect that the
effect of the Final Determination is to increase substantially the probability
that the gross income of the Trust will be subject to federal taxation, purchase
from the Trust all (but not fewer than all) Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the Trust Fund at a purchase
price equal to the aggregate principal balances of all Mortgage Loans as of the
Due Date which immediately follows the last day of the Remittance Period
immediately preceding the date of such purchase, plus one month's interest on
such amount computed at the weighted average Pass-Through Rate plus the
aggregate amount of unreimbursed Delinquency Advances and any Delinquency
Advances which the Servicer has theretofore failed to remit. In connection with
such purchase, the Servicer will be required to remit to the Trustee all amounts
then on deposit in the Principal and Interest Account for deposit to the
Certificate Account, which deposit shall be deemed to have occurred immediately
preceding such purchase. The foregoing opinion shall be deemed satisfactory
unless the Trustee, at the direction of the Owners of a majority of the
Percentage Interest of the Offered Certificates, gives the Owners of a majority
of the Percentage Interest of the Class B Certificates notice that such opinion
is not satisfactory within thirty days after receipt of such opinion.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the prospectus. The discussion herein and in
the prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC Elections
The Trustee will cause an election to be made to treat the Trust as a
REMIC for federal income tax purposes. Dewey Ballantine, special tax counsel,
will advise that, in its opinion, for federal income tax purposes, assuming (i)
the REMIC election is made and (ii) compliance with the Pooling and Servicing
Agreement, the Trust will be treated as a REMIC, each Class of Offered
Certificates and the Class B Certificates will be treated as "regular interests"
in the REMIC and the Class R Certificates will be treated as the sole Class of
"residual interests" in the REMIC. For federal income tax purposes, regular
interests in a REMIC are treated as debt instruments issued by the REMIC on the
date on which those interests are created, and not as ownership interests in the
REMIC or its assets. Owners of Offered Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to such Offered Certificates under an accrual method. The Offered Certificates
may be issued with "original issue discount" for federal income tax purposes.
The prepayment assumption to be used in determining whether any Class of Offered
Certificates is issued with original issue discount and the rate of accrual of
original issue discount is 16% HEP for the Offered Certificates (other than the
Variable Rate Certificates) and 25% CPR for the Variable Rate Certificates. No
representation is made that any of the Mortgage Loans will prepay at this rate
or any other rate. See "Certain Federal Income Tax Consequences -- Taxation of
Regular Certificates" in the prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit "plan assets" of a
pension, profit-sharing or other employee benefit plan, as well as individual
retirement accounts and Keogh Plans (each, a "Benefit Plan"), from being
involved in certain transactions with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to such
Benefit Plan. A violation of these "prohibited transaction" rules may result in
an excise tax or other penalties and liabilities under ERISA and Section 4975 of
the Code for such persons, unless a statutory or administrative exemption is
available.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and Section 4975 of the Code with respect to
a Benefit Plan if Certificates were acquired with "plan assets" of such Benefit
Plan and assets of the Trust were deemed to be "plan assets" of such Benefit
Plan. Purchasers of Certificates that are insurance companies should consult
with their counsel with respect to the United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Trust and Saving Bank, 114 S. Ct. 517 (1993). In
John Hancock, the Supreme Court ruled that assets held in an insurance Company's
general
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account may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Accordingly, Certificates may not be acquired by a Benefit Plan
or an investor using assets of a Benefit Plan, including, without limitation,
insurance company general accounts (collectively referred to as "Benefit Plan
Investors"). Each purchaser and each transferee of a Certificate will be deemed
to have represented and warranted that it is not a Benefit Plan Investor.
Certain employee benefit plans, such as governmental plans and church
plans (if no election has been made under Section 410(d) of the Code), are not
subject to the restrictions of ERISA, and assets of such plans may be invested
in the Certificates without regard to the ERISA considerations described above,
subject to other applicable federal, state or local law. However, any such
governmental or church plan which is qualified under Section 401(a) of the Code
and exempt from taxation under Section 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
RATINGS
It is a condition of the original issuance of the Offered Certificates
that the Class A Certificates that they receive ratings of [__] by [____] and
[__] by [____] and that the Class M-1 Certificates receive ratings of [__] from
[____] and [__] from [____], the Class M-2 Certificates receive ratings of [__]
from [____] and [__] from [____] and the Class M-3 Certificates receive ratings
of [__] from [____] and [__] from [____].
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. The security rating assigned to the Offered
Certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
Explanations of the significance of such ratings may be obtained from
[____________] at [address] and [____________] at [address]. Such ratings will
be the views only of such rating agencies. There is no assurance that any such
ratings will continue for any period of time or that such ratings will not be
revised or withdrawn. Any such revision or withdrawal of such ratings may have
an adverse effect on the market price of the Offered Certificates.
LEGAL INVESTMENT CONSIDERATIONS
[The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many institutions with legal authority to invest in
comparably rated securities may not be legally authorized to invest in the
Offered Certificates.]
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, dated [date],
the Depositor has agreed to cause the Trust to sell and First Union Capital
Markets, Inc. (the "Underwriter") has agreed to purchase the Offered
Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase the entire principal
amount of Offered Certificates.
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The Underwriter has advised the Depositor that it proposes to offer the
Offered Certificates purchased by the Underwriter for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Underwriter may effect such transactions by selling such Offered
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter or purchasers of the Offered Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Offered Certificates purchased by the Underwriter may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriter and any profit on the resale of Offered Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act of 1933, as amended.
Proceeds to the Depositor, including accrued interest, are expected to
be approximately [____%] of the aggregate principal balance of the Offered
Certificates, before deducting expenses payable by the Depositor in connection
with the Offered Certificates, estimated to be [$_____]. In connection with the
purchase and sale of the Offered Certificates, the Underwriter may be deemed to
have received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue. The Underwriter intends, but is not obligated, to
make a market in the Offered Certificates.
In connection with the offering of the Offered Certificates, the
Underwriter and its affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Offered Certificates. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such person may bid for or purchase
the Offered Certificates for the purpose of stabilizing its market price. Any of
the transactions described in this paragraph may result in the maintenance of
the price of the Offered Certificates at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are taken, may be discontinued at any time
without notice.
The Underwriter is an affiliate of the Depositor.
[The Underwriter (i) has in the past and may in the future provide
underwriting, financial advisory or other services to __________, an affiliate
of the Unaffiliated Seller, the Servicer and the Sub-Servicer and (ii) does
provide warehouse financing to the Unaffiliated Seller.]
For further information regarding any offer or sale of the Offered
Certificates pursuant to this prospectus supplement and the prospectus, see
"Plan of Distribution" in the prospectus.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Offered Certificates will be passed upon for the Unaffiliated Seller and the
Servicer by [__________] and for the Depositor and the Underwriter by Dewey
Ballantine LLP, New York, New York.
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INDEX OF SIGNIFICANT DEFINITIONS
60+ Delinquency Percentage.........................55
Accrual Period.....................................50
Adjustable Rate Group Certificates..................1
Adjustable Rate Mortgage Loans......................7
Administrative Rate.................................7
Advances...........................................45
Aggregate Collected Principal Amount...............50
Applied Realized Loss Amount.......................50
Appraised Values...............................24, 34
Auction Sale........................................8
Available Funds....................................50
Available Funds Cap Rate........................3, 50
Beneficial Owners..................................56
Benefit Plan.......................................70
Book-Entry Certificates............................56
CEDEL..............................................56
CEDEL Participants.................................58
CERCLA.............................................66
Certificate Account................................45
Civil Relief Act...................................15
Civil Relief Act Interest Shortfall................15
Class A Principal Distribution Amount..............50
Class A-1 Certificates..............................1
Class A-2 Certificates..............................1
Class A-3 Certificates..............................1
Class A-4 Certificates..............................1
Class A-6 Formula Pass-Through Rate.................1
Class A-6 Pass-Through Rate.........................1
Class A-6 Principal Distribution Amount............51
Class A-7 Percentage...............................51
Class A-7 Principal Distribution...................51
Class B Applied Realized Loss Amount...............51
Class B Certificates................................1
Class B Realized Loss Amortization Amount..........51
Class C Certificates................................1
Class M-1 Applied Realized Loss Amount.............51
Class M-1 Realized Loss Amortization Amount........51
Class M-2 Applied Realized Loss Amount.............52
Class M-2 Realized Loss Amortization Amount........52
Class M-3 Applied Realized Loss Amount.............52
Class M-3 Realized Loss Amortization Amount........52
Class R Certificates................................1
CLTV................................................6
Collected Principal Amount.........................52
Compensating Interest......................14, 46, 64
Constant Prepayment Rate...........................39
Cooperative........................................58
CPR................................................39
Cumulative Loss Percentage.........................53
Cumulative Loss Trigger Event......................53
Current Interest...................................53
Defective Loan.....................................62
Definitive Certificate.............................56
Delinquency Advance.............................7, 64
Distribution Date...................................1
DTC................................................56
Due Dates..........................................45
Eligible Investments...............................45
ERISA..............................................70
Euroclear..........................................56
Euroclear Operator.................................58
Euroclear Participants.............................58
European Depositaries..............................56
Excess Interest Amount.............................53
Extra Principal Distribution Amount................53
FHLMC..............................................12
Final Determination................................68
Financial Intermediary.............................57
Fixed Rate Group Certificates.......................1
Fixed Rate Group Principal Allocation..............53
Fixed Rate Mortgage Loans...........................6
HEP................................................38
Home Equity Prepayment.............................38
Independent Originator..............................1
Interest Remittance Amount.........................53
Liquidated Mortgage Loan...........................53
Liquidation Proceeds...............................14
Loan Purchase Agreement............................62
Lockbox Account....................................63
Monthly Remittance Amount..........................45
Mortgage Loans......................................6
Mortgage Rate.......................................6
Mortgaged Properties................................6
Mortgages...........................................6
Notes..........................................17, 25
Optional Termination................................2
Optional Termination Date...........................8
Original Aggregate Principal Balance............6, 16
Original Credit Support Percentage.................54
Overcollateralization Amount.......................54
Overcollateralization Deficiency Amount............54
Overcollateralization Reduction Amount..........4, 54
Overcollateralization Reduction Amounts............49
Participants.......................................56
Payment Delay Feature of the Certificates..........36
Plan assets........................................70
Pool Balance.......................................54
Pooling and Servicing Agreement.....................1
Potentially Hazardous Property.....................66
Prepayment Assumption..............................38
Principal and Interest Account......................7
Principal Balance..................................54
Principal Distribution Amount......................54
Purchase Option Period.............................68
Purchased Pool......................................1
Record Date.........................................1
REMIC...............................................9
Remittance Date....................................45
Remittance Period..................................54
Repurchase Price...................................62
Required OC Percentage.............................54
Required Overcollateralization Amount..............54
Riegle Act.........................................15
Schedule of Mortgage Loans.........................61
Senior Enhancement Percentage......................55
Servicer............................................7
Servicer Event of Default...........................8
Servicing Fee.......................................8
Servicing Report...................................63
Servicing Standards................................62
SMMEA...........................................9, 71
Stepdown Date......................................55
Stepped Up Percentage..............................55
Subordinate Certificates............................1
Sub-Servicer........................................7
Sub-Servicing Agreement.............................7
Substitution Amounts...............................45
Termination Notice.................................68
Terms and Conditions...............................59
Trigger Event......................................55
Trust...............................................1
Trust Fund......................................1, 61
Trustee.............................................1
Underwriter........................................71
Unpaid Realized Loss Amount........................55
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
[________] Mortgage Loan Trust [series] Mortgage Pass-Through Certificates,
Class A (the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, CEDEL or Euroclear. The Global Securities will be tradable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
A-1
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
asset-backed certificates issued in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear, Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant.
A-2
The seller will send instructions to CEDEL or Euroclear through a CEDEL
Participant or a Euroclear Participant at least one business day prior to
settlement. In these cases CEDEL or Euroclear will instruct the respective
Depositary, as appropriate, to credit the Global Securities to the DTC
Participant's account against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in such
accrual period and a year assumed to consist to 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the CEDEL Participant or the Euroclear Participant
the following day, and receipt of the cash proceeds in the CEDEL Participant's
or the Euroclear Participant's account would be back-valued to the value date
(which would be the preceding day, when settlement occurred in New York). Should
the CEDEL Participant or the Euroclear Participant have a line of credit with
its respective clearing system and elect to be in debt in anticipation of
receipt of the sale proceeds in its account, the back-valuation will extinguish
any overdraft incurred over that one-day period. If settlement is not completed
on the intended value date (i.e., the trade fails), receipt of the cash proceeds
in the CEDEL Participant's or the Euroclear Participant's account would instead
be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
A-3
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
A-4
================================================================================
Until 90 days after the date of this prospectus supplement, all dealers
effecting transactions in the offered certificates, whether or not participating
in this offering, may be required to deliver a prospectus supplement and the
prospectus to which it relates. This is in addition to the dealers' obligation
to deliver a prospectus supplement and prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
----------------------------------
TABLE OF CONTENTS
Prospectus Supplement
Summary........................................................
Risk Factors...................................................
The Mortgage Loan Pool.........................................
The Unaffiliated Seller........................................
The Servicer ..................................................
The Sub-Servicer ..............................................
Use of Proceeds ...............................................
Prepayment and Yield Considerations ...........................
Additional Information ........................................
Description of the Offered Certificates .......................
The Pooling and Servicing Agreement............................
Certain Federal Income Tax Consequences........................
ERISA Considerations...........................................
Ratings........................................................
Legal Investment Considerations................................
Underwriting...................................................
Certain Legal Matters..........................................
Index of Significant Definitions...............................
Global Clearance, Settlement and ..............................
Tax Documentation Procedures...................................
Prospectus
Reports.......................................................3
Available Information.........................................3
Incorporation of Certain Information by Reference.............3
Summary of Prospectus.........................................4
Risk Factors.................................................13
The Trust Funds..............................................18
Description of the Certificates..............................29
Credit Support...............................................43
Prepayment and Yield Considerations..........................48
Use of Proceeds..............................................52
The Depositor................................................52
Underwriting Guidelines......................................52
Servicing of the Loans.......................................54
The Pooling and Servicing Agreement..........................64
Certain Legal Aspects of the Loans...........................67
Certain Federal Income Tax Consequences......................81
ERISA Considerations.........................................93
Legal Investment.............................................96
Plan of Distribution.........................................98
Legal Matters................................................99
Rating.......................................................99
Additional Information.......................................99
Index of Significant Definitions............................100
=====================================================================
[$_______]
[________________]
Servicer
Residential Asset Funding Corporation
Depositor
Mortgage Loan
Pass-Through Certificates
Series [series]
---------------------
PROSPECTUS SUPPLEMENT
---------------------
First Union Capital Markets, Inc.
[date]
==============================================================
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............... $278,000
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............................................................. $798,000
========
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
3
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, 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 Residential Asset Funding Corporation*
3.2 By-laws of Residential Asset Funding Corporation*
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*
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters *
23.3 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1)
24.1 Power of Attorney*
* Filed previously
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;
4
(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 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.
(d) The undersigned registrant hereby undertakes that:
5
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus 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.
(e) 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.
6
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 4th day of
November, 1998.
RESIDENTIAL ASSET FUNDING CORPORATION
By:
---------------------------------
NAME: Wallace Saunders
TITLE Assistant Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated on November 4, 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.
7
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 Residential Asset Funding Corporation*
3.2 By-laws of Residential Asset Funding Corporation*
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*
8.1 Opinion of Dewey Ballantine LLP with respect to tax matters*
23.3 Consent of Dewey Ballantine LLP (contained in Exhibit 5.1)
24.1 Power of Attorney*
* Filed previously