PROSPECTUS SUPPLEMENT
(To prospectus dated September 9, 1999)
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RBMG FUNDING CO. MORTGAGE LOAN TRUST
1999-2 $125,000,000
ISSUER
RBMG, INC. ASSET-BACKED NOTES, SERIES 1999-2
SERVICER
RESIDENTIAL ASSET FUNDING CORPORATION
SPONSOR
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YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" STARTING ON PAGE S-5 OF THIS
PROSPECTUS SUPPLEMENT AND PAGE 3 OF THE ACCOMPANYING PROSPECTUS AND CONSIDER
THESE FACTORS BEFORE MAKING A DECISION TO INVEST IN THE NOTES.
THE NOTES REPRESENT NON- RECOURSE OBLIGATIONS OF THE TRUST ONLY AND ARE NOT
INTERESTS IN OR OBLIGATIONS OF ANY OTHER PERSON.
NEITHER THE NOTES NOR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THE NOTES --
o The trust will issue two classes of notes. Each class of notes will be
backed primarily by a pledge of one of the two groups of mortgage loans.
o Interest and principal on the notes is scheduled to be paid monthly on the
25th day of the month, or the next business day. The first scheduled payment
date is December 27, 1999.
CREDIT ENHANCEMENT --
o The notes will have the benefit of a financial guaranty insurance policy
from Ambac Assurance Corporation that will guarantee timely interest
payments due on the notes on each payment date and the payment of the
outstanding principal balance of the notes on the final scheduled payment
date.
[LOGO] AMBAC
o The notes will be cross collateralized to a limited extent and will have the
benefit of overcollateralization created by the application of excess
interest in the early years of the transaction.
OFFERING INFORMATION:
AGGREGATE NOTE UNDERWRITING PROCEEDS TO THE
CLASS BALANCE PRICE TO PUBLIC DISCOUNT SPONSOR
- --------------- ---------------- ----------------- -------------- ----------------
A-1 ........... $ 85,000,000 99.75% 0.25% $ 84,787,500
A-2 ........... $ 40,000,000 99.75% 0.25% $ 39,900,000
Total ......... $125,000,000 99.75% $124,687,500
The proceeds to the sponsor are calculated without taking into effect the
expenses of this offering, which are expected to be $350,000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
FIRST UNION SECURITIES
The date of this prospectus supplement is November 18, 1999
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents
that progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your series of
notes, and (2) this prospectus supplement, which describes the specific terms of
your series of notes.
This prospectus supplement does not contain complete information about
the offering of the notes. Additional information is contained in the
accompanying prospectus. You are urged to read both this prospectus supplement
and the accompanying prospectus in full. We cannot sell the notes to you unless
you have received both this prospectus supplement and the accompanying
prospectus.
THE ACCOMPANYING PROSPECTUS CONTAINS INFORMATION WHICH DESCRIBES THE
POSSIBLE CHARACTERISTICS OF DIFFERENT SERIES OF SECURITIES, AND IS NOT INTENDED
TO BE CONTRADICTORY TO THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT.
IF THE ACCOMPANYING PROSPECTUS CONTEMPLATES MULTIPLE OPTIONS, YOU SHOULD RELY ON
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AS TO THE APPLICABLE OPTION.
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TABLE OF CONTENTS
SUMMARY.............................................1
RISK FACTORS........................................5
TRANSACTION OVERVIEW...............................10
Formation of the Trust..........................10
The Owner Trustee...............................10
The Indenture Trustee...........................10
The Sponsor.....................................10
The Servicer....................................10
The Subservicer.................................11
Origination, Sale and Pledge of the
Mortgage Loans................................11
Issuance of the Notes...........................12
Issuance of the Financial Guaranty
Insurance Policy..............................12
RBMG Funding Co.................................12
DESCRIPTION OF THE MORTGAGE POOL...................12
General.........................................12
Difference between Statistical Calculation
Date and Closing Date Groups..................13
The Mortgage Pool...............................13
UNDERWRITING STANDARDS.............................59
General.........................................59
Application Process.............................59
Residential Loan Programs.......................60
Standard Documentation Programs.................61
Specialty Residential Loan Programs.............61
Categories and Criteria.........................62
Exceptions......................................64
Meri-Qwik.......................................64
Index Applicable to the Adjustable Rate Loans...65
RBMG...............................................65
DESCRIPTION OF THE NOTES...........................67
General.........................................67
Book-Entry Registration and Definitive Notes....68
Assignment of Mortgage Loans....................68
Payments on the Notes...........................70
Calculation of One-Month Libor..................72
Note Accounts...................................73
Overcollateralization Feature...................73
Reports to Noteholders..........................75
Redemption of the Notes.........................75
Payments to the Holder(s) of the
Trust certificates...........................75
Optional Purchase of Delinquent Mortgage Loans..75
P&I Advances....................................76
Compensating Interest Payments..................76
Note Events of Default..........................77
Rights Upon Event of Default....................77
List of Noteholders.............................78
The Indenture Trustee...........................78
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS........78
General.........................................78
Amortization of the Notes as a result of
allocation of Excess Cash.....................79
The effect of One-Month LIBOR...................79
Defaults on the Mortgage Loans..................79
Weighted Average Life of the Notes..............80
SERVICING OF THE MORTGAGE LOANS....................86
General.........................................86
Subservicing....................................86
The Subservicer.................................87
Servicing Compensation and Payment of Expenses..91
Standard Hazard Insurance Policies..............91
Payments on Mortgage Loans; Collection Account..92
Realization Upon Defaulted mortgage loans.......93
Enforcement of Due-On Sale Clauses..............93
Evidence as to Compliance.......................94
Certain Matters Regarding Servicer's
Servicing Obligations.........................94
Amendment of the Servicing Agreement............95
Servicer Events of Default and Termination
Event.........................................95
Servicing Obligations; Limitation On
Resignation of the Servicer...................96
Termination.....................................96
THE NOTE INSURER AND THE FINANCIAL GUARANTY
INSURANCE POLICY................................96
The Note Insurer................................97
The Financial Guaranty Insurance Policy.........98
ERISA CONSIDERATIONS..............................100
USE OF PROCEEDS...................................101
LEGAL INVESTMENT CONSIDERATIONS...................101
UNDERWRITING......................................101
MATERIAL FEDERAL INCOME TAX CONSEQUENCES..........102
Treatmentof the Notes..........................102
Treatmentof the Trust..........................104
STATE TAXES.......................................104
EXPERTS...........................................104
LEGAL MATTERS.....................................104
RATING OF THE NOTES...............................104
GLOSSARY............................................i
ANNEX I.............................................1
ii
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 notes, carefully read this entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview of structural provisions,
calculations, cash flow priorities and other information to aid your
understanding and is qualified by the full description of the
structural provisions, calculations, cash flow priorities and other
information in this prospectus supplement and the accompanying
prospectus.
-------------------------------
PARTIES TO THE TRANSACTION
TITLE OF SERIES
RBMG Funding Co. Mortgage Loan Trust 1999-2,
Asset-Backed Notes, Series 1999-2.
SPONSOR
Residential Asset Funding Corporation
SERVICER
RBMG, Inc.
SUBSERVICER
Ocwen Federal Bank FSB
ISSUER
RBMG Funding Co. Mortgage Loan Trust 1999-2
INDENTURE TRUSTEE
Bankers Trust Company
OWNER TRUSTEE
Wilmington Trust Company
NOTE INSURER
Ambac Assurance Corporation
DESCRIPTION OF THE NOTES
THE NOTES
The trust will issue two classes of notes: the class A-1 notes and the class A-2
notes. The initial principal amount is as set forth on the cover of this
prospectus supplement. The final scheduled payment date of each class of notes
is December 25, 2030. You should be aware that it is anticipated that the actual
final payment date will occur earlier than the final scheduled payment date.
The trust will issue the notes in book-entry form in integrals of $1,000.
THE ASSETS OF THE TRUST
The notes will be backed solely by a pledge of the assets of the trust. The
assets of the trust will consist primarily of:
o two separate groups of fixed and adjustable rate, residential one- to
four-family, first lien mortgage loans with the mortgage loans in group I
securing the class A-1 notes, and those in group II securing the class A-2
notes;
o a security interest in the underlying property;
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o principal and interest payments on the mortgage loans;
o money on deposit in any reserve account that may be established with
respect to the trust; and
o an interest rate cap agreement that is designed to provide extra cashflow
to be used for credit enhancement purposes.
CUT-OFF DATE
As of the opening of business on November 1, 1999 (other than those mortgage
loans originated after that date).
STATISTICAL CALCULATION DATE
As of the opening of business on November 1, 1999.
CLOSING DATE
On or about November 30, 1999.
FUNDS AVAILABLE FOR PAYMENT OF INTEREST AND PRINCIPAL
The following funds will generally be available for the payment of interest and
principal on a particular class of notes:
o collections on the mortgage loans in the related group, net of fees
and expenses;
o any advances made by the servicer in respect of delinquent payments
of principal and interest on mortgage loans in the related group;
o interest payments made by the servicer to compensate in part for any
shortfall in interest payments on the notes caused by a mortgagor
prepaying all or part of a mortgage loan in the related group;
o any amounts resulting from the repurchase, release, removal or
substitution of a mortgage loan in the related group;
o to a limited extent, payments received by the indenture trustee under
an interest rate cap agreement;
o to a limited extent, excess amounts available from the mortgage loans
in the other group, or available from the reserve account; and
o amounts deposited in connection with the redemption of the particular
class of notes.
NOTE INTEREST RATE AND THE AVAILABLE FUNDS CAP RATE
The rate of interest on the notes will be an annual rate of one month LIBOR plus
0.35% for the class A-1 notes and one month LIBOR plus 0.38% for the class A-2
notes. The notes are subject to a cap on the note interest rate. The note
interest rate will increase on the payment date immediately following the month
in which the optional redemption may first be exercised.
Although the trust will hold an interest rate cap agreement, any payments
received under the cap agreement will not be available to increase the caps on
the note interest rate, or to "uncap" the notes. The interest rate cap agreement
is for credit enhancement purposes only and will provide an additional source of
funds in certain circumstances in the event excess cash decreases as a result of
an increase in LIBOR.
APPLICATION OF EXCESS CASH
Generally, because the payments of interest and principal on the mortgage loans
in each group will exceed the amounts payable to the note insurer, other fees,
and payments of monthly interest and principal to the noteholders of the related
class of notes, there will be excess cash each month.
Excess cash for each group, plus payments received under the interest rate cap
agreement, will be available to pay down the note balance of the related class
of notes in order to reach the required level of overcollateralization. Any
excess cash remaining after payments on
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the related class of notes, payments to the note insurer in respect of such
notes and payment of any required reserve account deposit will be released to
the holder of the residual interests and will not be available for any
subsequent payments to the noteholders or the note insurer. However, if amounts
payable to the note insurer and to the noteholders as interest cannot be paid in
full from funds available from the related group of mortgage loans, then the
shortfall shall be made up from funds available (including amounts of excess
cash and amounts received under the interest rate cap agreement) from the other
group.
TRUST CERTIFICATES
The trust will also issue two trust certificates that are not being offered by
this prospectus supplement and the accompanying prospectus.
DISTRIBUTIONS
Owners of the notes will be entitled to receive payments of interest each month.
Owners of the notes may not necessarily receive a distribution of principal in
any given month. The amount of principal the owners of the notes will be
entitled to receive will vary depending on a number of factors, including the
payments received on the mortgage loans in the related pool. Each month, the
indenture trustee will calculate the amounts to be paid to the owners of the
notes.
Distributions will be made on each payment date to the owners of the notes as of
the record date. So long as the notes remain in book-entry form, the record date
for the notes is the most recent business day preceding the payment date. The
record date for any definitive note shall be the last business day of the month
preceding the month in which the payment date occurs.
Owners of notes will receive payments on the 25th day of each month, or, if such
day is not a business day, on the next business day. The first payment date is
December 27, 1999.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the owners
of the notes against losses due to defaults on the mortgage loans.
The notes will have the benefit of the following types of credit enhancement:
o the use of excess cashflow to cover losses and to
distribute as principal in order to create
overcollateralization;
o payments received by the indenture trustee under an
interest rate cap agreement;
o the financial guaranty insurance policy; and
o limited cross-collateralization.
NOTE INSURER
The notes will have the benefit of a financial guaranty insurance policy from
Ambac Assurance Corporation that will guarantee timely interest payments due on
the notes on each payment date and the payment of the outstanding principal
balance of the notes on the final scheduled payment date.
PAYMENTS NOT INSURED BY THE FINANCIAL GUARANTY INSURANCE POLICY
The financial guaranty insurance policy does not insure the payment of the
following:
o any shortfall arising where the caps on the note interest
rate limit the amount of interest paid on a class of
notes;
o any shortfall in interest as a result of prepayments on
the mortgage loans; or
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o shortfalls in interest due to the application of the
Relief Act.
Payments of these amounts may only be funded from any excess cash that would
otherwise be distributed to the holders of the residual interests.
MORTGAGE LOAN POOL
THE MORTGAGE LOANS
The mortgage loans owned by the trust consist primarily of two groups of
fixed-rate and adjustable rate mortgage loans secured by first lien mortgages on
one- to four-family residential properties.
OPTIONAL REDEMPTION
The servicer has the option to redeem the notes, in full but not in part, on or
after any payment date on which the combined principal balance of the notes of
both classes has declined to less than 10% of the combined principal balance of
the notes of both classes as of the date of issuance of the notes. The note
insurer must give its consent, if the exercise of this option will result in a
draw on the financial guaranty insurance policy.
FEDERAL TAX CONSIDERATIONS
Dewey Ballantine LLP acts as counsel to the trust and is of the opinion that:
o the notes will be treated as debt instruments; and
o the trust will not be treated as an association separately taxable as a
corporation, a publicly traded partnership or a taxable mortgage pool.
You must agree to treat your note as indebtedness for federal, state and local
income and franchise tax purposes.
ERISA CONSIDERATIONS
Subject to the considerations described under "ERISA Considerations" in this
prospectus supplement, the notes may be purchased by pension, profit sharing and
other employee benefit plans and retirement arrangements.
RATINGS
The notes will be rated Aaa by Moody's Investors Service, Inc. and AAA by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
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 a rating agency.
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RISK FACTORS
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FOLLOWING
FACTORS -- AS WELL AS THE FACTORS ENUMERATED UNDER "RISK FACTORS" IN THE
ACCOMPANYING PROSPECTUS -- BEFORE DECIDING TO INVEST IN THE NOTES.
Unless otherwise indicated, any statistical information
presented below is based upon the characteristics of the mortgage loans as of
November 1, 1999, and assumes that all scheduled payments of principal and
interest on the mortgage loans due on or before November 1, 1999 have been
received by the servicer and posted to each mortgagor's account. It does not
take into account the fact that certain mortgage loans may prepay in full or be
removed from the mortgage pool prior to the closing date and, consequently, the
characteristics of the mortgage pool as of the closing date may vary from that
presented below.
DUE TO LESS STRINGENT UNDERWRITING STANDARDS, THE MORTGAGE LOANS ARE LIKELY TO
EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND BANKRUPTCY THAT ARE HIGHER THAN
THOSE EXPERIENCED BY MORTGAGE LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER
Substantially all of the mortgage loans have been originated
using program criteria and underwriting standards that are
significantly less stringent than those used by other mortgage
loan program investors such as Fannie Mae or Freddie Mac.
Mortgage loans with higher loan-to-value ratios, mortgagors
with higher debt-to-income ratios and less favorable credit
histories, and less rigorous loan documentation than are
permitted pursuant to such other programs, are included in the
trust.
AS A RESULT OF BEING SERVICED BY THIRD PARTIES, SUBSTANTIAL INFORMATION IS NOT
CURRENTLY AVAILABLE ON THE DELINQUENCY, FORECLOSURE, BANKRUPTCY OR LOSS
EXPERIENCE OF THE ENTIRE PORTFOLIO OF MORTGAGE LOANS ORIGINATED OR ACQUIRED BY
MERITAGE
A majority of the subprime credit risk mortgage loans which
Meritage originates or acquires are serviced by RBMG on an
interim basis until they are transferred to a trust in
connection with a securitization, or in connection with a
whole loan sale. When this happens, the servicing for such
mortgage loans either is retained by RBMG until it is
transferred to a subservicer, or is transferred with the
mortgage loans as whole loans in the secondary mortgage market
or as part of a securitization. As a result, substantial
information is not currently available as to the delinquency,
foreclosure, bankruptcy or loss experience of the entire
portfolio of mortgage loans originated or acquired by
Meritage. See "SERVICING OF THE MORTGAGE LOANS--THe
SUBSERVICER."
DELINQUENT MORTGAGE LOANS IN THE MORTGAGE POOL MAY RESULT IN HIGHER LOSSES
Although none of the mortgage loans in group I by group
balance and none of the mortgage loans in group II by group
balance are 30-59 days delinquent (that is, having missed one
monthly payment) as of October 22, 1999, approximately 35.35%
of the mortgage loans in group I by group balance and
approximately 34.35% of the mortgage loans in group II by
group balance will have a first monthly payment due on or
after November 1, 1999. Accordingly, there can be no assurance
that these mortgagors will not be in default or that these
loans will not become or continue to be delinquent.
S-5
Substantially all of the mortgage loans were originated within
the last six months. Accordingly, no assurance can be given as
to the likelihood or severity of delinquencies or defaults
that the mortgage loans may experience. Nor is it possible to
predict whether or when any currently delinquent mortgage loan
will become current, or whether any existing delinquency will
continue. Furthermore, no information is available whether a
mortgagor that cures a delinquency is more likely to become
delinquent again as compared with a mortgagor that has never
been delinquent.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK OR INTEREST RATE RISK
The protection afforded by the overcollateralization
provisions and by the financial guaranty insurance policy is
protection for credit risk and not for prepayment risk or
interest rate risk. The financial guaranty insurance policy
does not guarantee or insure that any particular rate of
prepayment is experienced by the trust.
GEOGRAPHIC CONCENTRATION OF PROPERTIES MAY RESULT IN HIGHER LOSSES IF PARTICULAR
REGIONS EXPERIENCE DOWNTURNS
Of the mortgage loans in group I by group balance,
approximately 21.63% are secured by mortgaged properties
located in California, approximately 15.51% are secured by
mortgaged properties located in Oregon, and approximately
9.76% are secured by mortgaged properties located in
Washington. Of the mortgage loans in group II by group
balance, approximately 30.55% are secured by mortgaged
properties located in California, approximately 9.23% are
secured by mortgaged properties located in Oregon, and
approximately 6.53% are secured by mortgaged properties
located in Washington. In general, declines in the residential
real estate markets in these states may adversely affect the
values of the mortgaged properties securing the mortgage loans
with the result that the principal balance of the mortgage
loans may likely exceed the value of the related mortgaged
properties. In addition, adverse economic conditions in these
states may also affect the mortgagors' ability to timely pay
scheduled payments of principal and interest on their mortgage
loans.
THE CHARACTERISTICS OF THE MORTGAGE LOANS AS OF NOVEMBER 1, 1999 MAY VARY FROM
THOSE PRESENTED IN THIS PROSPECTUS SUPPLEMENT
The statistical information presented in this prospectus
supplement is based solely on the characteristics of the
mortgage loans as of November 1, 1999. We expect to add
additional mortgage loans prior to the closing date.
Additionally, the statistical information does not take into
account the fact that certain mortgage loans may prepay in
full or fail to satisfy the eligibility requirements for the
mortgage loans and thus may not be included in the trust. As a
result, the statistical characteristics of the mortgage loans
on the closing date may vary from those as of November 1,
1999.
ADJUSTABLE RATE LOANS IN THE MORTGAGE POOL MAY EXPERIENCE A HIGHER RATE OF
DEFAULT
Because each group of mortgage loans contains adjustable rate
loans, the mortgage pool may experience a higher rate of
default than would a comparable mortgage pool consisting
entirely of fixed rate mortgage loans. This is because
S-6
increases in the monthly payments on the adjustable rate loans
to amounts in excess of those applicable at their respective
dates of origination may be too high for certain mortgagors to
pay, resulting in a higher default rate.
YIELD TO MATURITY ON THE NOTES IS SENSITIVE TO VARIOUS FACTORS
The yield on each class of notes will be sensitive in varying
degrees to the default and loss experience on the related
mortgage loans and to the timing of any defaults or losses.
Certain loss scenarios, including a default by the note
insurer as described in this prospectus supplement, could lead
to the failure of investors in the related class of notes to
recover their initial investments.
In addition, the credit enhancement provisions will have the
effect of accelerating the amortization of a class of notes
relative to the amortization of the mortgage loans because any
excess cash will generally be distributed to the noteholders
as principal. This will cause overcollateralization on the
notes to the extent that the balance of the mortgage loans in
each group exceeds the aggregate note balance for that class.
As a result of the accelerated amortization, the weighted
average life of the notes will be shorter than otherwise would
be the case. See "DESCRIPTION OF THE NOTES--
OVERCOLLATERALIZATION FEATURE" and "CERTAIN PREPAYMENT
AND YIELD CONSIDERATIONS" in this prospectus supplement.
PREPAYMENT OF THE MORTGAGE LOANS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF
THE NOTES
Mortgagors may prepay their mortgage loans in whole or in
part, at any time. However, approximately 99.07% of the
mortgage loans in group I by group balance and approximately
99.24% of the mortgage loans in group II by group balance
require the mortgagors to pay a fee in connection with certain
prepayments, which may discourage prepayments. The rate of
prepayments may also be affected by a wide variety of general
economic, social, competitive and other factors, including
state and federal income tax policies, interest rates, the
availability of alternative financing, and homeowner mobility.
It is, therefore, impossible to predict the rate of such
prepayments.
The average life of each class of notes, and, if purchased at
other than par, the yields realized by noteholders, will be
sensitive to levels of payments, including prepayments, on the
mortgage loans. In general, a higher than anticipated level of
prepayments will have an adverse affect on the yield on notes
purchased at a premium and a lower than anticipated level of
prepayments will enhance the yield on such notes. Conversely,
a higher than anticipated level of prepayments will enhance
the yield on notes purchased at a discount and a lower than
anticipated level will have an adverse affect. See "CERTAIN
PREPAYMENT AND YIELD CONSIDERATIONS" and "LEGAL INVESTMENT
CONSIDERATIONS" in this prospectus supplement.
PAYMENTS OF EXCESS CASH MAY AFFECT THE YIELD TO MATURITY ON THE NOTES
Excess cash will be paid to reduce the note balance of each
class on each payment date if the level of
overcollateralization required at the time in question exceeds
the actual level of overcollateralization on the payment date.
The rate at which excess cash is paid to noteholders will
affect the yield to maturity on a note, if purchased at a
premium or a discount. If the actual rate of such excess
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cash payments is slower than the rate anticipated by an
investor who purchases a note at a discount, the actual yield
to such investor will be lower than the investor's anticipated
yield. If the actual rate of excess cash payments is faster
than the rate anticipated by an investor who purchases a note
at a premium, the actual yield to such investor will be lower
than such investor's anticipated yield.
The amount of excess cash on any payment date will depend on
the actual amount of interest collected on the mortgage loans
during the collection period, plus the amount of any payment
made under the interest rate cap agreement held by the
indenture trustee. In certain interest rate environments,
excess cash may decrease as a result of a rise in the level of
LIBOR. When certain interest rate thresholds are reached,
payments will be made under the interest rate cap agreement.
These payments will, in part, offset any decrease in excess
cash. Collections of interest on the mortgage loans will be
influenced by changes in the weighted average of the coupon
rates resulting from prepayments and liquidations of mortgage
loans as well as from adjustments of coupon rates on the
adjustable rate loans. The amount of excess cash payments and
interest rate cap payments applied in reduction of the note
balance on each payment date will be based on the level of
overcollateralization required at the time in question. The
required level of overcollateralization may increase or
decrease over time. Any increase may result in an accelerated
amortization of each class of notes until the required level
is reached. Any decrease will result in slower amortization of
the related class of notes until the required level is
reached. See "CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS" in
this prospectus supplement.
NOTES ARE NON-RECOURSE OBLIGATIONS
The notes will be non-recourse asset-backed obligations solely
of the issuer and will not represent an obligation of or
interest in the sponsor, Meritage, Resource Bancshares
Mortgage Group, Inc. RBMG, RBMG Asset Management Company,
Inc., RBMG Funding Co., the subservicer, the servicer, or any
of their respective affiliates, except as described in this
prospectus supplement. The assets included in the trust and
payments under the financial guaranty insurance policy will be
the sole source of payments on the notes, and there will be no
recourse to any other source if the assets are insufficient or
otherwise unavailable to make all payments provided for under
the notes.
BOOK-ENTRY REGISTRATION MAY REDUCE THE LIQUIDITY OF THE NOTES
Since transactions in the notes can be effected only through
DTC, Cedelbank, Euroclear, participating organizations,
indirect participants and certain banks, the ability of a
beneficial owner to pledge a note to persons or entities that
do not participate in the DTC, Cedelbank or Euroclear systems,
or otherwise to take actions in respect of the note, may be
limited due to lack of a physical certificate representing the
note.
POTENTIAL DELAYS IN RECEIPT OF PAYMENTS ON THE NOTES
Beneficial owners may experience some delay in their receipt
of payments of interest of and principal on the notes because
the payments will be forwarded by the indenture trustee to DTC
and DTC will credit the payments to the accounts of its
participants, which will then credit them to the accounts of
beneficial owners
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either directly or indirectly through indirect participants.
See "DESCRIPTION OF THE NOTES--BOOK-ENTRY REGISTRATION AND
DEFINITIVE NOTES" in this prospectus supplement and "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES" in the
annex.
AN INVESTMENT IN THE NOTES MAY BE AN ILLIQUID INVESTMENT
There is currently no secondary market for the notes. The
underwriter currently intends to make a market in the notes,
but it is under no obligation to do so. There can be no
assurance that a secondary market will develop or, if a
secondary market does develop, that it will provide the
noteholders with liquidity of investment or that it will
continue for the life of the notes.
YEAR 2000 ISSUE MAY ADVERSELY AFFECT THE DISTRIBUTIONS TO NOTEHOLDERS
As is the case with most companies using computers in their
operations, each of the servicer, the indenture trustee and
the subservicer is faced with the task of completing its
compliance goals in connection with the year 2000 issue. The
year 2000 issue is the result of prior computer programs being
written using two digits, rather than four digits, to define
the applicable year. Any of these parties' computer programs
that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. Any such
occurrence could result in major computer system failure or
miscalculations. Each of these parties is currently engaged in
various procedures to ensure that its computer systems and
software will be year 2000 compliant. However, in the event
that the servicer, the indenture trustee or the subservicer,
or any of their suppliers, customers, brokers or agents do not
successfully and timely achieve year 2000 compliance, the
performance of their obligations of the transaction agreements
could be materially and adversely affected.
S-9
SOME OF THE TERMS USED IN THIS PROSPECTUS SUPPLEMENT ARE
CAPITALIZED. THESE CAPITALIZED TERMS HAVE SPECIFIED DEFINITIONS, WHICH ARE
INCLUDED AT THE END OF THIS PROSPECTUS SUPPLEMENT UNDER THE HEADING "GLOSSARY."
TRANSACTION OVERVIEW
FORMATION OF THE TRUST
RBMG Funding Co. Mortgage Loan Trust 1999-2 is a business
trust formed under the laws of the State of Delaware under a trust agreement
among Residential Asset Funding Corporation, as sponsor, and Wilmington Trust
Company, as owner trustee and the Bankers Trust Company, as indenture trustee
and trust paying agent. Prior to formation, the trust will have no assets or
obligations or any operating history. The trust will not engage in any business
other than acquiring, holding and managing the mortgage loans transferred to the
trust and the other assets of the trust and any proceeds from those assets,
issuing the notes and trust certificates representing the ownership interest in
the trust property, making payments on the notes and the trust certificates and
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental to that business.
THE OWNER TRUSTEE
Wilmington Trust Company, the owner trustee, is a Delaware
banking corporation and its principal offices are located at Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention:
Corporate Trust Administration. The owner trustee will perform limited
administrative functions under the trust agreement. The owner trustee's duties
in connection with the issuance and sale of the notes and the trust certificates
are limited solely to its express obligations set forth in the trust agreement,
the indenture between the trust and the indenture trustee, and the servicing
agreement among the trust, the sponsor, the servicer and the indenture trustee.
THE INDENTURE TRUSTEE
Bankers Trust Company, a New York banking corporation, is the
indenture trustee under the indenture. Its corporate trust offices are located
at 1761 East St. Andrew Place, Santa Ana, California 92705-4934. The indenture
trustee's duties in connection with the notes are limited solely to its express
obligations under the indenture and the servicing agreement.
THE SPONSOR
The sponsor, Residential Asset Funding Corporation, a North
Carolina corporation, is a subsidiary of First Union National Bank and is a
publicly-traded company with its principal executive offices located at 301
South College Street, Charlotte, North Carolina 28202-6001. See "THE SPONSOR" in
the prospectus.
THE SERVICER
Prior to August 1, 1999, Resource Bancshares Mortgage Group
Inc., or RESOURCE BANCSHARES MORTGAGE, had acted as servicer of mortgage loans.
On August 1, 1999, Resource Bancshares Mortgage transferred its entire
conventional residential mortgage loan and subprime mortgage loan servicing
portfolio to RBMG, Inc., referred to as RBMG, a Delaware corporation, organized
on
S-10
February 22, 1999. RBMG will act as servicer of the mortgage loans and, in
this capacity, will have limited obligations that arise pursuant to certain
representations and warranties and to its contractual servicing obligations
under the servicing agreement to be entered into among the servicer, the issuer
and the indenture trustee, including the obligation to advance delinquent
payments of principal and interest on the mortgage loans to the extent allowed.
RBMG is a wholly-owned subsidiary of Resource Bancshares Mortgage, a publicly
traded company, and its corporate offices are located at 7909 Parklane Road,
Columbia, South Carolina 29223.
THE SUBSERVICER
RBMG has engaged Ocwen Federal Bank FSB to act as its
subservicer, to perform the servicing of the mortgage loans on its behalf. The
subservicer will commence servicing of the mortgage loans on or before December
15, 1999, pursuant to a sub-servicing agreement between the subservicer and the
servicer.
Ocwen Federal Bank FSB is a federally-chartered savings bank
with its home office in Fort Lee, New Jersey and its servicing operations and
corporate offices in West Palm Beach, Florida. The subservicer is a wholly-owned
subsidiary of Ocwen Financial Corporation, a public financial services holding
company. As of September 30, 1999, the subservicer had approximately $2.26
billion in assets, approximately $2.02 billion in liabilities and approximately
$244 million in equity. As of September 30, 1999, the subservicer's tangible and
leveraged capital ratio was approximately 10% and its risk-based capital ratio
was approximately 18.37%. For the four quarters ended September 30, 1999, the
subservicer's net income from continuing operations was approximately $32.3
million.
The major business of the subservicer has been the resolution
of non-performing single-family, multi-family and commercial mortgage loan
portfolios acquired from the Resolution Trust Corporation, from private
investors, and most recently, from the Department of Housing and Urban
Development through the auction of defaulted Federal Housing Administration
loans.
ORIGINATION, SALE AND PLEDGE OF THE MORTGAGE LOANS
The mortgage loans were originated or acquired directly or
indirectly by Meritage Mortgage Corporation, referred to as MERITAGE or the
ORIGINATOR, a wholly-owned subsidiary of Resource Bancshares Mortgage, and
underwritten generally in accordance with the subprime credit risk guidelines of
Meritage.
The originator sold certain of the mortgage loans that were
originated prior to August 1, 1999 to Resource Bancshares Mortgage, pursuant to
a master flow loan sale agreement, or the RESOURCE BANCSHARES MORTGAGE FLOW SALE
AGREEMENT, by and between the originator and Resource Bancshares Mortgage, dated
as of December 1, 1998. From time to time, certain of these mortgage loans were
then contributed by Resource Bancshares Mortgage to RBMG Asset Management
Company, Inc., referred to as the COMPANY, pursuant to a master mortgage loan
contribution agreement, or the COMPANY CONTRIBUTION AGREEMENT, by and between
Resource Bancshares Mortgage and the company, dated as of December 1, 1998.
Certain of these mortgage loans that were originated prior to
August 1, 1999 and sold to Resource Bancshares Mortgage pursuant to the Resource
Bancshares Mortgage flow sale agreement were not contributed to the company
pursuant to the company contribution agreement, but were instead sold by
Resource Bancshares Mortgage to the company on August 2, 1999, pursuant to a
bill of sale entered into by Resource Bancshares Mortgage in favor of the
company, dated as of August 1, 1999.
S-11
The remainder of the mortgage loans were originated on or
after August 2, 1999 and the originator has sold these loans to the company
pursuant to a master flow loan sale agreement, by and between the originator and
the company, dated as of August 2, 1999.
The company will sell all of the mortgage loans to RBMG
Funding Co., a wholly owned subsidiary of the company, pursuant to a mortgage
loan sale agreement between the company and RBMG Funding Co. to be dated as of
November 1, 1999. RBMG Funding Co. will sell the mortgage loans to the sponsor
pursuant to a mortgage loan sale agreement between RBMG Funding Co. and the
sponsor to be dated as of November 1, 1999. The sponsor will sell the mortgage
loans to the issuer pursuant to a mortgage loan sale agreement between the
sponsor and the issuer to be dated as of November 1, 1999.
ISSUANCE OF THE NOTES
Pursuant to the terms of an indenture, dated as of November
30, 1999, between the trust and the indenture trustee, the issuer will pledge
the trust estate, including the mortgage loans and related assets, to the
indenture trustee, for the benefit of the holders of the notes and the note
insurer, and issue the notes.
ISSUANCE OF THE FINANCIAL GUARANTY INSURANCE POLICY
The note insurer will issue the financial guaranty insurance
policy pursuant to the terms of an insurance and indemnity agreement, dated as
of November 30, 1999, among the note insurer, the trust, the sponsor, the
originator and the servicer.
RBMG FUNDING CO.
RBMG Funding Co. was incorporated in the State of Nevada on
September 26, 1997, and is a wholly-owned subsidiary of the company. The
principal executive offices of RBMG Funding Co. are located at 2820 West
Charleston Boulevard, Suite 17, Las Vegas, Nevada 89102.
RBMG Funding Co. was organized, among other things, for the
purposes of establishing trusts, selling beneficial interests in those trusts
and acquiring and selling mortgage assets to such trusts. None of Meritage, RBMG
Funding Co., Resource Bancshares Mortgage, RBMG, the company or any of RBMG
Funding Co.'s affiliates will ensure or guarantee payments on the notes. It is
anticipated that RBMG Funding Co. will be the holder of the trust certificates.
Funding Co. may transfer or sell all or a part of its interest in the trust
certificates at any time, subject to the restrictions provided in the trust
agreement.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The trust estate will consist primarily of a pool of fixed and
adjustable rate mortgage loans evidenced by mortgage notes and secured by first
liens on fee simple interests in one-to four-family residential properties.
The mortgage pool will be divided into two groups. The class
A-1 notes will be principally secured by one group of mortgage loans, the GROUP
I MORTGAGE LOANS, and the class A-2 notes
S-12
will be principally secured by the other group of mortgage loans, the GROUP II
MORTGAGE LOANS. Payments on the class A-1 notes will be made generally from
Available Funds for group I, and payments on the class A-2 notes will be made
generally from Available Funds for group II. Group I and group II are referred
to together in this prospectus supplement as the GROUPS and each singularly, a
GROUP.
DIFFERENCE BETWEEN STATISTICAL CALCULATION DATE AND CLOSING DATE GROUPS.
The statistical information presented in this prospectus
supplement concerning the mortgage loans is based on the aggregate outstanding
principal balance of all mortgage loans that existed on a statistical
calculation date, in this case November 1, 1999. Group I aggregated
$69,955,390.15 as of the statistical calculation date and group II aggregated
$30,276,432.22 as of the statistical calculation date. The actual groups on the
closing date will represent approximately $85,000,000 in aggregate principal
balance of mortgage loans in group I, as of the cut-off date and approximately
$40,000,000 in aggregate principal balance of mortgage loans in groups II, as of
the cut-off date. The cut-off date for any mortgage loan is November 1, 1999
(other than those mortgage loans originated after that date). In addition, the
statistical information presented in this prospectus supplement does not take
into account the fact that some amortization of the mortgage loans will occur,
some mortgage loans may prepay in full or be removed from the pool and other
mortgage loans substituted for them before the closing date. Consequently, the
statistical distribution of characteristics as of the closing date will vary
somewhat from the statistical distribution of these characteristics computed as
of the statistical calculation date as presented in this prospectus supplement,
although this variance is not expected to be greater than five percent.
The proceeds of the mortgage loans were used by the related
borrowers to purchase the related mortgaged property or to refinance existing
debt secured by the related mortgaged property. Substantially all of the
mortgage loans were originated or acquired by Meritage in accordance with the
underwriting standards for Meritage's residential sub-prime credit lending
program as described below under "--UNDERWRITING STANDARDS."
THE MORTGAGE POOL
Approximately 16.99% of the group I mortgage loans and
approximately 11.50% of the group II mortgage loans have coupon rates that are
fixed at the percentages specified in the related mortgage notes, each referred
to as a FIXED RATE LOAN. Approximately 0.45% of the group I mortgage loans and
approximately 1.07% of the group II mortgage loans are fully amortizing, fixed
rate loans with level monthly payments and original terms to maturity of not
more than 15 years from the due dates of their first monthly payments, each
referred to as a FIXED RATE 15-YEAR LOAN. Approximately 0.14% of the group I
mortgage loans and approximately 0.11% of the group II mortgage loans are fully
amortizing, fixed rate loans with level monthly payments and original terms to
maturity of not more than 20 years from the due dates of their first monthly
payments, each referred to as a FIXED RATE 20-YEAR LOAN. Approximately 8.58% of
the group I mortgage loans and approximately 5.55% of the group II mortgage
loans are fully-amortizing, fixed rate loans with level monthly payments and
original terms to maturity of not more than 30 years from the due dates of their
first monthly payments, each referred to as a FIXED RATE 30-YEAR LOAN. The
remaining 7.82% of the group I mortgage loans and 4.77% of the group II mortgage
loans that are fixed rate loans each has an original term to maturity of not
more than 15 years from the due date of its first monthly payment, has level
monthly payments during its term as if such mortgage loan were a fixed rate
30-year loan and have a final monthly payment equal to the outstanding principal
balance of the mortgage loan on the related maturity date plus interest at the
related coupon rate, referred to as a BALLOON LOAN.
S-13
Approximately 83.01% of the group I mortgage loans and 88.50%
of the group II mortgage loans are adjustable rate loans the coupon rate of
which is subject to adjustment as described below on the due dates in the months
specified in the related mortgage note, the ADJUSTMENT DATE, to equal, as to any
such adjustment date, the sum (rounded as applicable) of the related index as
described below and the fixed percentage amount specified in such mortgage note;
PROVIDED, that, except as described below, the coupon rate on any adjustable
rate loan will not increase or decrease by more than the percentage specified in
the related mortgage note on any related adjustment date, such coupon rate will
not exceed the sum of the initial coupon rate and the percentage specified in
that mortgage note and such coupon rate will not be less than the percentage
specified in such mortgage note. The index for substantially all of the
adjustable rate loans will be the average of interbank offered rates for
six-month United States dollar deposits in the London market based on quotations
of major banks, as published in THE WALL STREET JOURNAL and most recently
available 45 days prior to such adjustment date for which the related coupon
rates will be subject to adjustment commencing either approximately six months,
two years or three years after their respective dates of origination and
semi-annually after that time (generally with an increase in such coupon rates
of not more than 3.00% on the initial adjustment dates and for which the related
periodic rate caps will range from 1.00% to 3.00% on the initial adjustment date
and will range from 1.00% to 1.50% on each subsequent adjustment date.
Approximately 0.47% of the group I mortgage loans and approximately 2.23% of the
group II mortgage loans are adjustable rate loans for which the related index is
six-month LIBOR, for which the related coupon rates will be subject to
adjustment commencing approximately six months after their respective dates of
origination and semi-annually after that date, and for which the original terms
to maturity are not more than 30 years from the due dates of their first monthly
payments. Approximately 29.24% of the group I mortgage loans and approximately
31.17% of the group II mortgage loans are adjustable rate loans for which the
related index is six-month LIBOR, for which the related coupon rates will be
subject to adjustment commencing approximately two years after their respective
dates of origination and semi-annually after that date, and for which the
original terms to maturity are not more than 30 years from the due dates of
their first monthly payments. Approximately 52.92% of the group I mortgage loans
and approximately 54.88% of the group II mortgage loans are adjustable rate
loans for which the related index is six-month LIBOR, for which the related
coupon rates will be subject to adjustment commencing approximately three years
after their respective dates of origination and semi-annually after that date,
and for which the original terms to maturity are not more than 30 years from the
due dates of their first monthly payments. Effective with the first monthly
payment due on an adjustable rate loan after any related adjustment date, the
amount of the monthly payment on that mortgage loan will be adjusted to an
amount that will fully amortize the principal balance of the mortgage loan over
its remaining term and pay interest at the related coupon rate as adjusted on
the adjustment date.
The weighted average remaining term to maturity of the group I
mortgage loans and the group II mortgage loans is approximately 343 months and
347 months, respectively. All of the mortgage loans will have original terms to
maturity from the due date of the first monthly payment of not more than 30
years. None of the group I mortgage loans have a first payment date prior to May
1, 1996, and none of the group II mortgage loans have a first payment date prior
to May 1, 1996. None of the group I mortgage loans have a remaining term to
maturity of less than approximately 14 years and 6 months, and none of the group
II mortgage loans have a remaining term to maturity of less than approximately
14 years and 5 months. The latest maturity date of any of the group I mortgage
loans is October 1, 2029. The latest maturity date of any of the group II
mortgage loans is October 1, 2029.
A substantial number of adjustable rate loans will have
initial coupon rates that are less than the related fully indexed rates at their
respective dates of origination. In addition, the coupon rate on any adjustable
rate loan may be less than the fully indexed rate with respect to any adjustment
date because the periodic rate cap and maximum rate will have the effect of
limiting any increase in such coupon rate.
S-14
Each mortgage loan will contain a customary "due-on-sale"
clause. None of the group I mortgage loans are 30 to 59 days past due in their
monthly payments as of October 22, 1999. None of the group II mortgage loans by
are 30 to 59 days past due in their monthly payments as of October 22, 1999.
Investors in the notes should be aware, however, that only approximately 35.35%
of the group I mortgage loans and only approximately 34.35% of the group II
mortgage loans had a first monthly payment due on or after November 1, 1999 and,
therefore, such mortgage loans could not have been more than thirty days past
due in payment as of November 1, 1999. Approximately 99.07% of the group I
mortgage loans and approximately 99.24% of the group II mortgage loans provide
for payment of a prepayment charge. Under the subservicing agreement and the
servicing agreement, respectively, the subservicer is entitled to all late
payment charges received on the mortgage loans and the servicer is entitled to
all prepayment charges received on the mortgage loans as additional servicing
compensation and accordingly, such amounts will not be available as security
for, or for payment on, the notes.
Pursuant to its terms, each mortgage loan is required to be
covered by a standard hazard insurance policy in an amount equal to the lesser
of the original principal balance of the mortgage loan and the replacement value
of the improvements on the related mortgaged property, but in no event lower
than the amount necessary to avoid the application of a co-insurance clause in
the insurance policy. In addition, the servicing agreement will require the
servicer to cause to be maintained for each mortgaged property acquired upon
foreclosure of any mortgage loan, or upon deed in lieu of foreclosure, a fire
insurance policy with extended coverage in an amount equal to the replacement
value of the improvements on the mortgaged property. See "SERVICING OF THE
MORTGAGE LOANS--STANDARD HAZARD INSURANCE POLICIES" in this prospectus
supplement.
Not more than approximately 0.98% of the group I mortgage
loans and not more than approximately 2.39% of the group II mortgage loans are
secured by mortgaged properties located in any particular five digit zip code
area.
The mortgage loans have been originated using underwriting
standards that are significantly less stringent than the underwriting standards
applied by other first mortgage loan purchase programs such as those of Fannie
Mae or Freddie Mac. See "DESCRIPTION OF THE MORTGAGE POOL--UNDERWRITING
STANDARDS" and "RISK FACTORS" in this prospectus supplement.
The following tables set forth characteristics of the mortgage
loans on an approximate basis with respect to all the mortgage loans in each
group as of the cut-off date. With respect to any mortgage loan, as of any date
of determination, the loan-to-value ratio or LTV will be the ratio, expressed as
a percentage, of:
o the original principal balance of such mortgage loan to
o the value of the related mortgaged property as defined in the
servicing agreement.
S-15
ALL OF THE GROUP I MORTGAGE LOANS
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of all the group I mortgage loans
having the coupon rates in each given range. The sums of amounts and percentages
in the table below may not be equal to the totals due to rounding.
COUPON RATES OF THE GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
RANGE OF COUPON NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- ------------------- ------------------------ ---------------------------
7.501 - 8.000 3 $ 270,959.62 0.39%
8.001 - 8.500 82 10,734,740.78 15.35
8.501 - 9.000 71 8,302,939.68 11.87
9.001 - 9.500 70 8,607,755.09 12.30
9.501 - 10.000 112 13,232,835.53 18.92
10.001 - 10.500 109 11,801,153.13 16.87
10.501 - 11.000 94 8,663,787.06 12.38
11.001 - 11.500 47 3,991,149.64 5.71
11.501 - 12.000 27 2,211,705.68 3.16
12.001 - 12.500 13 951,412.17 1.36
12.501 - 13.000 12 1,089,738.16 1.56
13.001 - 13.500 1 51,788.80 0.07
13.501 - 14.000 1 45,424.81 0.06
- -------------------------- --------------------- --------------------- ----------------------
Totals 642 $ 69,955,390.15 100.00%
========================== ===================== ===================== ======================
S-16
WEIGHTED AVERAGE COUPON RATE OF THE GROUP I
MORTGAGE LOANS
WEIGHTED AVERAGE COUPON RATE
TYPE OF MORTGAGE LOAN (APPROX.)
- ---------------------------------------- -----------------------------------
All Group I Mortgage Loans 9.87%
All Fixed Rate Loans 10.63%
- - Fixed Rate 15-Year Loans 10.55%
- - Fixed Rate 20-Year Loans 11.38%
- - Fixed Rate 30-Year Loans 10.51%
- - Balloon Loans 10.76%
All Adjustable Rate Loans 9.71%
- - 6 month LIBOR Loans 10.10%
- - 2/6 LIBOR Loans 9.92%
- - 3/6 LIBOR Loans 9.61%
- - One Year CMT Loans 7.71%
A 6 MONTH LIBOR loan is an adjustable rate loan that has a six-month LIBOR index
and has a coupon rate subject to adjustment approximately six months after
origination and every following six months. Its original term to maturity is not
more than 30 years from the due date of its first monthly payment.
A 2/6 LIBOR loan is an adjustable rate loan that has a six-month LIBOR index and
has a coupon rate subject to adjustment approximately two years after its
origination and every following six months. Its original term to maturity is not
more than 30 years from the due date of its first monthly payment.
A 3/6 LIBOR loan is an adjustable rate loan that has a six-month LIBOR index and
has a coupon rate subject to adjustment approximately three years after its
origination and every following six months. Its original term to maturity is not
more than 30 years from the due date of its first monthly payment.
A ONE YEAR CMT loan is an adjustable rate loan that has an index of the weekly
average yield on United States Treasury Securities adjusted to a constant
maturity of one year, and has a coupon rate subject to adjustment approximately
one year after its origination and every following twelve months. Its original
term to maturity is not more than 30 years from the due date of its first
monthly payment.
S-17
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of all the group I mortgage loans
having cut-off date principal balances in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
RANGE OF PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- --------------- --------------------- ---------------------------
15,000.01 - 25,000.00 5 $ 108,511.82 0.16%
25,000.01 - 50,000.00 62 2,510,281.44 3.59
50,000.01 - 75,000.00 96 6,245,522.25 8.93
75,000.01 - 100,000.00 168 14,866,038.10 21.25
100,000.01 - 125,000.00 111 12,558,758.53 17.95
125,000.01 - 150,000.00 68 9,382,346.55 13.41
150,000.01 - 175,000.00 58 9,341,778.73 13.35
175,000.01 - 200,000.00 39 7,259,586.58 10.38
200,000.01 - 225,000.00 25 5,355,687.20 7.66
225,000.01 - 250,000.00 10 2,326,878.95 3.33
- -------------------------------- ---------------- --------------------- ----------------------------
Totals 642 $ 69,955,390.15 100.00%
================================ ================ ===================== =============================
S-18
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of all the group I mortgage loans
having the remaining terms to maturity in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
REMAINING TERMS TO MATURITY OF
THE GROUP I
PERCENTAGE OF GROUP I
RANGE OF NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
REMAINING TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- ---------------- ----------------------- ----------------------------
171 - 175 8 $ 611,790.33 0.87%
176 - 180 73 5,171,498.95 7.39
236 - 240 2 99,444.64 0.14
316 - 320 1 92,876.11 0.13
321 - 325 1 95,858.30 0.14
326 - 330 1 82,225.21 0.12
341 - 345 2 163,233.16 0.23
351 - 355 48 4,806,040.94 6.87
356 32 3,473,049.58 4.96
357 44 5,398,204.63 7.72
358 235 28,179,605.40 40.28
359 195 21,781,562.90 31.14
- ------------------------------- ---------------------------- ---------------------------- --------------------------
Totals 642 $ 69,955,390.15 100.00%
=============================== =========================== ============================ ==========================
S-19
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I mortgage loans having
loan-to-value ratios in each given range at origination. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
LOAN-TO-VALUE RATIOS OF THE GROUP I
MORTGAGE LOANS
PERCENTAGE OF GROUP I
RANGE OF LOAN-TO-VALUE MORTGAGE LOANS BY
RATIOS AT ORIGINATION NUMBER OF AGGREGATE AGGREGATE PRINCIPAL
(%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------- --------------- ----------------- -----------------------
20.01 - 25.00 2 $ 84,551.72 0.12%
30.01 - 35.00 3 160,855.63 0.23
40.01 - 45.00 1 50,518.31 0.07
45.01 - 50.00 3 165,751.09 0.24
50.01 - 55.00 8 738,631.52 1.06
55.01 - 60.00 11 1,087,264.64 1.55
60.01 - 65.00 24 1,962,877.76 2.81
65.01 - 70.00 46 4,405,805.45 6.30
70.01 - 75.00 194 22,255,501.72 31.81
75.01 - 80.00 167 17,893,334.66 25.58
80.01 - 85.00 101 11,110,736.26 15.88
85.01 - 90.00 79 9,768,601.77 13.96
95.01 - 100.00 3 270,959.62 0.39
- ----------------------- --------------- ------------------- ----------------------
Totals 642 $ 69,955,390.15 100.00%
======================= =============== ==================== ======================
The weighted average loan-to-value ratio, at origination, of
the group I mortgage loans was approximately 78.53%.
S-20
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I mortgage loans having
each indicated risk classification under Meritage's subprime credit risk
residential lending program. For a description of Meritage's subprime
underwriting risk categories, see "--UNDERWRITING STANDARDS" in this prospectus
supplement. The sums of amounts and percentages in the table below may not equal
the totals due to rounding.
RISK CLASSIFICATIONS OF THE
GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
RISK CLASSIFICATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- ------------------ ------------------------ ---------------------------
A 326 $ 38,244,106.93 54.67%
A- 135 15,289,602.15 21.86
B 115 10,831,270.55 15.48
C 57 4,626,017.14 6.61
C- 7 715,280.18 1.02
D 2 249,113.20 0.36
- --------------------------- ------------------ ------------------------ ---------------------------
Totals 642 $ 69,955,390.15 100.00%
=========================== ================== ======================== ===========================
(1) Under the "A" risk category, the applicant must have generally repaid
installment or revolving debt according to its terms. A maximum of one
30-day late payment and no 60-day late payments, within the last 12 months,
is acceptable on an existing mortgage loan.
(2) Under the "A-" risk category, an applicant must have generally repaid
installment or revolving debt according to its terms. A maximum of two
30-day late payments and no 60-day late payments within the last 12 months,
is acceptable on an existing mortgage loan.
(3) Under the "B" risk category, an applicant may have generally repaid
installment or revolving debt according to its terms. A maximum of three
30-day late payments or two 30-day late payments and one 60-day late
payment, within the last 12 months, is acceptable on an existing mortgage
loan.
(4) Under the "C" risk category, an applicant may have experienced significant
credit problems in the past. A maximum of six 30-day late payments, two
60-day late payments or one 90-day late payment, within the last 12 months,
is acceptable on an existing mortgage loan.
(5) Under the "C-" or "D" risk categories, an applicant will have experienced
significant credit problems in the past. As to mortgage credit, the
applicant may have had a history of being generally 30, 60, 90 or a maximum
of 120 days late within the last 12 months.
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I mortgage loans under
each of Meritage's documentation programs. For a description of Meritage's
subprime underwriting program classifications, see "UNDERWRITING STANDARDS" in
this prospectus supplement. The sums of the amounts and percentages in the table
below may not equal the total amount due to rounding.
S-21
PROGRAM CLASSIFICATIONS OF THE
GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
PROGRAM CLASSIFICATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------ ------------------------ ----------------------------
Full Documentation 512 $ 56,209,241.71 80.35%
Alternate Documentation 23 2,679,880.54 3.83
No Income Verification 107 11,066,267.90 15.82
- ----------------------------------- ------------------ ------------------------ ---------------------------
Totals 642 $ 69,955,390.15 100.00%
=================================== ================== ======================== ===========================
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I mortgage loans having
mortgaged properties of each given type. The sums of amounts and percentages in
the table below may not equal the totals due to rounding.
TYPES OF MORTGAGED PROPERTIES OF THE
GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ----------------- ----------------------- ---------------------------
2-4 Family Home 28 $ 3,106,810.42 4.44%
Condominium 12 1,187,900.64 1.70
Manufactured Home (1) 25 2,049,385.69 2.93
Single Family Home 577 63,611,293.40 90.93
- ------------------------------ ----------------- ----------------------- ---------------------------
Totals 642 $ 69,955,390.15 100.00%
============================== ================= ======================= ===========================
(1) Manufactured housing units must be legally classified as real estate and be
permanently fixed to their site.
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I mortgage loans having
mortgaged properties with each given occupancy status. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
S-22
OCCUPANCY STATUS OF THE MORTGAGED PROPERTIES OF THE
GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ---------------- --------------------- ----------------------------
Investment 36 $ 2,764,185.96 3.95%
Owner-Occupied 598 66,464,816.31 95.01
Second Home 8 726,387.88 1.04
- ------------------------------ ---------------- --------------------- ---------------------------
Totals 642 $ 69,955,390.15 100.00%
============================== ================ ===================== ===========================
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I mortgage loans having
each indicated purpose. The sums of amounts and percentages in the table below
may not equal the totals due to rounding.
USE OF PROCEEDS OF THE GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
USE OF PROCEEDS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ---------------- --------------------- ----------------------------
Purchase 321 $ 37,478,617.02 53.58%
Refinance (Cash Out) 212 21,816,604.40 31.19
Refinance (Rate/Term) 109 10,660,168.73 15.24
- ------------------------------ ---------------- --------------------- ----------------------------
Totals 642 $ 69,955,390.15 100.00%
============================== ================ ===================== ===========================
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I mortgage loans having
each indicated number of months from the date of origination to the cut-off
date. The sums of amounts and percentages in the table below may not equal the
totals due to rounding.
S-23
NUMBER OF MONTHS ELAPSED FROM THE DATE OF ORIGINATION OF THE
GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
RANGE OF MONTHS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ---------------- --------------------- ----------------------------
0-11 637 $ 69,521,197.37 99.38%
12-23 2 163,233.16 0.23
24-35 1 82,225.21 0.12
36-47 2 188,734.41 0.27
---------------- --------------------- ----------------------------
Totals 642 $ 69,955,390.15 100.00%
============================== ================ ===================== ============================
The weighted average number of months since the date of
origination of the group I mortgage loans, as of the cut-off date, was
approximately 3 months.
S-24
The table below sets forth as of the cut-off date the geographic distribution of
all the group I mortgage loans by location and the related number, aggregate
principal balance and percentage of the mortgage loans secured by mortgaged
properties in such locations. The sum of amounts and percentages in the table
below may not equal the totals due to rounding.
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE
GROUP I MORTGAGE LOANS
PERCENTAGE OF MORTGAGE GROUP
NUMBER OF AGGREGATE I LOANS BY AGGREGATE
LOCATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ------------------ ----------------------- ----------------------------
Alabama 10 $ 724,345.92 1.04%
Arizona 45 4,869,085.02 6.96
California 99 15,133,714.58 21.63
Colorado 39 4,725,220.61 6.75
Connecticut 1 114,619.23 0.16
Delaware 2 168,305.52 0.24
District of Columbia 1 76,433.82 0.11
Florida 18 1,544,647.64 2.21
Georgia 11 984,691.62 1.41
Idaho 5 351,797.51 0.50
Illinois 41 4,627,517.21 6.61
Indiana 9 634,207.36 0.91
Kansas 1 79,738.70 0.11
Kentucky 5 405,571.60 0.58
Louisiana 1 36,691.71 0.05
Maryland 15 1,684,354.94 2.41
Massachusetts 1 221,882.52 0.32
Michigan 14 1,114,475.10 1.59
Minnesota 7 679,038.69 0.97
Missouri 9 542,380.58 0.78
New Hampshire 1 39,987.21 0.06
New Mexico 22 1,885,088.83 2.69
New York 7 459,789.07 0.66
North Carolina 15 1,592,841.04 2.28
Ohio 40 2,999,095.80 4.29
Oklahoma 1 31,480.92 0.05
Oregon 96 10,853,292.64 15.51
Pennsylvania 23 1,660,663.78 2.37
South Carolina 5 351,652.75 0.50
South Dakota 1 94,776.29 0.14
Tennessee 14 1,185,562.01 1.69
Texas 3 367,349.48 0.53
Utah 11 1,388,372.05 1.98
Virginia 5 744,478.31 1.06
Washington 56 6,827,718.38 9.76
West Virginia 3 137,701.24 0.20
Wisconsin 3 364,195.66 0.52
Wyoming 2 252,624.81 0.36
- ------------------------------ ------------------ ----------------------- ----------------------------
Totals 642 $ 69,955,390.15 100.00%
============================== ================== ======================= ============================
S-25
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of all the group I mortgage loans
having a prepayment charge for the years indicated. The sum of amounts and
percentages in the table below may not equal the totals due to rounding.
PREPAYMENT CHARGES WITH RESPECT TO ALL THE
GROUP I MORTGAGE LOANS
PERCENTAGE OF GROUP I
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
PREPAYMENT CHARGE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ------------------ ----------------------- ----------------------------
1 Year 13 $ 1,400,230.17 2.00%
2 Year 109 14,621,850.36 20.90
3 Year 501 52,510,583.73 75.06
5 Year 8 769,816.10 1.10
None 11 652,909.79 0.93
- ------------------------------ ------------------ ----------------------- ----------------------------
Totals 642 $ 69,955,390.15 100.00%
============================== ================== ======================= ============================
S-26
FIXED RATE LOANS IN GROUP I
The following table sets forth information with respect to all
the fixed rate loans in group I as of the cut-off date.
GROUP I FIXED RATE LOANS
Number of Group I Fixed Rate Loans 152
Percentage of All Mortgage Loans in
group I (by number of loans) 23.68%
Aggregate Principal Balance $11,883,117.04
Percentage of All Mortgage Loans in
group I (by aggregate principal
balance) 16.99%
Principal Balance of Mortgage Loans as
of the Cut-Off Date
Average $78,178.40
Range $15,194.43 - $211,526.40
Coupon Rates
Weighted Average 10.632%
Range 8.990% - 13.990%
Remaining Term to Maturity
(in months)
Weighted Average 269
Range 174-359
Loan-to-Value Ratio at Origination
Weighted Average 78.40%
Range 30.68% - 90.00%
S-27
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I fixed rate loans
having the coupon rates in each given range. The sums of amounts and percentages
in the table below may not be equal to the totals due to rounding.
COUPON RATES OF THE GROUP I FIXED RATE LOANS
PERCENTAGE OF FIXED GROUP
NUMBER OF AGGREGATE I RATE LOANS BY AGGREGATE
RANGE OF COUPON RATES (%) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ------------------ ----------------------- ----------------------------
8.501 - 9.000 2 $ 156,469.59 1.32%
9.001 - 9.500 8 980,879.10 8.25
9.501 - 10.000 17 1,629,696.34 13.71
10.001 - 10.500 45 3,868,576.05 32.56
10.501 - 11.000 30 2,065,667.90 17.38
11.001 - 11.500 20 1,345,955.80 11.33
11.501 - 12.000 13 841,908.23 7.08
12.001 - 12.500 7 347,712.58 2.93
12.501 - 13.000 8 549,037.84 4.62
13.001 - 13.500 1 51,788.80 0.44
13.501 - 14.000 1 45,424.81 0.38
- ------------------------------ ------------------ ------------------------ ----------------------------
Totals 152 $ 11,883,117.04 100.00%
============================== ================== ======================== ============================
S-28
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I fixed rate loans
having cut-off date principal balances in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP I FIXED RATE LOANS
PERCENTAGE OF GROUP I
FIXED RATE LOANS BY
RANGE OF PRINCIPAL BALANCES NUMBER OF AGGREGATE AGGREGATE
($) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ------------------ -------------------------- ----------------------------
15,000.01 - 25,000.00 2 $ 36,514.70 0.31%
25,000.01 - 50,000.00 40 1,756,764.64 14.78
50,000.01 - 75,000.00 49 2,993,366.63 25.19
75,000.01 - 100,000.00 32 2,778,669.17 23.38
100,000.01 - 125,000.00 9 1,015,714.46 8.55
125,000.01 - 150,000.00 7 956,257.64 8.05
150,000.01 - 175,000.00 5 794,907.75 6.69
175,000.01 - 200,000.00 5 922,408.81 7.76
200,000.01 - 225,000.00 3 628,513.24 5.29
- ------------------------------ ------------------ ------------------------- ----------------------------
Totals 152 $ 11,883,117.04 100.00%
============================== ================== ========================= ============================
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I fixed rate loans
having the remaining terms to maturity in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
REMAINING TERMS TO MATURITY OF THE GROUP I
FIXED RATE LOANS
PERCENTAGE OF GROUP I FIXED
NUMBER OF AGGREGATE RATE LOANS BY AGGREGATE
REMAINING TERM (MONTHS) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ------------------ ----------------------- ----------------------------
171 - 175 8 $ 611,790.33 5.15%
176 - 180 73 5,171,498.95 43.52
236 - 240 2 99,444.64 0.84
351 - 355 8 608,100.66 5.12
356 3 194,762.05 1.64
357 6 483,217.68 4.07
358 30 3,001,274.37 25.26
359 22 1,713,028.36 14.42
- ------------------------------ ------------------ ------------------------ ----------------------------
Totals 152 $ 11,883,117.04 100.00%
=============================== ================== ======================== ============================
S-29
ADJUSTABLE RATE LOANS IN GROUP I
The following table sets forth information with request to all
the group I adjustable rate loans of the cut-off date.
GROUP I ADJUSTABLE RATE LOANS
Number of Group I Adjustable Rate Loans 490
Percentage of All Mortgage Loans in group I (by
number of loans) 76.32%
Aggregate Principal Balance $58,072,273.11
Percentage of All Mortgage Loans in group I (by
aggregate principal balance) 83.01%
Principal Balance as of the Cut-Off Date
Average $118,514.84
Range $22,664.38 - $239,769.12
Coupon Rates
Weighted Average 9.715%
Range 7.625% - 12.990%
Remaining Term to Maturity (in months)
Weighted Average 358
Range 317-359
Loan-to-Value Ratio at Origination
Weighted Average 78.55%
Range 24.89% - 97.00%
S-30
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I adjustable rate loans
having the gross margins in each given range. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
GROSS MARGINS OF THE GROUP I ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP I
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE PRINCIPAL AGGREGATE
RANGE OF GROSS MARGINS (%) ADJUSTABLE RATE LOANS BALANCE PRINCIPAL BALANCE
- --------------------------------- ---------------------- ----------------------- ----------------------------
2.501 - 3.000 3 $ 270,959.62 0.47%
5.001 - 5.500 2 255,808.74 0.44
5.501 - 6.000 152 19,208,445.75 33.08
6.001 - 6.500 104 12,328,877.56 21.23
6.501 - 7.000 146 17,028,894.39 29.32
7.001 - 7.500 59 6,469,919.04 11.14
7.501 - 8.000 21 2,224,723.38 3.83
8.001 - 8.500 3 284,644.63 0.49
- --------------------------------- --------------------- ----------------------- ----------------------------
Totals 490 $ 58,072,273.11 100.00%
================================= ===================== ======================= ============================
The weighted average gross margin on the group I adjustable
rate loans, as of the cut-off date, was approximately 6.44% per annum.
S-31
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I adjustable rate loans
having the current coupon rates in each given range. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
CURRENT COUPON RATES OF THE GROUP I ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP I
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF COUPON RATES (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- --------------------- ----------------------- ----------------------------
7.501 - 8.000 3 $ 270,959.62 0.47%
8.001 - 8.500 82 10,734,740.78 18.49
8.501 - 9.000 69 8,146,470.09 14.03
9.001 - 9.500 62 7,626,875.99 13.13
9.501 - 10.000 95 11,603,139.19 19.98
10.001 - 10.500 64 7,932,577.08 13.66
10.501 - 11.000 64 6,598,119.16 11.36
11.001 - 11.500 27 2,645,193.84 4.56
11.501 - 12.000 14 1,369,797.45 2.36
12.001 - 12.500 6 603,699.59 1.04
12.501 - 13.000 4 540,700.32 0.93
- ------------------------------- --------------------- ----------------------- ----------------------------
Totals 490 $ 58,072,273.11 100.00%
=============================== ===================== ======================= ============================
The weighted average of the coupon rates on the group I
adjustable rate loans, as of the cut-off date, was approximately 9.71% per
annum.
S-32
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I adjustable rate loans
having the maximum rates in each given range. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
MAXIMUM RATES OF THE GROUP I ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP I
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF MAXIMUM RATES (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- --------------------- ----------------------- ----------------------------
10.501 - 11.000 1 $ 92,876.11 0.16%
11.001 - 11.500 1 82,225.21 0.14
11.501 - 12.000 1 95,858.30 0.17
15.001 - 15.500 82 10,734,740.78 18.49
15.501 - 16.000 69 8,146,470.09 14.03
16.001 - 16.500 62 7,626,875.99 13.13
16.501 - 17.000 95 11,603,139.19 19.98
17.001 - 17.500 64 7,932,577.08 13.66
17.501 - 18.000 64 6,598,119.16 11.36
18.001 - 18.500 27 2,645,193.84 4.56
18.501 - 19.000 14 1,369,797.45 2.36
19.001 - 19.500 6 603,699.59 1.04
19.501 - 20.000 4 540,700.32 0.93
- ------------------------------- --------------------- ----------------------- ----------------------------
Totals 490 $ 58,072,273.11 100.00%
=============================== ===================== ======================= ============================
The weighted average maximum rate of the group I adjustable
rate loans, as of the cut-off date, was 16.70% per annum.
S-33
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I adjustable rate loans
having the minimum rates in each given range. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
MINIMUM RATES OF THE GROUP I ADJUSTABLE RATE LOANS
PERCENTAGE OF ADJUSTABLE
NUMBER OF AGGREGATE RATE LOANS BY AGGREGATE
RANGE OF MINIMUM RATES (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- --------------------- ----------------------- ----------------------------
5.501 - 6.000 1 $ 92,876.11 0.16%
6.001 - 6.500 1 82,225.21 0.14
6.501 - 7.000 1 95,858.30 0.17
8.001 - 8.500 82 10,734,740.78 18.49
8.501 - 9.000 69 8,146,470.09 14.03
9.001 - 9.500 62 7,626,875.99 13.13
9.501 - 10.000 95 11,603,139.19 19.98
10.001 - 10.500 64 7,932,577.08 13.66
10.501 - 11.000 64 6,598,119.16 11.36
11.001 - 11.500 27 2,645,193.84 4.56
11.501 - 12.000 14 1,369,797.45 2.36
12.001 - 12.500 6 603,699.59 1.04
12.501 - 13.000 4 540,700.32 0.93
- ------------------------------- --------------------- ---------------------------- ---------------------------
Totals 490 $ 58,072,273.11 100.00%
=============================== ===================== ============================ ===========================
The weighted average minimum rate of the adjustable rate loans
in group I, as of the cut-off date, was 9.708% per annum.
S-34
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I adjustable rate loans
having cut-off date principal balances in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
CUT-OFF DATE PRINCIPAL BALANCES OF
THE GROUP I ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP I
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF PRINCIPAL BALANCES ($) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- --------------------- ----------------------- ----------------------------
15,000.01 - 25,000.00 3 $ 71,997.12 0.12%
25,000.01 - 50,000.00 22 753,516.80 1.30
50,000.01 - 75,000.00 47 3,252,155.62 5.60
75,000.01 - 100,000.00 136 12,087,368.93 20.81
100,000.01 - 125,000.00 102 11,543,044.07 19.88
125,000.01 - 150,000.00 61 8,426,088.91 14.51
150,000.01 - 175,000.00 53 8,546,870.98 14.72
175,000.01 - 200,000.00 34 6,337,177.77 10.91
200,000.01 - 225,000.00 22 4,727,173.96 8.14
225,000.01 - 250,000.00 10 2,326,878.95 4.01
- ------------------------------- --------------------- ----------------------- ----------------------------
Totals 490 $ 58,072,273.11 100.00%
=============================== ===================== ======================= ============================
S-35
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group I adjustable rate loans
having the remaining terms to maturity in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
REMAINING TERMS TO MATURITY OF THE GROUP I
ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP I
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE AGGREGATE
REMAINING TERMS (MONTHS) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- --------------------- ----------------------- ----------------------------
316 - 320 1 $ 92,876.11 0.16%
321 - 325 1 95,858.30 0.17
326 - 330 1 82,225.21 0.14
341 - 345 2 163,233.16 0.28
351 - 355 40 4,197,940.28 7.23
356 29 3,278,287.53 5.65
357 38 4,914,986.95 8.46
358 205 25,178,331.03 43.36
359 173 20,068,534.54 34.56
- ------------------------------- --------------------- ----------------------- ----------------------------
Totals 490 $ 58,072,273.11 100.00%
=============================== ===================== ======================= ============================
S-36
The table below sets forth the number, aggregate principal
balance and percentage of the group I adjustable rate loans as of the cut-off
date having the next interest adjustment date on each date set forth below.
NEXT INTEREST ADJUSTMENT DATE OF THE GROUP I
ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP I
ADJUSTABLE RATE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
NEXT INTEREST ADJUSTMENT DATE ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- --------------------- ----------------------- --------------------------
10/01/99 1 $ 95,858.30 0.17%
11/01/99 1 184,616.32 0.32
12/01/99 1 77,959.70 0.13
02/01/00 1 82,225.21 0.14
04/01/00 1 65,162.49 0.11
07/01/00 2 211,427.72 0.36
08/01/00 1 44,681.55 0.08
05/01/01 4 453,323.98 0.78
06/01/01 3 433,485.12 0.75
07/01/01 12 1,276,416.48 2.20
08/01/01 18 2,387,351.39 4.11
09/01/01 83 10,591,918.70 18.24
10/01/01 44 5,146,182.33 8.86
03/01/02 2 240,939.33 0.41
05/01/02 19 1,837,308.45 3.16
06/01/02 10 970,307.38 1.67
07/01/02 17 2,001,871.05 3.45
08/01/02 21 2,634,133.01 4.54
09/01/02 121 14,479,914.88 24.93
10/01/02 128 14,857,189.72 25.58
- ------------------------------- --------------------- ----------------------- ---------------------
Totals 490 $ 58,072,273.11 100.00%
=============================== ===================== ======================= =====================
S-37
ALL OF THE GROUP II MORTGAGE LOANS
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of all the group II mortgage loans
having the coupon rates in each given range. The sums of amounts and percentages
in the table below may not be equal to the totals due to rounding.
COUPON RATES OF THE GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
RANGE OF COUPON NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- --------------------- ----------------------- ----------------------------
7.501 - 8.000 1 $ 66,059.14 0.22%
8.001 - 8.500 25 4,123,003.41 13.62
8.501 - 9.000 25 3,621,370.19 11.96
9.001 - 9.500 33 4,466,575.72 14.75
9.501 - 10.000 61 7,039,831.91 23.25
10.001 - 10.500 38 3,974,717.05 13.13
10.501 - 11.000 37 3,415,123.85 11.28
11.001 - 11.500 28 1,688,266.17 5.58
11.501 - 12.000 16 975,211.65 3.22
12.001 - 12.500 7 313,104.74 1.03
12.501 - 13.000 4 199,937.13 0.66
13.001 - 13.500 1 241,400.84 0.80
13.501 - 14.000 3 151,830.42 0.50
- ------------------------------- --------------------- ----------------------- ----------------------------
Totals 279 $ 30,276,432.22 100.00%
=============================== ===================== ======================= ============================
S-38
WEIGHTED AVERAGE COUPON RATE OF GROUP II MORTGAGE LOANS
WEIGHTED AVERAGE COUPON RATE
TYPE OF MORTGAGE LOAN (APPROX.)
- ---------------------------------------- -----------------------------
All Group II Mortgage Loans 9.87%
All Fixed Rate Loans 9.87%
- - Fixed Rate 15-Year Loans 9.35%
- - Fixed Rate 20-Year Loans 9.88%
- - Fixed Rate 30-Year Loans 9.79%
- - Balloon Loans 10.07%
All Adjustable Rate Loans 9.87%
- - 6 month LIBOR Loans 9.69%
- - 2/6 LIBOR Loans 9.99%
- - 3/6 LIBOR Loans 9.82%
- - One Year CMT Loans 7.63%
A 6 MONTH LIBOR loan is an adjustable rate loan that has a six-month LIBOR index
and has a coupon rate subject to adjustment approximately six months after
origination and every following six months. Its original term to maturity is not
more than 30 years from the due date of its first monthly payment.
A 2/6 LIBOR loan is an adjustable rate loan that has a six-month LIBOR index and
has a coupon rate subject to adjustment approximately two years after its
origination and every following six months. Its original term to maturity is not
more than 30 years from the due date of its first monthly payment.
A 3/6 LIBOR loan is an adjustable rate loan that has a six-month LIBOR index and
has a coupon rate subject to adjustment approximately three years after its
origination and every following six months. Its original term to maturity is not
more than 30 years from the due date of its first monthly payment.
A ONE YEAR CMT loan is an adjustable rate loan that has an index of the weekly
average yield on United States Treasury Securities adjusted to a constant
maturity of one year, and has a coupon rate subject to adjustment approximately
one year after its origination and every following twelve months. Its original
term to maturity is not more than 30 years from the due date of its first
monthly payment.
S-39
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of all the group II mortgage loans
having cut-off date principal balances in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
RANGE OF PRINCIPAL BALANCES NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- --------------- ----------------------- -----------------------------
0.01 - 15,000.00 1 $ 11,994.09 0.04%
15,000.01 - 25,000.00 4 82,110.69 0.27
25,000.01 - 50,000.00 86 3,425,916.29 11.32
50,000.01 - 75,000.00 111 6,749,913.39 22.29
75,000.01 - 100,000.00 2 171,080.05 0.57
100,000.01 - 125,000.00 8 863,043.14 2.85
125,000.01 - 150,000.00 1 130,353.14 0.43
175,000.01 - 200,000.00 2 369,560.77 1.22
200,000.01 - 225,000.00 3 645,849.80 2.13
225,000.01 - 250,000.00 17 4,068,464.39 13.44
250,000.01 - 275,000.00 13 3,354,484.58 11.08
275,000.01 - 300,000.00 11 3,170,878.75 10.47
300,000.01 - 325,000.00 4 1,254,549.28 4.14
325,000.01 - 350,000.00 4 1,377,465.90 4.55
350,000.01 - 375,000.00 6 2,177,487.22 7.19
375,000.01 - 400,000.00 4 1,591,897.22 5.26
400,000.01 - 425,000.00 2 831,383.52 2.75
- ---------------------------- --------------- ----------------------- -----------------------------
Totals 279 $ 30,276,432.22 100.00%
============================ =============== ======================= =============================
S-40
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of all the group II mortgage loans
having the remaining terms to maturity in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
REMAINING TERMS TO MATURITY OF
THE GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
RANGE OF NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
REMAINING TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- --------------- ----------------------- -----------------------------
171 - 175 3 $ 94,632.97 0.31%
176 - 180 34 1,673,287.94 5.53
236 - 240 1 34,453.82 0.11
316 - 320 1 66,059.14 0.22
346 - 350 3 791,121.31 2.61
351 - 355 30 3,307,037.29 10.92
356 14 1,617,581.35 5.34
357 23 3,421,334.92 11.30
358 85 9,728,876.54 32.13
359 85 9,542,046.94 31.52
- ---------------------------- --------------- ----------------------- -----------------------------
Totals 279 $ 30,276,432.22 100.00%
============================ =============== ======================= =============================
S-41
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II mortgage loans having
loan-to-value ratios in each given range at origination. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
LOAN-TO-VALUE RATIOS OF THE GROUP II
MORTGAGE LOANS
PERCENTAGE OF GROUP II
RANGE OF LOAN-TO-VALUE MORTGAGE LOANS BY
RATIOS AT ORIGINATION NUMBER OF AGGREGATE AGGREGATE PRINCIPAL
(%) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------------ --------------- ----------------------- -----------------------
10.01 - 15.00 1 $ 22,490.81 0.07%
20.01 - 25.00 1 29,977.92 0.10
25.01 - 30.00 3 82,583.56 0.27
35.01 - 40.00 3 358,580.20 1.18
40.01 - 45.00 1 64,975.52 0.21
45.01 - 50.00 3 137,824.77 0.46
50.01 - 55.00 5 277,697.57 0.92
55.01 - 60.00 7 269,891.68 0.89
60.01 - 65.00 19 1,112,659.59 3.68
65.01 - 70.00 34 2,966,443.88 9.80
70.01 - 75.00 70 8,970,880.40 29.63
75.01 - 80.00 67 6,569,308.84 21.70
80.01 - 85.00 38 5,004,429.06 16.53
85.01 - 90.00 26 4,342,629.28 14.34
95.01 - 100.00 1 66,059.14 0.22
- ------------------------ --------------- ----------------------- -----------------------
Totals 279 $ 30,276,432.22 100.00%
======================== =============== ======================= =======================
The weighted average loan-to-value ratio, at origination, of
the group II mortgage loans was approximately 77.56%.
S-42
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II mortgage loans having
each indicated risk classification under Meritage's subprime credit risk
residential lending program. For a description of Meritage's subprime
underwriting risk categories, see "--UNDERWRITING STANDARDS" in this prospectus
supplement. The sums of amounts and percentages in the table below may not equal
the totals due to rounding.
RISK CLASSIFICATIONS OF THE
GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
RISK CLASSIFICATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- --------------- --------------------- ----------------------------
A 131 $ 17,808,303.60 58.82%
A- 59 6,156,164.23 20.33
B 49 3,548,813.50 11.72
C 27 1,908,233.11 6.30
C- 11 741,848.78 2.45
D 2 113,069.00 0.37
- ------------------------ --------------- ---------------------- ---------------------------
Totals 279 $ 30,276,432.22 100.00%
======================== =============== ====================== ===========================
(1) Under the "A" risk category, the applicant must have generally repaid
installment or revolving debt according to its terms. A maximum of one
30-day late payment and no 60-day late payments, within the last 12 months,
is acceptable on an existing mortgage loan.
(2) Under the "A-" risk category, an applicant must have generally repaid
installment or revolving debt according to its terms. A maximum of two
30-day late payments and no 60-day late payments, within the last 12
months, is acceptable on an existing mortgage loan.
(3) Under the "B" risk category, an applicant may have generally repaid
installment or revolving debt according to its terms. A maximum of three
30-day late payments or two 30-day late payments and one 60-day late
payment, within the last 12 months, is acceptable on an existing mortgage
loan.
(4) Under the "C" risk category, an applicant may have experienced significant
credit problems in the past. A maximum of six 30-day late payments, two
60-day late payments or one 90-day late payment, within the last 12 months,
is acceptable on an existing mortgage loan.
(5) Under the "C-" or "D" risk categories, an applicant will have experienced
significant credit problems in the past. As to mortgage credit, the
applicant may have had a history of being generally 30, 60, 90 or a maximum
of 120 days late within the last 12 months.
S-43
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II mortgage loans under
each of Meritage's documentation programs.
For a description of Meritage's subprime underwriting program
classifications, see "--UNDERWRITING STANDARDS" in this prospectus supplement.
The sums of the amounts and percentages in the table below may not equal the
total amount due to rounding.
PROGRAM CLASSIFICATIONS OF THE
GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
PROGRAM CLASSIFICATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------- --------------- -------------------- ---------------------------
Alternate Documentation 8 $ 1,098,739.96 3.63%
Full Documentation 221 23,257,106.00 76.82
No Income Verification 50 5,920,586.26 19.56
- -------------------------------------- --------------- -------------------- ---------------------------
Totals 279 $ 30,276,432.22 100.00%
====================================== =============== ==================== ===========================
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II mortgage loans having
mortgaged properties of each given type. The sums of amounts and percentages in
the table below may not equal the totals due to rounding.
TYPES OF MORTGAGED PROPERTIES OF THE
GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ --------------- -------------------- ---------------------------
2-4 Family Home 10 $ 806,653.33 2.66%
Condominium 2 105,199.54 0.35
Manufactured Home(1) 16 1,158,827.00 3.83
Single Family Home 251 28,205,752.35 93.16
- ------------------------------ --------------- -------------------- ---------------------------
Totals 279 $ 30,276,432.22 100.00%
============================== =============== ==================== ===========================
(1) Manufactured housing units must be legally classified as real estate and be
permanently fixed to their site.
S-44
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II mortgage loans having
mortgaged properties with each given occupancy status. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
OCCUPANCY STATUS OF THE MORTGAGED PROPERTIES OF THE
GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ --------------- -------------------- ---------------------------
Investment 22 $ 937,296.54 3.10%
Owner-Occupied 256 29,281,580.46 96.71
Second Home 1 57,555.22 0.19
- ------------------------------ --------------- -------------------- ---------------------------
Totals 279 $ 30,276,432.22 100.00%
============================== =============== ==================== ===========================
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II mortgage loans having
each indicated purpose. The sums of amounts and percentages in the table below
may not equal the totals due to rounding.
USE OF PROCEEDS OF THE GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
USE OF PROCEEDS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ --------------- ---------------------- ---------------------------
Purchase 112 $ 13,089,478.20 43.23%
Refinance (Cash Out) 114 11,427,390.07 37.74
Refinance (Rate/Term) 53 5,759,563.95 19.02
- ------------------------------ --------------- ----------------------- ---------------------------
Totals 279 $ 30,276,432.22 100.00%
============================== =============== ======================= ===========================
S-45
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II mortgage loans having
each indicated number of months from the date of origination to the cut-off
date. The sums of amounts and percentages in the table below may not equal the
totals due to rounding.
NUMBER OF MONTHS ELAPSED FROM THE DATE OF ORIGINATION OF THE
GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
RANGE OF MONTHS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ --------------- -------------------- ---------------------------
0-11 276 $ 29,769,541.13 98.33%
12-23 2 440,831.95 1.46
36-47 1 66,059.14 0.22
- ------------------------------ --------------- -------------------- ---------------------------
Totals 279 $ 30,276,432.22 100.00%
============================== =============== ==================== ===========================
The weighted average number of months since the date of
origination of the group II mortgage loans, as of the cut-off date, was
approximately 3 months.
S-46
The table below sets forth as of the cut-off date, the
geographic distribution of all the group II mortgage loans by location and the
related number, aggregate principal balance and percentage of the mortgage loans
secured by mortgaged properties in such locations. The sum of amounts and
percentages in the table below may not equal the totals due to rounding.
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE
GROUP II MORTGAGE LOANS
PERCENTAGE OF MORTGAGE
NUMBER OF AGGREGATE GROUP II LOANS BY
LOCATION MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
- ------------------------------ --------------- -------------------- ---------------------------
Alabama 4 $ 210,039.29 0.69%
Arizona 19 1,365,038.47 4.51
California 36 9,248,126.90 30.55
Colorado 8 867,882.53 2.87
Delaware 2 95,979.49 0.32
Florida 10 1,082,758.93 3.58
Georgia 2 110,024.97 0.36
Idaho 3 162,042.30 0.54
Illinois 15 819,819.29 2.71
Indiana 8 363,932.74 1.20
Kansas 2 301,822.64 1.00
Kentucky 7 501,163.16 1.66
Louisiana 3 160,326.92 0.53
Maryland 7 1,424,348.57 4.70
Michigan 10 734,756.55 2.43
Minnesota 4 397,045.70 1.31
Missouri 17 811,500.68 2.68
Nevada 3 174,819.85 0.58
New Mexico 15 2,169,391.57 7.17
New York 3 130,458.54 0.43
North Carolina 8 576,238.07 1.90
North Dakota 1 44,950.55 0.15
Ohio 31 1,593,646.23 5.26
Oregon 18 2,793,656.84 9.23
Pennsylvania 16 999,909.33 3.30
Tennessee 4 163,039.84 0.54
Texas 1 55,863.46 0.18
Utah 3 763,608.64 2.52
Virginia 1 65,568.57 0.22
Washington 15 1,978,181.10 6.53
West Virginia 2 67,407.09 0.22
Wisconsin 1 43,083.41 0.14
- ------------------------------ --------------- -------------------- ---------------------------
Totals 279 $ 30,276,432.22 100.00%
============================== =============== ==================== ===========================
S-47
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of all the group II mortgage loans
having a prepayment charge for the years indicated. The sum of amounts and
percentages in the table below may not equal the totals due to rounding.
PREPAYMENT CHARGES WITH RESPECT TO ALL THE
GROUP II MORTGAGE LOANS
PERCENTAGE OF GROUP II
NUMBER OF AGGREGATE MORTGAGE LOANS BY AGGREGATE
PREPAYMENT CHARGE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ --------------- -------------------- ---------------------------
1 Year 6 $ 1,565,778.46 5.17%
2 Year 36 6,856,674.92 22.65
3 Year 224 21,000,788.15 69.36
5 Year 7 621,999.03 2.05
None 6 231,191.66 0.76
- ------------------------------ --------------- -------------------- ---------------------------
Totals 279 $ 30,276,432.22 100.00%
============================== =============== ==================== ===========================
S-48
FIXED RATE LOANS IN GROUP II
The following table sets forth information with respect to all
the fixed rate loans in group II as of the cut-off date.
GROUP II FIXED RATE LOANS
Number of Group II Fixed Rate Loans 64
Percentage of All Mortgage Loans in
group II (by number of loans) 22.94%
Aggregate Principal Balance $3,482,042.34
Percentage of All Mortgage Loans in
group II (by aggregate principal
balance) 11.50%
Principal Balance of Mortgage Loans as
of the Cut-Off Date
Average $54,406.91
Range $16,916.67 - $243,565.63
Coupon Rates
Weighted Average 9.869%
Range 8.250% - 12.875%
Remaining Term to Maturity
(in months)
Weighted Average 265
Range 173-359
Loan-to-Value Ratio at Origination
Weighted Average 71.20%
Range 11.03% - 85.00%
S-49
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II fixed rate loans
having the coupon rates in each given range. The sums of amounts and percentages
in the table below may not be equal to the totals due to rounding.
COUPON RATES OF GROUP II THE FIXED RATE LOANS
PERCENTAGE OF FIXED GROUP
NUMBER OF AGGREGATE II RATE LOANS BY AGGREGATE
RANGE OF COUPON RATES (%) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- ----------------- ---------------------- --------------------------
8.001 - 8.500 1 $ 43,153.81 1.24%
8.501 - 9.000 8 625,895.67 17.97
9.001 - 9.500 12 729,338.71 20.95
9.501 - 10.000 20 1,146,818.35 32.94
10.001 - 10.500 4 106,924.97 3.07
10.501 - 11.000 6 423,967.27 12.18
11.001 - 11.500 5 160,093.45 4.60
11.501 - 12.000 4 131,180.53 3.77
12.001 - 12.500 3 86,083.13 2.47
12.501 - 13.000 1 28,586.45 0.82
- ------------------------------ --------------- -------------------- ---------------------------
Totals 64 $ 3,482,042.34 100.00%
============================== =============== ==================== ===========================
S-50
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II fixed rate loans
having cut-off date principal balances in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP II FIXED RATE LOANS
PERCENTAGE OF GROUP II
FIXED RATE LOANS BY
RANGE OF PRINCIPAL BALANCES NUMBER OF AGGREGATE AGGREGATE
($) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ --------------- -------------------- ---------------------------
15,000.01 - 25,000.00 4 $ 82,110.69 2.36%
25,000.01 - 50,000.00 39 1,402,328.92 40.27
50,000.01 - 75,000.00 12 755,371.15 21.69
75,000.01 - 100,000.00 2 171,080.05 4.91
100,000.01 - 125,000.00 3 327,671.99 9.41
125,000.01 - 150,000.00 1 130,353.14 3.74
175,000.01 - 200,000.00 2 369,560.77 10.61
225,000.01 - 250,000.00 1 243,565.63 6.99
- ------------------------------ --------------- -------------------- ---------------------------
Totals 64 $ 3,482,042.34 100.00%
============================== =============== ==================== ===========================
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II fixed rate loans
having the remaining terms to maturity in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
REMAINING TERMS TO MATURITY OF THE GROUP II
FIXED RATE LOANS
PERCENTAGE OF GROUP II
NUMBER OF AGGREGATE FIXED RATE LOANS BY
REMAINING TERM (MONTHS) FIXED RATE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
- ------------------------------ ----------------- -------------------- ---------------------------
171 - 175 3 $ 94,632.97 2.72%
176 - 180 34 1,673,287.94 48.05
236 - 240 1 34,453.82 0.99
351 - 355 3 143,068.64 4.11
356 2 71,551.00 2.05
357 1 33,769.85 0.97
358 9 722,538.83 20.75
359 11 708,739.29 20.35
- ------------------------------ --------------- -------------------- ---------------------------
Totals 64 $ 3,482,042.34 100.00%
============================== =============== ==================== ============================
S-51
ADJUSTABLE RATE LOANS IN GROUP II
The following table sets forth information with request to all
the group II adjustable rate loans as of the cut-off date.
GROUP II ADJUSTABLE RATE LOANS
Number of Group II Adjustable Rate Loans 215
Percentage of All Mortgage Loans in group II (by
number of loans) 77.06%
Aggregate Principal Balance $26,794,389.88
Percentage of All Mortgage Loans in group II
(by aggregate principal balance) 88.50%
Principal Balance as of the Cut-Off Date
Average $124,625.07
Range $11,994.09 - $422,403.11
Coupon Rates
Weighted Average 9.870%
Range 7.625% - 13.750%
Remaining Term to Maturity (in months)
Weighted Average 357
Range 317-359
Loan-to-Value Ratio at Origination
Weighted Average 78.38%
Range 36.81% - 96.50%
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II adjustable rate loans
having the Gross Margins in each given range. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
S-52
GROSS MARGINS OF THE GROUP II ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP II
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE PRINCIPAL AGGREGATE
RANGE OF GROSS MARGINS (%) ADJUSTABLE RATE LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------- ---------------------- ---------------------- -----------------------
2.501 - 3.000 1 $ 66,059.14 0.25%
5.001 - 5.500 4 432,489.29 1.61
5.501 - 6.000 50 8,084,375.54 30.17
6.001 - 6.500 38 4,781,427.02 17.84
6.501 - 7.000 78 9,207,922.43 34.37
7.001 - 7.500 19 2,302,222.39 8.59
7.501 - 8.000 23 1,809,063.02 6.75
8.001 - 8.500 2 110,831.05 0.41
- -------------------------------- ---------------------- ---------------------- -----------------------
Totals 215 $ 26,794,389.88 100.00%
================================ ====================== ====================== =======================
The weighted average gross margin on the group II adjustable
rate loans, as of the cut-off date, was approximately 6.49% per annum.
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II adjustable rate loans
having the current coupon rates in each given range. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
CURRENT COUPON RATES OF THE GROUP II ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP II
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF COUPON RATES (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ---------------------- ---------------------- -----------------------
7.501 - 8.000 1 $ 66,059.14 0.25%
8.001 - 8.500 24 4,079,849.60 15.23
8.501 - 9.000 17 2,995,474.52 11.18
9.001 - 9.500 21 3,737,237.01 13.95
9.501 - 10.000 41 5,893,013.56 21.99
10.501 - 11.000 31 2,991,156.58 11.16
11.001 - 11.500 23 1,528,172.72 5.70
11.501 - 12.000 12 844,031.12 3.15
12.001 - 12.500 4 227,021.61 0.85
12.501 - 13.000 3 171,350.68 0.64
13.001 - 13.500 1 241,400.84 0.90
13.501 - 14.000 3 151,830.42 0.57
- -------------------------------- ---------------------- ---------------------- -----------------------
Totals 215 $ 26,794,389.88 100.00%
================================ ======================= ====================== =======================
S-53
The weighted average of the coupon rates on the group II
adjustable rate loans, as of the cut-off date, was approximately 9.87% per
annum.
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II adjustable rate loans
having the maximum rates in each given range. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
MAXIMUM RATES OF THE GROUP II ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP II
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF MAXIMUM RATES (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ---------------------- ---------------------- -----------------------
10.001 - 10.500 1 $ 66,059.14 0.25%
15.001 - 15.500 24 4,079,849.60 15.23
15.501 - 16.000 17 2,995,474.52 11.18
16.001 - 16.500 21 3,737,237.01 13.95
16.501 - 17.000 41 5,893,013.56 21.99
17.001 - 17.500 34 3,867,792.08 14.44
17.501 - 18.000 31 2,991,156.58 11.16
18.001 - 18.500 23 1,528,172.72 5.70
18.501 - 19.000 12 844,031.12 3.15
19.001 - 19.500 4 227,021.61 0.85
19.501 - 20.000 3 171,350.68 0.64
20.001 - 20.500 1 241,400.84 0.90
20.501 - 21.000 3 151,830.42 0.57
- -------------------------------- ---------------------- ---------------------- -----------------------
Totals 215 $ 26,794,389.88 100.00%
================================ ====================== ====================== =======================
The weighted average maximum rate of the group II adjustable
rate loans, as of the cut-off date, was 16.86% per annum.
S-54
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II adjustable rate loans
having the minimum rates in each given range. The sums of amounts and
percentages in the table below may not equal the totals due to rounding.
MINIMUM RATES OF THE GROUP II ADJUSTABLE RATE LOANS
PERCENTAGE OF ADJUSTABLE
NUMBER OF AGGREGATE RATE LOANS BY AGGREGATE
RANGE OF MINIMUM RATES (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ---------------------- ---------------------- -----------------------
5.001 - 5.500 1 $ 66,059.14 0.25%
8.001 - 8.500 24 4,079,849.60 15.23
8.501 - 9.000 17 2,995,474.52 11.18
9.001 - 9.500 21 3,737,237.01 13.95
9.501 - 10.000 41 5,893,013.56 21.99
10.001 - 10.500 34 3,867,792.08 14.44
10.501 - 11.000 31 2,991,156.58 11.16
11.001 - 11.500 23 1,528,172.72 5.70
11.501 - 12.000 12 844,031.12 3.15
12.001 - 12.500 4 227,021.61 0.85
12.501 - 13.000 3 171,350.68 0.64
13.001 - 13.500 1 241,400.84 0.90
13.501 - 14.000 3 151,830.42 0.57
- -------------------------------- ---------------------- ---------------------- -----------------------
Totals 215 $ 26,794,389.88 100.00%
================================ ====================== ====================== =======================
The weighted average minimum rate of the adjustable rate loans
in group II, as of the cut-off date, was 9.865% per annum.
S-55
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II adjustable rate loans
having Cut-off Date principal balances in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP II
ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP II
NUMBER OF ADJUSTABLE RATE LOANS BY
ADJUSTABLE RATE AGGREGATE AGGREGATE
RANGE OF PRINCIPAL BALANCES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ---------------------- ---------------------- -----------------------
0.01 - 15,000.00 1 $ 11,994.09 0.04%
25,000.01 - 50,000.00 46 1,973,588.55 7.37
50,000.01 - 75,000.00 100 6,044,541.06 22.56
100,000.01 - 125,000.00 5 535,371.15 2.00
200,000.01 - 225,000.00 3 645,849.80 2.41
225,000.01 - 250,000.00 16 3,824,898.76 14.27
250,000.01 - 275,000.00 13 3,354,484.58 12.52
275,000.01 - 300,000.00 11 3,170,878.75 11.83
300,000.01 - 325,000.00 4 1,254,549.28 4.68
325,000.01 - 350,000.00 4 1,377,465.90 5.14
350,000.01 - 375,000.00 6 2,177,487.22 8.13
375,000.01 - 400,000.00 4 1,591,897.22 5.94
400,000.01 - 425,000.00 2 831,383.52 3.10
- -------------------------------- ---------------------- ---------------------- -----------------------
Totals 215 $ 26,794,389.88 100.00%
================================ ====================== ====================== ========================
S-56
The table below sets forth as of the cut-off date the number,
aggregate principal balance and percentage of the group II adjustable rate loans
having the remaining terms to maturity in each given range. The sums of amounts
and percentages in the table below may not equal the totals due to rounding.
REMAINING TERMS TO MATURITY OF THE GROUP II
ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP II
ADJUSTABLE RATE LOANS BY
NUMBER OF AGGREGATE AGGREGATE
REMAINING TERMS (MONTHS) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- ---------------------- ---------------------- -----------------------
316 - 320 1 $ 66,059.14 0.25%
346 - 350 3 791,121.31 2.95
351 - 355 27 3,163,968.65 11.81
356 12 1,546,030.35 5.77
357 22 3,387,565.07 12.64
358 76 9,006,337.71 33.61
359 74 8,833,307.65 32.97
- -------------------------------- ---------------------- ---------------------- -----------------------
Totals 215 $ 26,794,389.88 100.00%
================================ ====================== ====================== =======================
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The table below sets forth the number, aggregate principal
balance and percentage of the group II adjustable rate loans as of the cut-off
date having the next interest adjustment date on each date set forth below.
NEXT INTEREST ADJUSTMENT DATE OF THE GROUP II
ADJUSTABLE RATE LOANS
PERCENTAGE OF GROUP II
ADJUSTABLE RATE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
NEXT INTEREST ADJUSTMENT DATE ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ---------------------- ---------------------- -----------------------
01/01/00 1 $ 354,828.42 1.32%
02/01/00 2 321,533.41 1.20
07/01/00 1 66,059.14 0.25
09/01/00 2 440,831.95 1.65
05/01/01 4 207,015.93 0.77
06/01/01 2 369,760.75 1.38
07/01/01 4 638,803.42 2.38
08/01/01 9 1,923,235.37 7.18
09/01/01 25 4,117,842.18 15.37
10/01/01 19 1,738,253.92 6.49
01/01/02 1 350,289.36 1.31
05/01/02 11 1,398,879.28 5.22
06/01/02 10 1,188,312.69 4.43
07/01/02 7 552,398.51 2.06
08/01/02 11 1,142,796.29 4.27
09/01/02 51 4,888,495.53 18.24
10/01/02 55 7,095,053.73 26.48
- ------------------------------ ------------------- ---------------------- -----------------------
Totals 215 $ 26,794,389.88 100.00%
============================== =================== ====================== =======================
S-58
UNDERWRITING STANDARDS
GENERAL
The mortgage loans were originated or acquired directly or
indirectly by Meritage, a wholly-owned subsidiary of Resource Bancshares
Mortgage and an affiliate of RBMG, and underwritten generally in accordance with
the subprime credit risk guidelines of Meritage. On a case-by-case basis,
exceptions to the guidelines are made where compensating factors exist.
The guidelines are primarily intended to assess the value of
the related mortgaged property and to evaluate the adequacy of such property as
collateral for a mortgage loan and to assess the mortgagor's ability and
willingness to pay creditors. The subprime credit mortgage loans originated or
acquired by Meritage will have been underwritten with a view toward the sale of
such mortgage loans in the secondary market. This type of mortgage loan entails
a greater degree of risk for prospective investors than mortgage loans eligible
to be purchased by Fannie Mae or Freddie Mac, and bear higher rates of interest
than mortgage loans that are originated in accordance with the underwriting
standards of Fannie Mae or Freddie Mac. The combination of these factors may
result in rates of delinquency, foreclosure, bankruptcy, and losses that are
higher, and which may be substantially higher, than those experienced by
mortgage loans underwritten in accordance with Fannie Mae and Freddie Mac
guidelines.
APPLICATION PROCESS
Each applicant completes a loan application that includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions, collections, judgments, charge-offs or
tax liens. Mortgaged properties that are to secure mortgage loans generally are
appraised by state licensed, qualified independent appraisers. Such appraisers
inspect and appraise the subject property and verify that it is in acceptable
condition. Following each appraisal, the appraiser prepares a report which
includes a market value analysis based on recent sales of comparable homes in
the area and, when deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home. All appraisals are required to
conform to the Uniform Standards of Professional Appraisal Practice adopted by
the Appraisal Standards Board of the Appraisal Foundation and are on forms
acceptable to Fannie Mae and Freddie Mac. The guidelines require a desk or field
review of all appraisals by a qualified appraiser employed or retained by
Meritage. The value of a mortgaged property as determined by the appraisal is
used for purposes of establishing the maximum permissible loan-to-value ratio of
the mortgage loan. If the value of any mortgaged property as determined in the
review is more than 5% lower than the appraised value, then Meritage uses such
review value for purposes of establishing the maximum permissible loan-to-value
ratio of the related mortgage loan for purposes of Meritage's quality control
procedures. If the value is between 5% and 10% lower than the appraised value,
then Meritage may contact the appraiser for an explanation of the difference or
may reconcile the difference on its own. If the value is more than 10% lower
than the appraised value, then Meritage contacts the appraiser for an
explanation of the difference. Meritage refuses to accept appraisals from an
appraiser who does not provide a satisfactory explanation of any such
difference.
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RESIDENTIAL LOAN PROGRAMS
The following are the residential loan programs under the
Meritage subprime credit risk guidelines:
o Full Documentation
o Limited Documentation
o Stated Income Documentation
o No Qualifier
o Mortgage Only
o No Ratio.
Under each of these programs, Meritage reviews the applicant's
source of income, calculates the amount of income from sources indicated on the
loan application or similar documentation, reviews the credit history of the
applicant, calculates the debt service-to-income ratio to determine the
applicant's ability to repay the loan, reviews the type and use of the property
being financed, and reviews the description of the property for program
eligibility. In determining the ability of the applicant to repay the loan, a
qualifying rate has been created under the guidelines that, with respect to a
6-month adjustable rate mortgage loan, generally is equal to 2% above the
initial interest rate on the loan for which the applicant has applied; however,
if the LTV is 80% or less, or if the loan for which the applicant has applied is
a 2/6 LIBOR loan or a 3/6 LIBOR loan, the guidelines allow the applicant to
qualify at the initial interest rate.
The guidelines require that mortgage loans be underwritten in
a standardized procedure that complies with applicable federal and state laws
and regulations and requires the underwriters to be satisfied that the income of
the applicant and the value of the property being financed, as indicated by an
appraisal and review of the appraisal, currently supports the outstanding
anticipated loan balance of the mortgage loan for which the applicant has
submitted an application. The maximum loan amount for mortgage loans originated
under the guidelines is $500,000. The guidelines permit single family loans to
have LTV's at origination of generally up to 90%, depending on, among other
things, the purpose of the mortgage loan, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the property. The guidelines generally limit all types of loans to a maximum
90% LTV, other than condominium loans, manufactured home loans and loans secured
by 3-4 family properties, which are each limited to a maximum 85% LTV, and
non-owner occupied loans, which are limited to a maximum 80% LTV. With respect
to mortgage loans secured by mortgaged properties acquired by a mortgagor under
a "lease option purchase," the LTV of the related mortgage loan is based on the
lower of the appraised value of such mortgaged property at the time of
origination, or the sale price of the related mortgaged property if the "lease
option purchase price" was set less than 24 months prior to origination, and is
based on the appraised value at the time of origination if the "lease option
purchase price" was set more than 24 months prior to origination.
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STANDARD DOCUMENTATION PROGRAMS
The three standard documentation programs are:
o FULL DOCUMENTATION PROGRAM, where applicants are required
to submit two written forms of verification of stable
income for the preceding 24 months;
o LIMITED DOCUMENTATION PROGRAM, where one form of
verification of stable income is required for the
preceding 12 months (6 months if the LTV is 80% or less);
and
o STATED INCOME DOCUMENTATION PROGRAM, where an applicant
may be qualified based upon monthly income as stated on
the mortgage loan application if the applicant meets
specific criteria.
These programs require that, with respect to each applicant,
there be a telephone verification of each applicant's employment within 24 hours
prior to closing. Verification of the source of funds (if any) required to be
deposited by the applicant into escrow in the case of a purchase money loan is
generally required. On a case-by-case basis, exceptions to the guidelines may be
made, as described below under "--EXCEPTIONs."
SPECIALTY RESIDENTIAL LOAN PROGRAMS
The three specialty residential loan programs are:
o NO QUALIFIER PROGRAM, where applicants are not required to
document employment or income, and no debt
service-to-income ratios are calculated; the loan
application is to be completed with only basic
information, such as name, address, social security
number, telephone number, and property address; a minimum
property value of $50,000 is required, and a maximum of
70% LTV and 80% combined loan-to-value, CLTV, is
permitted. The combined CLTV of a mortgage loan is equal
to the ratio expressed as a percentage of the sum of:
o the principal balance of the mortgage loan as
of the date of origination and
o the outstanding principal balances of any
mortgage loans junior in lien priority and
secured by the related mortgaged property as of
the date of origination
to the value of the mortgaged property as defined in the
servicing agreement at the time of origination of the
mortgage loan.
o MORTGAGE ONLY PROGRAM, where the overall credit profile of
an applicant may be poor; applicants must provide a
previous twelve month mortgage history aside from rental
history; a maximum 90% CLTV and a maximum 50% debt
service-to-income ratio are permitted; all existing
mortgage loans must be verified through the lender, a
third party servicer, a credit reporting agency, or
canceled checks; private mortgage loans held by an
individual and verified are acceptable if twelve months of
cancelled checks are provided; an applicant cannot have
experienced any rolling mortgage late payments or
foreclosures; discharged bankruptcies are acceptable, and
those applicants with mortgage loans that are currently
delinquent may still be eligible if
S-61
the mortgage loan is brought current prior to closing, and
the cause of such delinquency is well documented and
satisfactorily explained; and open charge-offs, collection
accounts and judgments may exist if they are not currently
or likely to attach to the property.
o NO RATIO PROGRAM, where applicants are not required to
document employment or income, and no debt
service-to-income ratios are calculated; a minimum
property value of $50,000 is required, and a maximum 75%
LTV and 90% CLTV is permitted; the applicant must have an
overall good, established credit history, and meet credit
depth requirements of at least five trade lines, with
minimum balances of $1,000, with activity dating back at
least five years; a maximum of two 30-day late payments
within the last 12 months is acceptable on an existing
mortgage loan.
These three specialty residential loan programs permit only
owner-occupied, single family residences, with loan amounts between $25,000 to
$350,000, unless otherwise specified. Attached and detached planned unit
developments or PUD'S, condominiums, two-to-four family properties and
manufactured homes are permitted on a case by case basis. These specialty
programs may be used only for purchases or rate and term or cash-out refinances.
In the case of a refinance mortgage loan, the applicant must have owned the
property for at least twelve months, or if the applicant has owned the property
for less than twelve months, the lesser of the sales price or appraised value is
used to calculate the LTV.
CATEGORIES AND CRITERIA
The guidelines include the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
o Under the "A" RISK CATEGORY, the applicant must have
generally repaid installment or revolving debt according
to its terms. A maximum of one 30-day late payment, and no
60-day late payments, within the last 12 months, is
acceptable on an existing mortgage loan. An existing
mortgage loan is not required to be current at the time
the application is submitted. Generally, no more than $500
of open charge-offs or collection accounts shall have
occurred within the last 12 months. Charge-offs or
collection accounts not affecting title may remain open if
they are over two years old or the LTV of the mortgage
loan is 70% or less. No bankruptcy or notice of default
filings may have occurred during the preceding 24 months.
The mortgaged property must be in at least average
condition. A maximum LTV of up to 90% for a mortgage loan
originated under the Full Documentation program, 85% for
the Limited Documentation program and 85% for the Stated
Income Documentation program is permitted on a single
family, owner-occupied property. A maximum LTV of 80% is
permitted for a mortgage loan originated under the Full
Documentation program (or 75% and 70% for mortgage loans
originated under the Limited Documentation or Stated
Income Documentation programs, respectively) for a
non-owner occupied property. The debt service-to-income
ratio is generally 45% or less. The guidelines permit a
50% debt service-to-income ratio with a $500 disposable
monthly income per family member.
o Under the "A-" RISK CATEGORY, an applicant must have
generally repaid installment or revolving debt according
to its terms. A maximum of two 30-day late payments, and
no 60-day late payments, within the last 12 months, is
acceptable on an existing
S-62
mortgage loan. An existing mortgage loan is not
required to be current at the time the application is
submitted. Minor derogatory items are allowed on
non-mortgage credit, and a letter of explanation may be
required. Generally, no more than $1,000 of open
charge-offs or collection accounts shall have occurred
within the last 12 months. Charge-offs, judgments or
collection accounts not affecting title may remain open
after funding of the loan if they are over two years old
or the LTV of the mortgage loan is 70% or less. No
bankruptcy or notice of default filings may have occurred
during the preceding 18 months. The mortgaged property
must be in at least average condition. A maximum LTV of
90% for a mortgage loan originated under the Full
Documentation program, 85% for a mortgage loan originated
under the Limited Documentation program, or 80% for a
mortgage loan originated under the Stated Income
Documentation program, is permitted on owner-occupied
property. A maximum LTV of 80% (or 75% and 70% for a
mortgage loan originated under the Limited Documentation
or Stated Income Documentation programs, respectively) is
permitted on a non-owner-occupied property. The debt
service-to-income ratio is generally 50% or less.
o Under the "B" RISK CATEGORY, an applicant may have
generally repaid installment or revolving debt according
to its terms. A maximum of three 30-day late payments, or
two 30-day late payments and one 60-day late payment,
within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is not required
to be current at the time the application is submitted. As
to non-mortgage credit, some prior defaults may have
occurred, and a letter of explanation may be required.
Generally, no more than $2,000 of open charge-offs or
collection accounts shall have occurred within the last 12
months. Charge-offs, judgments or open collection accounts
not affecting title may remain open after funding of the
loan if they are over two years old or the LTV of the
mortgage loan is 80% or less. No bankruptcy or notice of
default filing may have occurred during the preceding 18
months. The mortgaged property must be in at least average
condition. A maximum LTV of 85% (or 80% and 75% for a
mortgage loan originated under the Limited Documentation
and Stated Income Documentation programs, respectively) is
permitted on an owner-occupied property under the Full
Documentation program. A maximum LTV of 75% (or 70% and
65% for a mortgage loan originated under the Limited
Documentation or Stated Income Documentation programs,
respectively) is permitted on a non-owner-occupied
property. The debt service-to-income ratio is generally
50% or less. The guidelines permit a 55% debt
service-to-income ratio with a $500 disposable monthly
income per family member.
o Under the "C" RISK CATEGORY, an applicant may have
experienced significant credit problems in the past. A
maximum of six 30-day late payments, two 60-day late
payments or one 90-day late payment, within the last 12
months is acceptable on an existing mortgage loan. An
existing mortgage loan is not required to be current at
the time the application is submitted. As to non-mortgage
credit, significant prior defaults may have occurred.
Generally, no more than $4,000 of open charge-offs,
judgments or collection accounts shall have occurred
within the last 12 months. Charge-offs or collection
accounts not affecting title may remain open after the
funding of the loan. No bankruptcy or notice of default
filings may have occurred during the preceding 12 months.
The mortgaged property must be in average condition.
Generally, a maximum LTV of 80% for a mortgage loan on an
owner-occupied property under the Full Documentation
program (or 70% and 65% for a mortgage loan originated
under the Limited Documentation and Stated Income
S-63
Documentation programs, respectively) is permitted. A
maximum LTV of 70% (or 65% and 60% for a mortgage loan
originated under the Limited Documentation or Stated
Income Documentation programs, respectively) is permitted
on a non-owner-occupied property under the Full
Documentation program. The debt service-to-income ratio is
generally 55% or less. The guidelines require a 50% debt
service-to-income ratio at greater than 75% LTV.
o Under the "C-" OR "D" RISK CATEGORIES, an applicant will
have experienced significant credit problems in the past.
As to mortgage credit, the applicant may have had a
history of being generally 30, 60 or 90 days delinquent,
and a maximum of 119 days late within the last 12 months
is acceptable. An existing mortgage loan is not required
to be current at the time the application is submitted. As
to non-mortgage credit, significant prior defaults may
have occurred. No open collection accounts or open
charge-offs affecting title may remain open after funding
of the loan. A bankruptcy, notice of default, notice of
sale filing or foreclosure is permitted in the last 12
months, but must be discharged or completed, on a
case-by-case basis. The mortgaged property must be in
average or better condition. A maximum LTV of 70% is
permitted on an owner-occupied property under the Full
Documentation program (the Limited Documentation and
Stated Income programs are not offered). A maximum LTV of
60% is permitted on a non-owner occupied property under
the Full Documentation program. The debt service-to-income
ratio generally is 60% or less.
EXCEPTIONS
As described above, the foregoing categories and criteria are
guidelines only. On a case-by-case basis, it may be determined that an applicant
warrants a risk category upgrade, a debt service-to-income ratio exception, a
pricing exception, a loan-to-value exception or an exception from certain
requirements of a particular risk category, referred to as an UPGRADE or an
EXCEPTION. An upgrade or exception may generally be allowed if the application
reflects certain compensating factors, including, among other things: low LTV;
pride of ownership; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; stable employment; or ownership of current residence
for five or more years; or, if the applicant places a down payment through
escrow of at least 20% of the purchase price of the mortgaged property, or if
the new loan reduces the applicant's monthly aggregate mortgage payment by 25%
or more. An upgrade or exception may be permitted if the applicant has no 30 day
mortgage late payments in the past 24 months. Accordingly, certain applicants
may qualify in a more favorable risk category that, in the absence of such
compensating factors, would satisfy only the criteria of a less favorable risk
category. In no event, however, will any applicant be granted an upgrade into a
risk category more than one level or grade higher than the category into which
the applicant, in the absence of the compensating factor, would have qualified.
MERI-QWIK
Some mortgage loans may have been originated in accordance
with the Meri-Qwik upgrade and exception program. Using the Meri-Qwik program
credit scoring upgrade program, a proposed mortgage loan is underwritten and
graded according to the guidelines, without the use of any type of formal or
informal upgrade due to compensating factors. The applicant's maximum debt
service-to-income ratio must qualify at the upgraded credit level. The Meri-Qwik
program can improve the applicant's credit grade by only one level. The
Meri-Qwik upgrade cannot be combined with any other risk upgrade point system.
Only 6 Month adjustable rate mortgage loans, 2/6 LIBOR mortgage loans, 3/6
S-64
LIBOR mortgage loans and fixed rate mortgage loans are eligible. Only mortgage
loans underwritten in accordance with the standard documentation programs are
eligible for Meri-Qwik upgrade; mortgage loans underwritten in accordance with
the specialty residential loan programs are not eligible for Meri-Qwik upgrade.
INDEX APPLICABLE TO THE ADJUSTABLE RATE LOANS
With respect to substantially all of the adjustable rate loans
and as of any related adjustment date, the index is six-month LIBOR, as
published in THE WALL STREET JOURNAL and most recently available 45 days prior
to such adjustment date. If the index becomes unpublished or is otherwise
unavailable, the servicer will select an alternative index that is based upon
comparable information.
RBMG
A majority of the subprime credit risk mortgage loans
originated or acquired by Meritage are serviced by RBMG on an interim basis
pending the disposition to a trust in connection with a securitization, or other
disposition on a whole loan basis, of such mortgage loans. Upon the disposition
of such mortgage loans, the servicing for such mortgage loans either is retained
by RBMG, pending transfer, pursuant to arrangements currently in effect, to a
subservicer in accordance with an existing subservicing agreement by and between
RBMG and the subservicer, or is transferred as part of such mortgage loans as
whole loans in the secondary mortgage market or concurrently with the
securitization of the related mortgage loans. As a result of being serviced by
third parties, substantial information is not currently available as to the
delinquency, foreclosure, bankruptcy or loss experience of the entire portfolio
of mortgage loans originated or acquired by Meritage and serviced by RBMG.
However, see "SERVICING OF THE MORTGAGE LOANS--THE SUBSERVICER" below for
information regarding the delinquency, foreclosure, bankruptcy and REO Property
experience of the subservicer.
The following table sets forth information relating to the
delinquency experience at the end of the indicated periods for the subprime
mortgage loans originated or acquired by Meritage or Resource Bancshares
Mortgage and serviced by the subservicer. However, because many of the subprime
mortgage loans originated or acquired by Meritage or Resource Bancshares
Mortgage during the indicated periods may have been sold to third parties and
are not serviced by RBMG or the subservicer, the following information does not
relate to all the subprime mortgage loans originated or acquired by Meritage or
Resource Bancshares Mortgage during the indicated periods. The indicated periods
of delinquency are based on the number of days past due on a contractual basis.
No mortgage loan is considered delinquent for these purposes until it is one
month past due on a contractual basis and for these purposes the number of days
it is reported as being delinquent is the same number of days it is
contractually past due. The information contained in the monthly remittance
reports that will be sent to investors will be compiled using the same
methodology as that used to compile the information contained in the table
below.
S-65
DELINQUENCIES AND FORECLOSURES
(Dollars in Thousands)
As of December 31, 1997 As of December 31, 1998
-------------------------------------------- -----------------------------------------------
Percent Percent
--------------------- -------------------- -------------------- ------------------------
By By By
Number By Dollar Number Dollar By Number By Dollar By Number By Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
---------- --------- ---------- --------- ---------- --------- --------- ----------
Total Portfolio 1,590 $178,427 100.00% 100.00% 2,548 $281,286 100.00% 100.00%
Period of
Delinquency(1)
30-59 days 28 2,631 2.00 1.79 96 8,841 3.77 3.14
60-89 days 22 1,532 0.78 0.77 30 3,224 1.18 1.15
90 days or more 10 914 1.38 1.59 125 13,196 4.91 4.69
---------- --------- ---------- --------- ---------- --------- --------- ----------
Total Delinquent Loans 60 $5,077 4.17% 4.15% 251 $25,261 9.85% 8.98%
---------- --------- ---------- --------- ---------- --------- --------- ----------
Loans in foreclosure(2) 1 $35 1.29% 1.50% 55 $5,778 2.16% 2.05%
========== ========= ========== ========= ========== ========= ========= ==========
As of September 30, 1999
------------------------------------------------
Percent
---------------------- ------------------------
By Number By Dollar By Number By Dollar
of Loans Amount of Loans Amount
---------- ---------- ---------- -----------
Total Portfolio 3,657 $404,213 100.00% 100.00%
Period of
Delinquency(1)
30-59 days 94 10,261 2.57 2.54
60-89 days 48 5,839 1.31 1.44
90 days or more 161 16,312 4.40 4.04
---------- ---------- ---------- -----------
Total Delinquent Loans 303 $32,412 8.29% 8.02%
---------- ---------- ---------- -----------
Loans in foreclosure(2) 79 $8,452 2.16% 2.09%
========== ========== ========== ===========
- --------------------
(1) Includes 58 loans totaling $5,707,983 for September 30,
1999, which were more than 30 days past due at the time of transfer to
the subservicer.
(2) Loans in foreclosure are also included under the heading "Total
Delinquent Loans."
S-66
DESCRIPTION OF THE NOTES
The following summaries describe particular provisions of the
indenture applicable to the notes. The description of the notes and the
indenture that follows is a summary of terms and provisions relating
specifically to the notes, and does not purport to be complete. Such description
is subject to, and is qualified in its entirety by reference to, the actual
terms and provisions of the indenture (including the form of the notes). For
more details regarding the terms of the indenture, prospective investors in the
notes are advised to review the indenture, a copy of which Meritage will provide
(without exhibits) without charge upon written request addressed to Meritage c/o
Resource Bancshares Mortgage Group, Inc. at 7909 Parklane Road, Columbia, South
Carolina 29223, Attention: Jordan Dorchuck.
GENERAL
The notes will be issued under an indenture, to be dated as of
November 1, 1999, the INDENTURE, between the issuer and the indenture trustee.
Two classes of notes will be issued: the class A-1 notes and the class A-2
notes. The class A-1 notes will be principally secured by the group I mortgage
loans, and the class A-2 notes will be principally secured by the group II
mortgage loans. Payments on the class A-1 notes will be made generally from
Available Funds for group I, and payments on the class A-2 notes will be made
generally from Available Funds for group II. The notes represent non-recourse,
asset-backed obligations of the issuer, and proceeds of the assets of the trust
will be the sole source of payments on the notes. The notes will not represent
an interest in or obligation of the sponsor, the company, the servicer, the
indenture trustee, the owner trustee, the note insurer, any of their respective
affiliates or any other entity, and will not represent an interest in or
recourse obligation of the issuer.
All payments on the notes will be distributed by or on behalf
of the indenture trustee to each noteholder of record on the record date for the
related payment date. Payments on notes issued in book-entry form will be made
by or on behalf of the indenture trustee to The Depository Trust Company,
referred to as DTC. Payments on definitive notes generally will be made either:
o by check mailed to the address of each noteholder as it appears in
the register maintained by the indenture trustee or
o by wire transfer of immediately Available Funds to the account of
a noteholder, if such noteholder (a) is the registered holder of
definitive notes having an initial principal amount of at least
$1,000,000 and (b) has provided the indenture trustee with wiring
instructions in writing five business days prior to the record
date or has provided the indenture trustee with such instructions
for any previous payment date. A fee may be charged by the
indenture trustee to a noteholder holding definitive notes for any
payment made by wire transfer.
Notwithstanding the above, the final payment in redemption of any definitive
note will be made only upon presentation and surrender of such definitive note
at the office or agency designated by the indenture trustee for that purpose.
The notes will be issued in denominations of not less than
$1,000 principal amount and in integral dollar multiples, with the exception of
one note of each class which may be issued in a lesser amount.
The class A-1 notes in the aggregate will have an aggregate
original Note Balance of $85,000,000. The class A-2 notes in the aggregate will
have an aggregate original Note Balance of $40,000,000. The Note Interest Rate
for each class is adjustable and is calculated as described under the
S-67
section "--PAYMENT On THE NOTES" in this prospectus supplement. The aggregate
class A-1 original Note Balance equals approximately 100% of the sum of the
group I initial balance. The aggregate class A-2 original Note Balance equals
approximately 100% of the sum of the group II initial balance. The primary
source of funds for payment to the noteholders of each class of notes will be
the mortgage loans as described under the section "--PAYMENTS ON THe NOTES."
BOOK-ENTRY REGISTRATION AND DEFINITIVE NOTES
Persons in whose name a note is registered in the register
maintained by the indenture trustee are the OWNERS of the notes. For so long as
the notes are in book-entry form with DTC, the only owner under the indenture
will be Cede & Co., the nominee of DTC. Beneficial owners will receive all
payments of principal of and interest on, the notes from the indenture trustee
through DTC. No person acquiring a beneficial interest in a note will be
entitled to receive a definitive note, except in the event that physical notes
are issued because DTC becomes unable or unwilling to act as depository and no
suitable replacement can be found. All references to the owners of notes mean
and include the rights of the beneficial owners. See "DESCRIPTION OF THE
SECURITIES--FORM OF SECURITIES" in the prospectus.
ASSIGNMENT OF MORTGAGE LOANS
The mortgage loans were originated or acquired by Meritage. On
or prior to the closing date, the company will acquire the mortgage loans and
will sell the mortgage loans to RBMG Funding Co., RBMG Funding Co. will sell the
mortgage loans to the sponsor, the sponsor will sell the mortgage loans to the
issuer, and the issuer will pledge the mortgage loans to the indenture trustee
as security for the notes.
At the time of issuance of the notes, the issuer will pledge
all of its right, title and interest in and to the mortgage loans, including all
principal and interest due on each mortgage loan after the cut-off date,
together with its right, title and interest in and to the proceeds of any
insurance policies received after the cut-off date, without recourse, to the
indenture trustee pursuant to the indenture as security for the notes; PROVIDED,
HOWEVER, that Meritage, the company, RBMG Funding Co. or the sponsor, as
applicable, will reserve and retain all its right, title and interest in and to
principal and interest payments due on such mortgage loan on or prior to the
cut-off date (whether or not received on or prior to such cut-off date), and to
prepayments and prepayment charges received on or prior to the cut-off date. The
indenture trustee, concurrently with the pledge of the mortgage loans to the
indenture trustee as security for the notes, will authenticate and deliver the
notes at the direction of the issuer in exchange for, among other things, the
mortgage loans.
The indenture will require the issuer to deliver to the
indenture trustee or a custodian on behalf of the indenture trustee the mortgage
loans, the mortgage notes endorsed by Meritage, or the last holder of record,
without recourse to the indenture trustee, the related mortgages or deeds of
trust with evidence of recording, all intervening mortgage assignments, if any,
and other documents relating to the mortgage loans.
The indenture trustee or a custodian on behalf of the
indenture trustee will review the mortgage files delivered to it on behalf of
the indenture trustee on the closing date and within 180 days and 270 days after
the closing date and if any document required to be included in any mortgage
file is found to be missing or to be defective in any material respect and such
defect is not cured within 60 days following notification of the defect to the
indenture trustee, the issuer, the sponsor, the company, the note insurer and
Meritage by the indenture trustee, the indenture trustee will require either
that the related
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mortgage loan be removed from the mortgage pool or that a mortgage loan
conforming to the requirements of the indenture be substituted for the mortgage
loan in the manner described below.
In connection with the sale of the mortgage loans to RBMG
Funding Co. pursuant to the company sale agreement, the company will make
representations and warranties as to the accuracy in all material respects of
the information set forth on a schedule identifying and describing each mortgage
loan. In addition, the company will make other representations and warranties
regarding the mortgage loans, including, for instance, that each mortgage loan,
at its origination, complied in all material respects with applicable state and
federal laws, that each mortgage is a valid first priority lien, that, as of the
cut-off date, no mortgage loan included in the mortgage pool as of the closing
date was more than 59 days past due, that each mortgaged property consists of a
one- to four-family residential property or unit in a condominium or planned
unit development, that the company had good title to each mortgage loan prior to
such transfer and that the originator was authorized to originate each mortgage
loan. The rights of RBMG Funding Co. to enforce remedies for breaches of such
representations and warranties in the sale agreement against the company will be
assigned by RBMG Funding Co. to the sponsor pursuant to the RBMG Funding Co.
sale agreement, by the sponsor to the issuer pursuant to the sponsor sale
agreement, and by the issuer to the indenture trustee pursuant to the indenture.
Meritage will guarantee to the sponsor, the issuer, and the indenture trustee
the accuracy of the representations and warranties made by the company in the
company sale agreement.
If with respect to any mortgage loan:
o a defect in any document constituting a part of the
related mortgage file remains uncured within the period
specified above and materially and adversely affects the
value of any such mortgage loan or materially and
adversely affects the interest of the indenture trustee,
the noteholders or the note insurer, or
o a breach of any representation or warranty made by RBMG
Funding Co. relating to such mortgage loan occurs and such
breach materially and adversely affects the value of any
such mortgage loan or materially and adversely affects the
interests of the indenture trustee, the noteholders or the
note insurer,
then, the indenture trustee will enforce the remedies for such defects or
breaches against Meritage under its guarantee by requiring Meritage to remove
the related mortgage loan from the trust by remitting to the indenture trustee
an amount equal to the stated principal balance of the defective mortgage loan
(plus Realized Losses) together with interest accruing at the coupon rate (net
of the applicable Servicing Fee Rate) on the defective mortgage loan from the
date interest was last paid by the mortgagor to the end of the collection period
preceding the 18th day of the month in which the payment date occurs, or if the
day is not a business day, then the next succeeding business day, less any
payments received during the related collection period in respect of such
defective mortgage loan.
A BUSINESS DAY is any day other than:
o a Saturday or Sunday or
o a day on which banking institutions in the State of
Nevada, the State of Delaware, the State of New Jersey,
the State of New York, the State of South Carolina or the
city in which the corporate trust office of the indenture
trustee or in which the note insurer's principal office is
located are authorized or obligated by law, regulation,
executive order or governmental decree to be closed.
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Meritage will also have the option, but not the obligation, to
substitute for such defective mortgage loan a qualified replacement mortgage
loan. Upon delivery of a qualified replacement mortgage loan and deposit of
certain amounts in the note account as set forth in the indenture, or deposit of
the purchase price in the note account and receipt by the indenture trustee and
the note insurer of written notification of any substitution or removal, as the
case may be, the indenture trustee shall execute and deliver an instrument of
transfer or assignment necessary to vest legal and beneficial ownership of the
defective mortgage loan (including any property acquired or proceeds of any
insurance policy) in Meritage and release the defective mortgage loan from the
trust.
The obligation of Meritage to cure, remove or substitute any
mortgage loan as described above will constitute the sole remedy available to
noteholders, the note insurer, with some exceptions, or the indenture trustee
for a defective mortgage loan.
PAYMENTS ON THE NOTES
Payments on the notes will be distributed by the indenture
trustee, in its capacity as the paying agent, on each payment date, commencing
with the payment date in December 1999, to noteholders as of the related record
date in an amount equal to the product of such noteholders' percentage interest
and the amount paid in respect of the notes of the related class. Payments on
the class A-1 notes will be made generally from Available Funds for group I, and
payments on the class A-2 notes will be made generally from Available Funds for
group II. The percentage interest represented by any note will be equal to the
percentage obtained by dividing the aggregate principal balance of such note by
the related Note Balance.
On each payment date, the paying agent will be required to
distribute with respect to each class of notes, the following amounts, in the
following order of priority, out of Available Funds in the related note account
for such class unless otherwise specified:
o FIRST, to the payment of the premiums due to the note insurer, as
well as any unreimbursed Insured Payments;
o SECOND, to the payment of Note Interest to the noteholders of such
class;
o THIRD, to the payment of Monthly Principal to the noteholders of
such class;
o FOURTH, to the payment of any Note Interest for the other class
that remains unpaid after the payment described in clause SECOND
above, to the noteholders of that other class;
o FIFTH, to the payment of any Overcollateralization Deficit for
such class, after taking into account the payment of the Monthly
Principal for that class, to the noteholders of such class;
o SIXTH, to the payment of any remaining Overcollateralization
Deficit for such class, out of the note account for the other
class, after taking into account the payments described in clauses
FIRST through FIFTH for that other class;
o SEVENTH, to reduce the Note Balance of such class by an amount
equal to the lesser of:
(a) Excess Cash with respect to the related group for such
payment date, and
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(b) either the amount necessary for the Overcollateralization
Amount for such class to equal the Required
Overcollateralization Amount for such class on such payment
date (after paying the Monthly Principal and any
Overcollateralization Deficit of such class for such payment
date) or the amount necessary to reduce the Note Balance of
such class to zero, whichever is less;
o EIGHTH, to reimburse the note insurer for any amounts due and
owing under the insurance agreement;
o NINTH, to the reserve account, in the event that the
Overcollateralization Amount of such class is less than the
Required Overcollateralization Amount for such class, out of
amounts on deposit in the note account of the other class, to the
extent of any such shortfall;
o TENTH, to the payment of any Available Funds Cap Carry-Forward
Amounts of such class;
o ELEVENTH, to the payment of any amounts due the noteholders of
such class as result of shortfalls in interest resulting from
prepayments and application of the Soldiers' and Sailors' Civil
Relief Act of 1940, with respect to mortgage loans in the related
group;
o TWELFTH, to the payment of an amount equal to any remaining
shortfall in the amounts described in the previous two clauses, in
that order, to the noteholders of such class out of amounts on
deposit in the note account related to the other class; and
o THIRTEENTH, to reimburse the indenture trustee, the owner trustee,
the servicer and the issuer for certain advances and expenses not
previously reimbursed.
Any Available Funds remaining after application in the manner
specified above will be released to the holder(s) of the trust certificates on
such payment date, free from the lien of the indenture, and such amounts will
not be available to make payments on the Note Balances or payments to the note
insurer on any subsequent payment date to the extent of any draws on the
financial guaranty insurance policy as to which the note insurer is subrogated
to the rights of that noteholder to interest and principal.
In the event that, with respect to a particular payment date,
Available Funds for a group or, to the limited extent provided in this
prospectus supplement, Available Funds for the other group on such date, are not
sufficient to pay any portion of Note Interest for the related class of notes,
the indenture trustee will file a claim on the financial guaranty insurance
policy in an amount equal to such deficiency and apply the insured payment under
the financial guaranty insurance policy in respect of such claim to the payment
of the deficiency in such Note Interest. In addition, the indenture trustee will
file a claim on the financial guaranty insurance policy in an amount equal to
any Overcollateralization Deficit for a class on a payment date (after taking
into account payments in respect of Monthly Principal and Excess Cash on such
payment date from either group and funds applied from the reserve account) and
apply the portion of the insured payment under the financial guaranty insurance
policy related to such Overcollateralization Deficit to reduce the Note Balance
on such payment date by the amount of such Overcollateralization Deficit. Any
insured payment paid under the financial guaranty insurance policy in respect of
a class of notes to make up any Overcollateralization Deficit will be paid to
the related noteholders, to reduce the related Note Balance, until such Note
Balance is reduced to zero.
In no event will the aggregate payments of principal to
noteholders of a class exceed the original Note Balance of such class. All
calculations of interest on the notes will be computed on the basis of the
actual number of days elapsed in the related Interest Period and in a year of
360 days.
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On any payment date, the Available Funds Cap Rate may limit
the related Note Interest rate because the rate set by the related Available
Funds Cap Rate is less than the interest rate on the notes for each interest
period after the initial interest period. If this occurs, and if the amount of
any resulting shortfall is not covered by payments of Excess Cash from the other
group, the shortfall will be carried forward and be due and payable on the
following payment date and shall accrue interest, at the Note Interest rate,
until paid. This shortfall is referred to as the Available Funds Cap
Carry-Forward Amount. The financial guaranty insurance policy does not cover the
Available Funds Cap Carry-Forward Amount; the payment of such amount may be
funded only from any excess cash that would otherwise be paid to the holder(s)
of the trust certificates. The ratings assigned to the notes do not address the
payment of the Available Funds Cap Carry-Forward Amount.
CALCULATION OF ONE-MONTH LIBOR
On each INTEREST DETERMINATION DATE, which is the second
business day preceding each payment date or, in the case of the first payment
date, the second business day preceding the closing date, the indenture trustee
will determine the London interbank offered rate for one-month U.S. dollar
deposits, or LIBOR, for the next accrual period for the notes. LIBOR will be
established on the basis of the offered rates of the rEFERENCE BANKS for
one-month U.S. dollar deposits, as they appear on the Telerate Page 3750, as of
11:00 a.m., London time, on the 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; and rEFERENCE BANKS means
leading banks which are engaged in transactions in Eurodollar deposits in the
international Eurocurrency market with an established place of business in
London, which have been selected by the indenture trustee after consultation
with the servicer and which are not controlling, controlled by, or under common
control with the sponsor.
On each interest determination date, the indenture trustee
will determine LIBOR for the next accrual period for the notes as follows:
FIRST, on the basis of the offered rate for one-month United
States dollar deposits, as this rate appears on Telerate Page 3750, as
of 11:00 a.m., London time.
SECOND, if the rate does not appear on Telerate Page 3750 as
of 11:00 a.m. London time, LIBOR will be the arithmetic mean of the
offered quotations of two or more reference banks, rounded to the
nearest whole multiple of 1/16%.
THIRD, if fewer than two reference banks provide offered
quotations, LIBOR will be the higher of:
o LIBOR as determined on the previous interest determination
date and
o the reserve interest rate.
The RESERVE INTEREST RATE is the rate per annum that the
indenture trustee determines to be either the arithmetic mean, rounded 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 indenture trustee, are quoting on the
interest determination date to the principal London offices of leading banks in
the London interbank market or, in the event that the indenture trustee cannot
determine the arithmetic mean, the lowest one-month U.S. dollar lending rate
which New York City banks, selected by the indenture trustee, are quoting on the
interest determination date to leading European banks.
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The establishment of LIBOR on each interest determination date
by the indenture trustee and the indenture trustee's calculation of the rate of
interest applicable to the notes for the accrual period will, in the absence of
manifest error, be final and binding. Each rate of interest may be obtained by
telephoning the indenture trustee at 1-800-735-7777.
NOTE ACCOUNTS
Pursuant to the indenture, the indenture trustee shall
establish and maintain an account with respect to each class of Note Balances
from which all payments with respect to the related note will be made. As
described below, not later than the servicer remittance date, the servicer will
be required pursuant to the servicing agreement to wire transfer to the
indenture trustee for deposit in the appropriate note account the sum (without
duplication) of all amounts on deposit in the collection account that constitute
any portion of Available Funds for the related payment date.
All or a portion of each note account may be invested and
reinvested by the indenture trustee in one or more Permitted Investments bearing
interest or sold at a discount. The indenture trustee or any affiliate may be
the obligor on any investment in the note accounts which otherwise qualifies as
a Permitted Investment. No investment in the note accounts may mature later than
the business day preceding the payment date.
The indenture trustee will not in any way be held liable by
reason of any insufficiency in the note accounts resulting from any loss on any
Permitted Investment unless the indenture trustee is the obligor on the
investment.
All income or other gain from investments in each note account
will not be available to noteholders or otherwise subject to any claims or
rights of the noteholders and will be held in the note account for the benefit
of the issuer, subject to withdrawal from time to time as permitted by the
indenture. Any loss resulting from the investments will be for the account of
the issuer. The issuer will be required to deposit the amount of any loss
immediately upon the realization of the loss to the extent the loss will not be
offset by other income or gain from investments in the note account and then
available for such application.
The indenture trustee may purchase from or sell Permitted
Investments to itself or an affiliate, as principal or agent. All Permitted
Investments in a trust account under the indenture shall be made in the name of
the indenture trustee for the benefit of the noteholders and the note insurer.
OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to each class of notes will be
provided in part by overcollateralization resulting from the principal balance
for each mortgage group as of the end of each due period exceeding the related
note principal balance for the related payment date.
The notes are secured by a pool of mortgage loans. The
mortgage loans have coupon rates which on average are higher than the sum of:
o the Note Interest Rate, and
o the fees payable by the trust to the servicer, the
indenture trustee, the owner trustee and the note insurer.
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In the absence of losses and delinquencies on the mortgage
loans, the trust will have excess cashflow available to provide credit
enhancement. The overcollateralization available to absorb losses on the
mortgage loans is the difference between:
o the aggregate principal balance of the mortgage loans, and
o the aggregate outstanding principal balance of the notes.
The amount of overcollateralization must be maintained at
specified required levels, which are permitted to reduce or step down over time.
Monthly Excess Cash plus any amounts received under the cap
agreement with respect to a group are applied to accelerate the pay down of the
Note Balance for that group until the specified required level of
overcollateralization is reached. Excess cash for each group, plus payments
received under the interest rate cap agreement, will be available to pay down
the note balance of the related class of notes in order to reach the required
level of overcollateralization. Any Excess Cash remaining after payments on the
related class of notes, payments to the note insurer in respect of such notes
and payment of any required reserve account deposit will be released to the
holder of the residual interests and will not be available for any subsequent
payments to the noteholders or the note insurer. However, if amounts payable to
the note insurer and to the noteholders as interest cannot be paid in full from
funds available from the related group of mortgage loans, then the shortfall
shall be made up from funds available (including amounts of Excess Cash and
amounts received under the interest rate cap agreement) from the other group.
The trust will use the Excess Cash described above to make
payments of principal on the notes for the purpose of maintaining the
overcollateralization at its required amount. Using mortgage loan coupon
payments received by the trust to pay principal on the notes has the effect of
amortizing the notes more quickly, and to a greater degree, than the mortgage
loans amortize. This feature thus builds up overcollateralization, or
replenishes overcollateralization which would otherwise be reduced as a result
of losses on the mortgage loans. If, on any payment date, the amount of
overcollateralization with respect to a group is below the specified required
level for that group, after taking into account the application of Excess Cash
from that group, the other group's Available Funds remaining after application
of the first seven items under "PAYMENTS ON NOTES", may be deposited into a
reserve account. Once an amount is deposited into the reserve account, it may be
used for the benefit of either group to fund fees, Note Interest, or any
Overcollateralization Deficit, as directed by the Note Insurer.
OVERCOLLATERALIZATION AND THE CAP AGREEMENT. The cap agreement
has been entered into for the benefit of the indenture trustee on behalf of the
noteholders and the note insurer for the purpose of increasing the amount of
Excess Cash for each group that will be available to support the
overcollateralization feature. Amounts received under the cap agreement are not
available to increase the available funds cap rate for either class of notes, or
to "uncap" either class of notes. However, the interest rate cap agreement will
provide an additional source of funds in certain circumstances in the event
excess cash decreases as a result of an increase in LIBOR.
OVERCOLLATERALIZATION AND THE FINANCIAL GUARANTY INSURANCE
POLICY. The indenture will require the indenture trustee to file a claim for an
insured payment under the financial guaranty insurance policy not later than
12:00 noon (New York City time) on the third business day prior to any payment
date as to which the indenture trustee has determined that an
Overcollateralization Deficit will occur.
Accordingly, the financial guaranty insurance policy is
similar to the provisions described above with respect to the
overcollateralization provisions insofar as the financial guaranty insurance
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policy guarantees ultimate payment of the full amount of the related Note
Balance, rather than current payments of the amounts of any Realized Losses to
the noteholders. Investors in the notes should realize that, under certain loss
or delinquency scenarios, they may temporarily receive no payments to reduce the
related Note Balance.
REPORTS TO NOTEHOLDERS
Monthly reports concerning the trust and the notes will be
made available to the noteholders.
Note factor information may be obtained from the indenture
trustee by placing a telephone call to (800) 735-7777.
REDEMPTION OF THE NOTES
The notes will be subject to redemption, in whole but not in
part, at the option of the servicer, on or after the payment date on which the
aggregate outstanding Note Balance of the notes has declined to less than 10% of
the aggregate Note Balance of the notes as of the closing date. The note insurer
must give its consent if the exercise of this option will result in a draw on
the financial guaranty insurance policy. The date upon which such option may be
exercised is referred to as the REDEMPTION DATE.
The notes will be redeemed at a redemption price of 100% of
the then outstanding Note Balance of the notes plus accrued but unpaid interest
(including any Available Funds Cap Carry-Forward Amount) through the end of the
Interest Period preceding the related payment date, plus any amounts owing to
the indenture trustee and the servicer; PROVIDED, HOWEVER, that no redemption
may take place unless, in connection with such redemption, any amounts due and
owing to the note insurer under the insurance agreement are paid in full. There
will be no prepayment premium due in connection with such a redemption. Notice
of an optional redemption of the notes must be mailed by the indenture trustee
to the noteholders and the note insurer at least ten days prior to the payment
date set for such redemption.
The payment on the final payment date in connection with the
redemption of the notes shall be in lieu of the payment otherwise required to be
made on such payment date in respect of the notes.
PAYMENTS TO THE HOLDER(S) OF THE TRUST CERTIFICATES
On each payment date, any portion of Available Funds for each
group remaining after making payments of interest and principal due on the
related notes and other payments required on the payment date will be released
to the holder(s) of the trust certificates, free of the lien of the indenture.
These amounts will not be available to make payments on the notes or payments to
the note insurer on any subsequent payment date.
OPTIONAL PURCHASE OF DELINQUENT MORTGAGE LOANS
The servicer will have the option to purchase any mortgage
loan that is 90 days or more delinquent, that is, any mortgage loan on which the
related mortgagor has failed to make three or more consecutive monthly payments,
upon a determination and notice by the servicer that the mortgage loan will
otherwise become subject to foreclosure proceedings. The purchase price to be
paid to the indenture
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trustee to release any mortgage loan from the trust will equal the stated
principal balance of such mortgage loan, plus accrued and unpaid interest to the
due date related to, but not including, the payment date on which the amount of
the purchase price will be paid to the Holders of the related class of notes
plus unreimbursed P&I Advances and servicing advances.
P&I ADVANCES
Subject to the following limitations, the servicer will be
obligated to advance or cause to be advanced on or before each servicer
remittance date from its own funds, or funds in the collection account that are
Payments Ahead, in an amount equal to the aggregate of all payments of principal
and interest, net of the servicing fee, that were due during the related due
period on the mortgage loans and that were delinquent on the related
determination date, plus amounts representing assumed payments not covered by
any current net income on the mortgaged properties acquired by foreclosure or
deed in lieu of foreclosure, commonly referred to as REO Property.
Notwithstanding the foregoing, the servicer is not required to make an advance
of any delinquent balloon payment owing on a balloon loan. The servicer will,
however, make monthly P&I Advances with respect to balloon loans with delinquent
balloon payments, in each case in an amount equal to the assumed monthly
principal and interest payment that would have been due on the related due date
based on the original assumed hypothetical principal amortization schedule for
the applicable balloon loan.
DETERMINATION DATE means, with reference to any payment date,
the fifteenth (15th) day of the month in which such payment date occurs, or if
this is not a business day, then the preceding business day.
P&I Advances are required to be made only to the extent they
are deemed by the servicer to be recoverable from related late collections,
insurance proceeds or Liquidation Proceeds. The purpose of making such P&I
Advances is to maintain a regular cashflow to the noteholders, rather than to
guarantee or insure against losses. The servicer will not be required to make
any P&I Advances with respect to reductions in the amount of the monthly
payments on the mortgage loans due to bankruptcy proceedings or the application
of the Relief Act.
All P&I Advances will be reimbursable to the servicer from
late collections, insurance proceeds and Liquidation Proceeds from the mortgage
loan as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any mortgage loan that are deemed by the
servicer to be nonrecoverable from related late collections, insurance proceeds
or Liquidation Proceeds may be reimbursed to the servicer out of any funds in
the collection account prior to the payments on the notes. In the event the
servicer fails in its obligation to make any P&I Advance, the indenture trustee,
to the extent it has been appointed as successor to the servicer, will be
obligated to make the P&I Advance to the extent required in the servicing
agreement. In this case, the indenture trustee will be reimbursed for P&I
Advances in the same manner described above with respect to the servicer.
COMPENSATING INTEREST PAYMENTS
With respect to any mortgage loan as to which a prepayment in
whole or in part was received, the servicer will be required with respect to the
payment date to remit to the related note account, no later than the related
servicer remittance date, from amounts otherwise payable to the servicer as its
servicing fee for the related collection period, a COMPENSATING INTEREST
PAYMENT, which is an amount equal to the excess, if any, of:
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o 30 days' interest on the stated principal balance of each such
mortgage loan (immediately prior to such payment) at the related
coupon rate, less
o the amount of interest actually received on the mortgage loan
during the related due period for payment on the related notes on
such payment date to insure that the related noteholders do not
incur a shortfall in interest as a result of such prepayment. The
servicer will not be entitled to be reimbursed from collections on
the mortgage loans or any assets of the trust for any compensating
interest payments made.
NOTE EVENTS OF DEFAULT
An Event of Default with respect to each class of notes will
occur:
o if, on any payment date, the interest on the class of notes or the
Monthly Principal with respect to the class of notes on the
payment date remains unpaid or the notes of the class are not paid
in full on or before the final scheduled payment date;
o if negative covenants in the indenture or covenants relating to
redemption of the notes are not observed;
o if any other covenant of the issuer set forth in the indenture,
the servicing agreement, the sponsor sale agreement, or the
insurance agreement is not observed and the failure continues for
a period of sixty days after notice to the issuer by the indenture
trustee or to the issuer and the indenture trustee by the
noteholders evidencing at least 25% in aggregate Note Balance of
the related class;
o if any representation or warranty made by the issuer in the
indenture, the servicing agreement, the sponsor sale agreement, or
the insurance agreement or in any certificate delivered pursuant
to these agreements is incorrect in a material respect as of the
time made, and the circumstance in respect of which the
representation or warranty is incorrect is not cured within thirty
days after notice is given to the issuer by the indenture trustee
or by the noteholders evidencing at least 25% in aggregate Note
Balance of the related class; or
o upon the occurrence of events of bankruptcy, insolvency,
receivership or reorganization of the issuer.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing,
the indenture trustee or the note insurer may, and on request of noteholders
evidencing more than 50% in aggregate Note Balance of the related class of notes
shall, declare the principal of such class of notes to be due and payable. Such
declaration may under certain circumstances be rescinded by the noteholders
evidencing a majority in Note Balance of the related class of notes.
If the principal balance of the notes has been declared due
and payable as described in the preceding paragraph, the indenture trustee, at
the direction of the insurer, so long as a default by the insurer shall not have
occurred and be continuing, may institute proceedings to collect all amounts
payable on the notes, sell the assets of the trust or refrain from selling the
assets of the trust.
S-77
LIST OF NOTEHOLDERS
Three or more noteholders (each of whom has owned a note for
at least six months) may, by written request to the indenture trustee, obtain
access to the list of all noteholders maintained by the indenture trustee for
the purpose of communicating with other noteholders with respect to their rights
under the indenture. The indenture trustee may elect not to afford the
requesting noteholders access to the list of noteholders if it agrees to mail
the desired communication or proxy, on behalf of the requesting noteholders, to
all noteholders.
THE INDENTURE TRUSTEE
The indenture trustee is entitled to the Indenture Trustee's
Fee and reimbursement of certain expenses. The indenture trustee will, upon
termination of the servicer under the servicing agreement, be obligated to
succeed to the obligations of the servicer or to appoint an eligible successor
servicer.
The indenture trustee may, upon written notice to the
servicer, the issuer, the note insurer and all noteholders, resign at any time,
in which event the servicer will be obligated to appoint a successor indenture
trustee. If no successor indenture trustee has been appointed and has accepted
appointment within 30 days after giving its notice of resignation, the resigning
indenture trustee may petition any court of competent jurisdiction for
appointment of a successor indenture trustee. Any such successor indenture
trustee must be approved by the note insurer and each rating agency. The
indenture trustee may also be removed at any time:
o by the issuer or the note insurer, if the indenture trustee ceases
to be eligible to continue or if the indenture trustee is adjudged
bankrupt or insolvent or a receiver with respect to it or its
property is appointed,
o by noteholders evidencing at least 51% of the aggregate Note
Balance with the consent of the note insurer or
o by the note insurer.
Any removal or resignation of the indenture trustee and appointment of a
successor indenture trustee as described above will not become effective until
acceptance of appointment by the successor indenture trustee.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of payments on
each class of notes will be affected by, among other things, the rate and timing
of principal payments on the mortgage loans in the related group, and the amount
and timing of mortgagor defaults resulting in Realized Losses in the group. Such
yield may be adversely affected by a higher or lower than anticipated rate of
principal payments on the mortgage loans in the related group. The rate of
principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans, the rate and timing of principal
prepayments by the mortgagors, liquidations of defaulted mortgage loans and
repurchases of mortgage loans due to certain breaches of representations and
warranties, and purchases by the note insurer or the
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servicer. The timing of changes in the rate of prepayments, liquidations,
repurchases and purchases of the mortgage loans may, and the timing of Realized
Losses will, significantly affect the yield to an investor, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. Certain loss scenarios could lead to the failure of
noteholders to fully recover their initial investments. Since the rate and
timing of principal payments on the mortgage loans will depend on future events
and on a variety of factors (as described more fully in this prospectus
supplement), no assurance can be given as to the rate or as to the timing of
principal prepayments on the notes.
The mortgage loans may be prepaid by the mortgagors at any
time; however, in most circumstances, the mortgage loans will be subject to a
prepayment charge. See "DESCRIPTION OF THE MORTGAGE POOL" in this prospectus
supplement. All of the mortgage loans contain due-on-sale clauses. Prepayments,
liquidations, repurchases and purchases of the mortgage loans by the note
insurer or the servicer will result in payments to noteholders of the related
class of notes of principal amounts that otherwise would be paid over the
remaining terms of the related mortgage loans.
AMORTIZATION OF THE NOTES AS A RESULT OF ALLOCATION OF EXCESS CASH
In addition to the foregoing, the allocation of Excess Cash
for a group in respect of principal will have the effect of accelerating the
amortization of the related notes relative to the amortization of the related
mortgage loans. This will cause the related notes to be overcollateralized by
the related mortgage loans to the extent that the aggregate stated principal
balance of the mortgage loans exceeds the outstanding Note Balance of the
related notes, and as a result of the accelerated amortization, the weighted
average life of the notes will be shorter than otherwise would be the case.
THE EFFECT OF ONE-MONTH LIBOR
The yield to maturity on the notes will be affected by the
level of one-month LIBOR, which bears no relationship to the coupon rates
applicable to the fixed rate loans and which is different than the index
applicable to the adjustable rate loans. To the extent that the amount of
interest otherwise payable in respect of the notes is greater than the amount of
available interest on the mortgage loans with respect to any payment date,
shortfalls may occur in respect of the notes. Although the noteholders will be
entitled to be reimbursed for any shortfalls as and to the extent described in
this prospectus supplement, the yield to noteholders may be adversely affected
by the occurrence of such shortfalls. See "RISK FACTORS--PREPAYMENT OF THe
MORTGAGE LOANS MAY AFFECT THE YIELD TO MATURITY OF THE NOTES" in this prospectus
supplement.
DEFAULTS ON THE MORTGAGE LOANS
The rate of defaults on the mortgage loans also will affect
the rate and timing of principal payments on the mortgage loans. In general,
defaults on mortgage loans are expected to occur with greater frequency in their
early years. Increases in the monthly payments on the adjustable rate loans to
an amount in excess of the monthly payment required at their respective dates of
origination may result in a default rate higher than that on level payment
mortgage loans. In addition, there is a risk that the balloon loans may default
at maturity because the ability of a mortgagor to make a balloon payment
typically will depend upon the mortgagor's ability either to refinance the
related balloon loan or to sell the related mortgaged property. Furthermore, the
rate of default on mortgage loans that are refinancings or that were not
originated under Meritage's Full Documentation program also may be higher than
for other types of mortgage loans. See "RISK FACTORS" in this prospectus
supplement. As a consequence of the
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underwriting standards for Meritage's subprime credit risk residential lending
program, the mortgage loans are likely to experience rates of delinquency,
foreclosure, bankruptcy and loss that are higher, and, that may be substantially
higher, than those experienced by mortgage loans underwritten in accordance with
the guidelines of Fannie Mae and FHLMC. See "DESCRIPTION OF THE MORTGAGE
POOL--UNDERWRITING STANDARDS" in this prospectus supplement. Because of the
underwriting criteria, the mortgage loans will be serviced in a manner intended
to result in a faster exercise of remedies, including foreclosure, in the event
mortgage loan delinquencies and defaults occur than would be the case if the
mortgage loans were serviced in a more conventional manner. The rate and timing
of prepayments, defaults and liquidations on the mortgage loans will be affected
by the general economic condition of the region of the country in which the
related mortgaged properties are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or deteriorating
economy or real estate market exists, as may be evidenced by, among other
factors, increasing unemployment or falling property values.
WEIGHTED AVERAGE LIFE OF THE NOTES
Weighted average life refers to the average amount of time
that will elapse from the date of issuance of a security to the date of payment
to the investor of each dollar paid in reduction of principal of the security
(assuming no losses). The weighted average life of each class of notes will be
influenced by, among other things, the rate at which principal of the related
mortgage loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations.
The model used in this prospectus supplement is a 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. The tables relating to the fixed rate loans are modeled
at various Home Equity Prepayment, or HEP, assumptions. HEP assumes that a pool
of loans prepays in the first month in the life of such loan at a constant
prepayment rate, or CPR, that corresponds in CPR to one-tenth the given HEP
percentage and increases by an additional one-tenth each month after that time
until the tenth month, where it remains at a CPR equal to the given HEP
percentage. With respect to fixed rate loans, the "100% Prepayment Assumption"
assumes a CPR of 2.5% of the then outstanding principal balance of the
respective fixed rate loans in the first month of the life of the mortgage loans
and an additional 2.5% per annum, respectively, in each month after that time
until the tenth month. Beginning in the tenth month and in each month after that
time during the life of the respective mortgage loans, the "100% Prepayment
Assumption" with respect to the fixed rate loans assumes a CPR of 25% per annum.
With respect to the adjustable rate loans, the "100% Prepayment Assumption"
assumes a CPR of 27% per annum of the then outstanding principal balance of the
adjustable rate loans each month. 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. Correspondingly, 100% Prepayment Assumption assumes prepayment rates
equal to 100% of the related Prepayment Assumption, 125% Prepayment Assumption
assumes 125% of each of the rates described above; and so forth. 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,
including the related mortgage loans.
The tables below have been prepared assuming
o all distributions with respect to the notes will be made at the
scheduled times as described in this prospectus supplement under
"DESCRIPTION OF THE NOTES--PAYMENTS ON THE NOTEs,"
o distributions on the notes are received in cash on the 25th day of
each month, commencing in December 1999
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o prepayments represent payment in full of individual mortgage loans
and are received on the last day of each month (commencing in
November 1999) and include 30 days' interest on the mortgage loan,
o Scheduled payments of principal and interest are received on the
first day of each month starting in December 1999.
o the servicing fee for each mortgage loan will be 0.44% per annum
of the principal balance of the mortgage loan and that all other
fees will be as set forth in the servicing agreement,
o no delinquencies or defaults in payments by mortgagors of
principal and interest on the mortgage loans are experienced,
o no right of optional termination is exercised except as noted in
the tables below,
o the notes are purchased on November 30, 1999,
o with respect to the adjustable rate mortgage loans, six-month
LIBOR and one-year CMT remain constant at 6.015%, and 5.550%,
respectively,
o with respect to the notes, one-month LIBOR remains constant at
5.4725%,
o the coupon rates on the adjustable rate loans in each type are
adjusted on the respective due dates specified in the columns
entitled "Number of Months until Next Interest Rate Adjustment,"
and after that time with the frequency indicated in the columns
entitled "Frequency of Rate Adjustment in Months," to equal the
sum of the related index and gross margin, subject to the related
periodic rate caps, maximum rates and minimum rates,
o all of the mortgage loans prepay at the indicated percentage of
the related prepayment assumption,
o no payments are made under the interest rate cap agreement, and
o no amounts are withdrawn from the reserve account.
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GROUP I MORTGAGE LOANS: ASSUMED COLLATERAL CHARACTERISTICS
Remaining Remaining Original
Aggregate Term to Amortization Amortization Initial Subsequent
Principal Gross Maturity Term in Term in Minimum Periodic Periodic Maximum Gross
Loan Type Balance Coupon in Months Months Months Rate Rate Cap Rate Cap Rate Margin
- -------------------------------------------------------------------------------------------------------------------------------
15 Yr Fixed $ 311,951.04 10.5505% 178 178 180 N/A N/A N/A N/A N/A
20 Yr Fixed 99,444.64 11.3822 238 238 240 N/A N/A N/A N/A N/A
30 Yr Fixed 6,000,383.12 10.5112 358 358 360 N/A N/A N/A N/A N/A
30 Yr Balloon 5,471,338.24 10.7550 178 358 360 N/A N/A N/A N/A N/A
6 Mth LIBOR 327,738.51 10.0988 355 355 360 10.0988% 1.5000% 1.5000% 17.0988% 6.8581%
1 Yr CMT 270,959.62 7.7134 321 321 360 6.3314 1.0000 1.0000 11.3314 2.7500
2 Yr/6 Mth 20,451,911.16 9.9173 358 358 360 9.9173 3.0000 1.5000 16.9173 6.7194
LIBOR
3 Yr/6 Mth 37,021,663.82 9.6143 358 358 360 9.6143 3.0000 1.5000 16.6143 6.3119
LIBOR
2 Yr/6 Mth 5,353,608.58 9.9173 360 360 360 9.9173 3.0000 1.5000 16.9173 6.7194
LIBOR
3 Yr/6 Mth 9,691,001.27 9.6143 360 360 360 9.6143 3.0000 1.5000 16.6143 6.3119
LIBOR
Number of
Months
Until
Next Frequency
Interest of Rate
Rate Adjustment
Loan Type Adjustment in Months
- -------------- ------------------------
15 Yr Fixed N/A N/A
20 Yr Fixed N/A N/A
30 Yr Fixed N/A N/A
30 Yr Balloon N/A N/A
6 Mth LIBOR 1 6
1 Yr CMT 8 12
2 Yr/6 Mth 22 6
LIBOR
3 Yr/6 Mth 34 6
LIBOR
2 Yr/6 Mth 24 6
LIBOR
3 Yr/6 Mth 36 6
LIBOR
GROUP II MORTGAGE LOANS: ASSUMED COLLATERAL CHARACTERISTICS
Remaining Remaining Original
Aggregate Term to Amortization Amortization Initial Subsequent
Principal Gross Maturity Term in Term in Minimum Periodic Periodic Maximum Gross
Loan Type Balance Coupon in Months Months Months Rate Rate Cap Rate Cap Rate Margin
- ------------------------------------------------------------------------------------------------------------------------------
15 Yr Fixed $ 324,620.51 9.3500% 177 177 180 N/A N/A N/A N/A N/A
20 Yr Fixed 34,453.82 9.8750 239 239 240 N/A N/A N/A N/A N/A
30 Yr Fixed 1,679,667.61 9.7943 358 358 360 N/A N/A N/A N/A N/A
30 Yr Balloon 1,443,300.40 10.0736 178 358 360 N/A N/A N/A N/A N/A
6 Mth LIBOR 676,361.83 9.6937 356 356 360 9.6937% 1.5000% 1.5000% 16.6937% 7.0954%
1 Yr CMT 66,059.14 7.6250 317 317 360 5.5000 1.0000 1.0000 10.5000 2.7500
2 Yr/6 Mth 9,435,743.52 9.9920 357 357 360 9.9920 3.0000 1.5000 16.9920 6.7139
LIBOR
3 Yr/6 Mth 16,616,225.39 9.8168 358 358 360 9.8168 3.0000 1.5000 16.8168 6.3559
LIBOR
2 Yr/6 Mth 3,521,771.89 9.9920 360 360 360 9.9920 3.0000 1.5000 16.9920 6.7139
LIBOR
3 Yr/6 Mth 6,201,795.89 9.8168 360 360 360 9.8168 3.0000 1.5000 16.8168 6.3559
LIBOR
Number of
Months
Until
Next Frequency
Interest of Rate
Rate Adjustment
Loan Type Adjustment in Months
- -------------- -------------------------
15 Yr Fixed N/A N/A
20 Yr Fixed N/A N/A
30 Yr Fixed N/A N/A
30 Yr Balloon N/A N/A
6 Mth LIBOR 2 6
1 Yr CMT 8 12
2 Yr/6 Mth 21 6
LIBOR
3 Yr/6 Mth 34 6
LIBOR
2 Yr/6 Mth 24 6
LIBOR
3 Yr/6 Mth 36 6
LIBOR
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The actual characteristics and performance of the mortgage
loans will differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cashflows might behave under varying prepayment
scenarios. For example, the servicer might exercise its option to purchase the
mortgage loans as described under "SERVICING OF THE MORTGAGE LOANS--TERMINATION"
in this prospectus supplement, and it is very unlikely that the mortgage loans
will prepay at a constant prepayment assumption until maturity or that all of
the mortgage loans will prepay at the same percentage of the related Prepayment
Assumption. Moreover, the diverse remaining terms to maturity of the mortgage
loans could produce slower or faster principal payments than indicated in the
tables at the various prepayment assumptions specified, even if the various
weighted average remaining terms to maturity of the mortgage loans are as
assumed. Any difference between these assumptions and the actual characteristics
and performance of the mortgage loans, or the actual prepayment or loss
experience, will affect the percentages of original Note Balance outstanding
over time and the weighted average life of the notes.
Subject to the foregoing discussion and assumptions, the
tables below indicate the weighted average life of the notes and sets forth the
percentages of the original Note Balance that would be outstanding after each of
the payment dates shown at various percentages of the related Prepayment
Assumption.
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CLASS A-1 NOTES PERCENTAGE OF ORIGINAL NOTE BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGE OF THE RELATED
PREPAYMENT ASSUMPTIONS
PPA (1) 0% 75% 100% 125% 150% 175%
Payment Date
- ------------------------------ ------------- ------------ ------------- ------------- ------------- ------------- -------------
Initial Percentage 100 100 100 100 100 100
November 25, 2000 96 77 71 64 58 52
November 25, 2001 94 59 49 40 31 24
November 25, 2002 93 46 34 25 17 10
November 25, 2003 93 36 26 18 12 7
November 25, 2004 92 29 19 12 7 4
November 25, 2005 91 23 14 8 4 2
November 25, 2006 91 18 10 5 2 1
November 25, 2007 90 14 7 3 1 0
November 25, 2008 89 11 5 2 0 0
November 25, 2009 88 9 4 1 0 0
November 25, 2010 87 7 3 1 0 0
November 25, 2011 85 6 2 0 0 0
November 25, 2012 84 4 1 0 0 0
November 25, 2013 82 3 1 0 0 0
November 25, 2014 75 2 0 0 0 0
November 25, 2015 73 2 0 0 0 0
November 25, 2016 70 1 0 0 0 0
November 25, 2017 68 1 0 0 0 0
November 25, 2018 65 0 0 0 0 0
November 25, 2019 62 0 0 0 0 0
November 25, 2020 58 0 0 0 0 0
November 25, 2021 54 0 0 0 0 0
November 25, 2022 49 0 0 0 0 0
November 25, 2023 44 0 0 0 0 0
November 25, 2024 38 0 0 0 0 0
November 25, 2025 32 0 0 0 0 0
November 25, 2026 25 0 0 0 0 0
November 25, 2027 17 0 0 0 0 0
November 25, 2028 9 0 0 0 0 0
November 25, 2029 0 0 0 0 0 0
Weighted Average Life to 20.46 4.00 2.95 2.28 1.82 1.49
Maturity in Years (2)
Weighted Average Life To 20.42 3.65 2.68 2.08 1.66 1.35
Call in Years (2)
- ---------------------------
(1) The PPA is the percentage of the related prepayment assumption for the
fixed rate mortgage loans and the adjustable rate mortgage loans.
(2) The weighted average life of a note is determined by (i) multiplying the
amount of each payment in reduction of the Note Balance by the number of
years from the date of issuance of the note to the related payment date,
(ii) adding the results and (iii) dividing the sum by the original Note
Balance of the note.
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CLASS A-2 NOTES PERCENTAGE OF ORIGINAL NOTE BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGE OF THE RELATED
PREPAYMENT ASSUMPTIONS
PPA (1) 0% 75% 100% 125% 150% 175%
Payment Date
- ------------------------------ ------------- ------------ ------------- ------------- ------------- ------------- -------------
Initial Percentage 100 100 100 100 100 100
November 25, 2000 96 77 70 64 57 51
November 25, 2001 94 58 48 39 31 24
November 25, 2002 93 45 34 24 16 10
November 25, 2003 93 36 25 17 11 7
November 25, 2004 92 29 18 11 7 4
November 25, 2005 91 23 13 8 4 2
November 25, 2006 91 18 10 5 2 1
November 25, 2007 90 14 7 3 1 0
November 25, 2008 89 11 5 2 0 0
November 25, 2009 88 9 4 1 0 0
November 25, 2010 86 7 2 1 0 0
November 25, 2011 85 6 2 0 0 0
November 25, 2012 84 4 1 0 0 0
November 25, 2013 82 3 1 0 0 0
November 25, 2014 77 2 0 0 0 0
November 25, 2015 75 2 0 0 0 0
November 25, 2016 72 1 0 0 0 0
November 25, 2017 70 1 0 0 0 0
November 25, 2018 67 0 0 0 0 0
November 25, 2019 63 0 0 0 0 0
November 25, 2020 60 0 0 0 0 0
November 25, 2021 55 0 0 0 0 0
November 25, 2022 51 0 0 0 0 0
November 25, 2023 45 0 0 0 0 0
November 25, 2024 39 0 0 0 0 0
November 25, 2025 33 0 0 0 0 0
November 25, 2026 26 0 0 0 0 0
November 25, 2027 18 0 0 0 0 0
November 25, 2028 9 0 0 0 0 0
November 25, 2029 0 0 0 0 0 0
Weighted Average Life to 20.67 3.98 2.92 2.26 1.80 1.47
Maturity in Years (2)
Weighted Average Life To 20.63 3.63 2.66 2.06 1.64 1.33
Call in Years (2)
- ---------------------------
(1) The PPA is the percentage of the related prepayment assumption for the
fixed rate mortgage loans and the adjustable rate mortgage loans.
(2) The weighted average life of a note is determined by (i) multiplying the
amount of each payment in reduction of the Note Balance by the number of
years from the date of issuance of the note to the related payment date,
(ii) adding the results and (iii) dividing the sum by the original Note
Balance of the note.
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SERVICING OF THE MORTGAGE LOANS
GENERAL
Generally, servicing includes, but is not limited to,
post-origination loan processing, customer service, remittance handling,
collections and liquidations. The servicer in its own name may:
o waive any assumption fees, late payment charges, charges
for checks returned for insufficient funds or other fees
that may be collected in the ordinary course of servicing
a mortgage loan,
o arrange a schedule for the payment of delinquent payments
on the related mortgage loan, subject to conditions set
forth in the servicing agreement, if a mortgagor is in
default or about to be in default because of such
mortgagor's financial condition, or
o modify monthly payments on mortgage loans in accordance
with the servicer's general policy on mortgage loans
subject to the Relief Act.
However, the servicer may not, without the prior consent of the note insurer,
permit any waiver, modification or variance of a mortgage loan which would:
o change the coupon rate,
o forgive the payment of any principal or interest,
o lessen the lien priority of the mortgage loan or
o extend the final maturity date on a mortgage loan past
twelve months prior to the maturity date of the notes, in
any case except to the extent required under the Relief
Act.
The servicer, acting as agent for the indenture trustee, will
not consent to the subsequent placement of a deed of trust or mortgage, as
applicable, on any mortgaged property that is of equal or higher priority to
that of the lien securing the related mortgage loan unless such mortgage loan is
prepaid in full and thereby removed from the related group.
SUBSERVICING
The servicing agreement permits the servicer to enter into
subservicing agreements. The servicer will enter into a subservicing agreement
with Ocwen Federal Bank FSB, as subservicer. Under this agreement, Ocwen will
undertake the servicing and administration of the mortgage loans on behalf of
the servicer on or about December 15, 1999.
As part of its servicing activities under the servicing
agreement, the servicer is required to enforce the obligations of Ocwen under
the subservicing agreement. The servicer may, with consent of the note insurer,
terminate the subservicing agreement pursuant to the terms and conditions of
that agreement. In the event of a termination, all servicing obligations of
Ocwen will be assumed either by the servicer directly or by a successor
subservicer designated by the servicer, in either case with the approval of the
note insurer and the rating agencies. The subservicing agreement includes a
provision permitting it
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to be terminated by the indenture trustee or the issuer in the event the
servicer shall, for any reason, no longer be the servicer, in which case Ocwen
will become the servicer, unless the servicer was terminated as a result of
Ocwen's failure to perform under its subservicing agreement, in which case the
indenture trustee will become the servicer.
THE SUBSERVICER
The following table sets forth, for the non-conforming credit
mortgage loans serviced by the subservicer, information relating to the
delinquency experience (including loans in foreclosure included in the
subservicer's servicing portfolio (which portfolio does not include mortgage
loans that are sub-serviced by others)) at the end of the indicated periods. The
indicated periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these purposes
until it is one month past due on a contractual basis and for these purposes the
number of days it is being reported as delinquent is the same number of days it
is contractually past due. The information contained in the monthly remittance
reports that will be sent to investors will be compiled using the same
methodology as that used to compile the information contained in the table
below.
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DELINQUENCIES AND FORECLOSURES
(Dollars in Thousands)
As of December 31, 1997 As of December 31, 1998
---------------------------------------------- -----------------------------------------------
Percent Percent
--------------------- ---------------------- ---------------------- ----------------------
By By By By
By Number Dollar By Number Dollar By Number Dollar By Number Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
---------- ---------- ----------- -------- --------- ----------- --------- ---------
Total Portfolio 21,827 $2,318,261 100.00% 100.00% 68,274 $6,099,336 100.00% 100.00%
Period of Delinquency
30-59 days 437 $41,429 2.00% 1.79% 3,325 $265,396 4.87% 4.35%
60-89 days 171 $17,803 0.78% 0.77% 1,555 $129,439 2.28% 2.12%
90 days or more 302 $36,878 1.38% 1.59% 6,322 $561,709 9.26% 9.21%
Total Delinquent Loans (1) 910 $96,110 4.17% 4.15% 11,202 $956,545 16.41% 15.68%
Loans in Foreclosure (2) 281 $34,663 1.29% 1.50% 3,158 $297,859 4.63% 4.88%
As of September 30, 1999
-----------------------------------------------
Percent
------------------------ ---------------------
By By
By Number Dollar By Number Dollar
of Loans Amount of Loans Amount
---------- ----------- ---------- --------
Total Portfolio 86,255 $7,525,480 100.00% 100.00%
Period of Delinquency
30-59 days 3,987 $333,963 4.62% 4.44%
60-89 days 2,069 $179,535 2.40% 2.39%
90 days or more 12,416 $1,054,233 14.39% 14.01%
Total Delinquent Loans (1) 18,472 $1,567,731 21.41% 20.84%
Loans in Foreclosure (2) 5,514 $499,447 6.39% 6.64%
- ------------------
(1) Includes 13,521 loans totaling $1,078,734,361 for
September 30, 1999 which were more than 30 days past due at the time of
transfer to the subservicer.
(2) Loans in foreclosure are also included under the heading
"Total Delinquent Loans."
The following tables set forth, for the B, C and D mortgage
loan servicing portfolio serviced by the subservicer, information relating to
the foreclosure experience of the mortgage loans included in the portfolio
(which portfolio does not include mortgage loans that are sub-serviced by
others) at the end of the indicated periods.
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REAL ESTATE OWNED
(Dollars in Thousands)
As of December 31, 1997 As of December 31, 1998 As of September 30, 1999
--------------------------- --------------------------- ------------------------------
By Number of By Dollar By Number of By Dollar By Number of By Dollar
Loans Amount Loans Amount Loans Amount
------------- ------------- ------------ ------------- ------------ --------------
Total Portfolio 21,827 $ 2,318,261 68,274 $ 6,099,336 86,255 $ 7,525,480
Foreclosed Loans (1) 66 $ 7,387 808 $ 70,592 2,454 $ 202,071
Foreclosure Ratio (2) 0.30% 0.32% 1.18% 1.16% 2.85 2.69%
- ------------------------
(1)For the purposes of these tables, "Foreclosed Loans" means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by the subservicer.
(2)The "Foreclosure Ratio" is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the Total Portfolio at the end of
the indicated period.
LOAN GAIN/(LOSS) EXPERIENCE
(Dollars in Thousands)
As of As of As of
December 31, 1997 December 31, 1998 September 30, 1999
------------------ ------------------- -----------------
Total Portfolio (1) $2,318,261 $6,099,336 $7,525,480
Net Gain/(Losses) (2, 3) ($1,209) ($26,068) ($95,487)
Net Gain/(Losses) as a Percentage of
Total Portfolio -0.05% -0.43% -1.27%
- --------------------
(1)"Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2)"Net Gain/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or losses
on liquidated properties are calculated as net sales proceeds less book value
(exclusive of loan purchase premium or discount). Shortfall payoffs are
calculated as the difference between principal payoff amount and unpaid
principal at the time of payoff.
(3)Includes $32,802,259 as of September 30, 1999 of losses attributable to
loans which were delinquent at the time of transfer to the subservicer.
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MERITAGE SUBPRIME PORTFOLIO
DELINQUENCIES AND FORECLOSURES
(Dollars in Thousands)
As of December 31, 1997 As of December 31, 1998
--------------------------------------------- -----------------------------------------
By Percent Percent Percent Percent
No. By By By No. By By
of By Dollar Number Dollar of By Dollar Number Dollar
Loans Amount of Loans Amount Loans Amount of Loans Amount
-------- ---------- ----------- ------- --------- ----------- ---------- ---------
Total Portfolio 1,590 $ 178,427 100.00% 100.00% 3,513 $ 392,766 100.00% 100.00%
Period of Delinquency(1)
30-59 Days 28 $ 2,631 2.00% 1.79% 96 $ 8,841 2.73% 2.25%
60-89 Days 22 $ 1,532 0.78% 0.77% 30 $ 3,224 0.85% 0.82%
90 Days or More 10 $ 914 1.38% 1.59% 125 $ 13,196 3.56% 3.36%
Total Delinquent Loans 60 $ 5,077 4.17% 4.15% 251 $ 25,261 7.14% 6.43%
Loans in Foreclosure (2) 1 $ 35 1.29% 1.50% 55 $ 5,778 1.57% 1.47%
As of September 30, 1999
----------------------------------------------
Percent Percent By
By No. By Dollar By Number Dollar
Loans Amount of Loans Amount
-------- ----------- --------- ------------
Total Portfolio 4,138 $ 447,970 100.00% 100.00%
Period of Delinquency(1)
30-59 Days 137 $ 12,934 3.31% 2.89%
60-89 Days 68 $ 7,070 1.64% 1.58%
90 Days or More 252 $ 24,683 6.09% 5.51%
Total Delinquent Loans 457 $ 44,687 11.04% 9.98%
Loans in Foreclosure (2) 128 $ 12,102 3.09% 2.70%
- -------------------
(1) Includes 58 loans totaling $5,707,983 for September 30, 1999 which were
delinquent at the time of transfer to the subservicer
(2) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
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It is unlikely that the delinquency experience of the mortgage
loans will correspond to the delinquency experience of the subservicer's B, C
and D mortgage loan Portfolio set forth in the foregoing tables. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and foreclosures
could be higher than those previously experienced by the subservicer. In
addition, adverse economic conditions may affect the timely payment by
mortgagors of scheduled payments of principal and interest and payments of
arrearages on the mortgage loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the mortgage pool.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The primary compensation payable to the servicer on each
payment date will equal one-twelfth (1/12) of the product of (a) the Servicing
Fee Rate and (b) the aggregate mortgage pool of both groups as of the first day
of the related due period. The servicer shall be entitled to retain the
servicing fee from amounts to be deposited in the collection account. As
additional servicing compensation, the servicer will be entitled to retain all
assumption fees, prepayment charges and late payment charges and other amounts
and charges, to the extent collected from mortgagors, together with any interest
or other income earned on funds held in the collection account and any escrow
accounts. The subservicing agreement shall provide for the compensation of the
subservicer.
For any payment date for so long as RBMG is the servicer, the
Servicing Fee Rate is equal to 0.44% per annum on the aggregate loan balances of
the mortgage loans as of the first day of the prior calendar month, or as of the
cut-off date for the first remittance period; PROVIDED, HOWEVER, that if
necessary to obtain the appointment of a successor servicer or successor
subservicer, the Servicing Fee Rate may increase up to 0.50% per annum. The
payment of any increased servicing fee would reduce the amount of Excess Cash.
The servicer will pay the ongoing expenses associated with the
trust and incurred by it in connection with its responsibilities under the
servicing agreement. In addition, the servicer will be entitled to reimbursement
for its expenses incurred in connection with defaulted mortgage loans and in
connection with the restoration of mortgaged properties; the right of
reimbursement shall be prior to the rights of the noteholders to receive any Net
Liquidation Proceeds.
STANDARD HAZARD INSURANCE POLICIES
The terms of the mortgage loans require each mortgagor to
maintain a hazard insurance policy. Additionally, the servicing agreement will
require the servicer to cause to be maintained on property acquired upon
foreclosure, or in deed-in-lieu of foreclosure, of any mortgage loan, fire
insurance with extended coverage in an amount at least equal to the lesser of
the unpaid principal balance of the mortgage loan and the replacement value of
the improvements securing the mortgage loan, but in no event lower than the
amount necessary to avoid the application of a co-insurance clause in the
related insurance policy.
As set forth in the servicing agreement, all amounts collected
by the servicer under any insurance policy (except for amounts to be applied to
the restoration or repair of the mortgaged property or released to the mortgagor
in accordance with the servicer's normal servicing procedures) will be deposited
initially in the collection account, subject to withdrawal in accordance with
the servicing agreement. The servicing agreement provides that the servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket policy insuring against losses on the mortgage loans.
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If the blanket policy contains a deductible clause the servicer will deposit in
the collection account all sums that would have been deposited in the collection
account but for the clause.
PAYMENTS ON MORTGAGE LOANS; COLLECTION ACCOUNT
The servicer will establish and maintain one or more accounts,
referred to collectively as the COLLECTION ACCOUNT, in which the servicer will
deposit or cause to be deposited on a daily basis, or as and when received from
subservicers or deposited directly by subservicers, the following payments and
collections received or made by or on behalf of it subsequent to the cut-off
date, or received by it prior to the cut-off date but allocable to a period
subsequent to that cut-off date (other than in respect of principal and interest
on the mortgage loans due on or before the cut-off date):
o all payments on account of principal, including principal
prepayments, on the mortgage loans in each group;
o all payments on account of interest on the mortgage loans,
net of the related servicing fee in each group;
o all insurance proceeds and Liquidation Proceeds, other
than proceeds that represent reimbursement of costs and
expenses incurred by the servicer in connection with
presenting claims under the related Insurance Policies,
Liquidation Proceeds and REO Proceeds;
o all proceeds of any mortgage loan or REO Property in each
group repurchased or purchased in accordance with the
servicing agreement;
o any amounts required to be deposited pursuant to the
servicing agreement; and
o all amounts transferred from the note accounts to the
collection account in accordance with the servicing
agreement.
Notwithstanding the foregoing, the servicer may make
withdrawals from the collection account (or net amounts prior to making deposits
in the collection account) only for the following purposes:
o to make deposits into the note accounts on each servicer
remittance date as described in the servicing agreement;
o to pay itself any related monthly servicing fees and other
items of servicing compensation and investment income on
Permitted Investments to the extent permitted by the
servicing agreement;
o to make any servicing advance to the extent permitted by
the servicing agreement or to reimburse itself for any
servicing advance or P&I Advance previously made to the
extent permitted by the servicing agreement;
o to withdraw amounts that have been deposited into the
collection account in error;
o to clear and terminate the collection account and
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o to reimburse the indenture trustee, the servicer and the
issuer for amounts to the extent permitted under the
servicing agreement or the indenture.
All or a portion of the collection account may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount, at the servicer's direction. The indenture trustee, the servicer or
any of their affiliates may be the obligor on any investment in any collection
account that otherwise qualifies as a Permitted Investment. No investment in the
collection account may mature later than the servicer remittance date next
succeeding the date of investment.
The indenture trustee will not in any way be held liable by
reason of any insufficiency in the collection account resulting from any loss on
any Permitted Investment (except to the extent the indenture trustee is the
obligor on the investment).
All income or other gain from investments in the collection
account will be held in the collection account for the benefit of the servicer
and will be subject to withdrawal from time to time as permitted by the
servicing agreement. Any loss resulting from the investments will be for the
account of the servicer. The servicer will be required to deposit the amount of
any loss immediately upon the realization of the loss to the extent the loss
will not be offset by other income or gain from investments in the collection
account and then available for application.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicing agreement will require the servicer, acting as
agent of the indenture trustee, to foreclose upon or otherwise comparably
convert to ownership in the name of the indenture trustee, on behalf of the
noteholders and the note insurer, mortgaged properties securing the mortgage
loans which come into default, as to which no satisfactory arrangements can be
made for the collection of delinquent payments and which the servicer has not
reacquired pursuant to the option described below; PROVIDED, HOWEVER, that if
the servicer has actual knowledge or cause to believe that any mortgaged
property is contaminated by hazardous or toxic wastes or substances, the
servicer will cause an environmental inspection of the mortgaged property that
complies with Fannie Mae's selling and servicing guide applicable to single
family homes and its servicing procedures to be conducted.
In servicing the mortgage loans, the servicer will be required
to determine, with respect to each defaulted mortgage loan, when it has
recovered, whether through trustee's sale, foreclosure sale or otherwise, all
amounts, if any, it expects to recover from or on account of the defaulted
mortgage loan, at which time such mortgage loan will be charged off and will
become a liquidated mortgage loan.
ENFORCEMENT OF DUE-ON SALE CLAUSES
In any case in which the servicer becomes aware that a
mortgaged property has been or is about to be voluntarily conveyed by the
related mortgagor, the servicer may enter into an assumption agreement with the
person to whom the property has been or is about to be conveyed, pursuant to
which the person becomes liable under the related promissory note and, to the
extent permitted by applicable law or the mortgage documents, the mortgagor
remains liable on the note. In addition, the servicer may enter into a
substitution of liability agreement with the person, pursuant to which the
original mortgagor is released from liability and the person is substituted as
mortgagor and becomes liable under the mortgage note. The servicing agreement
will prohibit the servicer from entering into an assumption or substitution of
liability agreement unless permitted by applicable law and unless the servicer
determines that the assuming party would not fall within a lower Meritage risk
category than the original mortgagor and the assumption or substitution of
liability agreement would not materially increase the risk of default or
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delinquency on, or materially decrease the security for, such mortgage loan. In
the event the servicer does not approve an assumption, the servicing agreement
will require the servicer to enforce the rights of the indenture trustee as the
mortgagee of record to accelerate the maturity of the related mortgage loan
under any due-on-sale clause contained in the related Mortgage or mortgage note
to the extent permitted by the related mortgage note and Mortgage and applicable
law or regulation, but only to the extent the servicer does not believe that the
enforcement will:
o adversely affect or jeopardize coverage under any related
insurance policy,
o result in legal action by the mortgagor or
o materially increase the risk of default or delinquency on,
or materially impair the security for, the mortgage loan.
EVIDENCE AS TO COMPLIANCE
The servicing agreement will provide that on or before a
specified date in each year, a firm of independent public accountants will
furnish to the servicer a report to the effect that:
o on the basis of an examination by such firm conducted
substantially in compliance with industry standards, the
servicer has complied with specific minimum residential
mortgage loan servicing standards, and such examination
disclosed no significant exceptions or errors, except for
the exceptions that will be referred to in the report, and
o on the basis of an examination conducted by the firm in
accordance with industry standards, this representation is
fairly stated in all material respects subject to any
exceptions and other qualifications that may be
appropriate.
The servicing agreement will provide that the servicer will be
required to deliver the report to the indenture trustee, the rating agencies and
the note insurer on or before a specified date in each year.
CERTAIN MATTERS REGARDING SERVICER'S SERVICING OBLIGATIONS
The servicing agreement will also provide that neither the
servicer, nor any of its directors, officers, employees or agents, will be
liable to the indenture trustee, the trust or the noteholders for any action
taken or for refraining from the taking of any action by the servicer pursuant
to the servicing agreement, or for errors in judgment; PROVIDED, HOWEVER, that
neither the servicer nor any such person will be protected against any liability
that would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties by the servicer, or by reason
of reckless disregard of obligations and duties of the servicer provided under
the servicing agreement.
In addition, the servicing agreement will provide that the
servicer will not be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its duties to service the mortgage loans
under the servicing agreement and which in its opinion may involve it in any
expense or liability.
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AMENDMENT OF THE SERVICING AGREEMENT
The servicing agreement may be amended from time to time by
the issuer, the servicer and the indenture trustee without the consent of any of
the noteholders but with the prior written consent of the note insurer, for the
purpose of curing any ambiguity, or correcting or supplementing any provisions
in the agreement; PROVIDED that such action will not, as evidenced by an opinion
of counsel delivered to the indenture trustee and the note insurer, adversely
affect in any material respect the interests of any noteholders or the note
insurer.
The servicing agreement may also be amended from time to time
by the issuer, the servicer and the indenture trustee with the consent of the
note insurer and of the holders of the notes evidencing at least 66% of the
aggregate Note Balance for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the servicing agreement or
of modifying in any manner the rights of the noteholders; PROVIDED, HOWEVER,
that no amendment will:
o reduce the amount of, or delay the timing of, payments
which are required to be distributed to any noteholders
without the consent of each affected noteholder, or
o modify the percentage of noteholders which is required to
consent to any amendment, without the consent of the note
insurer and all the noteholders affected.
SERVICER EVENTS OF DEFAULT AND TERMINATION EVENT
Events of default under the servicing agreement will consist
of:
o any failure by the servicer to remit to the indenture
trustee for payment to the noteholders any required
payment that continues unremedied for one business day
after the giving of written notice of the failure to the
servicer by the indenture trustee, the issuer, or the note
insurer, or to the servicer, the issuer, the note insurer
and the indenture trustee by the holders of notes
evidencing not less than 25% of the aggregate Note
Balance;
o any failure by the servicer duly to observe or perform in
any material respect any of its other covenants or
agreements in the servicing agreement which continues
unremedied for thirty days after the giving of written
notice of the failure to the servicer by the indenture
trustee, the issuer or the note insurer or to the
servicer, the issuer, the note insurer and the indenture
trustee by the holders of notes evidencing not less than
25% of the aggregate Note Balance;
o certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar
proceedings and certain actions by or on behalf of the
servicer indicating its insolvency or inability to pay its
obligations;
o any failure of the servicer to make any principal and
interest Advance as required that is not remedied one
business day after the related servicer remittance date;
and
o the occurrence of certain loss and delinquency triggers in
the insurance agreement.
S-95
A termination event under the servicing agreement will be
deemed to occur if the delinquency or loss experience of the mortgage pool
exceeds certain levels specified in the servicing agreement.
SERVICING OBLIGATIONS; LIMITATION ON RESIGNATION OF THE SERVICER
The servicer may resign from its obligations and duties under
the servicing agreement only upon a determination that its duties are no longer
permissible under applicable law or with the prior written consent of the note
insurer. If the indenture trustee terminates the rights and obligations of the
servicer due to a servicer event of default, the indenture trustee shall become
the servicer under the servicing agreement. If the indenture trustee is
unwilling or unable to so act, or if the note insurer or the noteholders
evidencing at least 51% of the aggregate Note Balances of both classes of notes
so request, the indenture trustee will appoint a successor, which proposed
successor must be an established mortgage loan servicing institution acceptable
to the note insurer and each rating agency. No such resignation or appointment
of successor will become effective until the indenture trustee or a successor
servicer has assumed the servicer's responsibilities.
TERMINATION
The obligations created by the servicing agreement will
terminate upon payment to the noteholders of all amounts held in the note
account required to be paid to the noteholders, following the earlier of:
o the final payment or other liquidation of the last
mortgage loan remaining in the trust or the disposition of
all Properties acquired by foreclosure or deed in lieu of
foreclosure and
o the purchase of all of the assets of the trust by the
servicer or the note insurer when the outstanding
aggregate Note Balance of the notes is less than 10% of
the aggregate Note Balance of the notes as of the closing
date.
The exercise of the right to purchase the assets of the trust will effect early
retirement of the notes. The note insurer will have the right to consent to any
optional redemption, if the redemption would result in a draw under the
financial guaranty insurance policy.
In general, any such purchase of mortgage loans and property
acquired in respect of the mortgage loans will be made at a price equal to the
sum of the stated principal balance of each outstanding mortgage loan as of the
day of the repurchase, plus accrued interest at the coupon rate, to the first
day of the month of the purchase, plus any unreimbursed P&I Advances and
servicing advances.
THE NOTE INSURER AND THE FINANCIAL GUARANTY INSURANCE POLICY
The following information has been supplied by Ambac Assurance
Corporation for inclusion in this prospectus supplement. No representation is
made by the sponsor, the servicer, the subservicer, Meritage or the underwriter
or any of their affiliates as to the accuracy or completeness of this
information.
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THE NOTE INSURER
Ambac Assurance Corporation, the note insurer, is a
Wisconsin-domiciled stock insurance corporation regulated by the Office of the
Commissioner of Insurance of the State of Wisconsin and licensed to do business
in 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the
Territory of Guam. The note insurer primarily insures newly issued municipal and
structured finance obligations. The note insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc., a 100% publicly-held company. Moody's Investors
Service, Inc., Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc. and Fitch IBCA, Inc. have each assigned a triple-A financial
strength rating to the note insurer.
The consolidated financial statements of the note insurer and
subsidiaries as of December 31, 1998 and December 31, 1997 and for each of the
years in the three-year period ended December 31, 1998, prepared in accordance
with generally accepted accounting principles, included in the Annual Report on
Form 10-K of Ambac Financial Group, Inc. (which was filed with the Securities
and Exchange Commission on March 30, 1999; Securities and Exchange Commission
File No. 1-10777) and the unaudited consolidated financial statements of the
note insurer and subsidiaries as of September 30, 1999 and for the periods
ending September 30, 1999 and September 30, 1998, included in the Quarterly
Report on Form 10-Q of Ambac Financial Group, Inc. for the period ended
September 30, 1999 (which was filed with the Securities and Exchange Commission
on November 12, 1999) are incorporated by reference into this prospectus
supplement and are deemed to constitute a part of this prospectus supplement.
Any statement contained in a document incorporated by reference shall be
modified or superseded for the purposes of this prospectus supplement to the
extent that a statement contained by reference in this prospectus supplement
also modifies or supersedes that statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
All financial statements of the note insurer and subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Securities
and Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, subsequent to the date of this prospectus
supplement and prior to the termination of the offering of the notes are deemed
to be incorporated by reference into this prospectus supplement and to be a part
of this prospectus supplement from the respective dates of filing of the
financial statements.
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CAPITALIZATION
The following table sets forth the capitalization of the note
insurer as of December 31, 1996, December 31, 1997, December 31, 1998 and
September 30, 1999, respectively, in conformity with generally accepted
accounting principles.
SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999
1996 1997 1998 (UNAUDITED)
--------------- -------------- -------------- ---------------
Unearned premiums.............................. $ 995 $ 1,184 $ 1,303 $ 1,376
Other liabilities.............................. 259 562 548 465
--------------- -------------- -------------- ---------------
Total liabilities.............................. $ 1254 $ 1,746 $ 1,851 $ 1,841
=============== ============== ============== ===============
Stockholder's equity:(1)
Common stock................................ $ 82 $ 82 $ 82 $ 82
Additional paid-in capital.................. 515 521 541 643
Accumulated other comprehensive income (loss) 66 118 138 (23)
Retained earnings........................... 992 1,180 1,405 1,600
--------------- -------------- -------------- ---------------
Total stockholder's equity..................... 1,655 1,901 2,166 2,302
--------------- -------------- -------------- ---------------
Total liabilities and stockholder's equity..... $ 2,909 $ 3,647 $ 4,017 $ 4,143
=============== =============== ============== ===============
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the note insurer effective
January 1, 1998. As this new standard only requires additional
information in the financial statements, it does not affect the note
insurer's financial position or results of operations.
For additional financial information concerning the note
insurer, see the audited and unaudited financial statements of the note insurer
incorporated by reference in this prospectus supplement. Copies of the financial
statements of the note insurer incorporated by reference in this prospectus
supplement and copies of the note insurer's annual statement for the year ended
December 31, 1998 prepared in accordance with statutory accounting standards are
available, without charge, from the note insurer. The address of the note
insurer's administrative offices and its telephone number are One State Street
Plaza, 19th Floor, New York, New York 10004, (212) 668-0340.
The note insurer makes no representation regarding the notes
or the advisability of investing in the notes and makes no representation
regarding, nor has it participated in the preparation of, this prospectus
supplement other than the information supplied by the note insurer and presented
under the heading "THE NOTE INSURER AND THE FINANCIAL GUARANTY INSURANCE POLICY"
and in the financial statements incorporated in this prospectus supplement by
reference.
THE FINANCIAL GUARANTY INSURANCE POLICY
The note insurer will issue a financial guaranty insurance
policy for the notes. This policy unconditionally guarantees the payment of
Insured Amounts and Preference Amounts on the notes. The note insurer will make
each required payment of an Insured Amount to the indenture trustee on the later
of (1) the business day immediately preceding the payment date the Insured
Amount is distributable to the holders under the indenture, and (2) the business
day next following the day the note insurer shall have received telephonic or
telegraphic notice, subsequently confirmed in writing, or written notice by
registered or certified mail, from the indenture trustee, specifying that an
Insured Amount is due and payable in accordance with the terms of the policy.
The note insurer will make each required payment of a Preference Amount on the
payment date next following receipt on a business day of a certified copy of a
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final non-appealable order requiring the return of a Preference Amount, and such
other documentation as is reasonably required by the note insurer, such
documentation being in a form satisfactory to the note insurer, PROVIDED that if
such documents are received after 12:00 noon New York City time on such business
day, they will be deemed to be received on the following business day.
The note insurer's obligation under the policy will be
discharged to the extent that funds are received by the indenture trustee for
distribution to the holders, whether or not those funds are properly distributed
by the indenture trustee.
For purposes of the policy, HOLDER as to a particular note,
does not and may not include the issuer, the servicer, the sponsor or Meritage.
The note insurer only insures the timely receipt of interest
on the notes, calculated at the Note Interest Rate, the amount of any
Overcollateralization Deficit, payable on each payment date on the notes and the
principal balance of the notes on the final scheduled payment date. The policy
will not cover the Available Funds Cap Carry-Forward Amount, a shortfall in
interest as a result of prepayment or shortfalls resulting from the Soldiers'
and Sailors' Civil Relief Act of 1940, nor does the policy guarantee to the
holders of the notes any particular rate of principal payment. The policy
expires and terminates without any action on the part of the note insurer or any
other person on the date that is one year and one day following the date on
which the notes have been paid in full.
To the extent that the note insurer makes Insured Payments,
either directly or indirectly (as by paying through the indenture trustee), to
the related holders, the note insurer will be subrogated to the rights of such
holders with respect to such Insured Payments and shall be deemed to the extent
of the payments so made to be a registered holder of the notes for purposes of
payment.
Payments under the policy will be made only at the time set
forth in the policy. No accelerated payments shall be made under the policy
regardless of any acceleration of any of the Notes, unless such accelerated
payments are made at the sole option of the note insurer.
The policy is non-cancelable.
The policy will be issued under and shall be construed under,
the laws of the State of New York, without giving effect to the conflict of laws
principles of the State of New York.
IN THE EVENT THAT THE INSURER WERE TO BECOME INSOLVENT, ANY
CLAIMS ARISING UNDER THE POLICY WOULD BE EXCLUDED FROM COVERAGE BY THE
CALIFORNIA INSURANCE GUARANTY ASSOCIATION, ESTABLISHED UNDER THE LAWS OF THE
STATE OF CALIFORNIA.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE
SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
DRAWINGS UNDER THE POLICY
On each available funds determination date the indenture
trustee shall determine, for the next payment date, the Total Available Funds to
be on deposit in the note account on that payment date, excluding the amounts of
the servicing fee, the indenture trustee fee, the owner trustee fee, and the
premium payable to the note insurer. In relation to each payment date, the
AVAILABLE FUNDS DETERMINATION DATE is the third business day next preceding that
payment date or any earlier day that shall be agreed to by the note insurer and
the indenture trustee.
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If an Insured Amount is due, the indenture trustee shall
complete a telephone or telegraphic notice, promptly confirmed in writing by
telecopy, the original of which is subsequently delivered by registered or
certified mail, and submit the notice to the note insurer no later than 12:00
noon New York City time on the third business day preceding the payment date as
a claim for an Insured Amount in an amount equal to the Deficiency Amount.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of
1974, as amended, and Section 4975 of the Code prohibit a pension, profit
sharing, or other employee benefit plan as well as individual retirement
accounts and certain types of Keogh Plans 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 benefit plan. A
violation of these "prohibited transaction" rules may generate excise tax and
other liabilities under ERISA and the Code for those persons. Title I of ERISA
also requires that fiduciaries of a benefit plan subject to ERISA make
investments that are prudent, diversified (except if prudent not to do so) and
in accordance with governing plan documents. Employee 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; however,
the plans may be subject to comparable restrictions under federal, state or
local law.
References in this section to sections of the Code are
references to the Internal Revenue Code of 1986, as amended.
Certain transactions involving the trust might be deemed to
constitute prohibited transactions under ERISA and the Internal Revenue Code if
assets of the trust were deemed to be plan assets of a benefit plan. Under a
regulation issued by the United States Department of Labor, the assets of the
trust would be treated as plan assets of a benefit plan for the purposes of
ERISA and the Internal Revenue Code only if the benefit plan acquired an equity
interest in the trust and none of the exceptions contained in this regulation
were applicable. An equity interest is defined under this regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The notes
should be treated as indebtedness without substantial equity features for
purposes of the regulation. This determination is based in part upon the
traditional debt features of the notes, including the reasonable expectation of
purchasers of the notes that the notes will be repaid when due, as well as the
absence of conversion rights, warrants and other typical equity features. The
debt treatment of the notes for ERISA purposes could change if the trust
incurred losses.
Without regard to whether the notes are treated as an equity
interest for purposes of determining whether the assets of the trust constitute
plan assets, the acquisition or holding of the notes by or on behalf of a
benefit plan could be considered to give rise to a prohibited transaction if the
trust or any of its affiliates is or becomes a party in interest or disqualified
person with respect to the benefit plan. In this case, certain exemptions from
the prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a note.
Included among these exemptions are: Prohibited Transaction Class Exemption
90-1, regarding investments by insurance company pooled separate accounts;
Prohibited Transaction Class Exemption 91-38, regarding investments by bank
collective investment funds; Prohibited Transaction Class Exemption 95-60,
regarding investments by insurance company general accounts; Prohibited
Transaction Class Exemption 96-23, regarding transactions by in-house asset
managers; and Prohibited Transaction Class Exemption 84-14, regarding
transactions by qualified professional assets managers. Each investor using the
assets of a benefit plan which acquires the notes, or to whom the notes are
transferred, will be deemed to have
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represented that the acquisition and continued holding of the notes will be
covered by a prohibited transaction class exemption issued by the United States
Department of Labor.
Any benefit plan fiduciary considering the purchase of a note
should consult with its counsel with respect to the potential applicability of
ERISA and the Internal Revenue Code to the investment. Moreover, each benefit
plan fiduciary should determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the notes is
appropriate for the benefit plan, taking into account the overall investment
policy of the benefit plan and the composition of the benefit plan's investment
portfolio. Purchasers of the notes that are insurance companies should consult
with their counsel with respect to the United States Supreme Court's decision in
John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510
U.S. 86 (1993), which ruled that assets held in an insurance company's general
account may be deemed to be plan assets for ERISA purposes under certain
circumstances. See "ERISA Considerations" in the Prospectus.
The sale of notes to a benefit plan is in no respect a
representation by the sponsor or the underwriter that this investment meets all
relevant legal requirements with respect to investments by benefit plans
generally or any particular benefit plan, or that this investment is appropriate
for benefit plans generally or any particular benefit plan.
USE OF PROCEEDS
The issuer intends to use the net proceeds to be received from
the sale of the notes to acquire the mortgage loans from the sponsor and to pay
other expenses associated with the pooling of the mortgage loans and the
issuance of the notes.
LEGAL INVESTMENT CONSIDERATIONS
The notes will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984. Institutions
whose activities are subject to review by federal or state regulatory
authorities may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the investment by such
institutions in certain forms of mortgage related securities.
See "LEGAL INVESTMENT" in the Prospectus.
UNDERWRITING
The notes will be purchased by First Union Securities, Inc.,
the UNDERWRITER, from the issuer and will be offered by the underwriter from
time to time to the public in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. Under the terms set forth in the
underwriting agreement, dated as of the date of this prospectus supplement, the
sponsor has agreed to cause the issuer to sell, and the underwriter has agreed,
subject to the terms and conditions set forth in the underwriting agreement, to
purchase the entire principal amount of the notes.
The underwriter has informed the sponsor that it proposes to
offer the notes for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The underwriter may effect such transactions by
selling the notes to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the underwriter. In connection with the sale of the notes, the underwriter
may be deemed to have received compensation from the sponsor in the form of
underwriting compensation. The underwriter and any dealers that participate with
the underwriter in the distribution of
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the notes may be deemed to be underwriters and any commissions received by them
and any profit on the resale of the notes by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
The sponsor and Meritage have agreed to indemnify the
underwriter against certain liabilities including liabilities under the
Securities Act.
The sponsor has been advised by the underwriter that the
underwriter intends to make a market in the notes, as permitted by applicable
laws and regulations and subject to the provisions of Rule 104 of Regulation M.
The underwriter is not obligated, however, to make a market in the notes and
such market-making may be discontinued at any time at the sole discretion of the
underwriter. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the notes.
The underwriter, or affiliates of the underwriter, provide
warehouse financing facilities to RBMG, Meritage and the company.
All of the mortgage loans included in the trust will have been
acquired in a privately negotiated transaction with Meritage.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain material federal income
tax consequences of the purchase, ownership and disposition of the notes is to
be considered only in connection with "MATERIAL FEDERAL INCOME TAX CONSEQUENCES"
in the accompanying prospectus. The discussion herein and in the accompanying
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 accompanying
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 are encouraged to consult their own tax advisors in determining the
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of the notes.
TREATMENT OF THE NOTES
The sponsor, the servicer and the trust agree, and the holders
of the notes will agree by their purchase of the notes, to treat the notes as
indebtedness for all federal, state and local income tax purposes. There are no
regulations, published rulings or judicial decisions involving the
characterization for federal income tax purposes of securities with terms
substantially the same as the notes. In general, whether instruments such as the
notes constitute indebtedness for federal income tax purposes is a question of
fact, the resolution of which is based primarily upon the economic substance of
the instruments and the transaction pursuant to which they are issued rather
than merely upon the form of the transaction or the manner in which the
instruments are labeled. The Internal Revenue Service and the courts have set
forth various factors to be taken into account in determining, for federal
income tax purposes, whether an instrument constitutes indebtedness and whether
a transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Dewey Ballantine LLP, special tax counsel to the
sponsor, is of the opinion that, for federal income tax purposes, the notes will
be treated as indebtedness, and not as an ownership interest in the mortgage
loans, or an equity interest in the trust, or in a separate association taxable
as a corporation or other taxable entity. SEE "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES -- DEBT SECURITIES" in the accompanying prospectus.
S-102
If the notes are characterized as indebtedness, interest paid
or accrued on a note will be treated as ordinary income to holders of the notes
and principal payments on a note will be treated as a return of capital to the
extent of the holder's basis in the note allocable thereto. An accrual method
taxpayer will be required to include in income interest on the notes when
earned, even if not paid, unless it is determined to be uncollectible. The
indenture trustee, on behalf of the trust, will report to the holders of the
notes of record and the IRS the amount of interest paid and original issue
discount, if any, accrued on the notes to the extent required by law.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS OF THE NOTES. Although,
as described above, it is the opinion of tax counsel that for federal income tax
purposes, the notes will be characterized as indebtedness, such opinion is not
binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that the notes
did not represent debt for federal income tax purposes, holders of the notes
would likely be treated as owning an interest in a partnership and not an
interest in an association, or a publicly traded partnership, taxable as a
corporation or a taxable mortgage pool. If the holders of the notes were treated
as owning an equity interest in a partnership, the partnership itself would not
be subject to federal income tax; rather each partner would be taxed
individually on their respective distributive share of the partnership's income,
gain, loss, deductions and credits. The amount, timing and characterization of
items of income and deduction for a holder of a note would differ if the notes
were held to constitute partnership interests, rather than indebtedness. Since
the parties will treat the notes as indebtedness for federal income tax
purposes, none of the servicer, the indenture trustee or the owner trustee will
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the notes. Investors that are foreign persons
are strongly encouraged to consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the notes.
SPECIAL TAX ATTRIBUTES. The notes will not represent "real
estate assets" for purposes of Section 856(c)(4)(A) of the Code or "[l]oans ...
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C) of the Code.
DISCOUNT AND PREMIUM. The notes will be variable-rate debt
instruments. It is not anticipated that the notes will be issued with any
original issue discount. SEE "MATERIAL FEDERAL INCOME TAX CONSEQUENCES --
DISCOUNT AND PREMIUM -- ORIGINAL ISSUE DISCOUNT" in the accompanying prospectus.
The prepayment assumption for each class of notes that will be used for purposes
of computing original issue discount, if any, for federal income tax purposes is
100% of the related prepayment assumption. SEE "CERTAIN PREPAYMENT AND YIELD
CONSIDERATIONS" in this prospectus supplement. In addition, a subsequent
purchaser who buys a note for less than its remaining stated redemption price at
maturity may be subject to the "market discount" rules of the Code. SEE
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES -- DISCOUNT AND PREMIUM -- MARKET
DISCOUNT" in the accompanying prospectus. A subsequent purchaser who buys a note
for more than its remaining stated redemption price at maturity may be subject
to the "market premium" rules of the Code. SEE "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES -- DISCOUNT AND PREMIUM -- SECURITIES PURCHASED AT A PREMIUM" in
the accompanying prospectus.
SALE OR REDEMPTION OF THE NOTES. If a note is sold or retired,
the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and such holder's adjusted basis in the note. SEE
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES -- DEBT SECURITIES -- SALE OR
EXCHANGe" in the accompanying prospectus.
OTHER MATTERS. For a discussion of backup withholding and
taxation of foreign investors in the notes, SEE "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES -- BACKUP WITHHOLDING" anD " --FOREIGN INVESTORS -- GRANtor TRUST
SECURITIES AND REMIC REGULAR INTERESTS" in the accompanying prospectus.
S-103
The IRS has issued new withholding regulations which make
certain modifications to withholding, backup withholding and information
reporting rules. The withholding regulations attempt to unify certification
requirements and modify certain reliance standards. The withholding regulations
will generally be effective for payments made after December 31, 2000, although
taxpayers may begin compliance with the withholding regulations immediately.
Withholding Forms W-8 and 1001 are valid only until December 31, 2000, although
the new Form W-8BEN is valid for a period of three years beginning on the date
that the form is signed. Prospective investors are encouraged to consult their
own tax advisors regarding the withholding regulations.
TREATMENT OF THE TRUST
Tax counsel is of the opinion that the trust will not be
characterized as an association, or a publicly traded partnership, taxable as a
corporation or a taxable mortgage pool.
STATE TAXES
The sponsor makes no representations regarding the tax
consequences of purchase, ownership or disposition of the notes under the tax
laws of any state. Investors considering an investment in the notes may wish to
consult their own tax advisors regarding the tax consequences.
Investors may wish to consult their own tax advisors regarding
the federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the notes.
EXPERTS
The consolidated financial statements of Ambac Assurance
Corporation and subsidiaries, as of December 31, 1998 and 1997 and for each of
the years in the three-year period ended December 31, 1998 are incorporated by
reference into this prospectus supplement and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference into this prospectus supplement, and upon the
authority of KPMG LLP as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the originator
and the servicer by Jordan D. Dorchuck, Esq., Corporate Senior Vice President,
Corporate General Counsel & Director of Legal Services of Resource Bancshares
Mortgage Group, Inc., and by Kirkpatrick & Lockhart LLP, New York, New York.
Dewey Ballantine LLP, New York, New York or Dewey Ballantine LLP, Washington,
D.C., will act as counsel for the underwriter, the sponsor and the issuer and
will pass upon federal income tax matters for the issuer.
RATING OF THE NOTES
It is a condition to the issuance of the notes that the class
A-1 notes shall be rated "Aaa" by Moody's and "AAA" by Standard & Poor's and the
class A-2 notes be rated "Aaa" by Moody's and "AAA" by S&P.
S-104
Explanations of the significance of such ratings may be
obtained from Moody's at 99 Church Street, New York, New York 10007, and
Standard & Poor's at 25 Broadway, New York, New York 10004.
The ratings on the notes are based in substantial part on the
ability of the note insurer to pay claims. Any changes in the ratings of the
note insurer by the rating agencies may result in a change in the ratings of the
notes.
The ratings assigned to the notes do not represent any
assessment of the likelihood or rate of prepayments and do not address the
possibility that noteholders might suffer a lower than anticipated yield.
There is no assurance that any rating assigned to the notes
will continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of the ratings may have an adverse
effect on the market price or liquidity of the notes.
The ratings of the notes should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities.
There can be no assurances as to whether any other rating
agency will rate either class of the notes, or, if one does, what rating will be
assigned by such other rating agency. A rating on a class of the notes by
another rating agency, if assigned at all, may be lower than the ratings
assigned to the applicable class of notes by Moody's or Standard & Poor's.
S-105
GLOSSARY
The following terms have the meanings given below when used in
this prospectus supplement.
ADMINISTRATIVE FEE AMOUNT, with respect to any payment date,
the sum of the servicing fee, the owner trustee fee, the indenture trustee fee,
and the note insurer premium relating to such payment date and allocable to such
group.
AVAILABLE FUNDS, with respect to a group and any payment date,
will consist of the sum of the following amounts, together with amounts
withdrawn from the reserve account for the benefit of such group on such payment
date:
o all scheduled payments of interest received with respect
to the mortgage loans in such group and due during the
related due period and all other interest payments on or
in respect of the mortgage loans in such group received by
or on behalf of the servicer during the related collection
period, net of amounts representing interest accrued on
such mortgage loans in respect of any period prior to the
cut-off date, plus any compensating interest payments made
by the servicer in respect of the related mortgage loans
and any net income from related REO properties for such
collection period;
o all scheduled payments of principal received with respect
to the mortgage loans in such group and due during the
related due period and all other principal payments
(including principal prepayments, but excluding amounts
described elsewhere in this definition) received or deemed
to be received during the related collection period in
respect of the mortgage loans in such group;
o all insurance proceeds;
o the aggregate of any other proceeds received by the
servicer during the related collection period in
connection with the liquidation of any mortgaged property
securing a mortgage loan in that group, whether through
trustee's sale, foreclosure, condemnation, taking by
eminent domain or otherwise, including any insurance
proceeds to the extent not duplicative of amounts in the
preceding clause, after deducting unreimbursed P&I
Advances, servicing advances and expenses incurred by the
servicer in connection with the liquidation of that
mortgage loan;
o the aggregate of the amounts received in respect of any
mortgage loans in such group that are required or
permitted to be repurchased, released, removed or
substituted by any of Meritage, the company, the sponsor,
RBMG, Funding Co., the servicer, the note insurer or the
issuer during the related collection period as described
in "--ASSIGNMENT OF MORTGAGE LOANs" and "SERVICING OF THE
MORTGAGE LOANS" in this prospectus supplement, to the
extent such amounts are received by the indenture trustee
on or before the related servicer remittance date;
o the amount of any P&I Advances with respect to such group
made for such payment date;
i
o the amount of any payments received with respect to such
group for such payment date under the cap agreement held
by the indenture trustee; and
o the aggregate of amounts deposited in the related note
account by the issuer, the servicer or the note insurer,
as the case may be, during such collection period in
connection with redemption of the notes as described under
"--REDEMPTION OF THE NOTEs" in this prospectus supplement.
LESS
o the Administrative Fee Amount for such group in respect of
such payment date,
o P&I Advances and servicing advances (for such group
previously made that are reimbursable to the servicer
(other than those included in liquidation expenses for any
liquidated mortgage loan in such group and already
reimbursed from the related Liquidation Proceeds) in such
collection period to the extent permitted by the servicing
agreement and other amounts for which the indenture
trustee, the servicer and the issuer are permitted to be
reimbursed,
o the aggregate amounts deposited into the collection
account or into the related note account and allocable to
the related group that may not be withdrawn from the
collection account pursuant to a final and nonappealable
order of a United States Bankruptcy Court of competent
jurisdiction imposing a stay pursuant to section 362 of
the United States Bankruptcy Code and that would otherwise
have been included in Available Funds on such payment date
and received by the indenture trustee that are recoverable
and sought to be recovered from the issuer as a voidable
preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code (11 U.S.C.) in accordance
with a final nonappealable order of a court of competent
jurisdiction and
o any other costs, expenses, liabilities and losses borne by
the trust, which are not otherwise reimbursable to the
trust.
AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT for a class of notes
and any payment date, the shortfall which arises as a result of the Available
Funds Cap Rate limiting the related Note Interest Rate because the rate set by
the related Available Funds Cap Rate is less than the interest rate based on
one-month LIBOR on the notes for each interest period after the initial interest
period. If this occurs, and if the amount of any resulting shortfall is not
covered by payments of Excess Cash from the other group, the shortfall will be
carried forward and be due and payable on the following payment date and shall
accrue interest, at the Note Interest rate, until paid.
AVAILABLE FUNDS CAP RATE for a class of notes and any payment
date is a rate per annum equal to the fraction, expressed as a percentage the
numerator of which is an amount equal to:
o 1/12 of the aggregate scheduled principal balance of the
then outstanding mortgage loans and REO properties in the
related group multiplied by the weighted average of the
Expense Adjusted Coupon Rates on the then outstanding
mortgage loans and REO properties in the related group
MINUS
ii
o the amount of the note insurer premium allocable to the
related group for such payment date,
and the denominator of which is an amount equal to:
o the then outstanding aggregate Note Balance of the related
class multiplied by
o the actual number of days elapsed in the related interest
period divided by 360.
COLLECTION PERIOD, with respect to any payment date and a
mortgage loan, means the calendar month preceding the month in which such
payment date occurs (or, in the case of the first payment date after a mortgage
loan constitutes part of the trust, during the period beginning on the day
following the cut-off date through and including the last day of the month prior
to the month in which the payment date occurs).
DEFICIENCY AMOUNT means, for any payment date, the excess, if
any, of Required Distributions over the Net Available Funds.
DUE PERIOD, with respect to any payment date, means the period
commencing on the second day of the calendar month preceding the calendar month
in which such payment date occurs (or with respect to the first payment date
after a mortgage loan constitutes part of the trust, commencing on the day
following the cut-off date for each mortgage loan) and ending on the first day
of the calendar month in which such payment date occurs.
EXCESS CASH with respect to a group on any payment date will
be equal to Available Funds for such group and payment date, reduced by the sum
of:
o any amounts payable to the note insurer for insured
payments with respect to either group paid on prior
payment dates and not yet reimbursed and for any unpaid
note insurer premiums for such group on prior payment
dates (in each case with interest at the late payment rate
as defined and set forth in the insurance agreement) (and
such amounts with respect to the other group, to the
extent not completely covered by the Available Funds for
the other group) and other amounts payable to the note
insurer,
o the note interest for the related class and payment date
(and the portion of Note Interest with respect to the
other group, to the extent not completely covered by
Available Funds for the other group),
o any amounts payable for any Overcollateralization Deficit
for either class, and
o the Monthly Principal for the related class and payment
date.
EXPENSE ADJUSTED COUPON RATE on any mortgage loan is equal to
the then applicable coupon rate on the mortgage loan minus the sum of:
o the Minimum Spread
o the Servicing Fee Rate and
o the indenture trustee fee rate.
iii
INDENTURE TRUSTEE FEE, the amount payable monthly on each
payment date to the indenture trustee, which shall be equal to one-twelfth of
0.015% of the related mortgage group balance.
INSURANCE PROCEEDS means, with respect to a group and any
payment date, the aggregate of any proceeds from or in respect of any policy of
insurance covering a mortgaged property securing a mortgage loan in that group
that are received during the related collection period and applied by the
servicer to reduce the stated principal balance of that mortgage loan; these
proceeds will not include any amounts applied to the restoration or repair of
the mortgaged property or released to the mortgagor in accordance with
applicable law, the servicer's customary servicing procedures or the terms of
the mortgage loan.
INSURED AMOUNTS shall mean, with respect to any payment date,
any Deficiency Amount for such payment date.
INSURED PAYMENTS shall mean, the aggregate amount actually
paid by the note insurer to the indenture trustee in respect of (i) Insured
Amounts for a payment date and (ii) Preference Amounts for any given business
day.
LIQUIDATED MORTGAGE LOAN means, as to any payment date, any
mortgage loan as to which the servicer has determined during the related
collection period, in accordance with its customary servicing procedures, that
all Liquidation Proceeds which it expects to recover from or on account of such
mortgage loan have been recovered.
LIQUIDATION PROCEEDS mean those items described in the fourth
clause of the definition of Available Funds before the deduction of unreimbursed
P&I Advances, servicing advances and expenses incurred by the servicer in
connection with the liquidation of the mortgage loan.
MINIMUM SPREAD: For any payment date occurring from the
closing date through and including the twelfth payment date, the Minimum Spread
is equal to 0.00% per annum; for any payment date occurring after the twelfth
payment date the Minimum Spread is equal to 0.50% per annum.
MONTHLY PRINCIPAL for each class of notes and any payment date
will be an amount equal to the lesser of the following two amounts reduced by
the excess, if any, of the current amount of overcollateralization over the
required level of overcollateralization for that class of notes and that payment
date:
o the excess of Available Funds in the related note account
over the amounts payable to the note insurer and to the
class A-1 or class A-2 noteholders under the first two
headings under "Payments, on the Notes" with, respect to
such class, and
o the aggregate of all scheduled payments of principal
received or advanced with respect to the mortgage loans in
the related group and due during the related due period
and all other amounts collected, received or otherwise
recovered in respect of principal on such mortgage loans,
including principal prepayments, but not including
payments ahead during or in respect of the related
collection period, and the aggregate of the amounts
allocable to principal paid to the indenture trustee for
deposit in the related note account on the related
servicer remittance date by the issuer, the sponsor, the
company, Funding Co., the servicer, the note insurer or
Meritage in connection with a repurchase, release, removal
or substitution of any mortgage loans in the related group
pursuant to the indenture.
iv
MORTGAGE GROUP BALANCE is the outstanding aggregate stated
principal balance of the mortgage loans in the related group as of the first day
of the related due period.
MORTGAGE POOL BALANCE is the outstanding aggregate stated
principal balance of the mortgage loans in group I and group II as of the first
day of the related due period.
NET AVAILABLE FUNDS is for any payment date, the Total
Available Funds, less the servicing fees, indenture trustee's fees, the owner
trustee's fees and the premiums due to the note insurer on that payment date.
NET LIQUIDATION PROCEEDS mean those items described in the
fourth clause of the definition of Available Funds;
NOTE BALANCE with respect to the class A-1 or class A-2 notes
will be equal, as of any payment date, to the original Note Balance of such
class less all Monthly Principal and Excess Cash paid to the related noteholders
on previous payment dates to reduce the Note Balance of such class (exclusive,
for the sole purpose of effecting the note insurer's subrogation rights, of
payments made by the note insurer in respect of any Overcollateralization
Deficit related to such class of notes and such payment date under the financial
guaranty insurance policy, except to the extent reimbursed to the note insurer
pursuant to the indenture).
NOTE INTEREST for a class of notes and any payment date will
be an amount equal to interest accrued during the related interest period at the
Note Interest Rate on the related Note Balance as of the preceding payment date
(after giving effect to the payment, if any, in reduction of principal made on
such notes on such preceding payment date), less the amount of any shortfalls in
interest resulting from prepayments and application of the Soldiers' and
Sailors' Civil Relief Act of 1940 with respect to mortgage loans in the related
group.
NOTE INTEREST RATE will be, with respect to the class A-1
notes, for the initial interest period a per annum rate equal to one-month LIBOR
(set two business days prior to the closing date) plus 0.35%, and for each
subsequent interest period a per annum rate equal to the lesser of:
o for each interest period ending on or prior to the
redemption date, one-month LIBOR plus 0.35%, and for each
interest period after that date, one-month LIBOR plus
0.70%, and
o the related Available Funds Cap Rate;
and, with respect to the class A-2 notes, for the initial
interest period a per annum rate equal to one-month LIBOR (set two business days
prior to the closing date) plus 0.38%, and for each subsequent interest period,
per annum rate equal to the lesser of:
o for each interest period ending on or prior to the
redemption date, one-month LIBOR plus 0.38%, and for each
interest period after that date, one-month LIBOR plus
0.76% and
o the related Available Funds Cap Rate.
OVERCOLLATERALIZATION AMOUNT with respect to a class of notes
and any payment date is the amount, if any, by which the aggregate Stated
Principal Balance of the Mortgage Loans in the related group as of the end of
the related Due Period exceeds the Note Balance of the related class of notes as
of
v
such payment date after taking into account payments of Monthly Principal,
disregarding any permitted reduction in Monthly Principal due to an
overcollateralization surplus, made on that payment date.
OVERCOLLATERALIZATION DEFICIT for any payment date and any
class is the amount, if any, by which the related Note Balance, after taking
into account all payments to be made on the payment date in reduction of the
Note Balance, including any Excess Cash payments related to each class, exceeds
the aggregate stated principal balance of the mortgage loans in the related
group as of the end of the applicable due period.
P&I ADVANCES mean all payments of principal and interest, net
of the servicing fee, that were due during the related due period on the
mortgage loans and that were delinquent on the related determination date, plus
amounts representing assumed payments not covered by any current net income on
REO Property.
PERMITTED INVESTMENTS generally means the following:
(a) direct obligations of, and obligations fully guaranteed
by, the United States of America, Fannie Mae, Freddie Mac, the Federal
Home Loan Banks or any agency or instrumentality of the United States
of America, the obligations of which are backed by the full faith and
credit of the United States of America;
(b) o demand and time deposits in, certificates of
deposit of, banker's acceptances issued by or
federal funds sold by any depository institution
or trust company (including the indenture trustee
or its agent acting in their respective
commercial capacities) incorporated under the
laws of the United States of America or any state
of the United States of America and subject to
supervision and examination by federal and/or
state authorities, so long as, at the time of
such investment or contractual commitment
providing for such investment, such depository
institution or trust company or its ultimate
parent has a short-term unsecured debt rating in
one of the two highest available rating
categories of S&P and the highest available
rating category of Moody's and provided that each
such investment has an original maturity of no
more than 365 days, and
o any other demand or time deposit or deposit which
is fully insured by the Federal Deposit Insurance
Corporation;
(c) repurchase obligations with a term not to exceed 30 days
with respect to any security described in clause (a) above and entered
into with a depository institution or trust company (acting as a
principal) rated "A" or higher by S&P and rated "A2" or higher by
Moody's; PROVIDED, HOWEVER, that collateral transferred pursuant to
such repurchase obligation must:
o be of the type described in clause (a) above and must:
o be valued daily at current market price plus accrued
interest,
o pursuant to such valuation, be equal, at all times, to at
least 105% of the cash transferred by the indenture
trustee in exchange for the collateral and
vi
o be delivered to the indenture trustee or, if the indenture
trustee is supplying the collateral, an agent for the
indenture trustee, in a manner to accomplish perfection of
a security interest in the collateral by possession of
certificated securities;
(d) securities bearing interest or sold at a discount issued
by any corporation incorporated under the laws of the United States of
America which has a long-term unsecured debt rating in the highest
available rating category of each of the rating agencies at the time of
the investment;
(e) commercial paper having an original maturity of less than
365 days and issued by an institution having a short-term unsecured
debt rating in the highest available rating category of each of the
rating agencies at the time of the investment;
(f) a guaranteed investment contract approved by each of the
rating agencies and the note insurer and issued by an insurance company
or other corporation having a long-term unsecured debt rating in the
highest available rating category of each of the rating agencies at the
time of the investment;
(g) money market funds having ratings in one of the two
highest available rating categories of S&P and Moody's at the time of
the investment which invest only in other Permitted Investments (any
such money market funds which provide for demand withdrawals being
conclusively deemed to satisfy any maturity requirements for Permitted
Investments set forth in this prospectus supplement), including money
market funds of the indenture trustee and any such funds that are
managed by the indenture trustee or its affiliates or for which the
indenture trustee or any affiliate acts as advisor as long as the money
market funds satisfy the criteria of this subparagraph (g); and
(h) any investment approved in writing by the note insurer
with written evidence that such investment will not result in a
downgrading or withdrawal of the rating of the notes by either S&P or
Moody's.
PREFERENCE AMOUNT means any payment of principal or interest
on a note which has become due and payable and which is made to an owner of a
note by or on behalf of the indenture trustee which has been deemed a
preferential transfer and was previously recovered from its owner pursuant to
the United States Bankruptcy Code in accordance with a final, nonappealable
order of a court of competent jurisdiction.
PRINCIPAL PREPAYMENT means any mortgagor payment or other
recovery in respect of principal on a mortgage loan, including Net Liquidation
Proceeds and insurance proceeds, allocable to principal), which, in the case of
a mortgagor payment, is received in advance of its scheduled due date and is not
accompanied by an amount as to interest representing scheduled interest for any
month subsequent to the month of such payment, or that is accompanied by
instructions from the related mortgagor directing the servicer to apply such
payment to the principal balance of such mortgage loan currently.
REALIZED LOSS is the deficiency which arises when any mortgage
loan becomes a Liquidated Mortgage Loan during the prior collection period and
the Net Liquidation Proceeds obtained and allocated to principal are less than
the Stated Principal Balance of the mortgage loan.
REO PROPERTY means a mortgaged property acquired by
foreclosure or deed in lieu of foreclosure.
vii
REQUIRED DISTRIBUTIONS means, with respect to (1) any payment
date occurring prior to the payment date in December 2030, the Note Interest
less the amount of any Available Funds Cap Carry-Forward Amounts; (2) any
Overcollateralization Deficit after application of Total Available Funds from
both groups; and (3) the final scheduled payment date, the aggregate outstanding
principal balance, if any, of the notes, after giving effect to all other
payments of principal on the notes on that payment date.
SERVICING FEE RATE, for any payment date, is equal to 0.44%
per annum; PROVIDED, HOWEVER, that if necessary to obtain the appointment of a
successor servicer or successor subservicers, the Servicing Fee Rate may
increase up to 0.50% per annum. The payment of any increased servicing fee would
reduce the amount of Excess Cash.
SERVICER REMITTANCE DATE, with respect to any payment date,
3.00 p.m. New York time on the 18th day of the calendar month in which that
payment date occurs or, if the 18th day is not a business day, the next business
day after the 18th.
STATED PRINCIPAL BALANCE, with respect to any mortgage loan,
as of any date of determination, is equal to the scheduled principal balance of
that mortgage loan as of the cut-off date, after application of all scheduled
principal payments due on or before the cut-off date, reduced by the sum of the
principal portion of each monthly payment due on such mortgage loan subsequent
to the cut-off date received by the indenture trustee or advanced to the
indenture trustee, reduced by all other amounts allocable to principal that have
been received by the indenture trustee with respect to such mortgage loan on or
before such date, and as further reduced to the extent that any Realized Loss on
that mortgage loan has been allocated to such mortgage loan on or before the
date of determination.
TOTAL AVAILABLE FUNDS, as to any payment date and with respect
to either class of notes, is the sum of:
o Available Funds for the related group,
o Available Funds for the unrelated group which are
available for payment of Note Interest or
Overcollateralization Deficit, and
o amounts in the reserve account.
viii
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered notes,
referred to as the GLOBAL SECURITIES, will be available only in book-entry form.
Investors in the global securities may hold such global securities through DTC,
Cedelbank 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 holding global
securities through Cedelbank and Euroclear will be conducted in the ordinary way
in accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice which is seven calendar day settlement.
Secondary market trading between investors holding global
securities through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations.
Secondary cross-market trading between participants of
Cedelbank or Euroclear and participants holding notes will be effected on a
delivery-against-payment basis through the relevant depositaries of Cedelbank
and Euroclear and as participants.
Non-U.S. holders (as described below) of global securities
will be subject to U.S. withholding taxes unless the 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, Cedelbank and
Euroclear will hold positions on behalf of their participants through their
relevant depositaries, which in turn will hold such positions in accounts as
participants.
Investors selecting to hold their global securities through
DTC will follow DTC settlement practice. Investor securities custody accounts
will be credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their global securities through
Cedelbank or Euroclear accounts will follow the settlement procedures applicable
to conventional eurobonds, except that there will be no temporary global
security and no "lock-up" or restricted period. Global securities will be
credited to securities custody accounts on the settlement date against payment
in same-day funds.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
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TRADING BETWEEN PARTICIPANTS. Secondary market trading between
participants will be settled using the procedures applicable to prior
asset-backed note issues in same-day funds.
TRADING BETWEEN CEDELBANK AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Cedelbank participants or Euroclear
participants will be settled using the Procedures applicable to conventional
eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDELBANK OR EUROCLEAR
PARTICIPANTS. When global securities are to be transferred from the account of a
participant to the account of a Cedelbank participant or a Euroclear
participant, the purchaser will send instructions to Cedelbank or Euroclear
through a Cedelbank participant or Euroclear participant at least one business
day prior to settlement. Cedelbank or Euroclear will instruct the respective
Depositary, as the case may be, to receive the global securities against
payment. Payment will include interest accrued on the global securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary to the
participant's account against delivery of the global securities. After
settlement has been completed, the global securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedelbank 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 Cedelbank or Euroclear cash debt will be
valued instead as of the actual settlement date.
Cedelbank 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 Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the global securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a
line of credit to them, Cedelbank 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, Cedelbank participants or Euroclear
participants purchasing global securities would incur overdraft charges for one
day, assuming they clear the overdraft when the global securities are credited
to their accounts. However, interest on the global securities would accrue from
the value date. Therefore, in many cases the investment income on the global
securities earned during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although this result will depend on each
Cedelbank participant's or Euroclear participant's particular cost of funds.
Because the settlement is taking place during New York
business hours, participants can employ their usual procedures for sending
global securities to the respective European Depositary for the benefit of
Cedelbank participants or Euroclear participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the participants a
cross-market transaction will settle no differently than a trade between two
participants.
TRADING BETWEEN CEDELBANK OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Cedelbank participants
and Euroclear participants may employ their customary procedures for
transactions in which global securities are to be transferred by the respective
clearing
A-2
system, through the respective Depositary, to a participant. The seller
will send instructions to Cedelbank or Euroclear through a Cedelbank participant
or Euroclear participant at least one business day prior to settlement. In these
cases, Cedelbank or Euroclear will instruct the relevant depositary, as
appropriate, to deliver the global securities to the participant's account
against payment. Payment will include interest accrued on the global securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank participant or Euroclear participant the following day, and receipt of
the cash proceeds in the Cedelbank participant's or Euroclear participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedelbank participant or
Euroclear participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date (I.E.,
the trade fails), receipt of the cash proceeds in the Cedelbank participant's or
Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that
purchase global securities from participants for delivery to Cedelbank
participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
o borrowing through Cedelbank or Euroclear for one day
(until the purchase side of the day trade is reflected in
their Cedelbank or Euroclear accounts) in accordance with
the clearing system's customary procedures;
o borrowing the global securities in the U.S. from a
participant no later than one day prior to settlement,
which would give the global securities sufficient time to
be reflected in their Cedelbank or Euroclear account in
order to settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the
participant is at least one day prior to the value date
for the sale to the Cedelbank participant or Euroclear
participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of securities holding securities through
Cedelbank or Euroclear, or through DTC if the holder has an address outside the
U.S., will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest, including original issue discount, on registered debt
issued by U.S. persons, unless:
o 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 the beneficial owner and the U.S. entity required
to withhold tax complies with applicable certification
requirements and
o the beneficial owner takes one of the steps described
below to obtain an exemption or reduced tax rate.
A-3
The IRS recently issued withholding regulations, which make
certain modifications to withholding, backup withholding and information
reporting rules. The withholding regulations attempt to unify certification
requirements and modify certain reliance standards. The withholding regulations
will generally be effective for payments made after December 31, 2000, although
taxpayers may begin compliance with the withholding regulations immediately.
This summary does not deal with all aspects of U.S. federal
income tax withholding that may be relevant to foreign holders of the securities
as well as the application of the withholding regulations. Prospective investors
are urged to consult their own tax advisors for specific advice regarding their
holding and disposing of the securities.
EXEMPTION FOR NON-U.S. PERSONS
Under the existing rules, 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
Foreign Status. Under the withholding regulations, a non-U.S. person may claim
beneficial owner status by filing Form W-8BEN, Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. The old Form W-8 is valid
until the earlier of (i) three years beginning on the date that the form is
signed, or (ii) December 31, 2000. The new Form W-8BEN is valid for a period of
three years beginning on the date that the form is signed. If the information
shown on Form W-8 or Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be
filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME
Under the existing rules, 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. Under the
withholding regulations, a non-U.S. person may claim an exemption from U.S.
withholding on income effectively connected with the conduct of a trade or
business in the United States by filing Form W-8ECI, Certificate of Foreign
Person's Claim for Exemption From Withholding on Income Effectively Connected
With the Conduct of a Trade or Business in the United States. The old Form 4224
is valid until the earlier of (i) one year beginning on the date that the form
is signed, or (ii) December 31, 2000. The new Form W-8ECI is valid for a period
of three years beginning on the date that the form is signed.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
Under the existing rules, 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. Under the withholding regulations, a non-U.S.
person may claim treaty benefits by filing Form W-8BEN, Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding. The old Form 1001
is valid until the earlier of (i) three years beginning on the date that the
form is signed, or (ii) December 31, 2000. The new Form W-8BEN is valid for a
period of three years beginning on the date that the form is signed.
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.
A-4
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE
Under the existing rules, the Owner of a global security or
his agent, files by submitting the appropriate form to the person through whom
it holds, the clearing agency, in the case of persons holding directly on the
books of the clearing agency. The withholding regulations revise the procedures
that withholding agents and payees must follow to comply with, or to establish
an exemption from, withholding for payments made after December 31, 2000. Each
foreign holder of securities should consult its own tax advisor regarding
compliance with these procedures under the withholding regulations.
A U.S. PERSON is:
o a citizen or resident of the United States;
o a corporation, partnership or other entity organized in or
under the laws of the United States or any political
subdivision of the United States;
o an estate that is subject to U.S. federal income tax
regardless of the source of its income; or
o 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.
A NON-U.S. PERSON is any person who is not a U.S. person.
A-5
PROSPECTUS
- ----------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL ASSET FUNDING CORPORATION ASSET-BACKED SECURITIES
SPONSOR ISSUABLE IN SERIES
- ----------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------
YOU SHOULD READ THE SECTION ENTITLED THE SECURITIES
"RISK FACTORS" STARTING ON PAGE 3 OF
THIS PROSPECTUS AND CONSIDER THESE o will be issued from time to time in series,
FACTORS BEFORE MAKING A DECISION TO
INVEST IN THE SECURITIES. o will consist of either asset-backed
certificates or asset-backed notes,
o will be issued by a trust or other special
Retain this prospectus for future purpose entity established by the sponsor,
reference. This prospectus may not
be used to consummate sales of o will be backed by one or more pools of mortgage
securities unless accompanied by the loans or manufactured housing contracts held
prospectus supplement relating to by the issuer, and
the offering of the securities.
o may have one or more forms of credit enhancement,
such as insurance policies or reserve funds.
- --------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OF OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FIRST UNION CAPITAL MARKETS
The date of this prospectus is September 9, 1999
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS.....................................................1
RISK FACTORS..............................................................3
THE SPONSOR...............................................................6
USE OF PROCEEDS...........................................................6
DESCRIPTION OF THE SECURITIES.............................................6
PAYMENTS OF INTEREST...................................................7
PAYMENTS OF PRINCIPAL..................................................7
FINAL SCHEDULED DISTRIBUTION DATE......................................7
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION...........................8
MANDATORY TERMINATION; AUCTION SALE....................................8
DEFEASANCE.............................................................8
WEIGHTED AVERAGE LIFE OF THE SECURITIES................................8
FORM OF SECURITIES.....................................................9
THE TRUST FUNDS..........................................................11
THE MORTGAGE LOANS....................................................12
THE CONTRACTS.........................................................15
PRIVATE SECURITIES....................................................16
ACCOUNTS..............................................................18
COLLECTION AND DISTRIBUTION ACCOUNTS..................................18
PRE-FUNDING ACCOUNT...................................................18
CREDIT ENHANCEMENT.......................................................19
SUBORDINATE SECURITIES................................................19
INSURANCE.............................................................19
RESERVE FUNDS.........................................................20
MINIMUM PRINCIPAL PAYMENT AGREEMENT...................................20
DEPOSIT AGREEMENT.....................................................21
DERIVATIVE CONTRACTS..................................................21
SERVICING................................................................21
COLLECTION PROCEDURES; ESCROW ACCOUNTS................................21
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT...............21
ADVANCES AND LIMITATIONS THEREON......................................23
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES......23
REALIZATION UPON DEFAULTED MORTGAGE LOANS.............................24
ENFORCEMENT OF DUE-ON-SALE CLAUSES....................................25
SERVICING COMPENSATION AND PAYMENT OF EXPENSES........................25
EVIDENCE AS TO COMPLIANCE.............................................26
MATTERS REGARDING THE SERVICER........................................26
THE AGREEMENTS...........................................................27
ASSIGNMENT OF PRIMARY ASSETS..........................................27
ii
REPORTS TO HOLDERS....................................................29
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT.......................30
THE TRUSTEE...........................................................31
DUTIES OF THE TRUSTEE.................................................32
RESIGNATION OF TRUSTEE................................................32
AMENDMENT OF AGREEMENT................................................32
VOTING RIGHTS.........................................................33
LIST OF HOLDERS.......................................................33
REMIC ADMINISTRATOR...................................................33
TERMINATION...........................................................33
LEGAL ASPECTS OF LOANS...................................................33
MORTGAGE LOANS........................................................33
CONTRACTS.............................................................40
SECURITY INTERESTS IN THE MANUFACTURED HOMES..........................40
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES...............42
CONSUMER PROTECTION LAWS..............................................42
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE"
CLAUSES.............................................................42
APPLICABILITY OF USURY LAWS...........................................43
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS.....................43
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940.......................43
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................44
GRANTOR TRUST SECURITIES..............................................44
REMIC SECURITIES......................................................46
DEBT SECURITIES.......................................................53
PARTNERSHIP INTERESTS.................................................53
FASIT SECURITIES......................................................55
DISCOUNT AND PREMIUM..................................................58
BACKUP WITHHOLDING....................................................61
FOREIGN INVESTORS.....................................................61
STATE TAX CONSIDERATIONS.................................................63
ERISA CONSIDERATIONS.....................................................63
CERTIFICATES..........................................................64
NOTES.................................................................65
CONSULTATION WITH COUNSEL.............................................66
LEGAL INVESTMENT.........................................................66
AVAILABLE INFORMATION....................................................66
INCORPORATION OF DOCUMENTS BY REFERENCE..................................67
PLAN OF DISTRIBUTION.....................................................67
LEGAL MATTERS............................................................67
FINANCIAL INFORMATION....................................................67
iii
SUMMARY OF PROSPECTUS
This summary highlights selected information from this prospectus 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 your
series of securities, read carefully this entire prospectus and the
accompanying prospectus supplement.
THE SPONSOR
Residential Asset Funding Corporation will act as the sponsor of the
issuers, meaning that it will establish the issuers and cause them to issue the
securities. The principal executive address of the sponsor are located at 301
South College Street, Charlotte, North Carolina 28202-6001, telephone no. (714)
373 -6611.
SECURITIES OFFERED
Each class of securities will consist of one or more classes of ownership
securities or debt securities. Ownership securities represent beneficial
ownership interests in the assets held by the issuer. Ownership securities will
be issued in the form of certificates. Debt securities represent indebtedness
secured by the assets of the issuer. Debt securities will be issued in the form
of notes.
Each series of securities will be issued in one or more classes, one or
more of which may be classes of:
o fixed-rate securities,
o adjustable-rate securities,
o compound-interest or accrual securities,
o planned-amortization-class securities,
o principal-only securities,
o interest-only securities,
o participating securities,
o senior securities, or
o subordinated securities.
The interest rate, principal balance, notional balance, minimum
denomination and form of each class of securities will be described in the
accompanying prospectus supplement. The securities will be available in either
fully registered or book-entry form, as described in the accompanying prospectus
supplement.
THE LOANS
Each issuer will hold one or more pools of loans, which may include:
o mortgage loans or manufactured housing contracts secured by
one-to-four family residential properties and/or manufactured homes,
o mortgage loans secured by security interests in shares issued by
private, non-profit cooperative housing corporations,
o mortgage loans secured by junior liens on the mortgaged properties,
o mortgage loans with loan-to-value ratios in excess of the appraised
value of the mortgaged property,
o home improvement retail installment contracts,
o revolving home equity lines of credit, and
o private securities backed by mortgage loans or contracts.
The sponsor will direct the issuer to acquire the loans from affiliated
originators, unaffiliated originators or warehouse trusts created by the sponsor
or an affiliate to finance the origination of loans.
1
DISTRIBUTIONS ON THE SECURITIES
Owners of securities will be entitled to receive payments in the manner
described in the accompanying prospectus supplement, which will specify:
o whether distributions will be made monthly, quarterly, semi-annually
or at other intervals and dates,
o the amount allocable to payments of principal and interest on any
distribution date, and
o whether distributions will be made on a pro rata, random lot, or
other basis.
CREDIT ENHANCEMENT
A series of securities, or classes within a series, may have the benefit of
one or more types of credit enhancement, including:
o the use of excess interest to cover losses and to create
over-collateralization,
o the subordination of distributions on the lower classes to the
distributions on more senior classes,
o the allocation of losses on the underlying loans to the lower
classes, and
o the use of cross support, reserve funds, financial guarantee
insurance policies, guarantees and letters of credit.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the accompanying prospectus supplement.
REDEMPTION OR REPURCHASE OF SECURITIES
One or more classes of securities may be redeemed or repurchased in whole
or in part at the times described in the prospectus supplement and at a price at
least equal to the amount necessary to pay all principal and interest on the
redeemed classes.
LEGAL INVESTMENT
The accompanying prospectus supplement will state whether or not the
securities will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984.
ERISA LIMITATIONS
Employee benefit plans should carefully review with their own legal
advisors whether the purchase or holding of the securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Internal
Revenue Code.
FEDERAL INCOME TAX CONSEQUENCES
Each class of securities offered by this prospectus and the accompanying
prospectus supplement will constitute one of the following for federal income
tax purposes:
o interests in a trust treated as a grantor trust,
o "regular interests" or "residual interests" in a trust treated as one
or more "real estate mortgage investment conduits",
o debt issued by the issuer,
o interests in an issuer which is treated as a partnership, or
o "regular interests", "high-yield interests" or "ownership interests"
in a trust treated as one or more "financial asset securitization
investment trusts".
RATINGS
The securities offered by this prospectus and the accompanying prospectus
supplement will be rated at the time of issuance in one of the four highest
rating categories by at least one statistical rating organization.
2
RISK FACTORS
You should consider the following risk factors prior to any purchase of
any class of securities. You should also consider the information under the
caption "Risk Factors" in the accompanying prospectus supplement.
YOUR INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT; YOU SHOULD BE
PREPARED TO HOLD YOUR SECURITY TO MATURITY.
A secondary market for these securities is unlikely to develop. If it
does develop, it may not provide you with sufficient liquidity of
investment or continue for the life of these securities. The
underwriters may establish a secondary market in the securities,
although no underwriter will be obligated to do so. We neither expect
to list the securities on any securities exchange nor to have the
securities quoted in the automated quotation system of a registered
securities association.
Issuance of the securities in book-entry form may also reduce the
liquidity in the secondary trading market, since some investors may be
unwilling to purchase securities for which they cannot obtain
definitive physical securities.
THE ASSETS OF THE TRUST FUND WILL BE LIMITED AND, IF THE ASSETS BECOME
INSUFFICIENT TO SERVICE THE SECURITIES, LOSSES MAY RESULT.
The securities will be payable solely from the assets of the trust
fund. Neither the sponsor nor any other person will be obligated to
make payments to the security holders, except to the extent of any
credit enhancement as specifically provided in the prospectus
supplement. Consequently, security holders must rely solely upon
payments from the trust fund for the payment of principal and interest
on the securities.
AS A RESULT OF PREPAYMENT ON THE LOANS OR EARLY REDEMPTION OF THE SECURITIES,
YOU COULD BE FULLY PAID SIGNIFICANTLY EARLIER THAN WOULD OTHERWISE BE THE CASE,
WHICH MAY ADVERSELY AFFECT THE YIELD TO MATURITY ON YOUR SECURITIES.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the loans. The
yield to maturity on interest-only securities purchased at premiums or
discounts to par will be extremely sensitive to the rate of prepayments
on the loans.
The underlying loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay of a prepayment
penalty or premium. These penalties will generally not be property of
the issuer, and will not be available to fund distributions owing to
you. We cannot predict the rate of prepayments of the loans, which 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, we can give no assurance as to the level
of prepayments that a trust fund will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by
borrowers, including payments in connection with refinancings, sales of
mortgaged properties subject to "due-on-sale" provisions and
liquidations due to default, as well as the receipt of proceeds from
insurance policies. In addition, repurchases or purchases from the
issuer of loans or the payment of substitution adjustments will have
the same effect on the securities as a prepayment of the loans.
3
One or more classes of securities of any series may be subject to
optional or mandatory redemption or auction sale in whole or in part,
on or after a specified date, or on or after the time when the
aggregate outstanding principal amount of the underlying loans or the
securities is less than a specified amount. You will bear the risk of
reinvesting unscheduled distributions resulting from redemption.
Any of the foregoing principal prepayments may adversely affect the
yield to maturity of the prepaid securities. Since prevailing interest
rates are subject to fluctuation, there can be no assurance that you
will be able to reinvest these prepayments at a yield equaling or
exceeding the yield on your securities.
CREDIT ENHANCEMENT, EVEN IF PROVIDED, WILL IN ANY EVENT BE LIMITED IN BOTH
AMOUNT AND SCOPE OF COVERAGE, AND MAY NOT BE SUFFICIENT TO COVER ALL LOSSES OR
RISKS ON YOUR INVESTMENT.
Credit enhancement may be provided in limited amounts to cover some,
but not all, types of losses on the underlying loans and, in most
cases, will reduce over time in accordance with a schedule or formula.
Furthermore, credit enhancement may provide only very limited coverage
as to some types of losses, and may provide no coverage as to other
types of losses. Generally, credit enhancement does not directly or
indirectly guarantee to the investors any specified rate of
prepayments, which is one of the principal risks of your investment.
The amount and types of coverage, the identification of any entity
providing the coverage, the terms of any subordination and any other
information will be described in the accompanying prospectus
supplement.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES ON THE LOANS.
An investment in the securities, which are backed by residential real
estate loans, may be affected by a decline in real estate values. A
decline could be caused by a general decline in the real estate market,
the borrower's failure to maintain the property or a natural disaster,
among other things. If property values were to decline, the rates of
delinquencies and foreclosures may rise, thereby increasing the
likelihood of loss. If these losses are not covered by any credit
enhancement, you will bear all risk of these losses and will have to
look primarily to the value of the mortgaged properties for recovery of
the outstanding principal and unpaid interest on the defaulted loans.
FORECLOSURE OF MORTGAGED PROPERTIES INVOLVES DELAYS AND EXPENSE AND COULD CAUSE
LOSSES ON THE LOANS.
Even if the mortgaged properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
foreclosure of defaulted loans, and corresponding delays in the receipt
of the foreclosure proceeds could occur. Foreclosures are regulated by
state statutes, rules and judicial decisions and are subject to many of
the delays and expenses of other lawsuits, sometimes requiring several
years to complete. The servicer will be entitled to reimburse itself
for any expenses it has paid in attempting to recover amounts due on
the liquidated loans, including payments to prior lienholders, accrued
fees of the servicer, legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses, which will reduce the
amount of the net recovery by the trust.
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ENVIRONMENTAL CONDITIONS ON THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY
FOR THE ISSUER.
Real property pledged as security to a lender may be subject to
environmental risks which could cause losses on your securities. Under
the laws of some 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, this type of lien has priority over the
lien of an existing mortgage or owner's interest against the property.
In addition, under the laws of some states and under CERCLA, a lender
may be liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances 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 will increase its risk of environmental liability
upon the foreclosure of the mortgaged property, since the lender may
then become the legal owner of the property.
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND
INTEREST ON THE LOANS.
Residential mortgage lending is highly regulated at both the federal
and state levels and violations of these laws, policies and principles
may limit the ability of the servicer to collect all or part of the
amounts due on the loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the issuer, as
the owner of the loan, to damages and administrative enforcement. The
occurrence of any of the foregoing could cause losses on your
securities.
THE SOLDIERS' AND SAILORS' CIVIL RELIEF ACT MAY LIMIT THE ABILITY TO COLLECT ON
THE LOANS.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or
similar state legislation, benefit mortgagors who enter military
service after the origination of his or her loan, including a mortgagor
who is a member of the National Guard or is in reserve status at the
time of the origination of the loan and is later called to active duty.
These mortgagors may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the
mortgagor's active duty status, unless a court orders otherwise upon
application of the lender. The implementation of the Soldiers' and
Sailors' Civil Relief Act could have an adverse effect, for an
indeterminate period of time, on the ability of the servicer to collect
full amounts of interest on these loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes
limitations that would impair the ability of the servicer to foreclose
on loans during the mortgagor's period of active duty status. Thus, in
the event that these loans go into default, there may be delays and
losses occasioned by the inability to realize upon the mortgaged
property in a timely fashion.
RATINGS ARE NOT RECOMMENDATIONS; THE RATINGS ASSIGNED TO YOUR SECURITIES MAY BE
LOWERED OR WITHDRAWN.
Each series of securities will be rated in one of the four highest
rating categories by the rating agency. Any rating would be based on,
among other things, the adequacy of the value of the assets and any
credit enhancement. A rating is not a recommendation to purchase, hold
or sell securities, because as it does not address market price or
suitability for a particular investor.
The ratings assigned to the securities will be based on, among other
things, the adequacy of the value of the trust fund and any credit
enhancement. Any rating which is assigned may not remain in effect for
any given period of time or may be lowered or withdrawn
5
entirely by the rating agencies if, in their judgment, circumstances in
the future so warrant. Ratings may also be lowered or withdrawn because
of an adverse change in the financial or other condition of a provider
of credit enhancement or a change in the rating of a credit enhancement
provider'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 benefit plans. Due to the
complexity of regulations that govern benefit 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.
THE SPONSOR
The sponsor, Residential Asset Funding Corporation, 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 sponsor'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.
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: to acquire the primary assets,
to repay indebtedness which has been incurred to obtain funds to acquire the
primary assets, to establish any reserve funds described in the prospectus
supplement and to pay costs of structuring and issuing the 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 seller of the primary assets. The seller may agree to reimburse the sponsor
for fees and expenses of the sponsor incurred in connection with the offering of
the securities.
DESCRIPTION OF THE SECURITIES
The sponsor may offer from time to time the securities, which may be
asset-backed notes or certificates, in one or more series.
The certificates of a series will evidence undivided interests in
assets deposited into a trust fund. The notes of a series will represent
indebtedness secured by the trust fund. A series may consist of both notes and
certificates.
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.
If a series includes multiple classes, the amount, percentage and
timing of distributions of principal, interest or both to each class may vary
and one or more classes' right to distributions of principal, interest or both
may be subordinated to other classes. The primary assets and other assets
comprising the trust fund may be divided into one or more groups and one or more
classes may evidence beneficial ownership of or be secured by the corresponding
group.
6
The trustee, or a paying agent on its behalf, will make payments of
principal of and interest on the securities. Interest on and principal of the
securities of a series will be payable on each distribution date at the times,
at the rates, in the amounts and in the order of priority described in the
prospectus supplement. Payments will be made by check mailed to holders of
record at their addresses appearing on the security register. Payments may be
made, however, by wire transfer, at the expense of the holder requesting payment
by wire transfer, in circumstances described in the prospectus supplement. Final
payments of principal in retirement of each security will be made only upon
presentation and surrender of the security at the office of the trustee
specified in the prospectus supplement. The trustee will mail notice of the
final payment on a security to the holder of the security before the
distribution date on which the trustee expects to make the final principal
payment.
PAYMENTS OF INTEREST
The interest-bearing securities of each class will bear interest from
the date and at the rate per annum specified, or calculated in the method
described in, the 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 loans and/or as prepayments occur on the loans. Principal-only securities
may not be entitled to receive any interest distributions or may be entitled to
receive only nominal interest distributions.
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the 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 the distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made
to the holders of the securities of the series on which principal is then
payable, as described in the prospectus supplement. Principal payments will be
allocated among the classes of a series in the manner, at the times and in the
priority described in the prospectus supplement.
The rate of principal payments of each class may depend principally
upon the rate of payment, including prepayments, on the primary assets. A rate
of prepayment lower or higher than anticipated will affect the yield on the
securities of a series in the manner described under "--Weighted Average Life of
the Securities." Under limited circumstances, a series of securities may be
subject to termination or redemption. See " --Optional Redemption, Purchase or
Termination" below.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date on each class of securities is
the date no later than which the principal balance is expected to be reduced to
zero, calculated on the basis of the assumptions described in the prospectus
supplement. The final scheduled distribution date will be specified in the
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 class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date.
Furthermore, 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 of a series. See
"--Weighted Average Life of the Securities" below.
7
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 seller, servicer or credit enhancer or an affiliate thereof. Redemption
or repurchase may occur on or after a specified date, or on or after the time as
the aggregate outstanding principal amount of the securities or primary assets,
is less than a percentage not to exceed 20% of the initial aggregate principal
balance of the securities or primary assets. The redemption, purchase or
repurchase price may not be less than an amount necessary to pay all principal
and interest on the securities outstanding. If we have made a REMIC election,
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 Internal Revenue 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 an optional redemption or repurchase.
MANDATORY TERMINATION; AUCTION SALE
The trustee, the servicer or the seller may be required to effect early
retirement of a series of securities by auction sale. Within a period following
the failure of the holder of the optional termination right to exercise its
right, the required party shall solicit bids for the purchase of all primary
assets remaining in the trust. In the event that satisfactory bids are received,
the net sale proceeds will be distributed to holders in the same order of
priority as collections on the loans. A satisfactory bid will not be less than
an amount necessary to pay all principal and interest on the notes. If
satisfactory bids are not received, the required party shall decline to sell the
loans and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the loans. The sale and consequent
termination of the trust must constitute a "qualified liquidation" of each
REMIC.
DEFEASANCE
The indenture may provide that a trust fund may be discharged through
defeasance. In a defeasance, a party will deposit with the trustee money and/or
direct obligations of or obligations guaranteed by the United States of America
which will provide money in an amount sufficient to pay each installment of
interest and, on the final scheduled distribution date, principal on the notes.
In the event of any defeasance and discharge of notes, note holders would be
able to look only to the deposited money and/or direct obligations for payment
of principal and interest, if any, on their notes until maturity.
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
the 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.
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 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 and the
percentage of the original principal amount of each class of securities that
would be outstanding on specified distribution dates based on the assumptions
stated in the prospectus supplement, including assumptions that prepayments on
the mortgage loans or underlying loans relating to the private securities,
8
as applicable, included in the trust fund are made at rates corresponding to
various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans will
conform to any level of any prepayment standard or model specified in the
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 the loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
loans, the loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by the loans. In this
regard, it should be noted that the loans may have different interest rates. In
addition, the weighted average life of the securities may be affected by the
varying maturities of the loans. If any loans have actual terms-to-stated
maturity of less than those assumed in calculating the final scheduled
distribution date of the 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.
FORM OF SECURITIES
The securities in each series will either be issued as physical
certificates or in book-entry form. Physical certificates in fully registered
form will be transferable and exchangeable at the corporate trust office of the
registrar of the securities named in the 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.
Securities issued in book-entry form will be registered in the name of
Cede & Co., the nominee of the Depository Trust Company. DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered under
the provisions of section 17A of the Securities Exchange Act of 1934. DTC was
created to hold securities for its participating organizations 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. Indirect
access to the DTC system also is available to brokers, dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
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 & Co., as nominee of
DTC, may do so only through participants and indirect participants. In addition,
the 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 each distribution date because,
while payments are required to be forwarded to Cede & Co., as nominee for DTC,
on each
9
distribution date, DTC will forward payments to its participants, which
thereafter will be required to forward payments to indirect participants or
holders. Unless and until physical securities are issued, it is anticipated that
the only holder will be Cede & Co., as nominee of DTC, and that the beneficial
holders of securities will not be recognized by the trustee as holders under the
agreements. The beneficial holders will only be permitted to exercise the rights
of holders under the agreements indirectly through DTC and its participants who
in turn will exercise their rights through DTC.
DTC is required to make book-entry transfers of securities among
participants and is required to receive and transmit payments of principal of
and interest on the securities. Participants and indirect participants with
which holders have securities accounts similarly are required to make book-entry
transfers and receive and transmit 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 participants to transfer securities, by book-entry transfer, through
DTC for the account of the purchasers of securities, which account is maintained
with their respective participants. 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 banks, the ability of a holder to pledge
securities to persons or entities that do not participate in the DTC system, or
otherwise act as the owner of the securities may be limited due to the lack of a
physical certificate.
DTC in general advises that it will take any action permitted to be
taken by a holder under an agreement only at the direction of one or more
participants to whose account with DTC the securities are credited.
Additionally, DTC in general advises that it will take actions on behalf of
specified percentages of the holders only at the direction of participants whose
holdings include current principal amounts of outstanding securities that
satisfy the specified percentages. DTC may take conflicting actions with respect
to other current principal amounts of outstanding securities to the extent that
actions are taken on behalf of participants whose holdings include current
principal amounts of outstanding securities.
Any securities initially registered as physical certificates in the
name of Cede & Co., 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 agreements and described in the
prospectus supplement. Upon the occurrence of any of the events specified in the
agreements 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
physical certificates as holders. Thereafter, payments of principal of and
interest on the securities will be made by the trustee directly to holders. The
final distribution of any security, whether physical certificates or securities
registered in the name of Cede & Co., however, will be made only upon
presentation and surrender of the securities on the final distribution date at
the office or agency specified in the notice of final payment to holders.
10
THE TRUST FUNDS
Each trust fund will include assets originated or acquired by the
seller or sellers specified in the prospectus supplement composed of:
o primary assets, which may include one or more pools of (1) mortgage
loans that are secured by mortgages or deeds of trust on residential
properties, (2) manufactured housing conditional sale contracts and
installment agreements that are secured by manufactured homes, and
(3) securities backed or secured by loans,
o all monies due on the loans net, if and as provided in the prospectus
supplement, of amounts payable to the servicer of the loans,
o funds on deposit in any pre-funding and capitalized interest
accounts,
o reserve funds, letters of credit, surety bonds, insurance policies or
other forms of credit support,
o any mortgaged property acquired by foreclosure or deed in lieu of
foreclosure or repossession,
o any manufactured home acquired by repossession and
o any amount on deposit in the collection account or distribution
account.
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.
A maximum of 5%, by initial principal balance, of the aggregate primary
assets that are included in a trust fund at the closing date will deviate from
the characteristics that are described in the prospectus supplement.
The securities will be non-recourse obligations secured by the trust
fund. Holders of a series of notes may only proceed against the collateral
securing the notes in the case of a default and may not proceed against any
assets of the sponsor or the trust fund not pledged to secure the notes.
The primary assets for a series will be acquired by the trust fund from
the seller, or may be acquired in the open market or in privately negotiated
transactions. Loans relating to a series will be serviced by the servicer, which
may be the seller, specified in the prospectus supplement, under a servicing
agreement between the trust fund and servicer.
"Agreement" means, as to a series of certificates, the pooling and
servicing agreement or trust agreement, and as to a series of notes, the
indenture and the servicing agreement, as the context requires.
A trust fund relating to a series of securities may be a business trust
formed under the laws of the state specified in the prospectus supplement.
Prior to the initial offering of a series of securities, the trust fund
will have no assets or liabilities. We do not expect any trust fund to engage in
any activities other than acquiring, managing and holding the trust assets and
the proceeds thereof, issuing securities and making distributions thereon. No
trust fund will have any significant source of capital other than its assets and
any credit enhancement.
11
Primary assets included in the trust fund for a series may consist of
any combination of mortgage loans, contracts and private securities. Some of the
loans may be delinquent, although the loans that are delinquent as of the
cut-off date will not exceed 10% of the initial aggregate principal balance of
the primary assets for that series. The following is a brief description of the
loans we expect to be include as trust property.
THE MORTGAGE LOANS
MORTGAGE LOANS. The primary assets for a series may consist, in whole
or in part, of mortgage loans secured by mortgages on one- to four-family
residential housing, including condominium units and 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
prospectus supplement.
The mortgage loans may be either "closed-end" loans, which do not
permit the borrower to obtain the proceeds of future advances, or "open-end"
loans structured as lines of credit, which permit the 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. 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 prepayment, at a daily interest rate that is applied to the
principal amount of the mortgage loan so prepaid.
PAYMENT TERMS. The payment terms of the mortgage loans to be included
in a trust for a series will be described in the prospectus supplement and may
include any of the following features of combinations thereof or other features
described in the prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index, a rate that is fixed for a period of
time or under specified 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 limitations. Accrued
interest may be deferred and added to the principal of a mortgage
loan for periods and under circumstances specified in the 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.
o 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.
o 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
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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.
o 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
specified periods. Some 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 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 transfer of the mortgaged property. Other
mortgage loans may be assumable by persons meeting the then
applicable underwriting standards of the seller.
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, the simple interest method or the "Rule of 78s" method. The
prospectus supplement will state 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 the payment applied to
principal.
A simple interest mortgage loan provides for the amortization of the
amount financed under the 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 the mortgage loan. As payments are received under
a simple interest mortgage loan, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if a borrower pays a fixed monthly
installment on a simple interest mortgage loan before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. However, the next
succeeding payment will result in an allocation of a greater amount to interest
if the 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.
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Some mortgage loans may be insured under the Federal Housing Authority
Title I credit insurance program created under sections 1 and 2(a) of the
National Housing Act of 1934. Under the Title I program, the Federal Housing
Authority 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 Federal Housing Authority insures up to 90% of specified
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 Federal Housing Authority insurance coverage reserve account.
The owner of the loan bears the uninsured loss on each loan.
The mortgaged properties will include single family property, which is
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 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 prospectus supplement will specify whether or not mortgages on
cooperative dwellings consist of a lien on the shares issued by the cooperative
dwelling and the proprietary lease or occupancy agreement relating to the
cooperative dwelling.
The aggregate principal balance of mortgage loans secured by mortgaged
properties that are owner-occupied will be disclosed in the 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 (1) 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 (2) 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 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 prospectus supplement, taking into account the
amounts of any senior loans.
ADDITIONAL INFORMATION. The selection criteria for the mortgage loans,
including loan-to-value ratios, original terms to maturity and delinquency
information, will be specified in the prospectus supplement.
The trust fund may include mortgage loans that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity.
The trust fund may include mortgage loans that do not have a specified stated
maturity.
The prospectus supplement for a series for which the primary assets
include mortgage loans will specify, to the extent relevant and to the extent
the information is reasonably available to the sponsor and the sponsor
reasonably believes the information to be reliable:
o the aggregate unpaid principal balance;
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o the range and weighted average loan rate, 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;
o the range and average outstanding principal balance;
o the weighted average original and remaining term-to-stated maturity
and the range of original and remaining terms-to-stated maturity, if
applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios;
o the percentage of mortgage loans that accrue interest at adjustable
or fixed interest rates;
o the geographic distribution of the mortgaged properties;
o the percentage of mortgage loans that are secured by single family
mortgaged properties, shares relating to cooperative dwellings,
condominium units, investment property and vacation or second homes;
o the lien priority;
o year of origination; and
o the delinquency status, including the duration and history of
delinquencies and the percentage of delinquent mortgage loans.
The prospectus supplement will also specify any other limitations on
the types or characteristics of mortgage loans for a series.
THE CONTRACTS
CONTRACTS. Each pool of contracts in a trust fund will consist of
conventional manufactured housing installment sales contracts and installment
loan agreements 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, 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 seller of the
contracts may retain a portion of the interest payments, called a "fixed
retained yield." If the seller retains a fixed retained yield, the trust will be
entitled to payments on the contracts after payment of the fixed retained yield.
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 contract.
ADDITIONAL INFORMATION. The prospectus supplement for a series for
which the primary assets include contracts will specify, to the extent relevant
and to the extent the information is reasonably available to the sponsor and the
sponsor reasonably believes the information to be reliable:
o the initial aggregate principal balance;
o the range of original terms to maturity;
o the weighted average remaining term to stated maturity;
o the earliest and latest origination dates;
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o the range of contract rates and net contract rates;
o the weighted average net contract rate;
o the geographic distribution of manufactured homes;
o the percentage of any contracts which are secured by manufactured
homes which have become permanently affixed to real estate;
o the percentage of the contracts representing the refinancing of
existing indebtedness;
o the range of loan-to-value ratios and
o the highest outstanding principal balance at origination of any
contract.
The contracts in a trust fund will generally have monthly payments due
on the first of each month 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 change
in the rate of amortization of the contract. Moreover, payment adjustments on
the contracts may be subject to limitations, as specified in the prospectus
supplement, which may also affect the rate of amortization on the contract. As a
result, 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, the 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 the 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 the stated maturity date.
PRIVATE SECURITIES
Primary assets for a series may consist, in whole or in part, of
"private securities" which include pass-through certificates representing
beneficial interests in underlying loans of the type that would otherwise be
eligible to be loans or collateralized obligations secured by underlying loans.
Private securities may have previously been offered to the public and not
purchased as part of the original distribution or may be acquired in a private
transaction. 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 under a pooling and servicing
agreement, a trust agreement or similar agreement. The seller/servicer of the
underlying loans will have entered into the underlying agreement with the
underlying trustee. The underlying trustee or its agent, or a custodian, will
possess the underlying loans. Underlying loans will be serviced by a servicer
directly or by one or more sub-servicers who may be subject to the supervision
of the underlying servicer.
The sponsor of the private securities 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 trusts, and selling beneficial
interests in trusts. The underlying sponsor may be an affiliate of the sponsor.
The obligations of the underlying sponsor will generally be limited to
representations and warranties as to the assets conveyed by it to the trust.
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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 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 underlying trustee or the underlying
servicer. The underlying sponsor or the underlying servicer may have the right
to repurchase the underlying loans after a specified date or under other
circumstances specified in the 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. 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 underlying 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 characteristics of the underlying loans and other factors and will
have been established for the private securities on the basis of requirements of
the rating agency that rated the private securities.
ADDITIONAL INFORMATION. The prospectus supplement for a series for
which the primary assets include private securities will specify, to the extent
relevant and to the extent the information is reasonably available to the
sponsor and the sponsor reasonably believes the information to be reliable:
o the aggregate approximate principal amount and type;
o the maximum original term-to-stated maturity;
o the weighted average term-to-stated maturity;
o the pass-through or certificate rate or ranges thereof;
o the underlying sponsor, the underlying servicer and the underlying
trustee;
o characteristics of credit support relating to the underlying loans or
to the private securities;
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity of
the private securities;
o the terms on which underlying loans may be substituted for those
originally underlying the private securities;
and, as to the underlying loans, the following:
o the payment features, including whether the underlying loans are
fixed rate or adjustable rate and whether they provide for fixed
level payments or other payment features;
o the approximate aggregate principal balance, if known, of the
underlying loans insured or guaranteed by a governmental entity;
o the servicing fee or range of servicing fees;
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o the minimum and maximum stated maturities at origination;
o the lien priority; and
o the delinquency status and year of origination.
ACCOUNTS
Each trust fund will include one or more accounts. Each account will
either be an account maintained at a depository institution, the long-term
unsecured debt obligations of which are satisfactory to each rating agency or an
account the deposits in which are insured to the maximum extent available by the
Federal Deposit Insurance Corporation or which are secured in a manner meeting
requirements established by each rating agency.
The trustee may invest the funds in the accounts in eligible
investments maturing, with exceptions, not later than the day preceding the date
funds are due to be distributed. Eligible investments include, among other
investments, obligations of the United States and agencies thereof, federal
funds, certificates of deposit, commercial paper, demand and time deposits and
banker's acceptances, repurchase agreements of United States government
securities and guaranteed investment contracts, in each case, acceptable to the
rating agencies rating the securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate collection account will be established in the name of the
trustee for receipt of all amounts received from the primary assets. Amounts on
deposit in the collection account and amounts available from any credit
enhancement will be deposited in a distribution account, which will also be
established in the name of the trustee, for distribution to the holders.
PRE-FUNDING ACCOUNT
A trust fund may include a "pre-funding account." On the closing date,
the "pre-funded amount," which is a portion of the proceeds of the sale of the
securities of a series, will be deposited in the pre-funding account and may be
used to acquire additional primary assets during a specified "pre-funding
period." If any pre-funded amount remains on deposit in the pre-funding account
at the end of the pre-funding period, it will be applied in the manner specified
in the prospectus supplement to prepay the notes and/or the certificates of the
applicable series.
If a pre-funding account is established:
o the pre-funding period will not exceed 1 year from the closing date,
o 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 trust fund on the closing date, subject to the
exceptions stated in the prospectus supplement,
o the pre-funding amount will not exceed 50% of the principal amount of
the securities issued and
o prior to the investment of the pre-funded amount in additional
primary assets, the pre-funded amount will be invested in one or more
eligible investments.
If a pre-funding account is established, a "capitalized interest
account" may be established and maintained with the trustee. On the closing
date, funds will be deposited in the capitalized interest
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account and used to fund any shortfall in the interest accrued on the securities
and fees or expenses during the pre-funding period. Any amounts on deposit in
the capitalized interest account at the end of the pre-funding period that are
not necessary to fund any shortfall will be distributed to the person specified
in the 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
securityholders will receive a prepayment of principal to the extent described
in the prospectus supplement. Any 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 a prepayment at yields equaling or exceeding the yields on the
securities. It is possible that the yield on any reinvestment will be lower, and
may be significantly lower, than the yield on the securities.
CREDIT ENHANCEMENT
The sponsor may obtain credit enhancement, which may include an
irrevocable letter of credit, surety bond or insurance policy, issue subordinate
securities or obtain any other form of credit enhancement or combination thereof
in favor of the trustee on behalf of the holders of a series or designated
classes of a series from an institution or by other means. The credit
enhancement will support the payment of principal and interest on the
securities, and may be applied for other purposes to the extent and under the
conditions described in the prospectus supplement. Credit enhancement for a
series may include one or more of the following forms, or another form specified
in the prospectus supplement. Credit enhancement may be structured so as to
protect against losses relating to more than one trust fund.
SUBORDINATE SECURITIES
Credit enhancement for a series may consist of one or more classes of
subordinate securities. The rights of holders of 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.
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.
POOL INSURANCE POLICY. The pool insurance policy will cover, subject to
the limitations described in a prospectus supplement, losses resulting from
defaults, but will not cover the portion of the principal balance of any loan
that is required to be covered by any primary mortgage insurance policy.
SPECIAL HAZARD INSURANCE POLICY. 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 the damage is not covered by the standard hazard insurance policy or
any flood insurance policy, 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 (1) the cost of repair or
replacement of the mortgaged property or manufactured home or (2) upon transfer
of the mortgaged property or manufactured home to the special hazard insurer,
the unpaid principal balance of the loan at the time of foreclosure, plus
accrued interest to the date of claim settlement and expenses incurred by the
servicer. If the unpaid principal balance plus accrued interest and expenses is
paid by the special hazard insurer, the amount of further coverage under the
special hazard insurance policy will be correspondingly
19
reduced, less any net proceeds from the sale of the mortgaged property or
manufactured home. Any amount paid as the cost of repair of a mortgaged property
or manufactured home will reduce coverage by the amount paid. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, governmental actions, errors in design, faulty workmanship or
materials, except under specified circumstances, nuclear reaction, if the
mortgaged property is in a federally designated flood area, flood, chemical
contamination and related other risks.
Restoration of the mortgaged property or replacement of the
manufactured home with the proceeds described under (1) above is expected to
satisfy the condition under any pool insurance policy that the mortgaged
property be restored or manufactured home replaced before a claim under the pool
insurance policy may be validly presented with respect to the defaulted loan.
The payment described under (2) above will render unnecessary presentation of a
claim for the loan under any pool insurance policy. Therefore, so long as a 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 loan plus accrued
interest and expenses will not affect the total insurance proceeds paid to
security holders, 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 or
manufactured home at an amount less than the then-outstanding principal balance
of the loan. The amount of the secured debt could be reduced to the assigned
value, and the holder of the loan thus would become an unsecured creditor to the
extent the outstanding principal balance of the loan exceeds the assigned value.
In addition, other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Legal Aspects of the Loans." The sponsor may obtain
a bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the federal bankruptcy code. The
bankruptcy bond will cover losses resulting from a reduction by a bankruptcy
court of scheduled payments of principal and interest on a loan or a reduction
by a bankruptcy court of the principal amount of a loan and will cover unpaid
interest on the amount of the principal reduction from the date of the filing of
a bankruptcy petition.
RESERVE FUNDS
The sponsor may deposit into one or more funds to be established with
the trustee as part of the trust fund or for the benefit of any credit enhancer,
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. In the alternative or in addition to an initial deposit, a
reserve fund may be funded over time through application of all or a portion of
the excess cash flow from the primary assets, to the extent described in the
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.
The trustee will invest amounts deposited in a reserve fund in eligible
investments.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
The sponsor may enter into a minimum principal payment agreement with
an entity specified in the prospectus supplement. The entity would provide
payments on the securities of a series in the event that aggregate scheduled
principal payments and/or prepayments on the primary assets are not sufficient
to make payments on the securities.
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DEPOSIT AGREEMENT
The sponsor and the trustee for a series may enter into a deposit
agreement with the entity specified in the prospectus supplement. The purpose of
a deposit agreement is to accumulate available cash for investment so that it,
together with income thereon, can be applied to future distributions on one or
more classes of securities.
DERIVATIVE CONTRACTS
A trust may hold an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks. These derivative contracts may provide the trust with additional amounts
which will be available to pay interest on the securities, to build up
overcollateralization, or both.
SERVICING
The following summaries describe material provisions in the servicing
agreements common to each series of securities. The summaries do not purport to
be complete and are subject to and qualified by reference to the provisions of
the servicing agreements and the prospectus supplements. Where particular
provisions or terms used in the servicing agreements are referred to, the actual
provisions are incorporated by reference as part of the summaries.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The servicer will make reasonable efforts to collect all payments
required to be made under the loans and will, consistent with the terms of the
servicing agreement and any credit enhancement, follow the collection procedures
that it follows with respect to comparable loans held in its own portfolio. The
servicer may, in its discretion, waive any assumption fee, late payment charge,
or other charge on a loan and to the extent provided in the servicing agreement
arrange with an obligor a schedule for the liquidation of delinquencies by
extending the dates on which the scheduled payments are due on the loan.
The servicer, to the extent permitted by law and required by the
underlying loan documents, will establish and maintain escrow or impound
accounts with respect to loans in which payments by obligors to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
will be deposited. 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 or manufactured home and to
clear and terminate the escrow account. The servicer will be responsible for the
administration of the escrow accounts and generally will make advances to the
escrow accounts when a deficiency exists.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
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 will deposit into the collection account on the business
day following the closing date any amounts representing scheduled payments due
after the cut-off date but received by the servicer on or before the closing
date. Thereafter, the servicer will, within two business days after receipt, the
deposit into the collection account the following:
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o All payments on account of principal, including prepayments, on the
primary assets;
o All payments on account of interest on the primary assets after
deducting, if permitted by the servicing agreement, the servicing
fee;
o 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 the primary assets received
from the obligor, other than liquidation proceeds, which are amounts
required to be paid or refunded to the obligor under the terms of the
applicable loan documents or otherwise under law, exclusive of, if
permitted by the servicing agreement, the servicing fee;
o All proceeds under any title insurance, hazard insurance or other
insurance policy covering any primary asset, other than proceeds to
be applied to the restoration or repair of the mortgaged property or
manufactured home or released to the obligor;
o All amounts from any reserve fund;
o All advances made by the servicer; and
o All repurchase prices of any primary assets repurchased by the
sponsor, the servicer or the seller.
The servicer may be permitted, from time to time, to make withdrawals
from the collection account for each series for the following purposes:
o to reimburse itself for advances made by it; the servicer's right to
reimburse itself is limited to amounts received from particular
loans, including, for this purpose, liquidation proceeds and amounts
representing proceeds of insurance policies covering the mortgaged
property or manufactured home, which represent late recoveries of
scheduled payments respecting which any advance was made;
o to the extent provided in the servicing agreement, to reimburse
itself for any advances that the servicer determines in good faith it
will be unable to recover from late recoveries or proceeds from the
particular loan;
o to reimburse itself from liquidation proceeds for liquidation
expenses and for amounts expended by it in good faith in connection
with the restoration of damaged 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 reimbursement exceed the outstanding principal balance of the
loan, together with accrued and unpaid interest thereon to the due
date for the loan next succeeding the date of its receipt of
liquidation proceeds, to pay to itself out of the excess the amount
of any unpaid servicing fee and any assumption fees, late payment
charges, or other charges on the loan;
o 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 loan prior to the deposit
of the scheduled payment, late payment or recovery into the
collection account, to pay to itself the servicing fee, as adjusted
under the servicing agreement, from any scheduled payment, late
payment or other recovery, to the extent permitted by the servicing
agreement;
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it;
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o to pay to the applicable person with respect to each "REO property,"
a primary asset or mortgaged property acquired through or in lieu of
foreclosure acquired in respect thereof that has been repurchased or
removed from the trust fund by the sponsor, the servicer or the
seller, all amounts received thereon and not distributed as of the
date on which the repurchase price was determined;
o to make payments to the trustee for deposit into the distribution
account, if any, or for remittance to the holders in the amounts and
in the manner provided for in the servicing agreement; and
o to clear and terminate the collection account.
In addition, the servicer may withdraw at any time from the collection
account any amount inadvertently deposited in the collection account.
ADVANCES AND LIMITATIONS THEREON
The prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
on loans. The servicer will be obligated to make advances, and the obligation
may be limited in amount, or may not be activated until a portion of a specified
reserve fund is depleted. Advances are intended to provide liquidity and, except
to the extent specified in the prospectus supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the servicer
out of amounts received on particular loans which represent late recoveries of
principal or interest, proceeds of insurance policies or liquidation proceeds
respecting which any 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 loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account, as the case may be, or from a specified reserve fund as applicable, to
the extent specified in the prospectus supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE; FLOOD INSURANCE. The prospectus supplement
will specify the extent to which the servicer will be required to maintain or to
cause the obligor on each loan to maintain a standard hazard insurance policy
providing coverage of the standard form of fire insurance with extended coverage
for other hazards as is customary in the state in which the 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 loans. In general, the standard form of fire and extended coverage policy
will cover physical damage to or destruction of, the 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 loans will be underwritten by different hazard insurers and will
cover mortgaged properties and manufactured homes located in various states, the
policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most 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 some cases, vandalism. The foregoing list is merely indicative of common
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 the
Department of Housing and Urban
23
Development under the Flood Disaster Protection Act of 1973, the servicer will
be required to cause flood insurance to be maintained with respect to the
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, the clause will provide that the hazard
insurer's liability in the event of partial loss will not exceed the greater of
(1) the actual cash value, which is the replacement cost less physical
depreciation, of the mortgaged property or manufactured home, including the
improvements, if any, damaged or destroyed or (2) the proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the 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 (1) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (2) the outstanding principal balance of the loan.
The servicer may also maintain on REO property that secured a defaulted mortgage
loan and that has been acquired upon foreclosure, deed in lieu of foreclosure,
or repossession, a standard hazard insurance policy in an amount that is at
least equal to the maximum insurable value of the REO property. No earthquake or
other additional insurance will be required of any obligor or will be maintained
on REO property, other than under any applicable laws and regulations as shall
at any time be in force and shall require additional insurance.
In the event that the servicer obtains and maintains a blanket policy
insuring against hazard losses on all of the loans, written by an insurer then
acceptable to each rating agency which assigns a rating to the 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 REO property.
This blanket policy may contain a deductible clause, in which case the servicer
will be required, in the event that there has been a loss that would have been
covered by the policy absent the deductible clause, to deposit in the collection
account the amount not otherwise payable under the blanket policy because of the
application of the 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 or the manufactured homes 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 a foreclosure, repossession or other conversion,
the servicer will follow the practices and procedures that 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 (1) the restoration, repossession or foreclosure will increase
the liquidation proceeds available to the holders after reimbursement to itself
for its expenses and (2) its expenses will be recoverable either through
liquidation proceeds or the proceeds of insurance. In the case of a trust fund
for which a REMIC election has been
24
made, the servicer will be required to liquidate any mortgaged property acquired
through foreclosure within two years after the acquisition of the 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 sponsor will be required to do so.
The servicer may arrange with the obligor on a defaulted loan a
modification of the loan. 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 in the servicing
agreement.
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 the prospective conveyance and
prior to the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the mortgage loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that the clause is not enforceable
under applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In that event, the
servicer is authorized to accept from or enter into an assumption agreement with
the person to whom the mortgaged property has been or is about to be conveyed,
under which the assuming person becomes liable under the mortgage loan and under
which the original obligor is released from liability and the assuming 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 servicing fee as servicing
compensation in an amount to be determined as specified in the prospectus
supplement. The servicing fee may be fixed or variable, as specified in the
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 prospectus
supplement.
The servicer may pay expenses incurred in connection with the servicing
of the mortgage loans, including, without limitation, the payment of the fees
and expenses of the trustee and independent accountants, payment of insurance
policy premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to holders.
When an obligor makes a principal prepayment in full between due dates
on the loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the 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 loan, less
the servicing fee. If the aggregate amount of shortfalls in a month exceeds the
servicing fee for a month, a shortfall to holders may occur.
25
The servicer will be entitled to reimbursement for expenses incurred by
it in connection with the liquidation of defaulted loans. The holders will
suffer no loss by reason of reimbursement of expenses if expenses are covered
under 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 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 loan which
would be distributable to holders. In addition, the servicer will be entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of property securing a defaulted loan, prior to the rights of the holders to
receive any 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 prospectus supplement will describe the priority of the servicer's
right, which is typically senior in priority, 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, with
respect to the rights of the holders.
EVIDENCE AS TO COMPLIANCE
Each year, a firm of independent public accountants will furnish a
statement to the trustee to the effect that it has examined documents and
records relating to the servicing of the loans by the servicer and that, on the
basis of its examination, it is of the opinion that the servicing has been
conducted in compliance with the servicing agreement, except for any exceptions
that it believes to be immaterial and any other exceptions identified in the
statement.
The servicer for each series will also provide to the trustee an annual
statement to the effect that the servicer has fulfilled its obligations under
the servicing agreement throughout the preceding calendar year.
MATTERS REGARDING THE SERVICER
The servicer for each series will be identified in the prospectus
supplement. The servicer may be an affiliate of the sponsor and may have other
business relationships with the sponsor and its affiliates.
If an event of default occurs under a servicing agreement, the servicer
may be replaced by the trustee or a successor servicer. These events of default
and the rights of the trustee upon a default under the servicing agreement will
be substantially similar to those described under "The Agreements-- Events of
Default; Rights Upon Events of Default-- Servicing Agreement."
The servicing 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 the assignment or delegation:
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than a minimum amount;
o would not cause the securities to be qualified, downgraded or
withdrawn and
o executes and delivers to the trustee an agreement under which it
assumes the obligations to act as servicer.
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No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the servicing
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the above criteria. However, the assigning servicer will remain liable
for the servicing obligations under the servicing 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 servicing agreement provided that the successor
or surviving entity meets the above requirements for a successor servicer.
The servicer, and its directors, officers, employees and agents, will
not be responsible for any action taken or for failing to take any action in
good faith under the servicing agreement, or for errors in judgment. However,
neither the servicer nor its directors, officers, employees and agents will be
protected against any breach of warranty or representations or the failure to
perform its obligations in compliance with the specified standard of care, 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. Each servicing agreement will further
provide that the servicer and any director, officer, employee or agent of the
servicer is entitled to indemnification from the trust fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the servicing 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
servicer is not under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its servicing responsibilities under the
servicing agreement which, in its opinion, may involve it in any expense or
liability. The servicer may, in its discretion, undertake any action which it
may deem necessary or desirable with respect to the servicing agreement and the
rights and duties of the parties thereto and the interests of the holders
thereunder. In that event, the servicer may be entitled to be reimbursed for the
legal expenses and costs of the action out of the collection account.
THE AGREEMENTS
The following summaries describe the material 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, the
provisions or terms are as specified in the agreements.
ASSIGNMENT OF PRIMARY ASSETS
At the time of issuance of the securities of a series, the seller will
transfer, convey and assign to the trust fund all right, title and interest of
the seller in the primary assets and other property to be transferred to the
trust fund for a series. The assignment will include all principal and interest
due on or with respect to the primary assets after the cut-off date specified in
the prospectus supplement, except for any interests in the trust fund retained
by the seller, the sponsor or its affiliate. The trustee will, concurrently with
the assignment, execute and deliver the securities.
ASSIGNMENT OF MORTGAGE LOANS. The seller will, as to each mortgage
loan, deliver or cause to be delivered to the trustee, or, as specified in the
prospectus supplement a custodian on behalf of the trustee, 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 the
mortgage will be delivered, together with a certificate that the original
mortgage was delivered to the recording office, and an assignment of the
mortgage in
27
recordable form. The trustee or the custodian will hold these documents in trust
for the benefit of these holders.
The seller will cause assignments to the trustee of the mortgages to be
recorded in the appropriate public office for real property records, except in
states where, in the opinion of counsel acceptable to the trustee, recording is
not required. If the seller does not cause assignments to be recorded, the
agreement may require the seller to repurchase from the trustee the affected
mortgage loans, at the price described below with respect to repurchases by
reason of defective documentation. The enforcement of the repurchase obligation
constitutes the sole remedy available to the holders or the trustee for the
failure of a mortgage to be recorded.
ASSIGNMENT OF CONTRACTS. The seller 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
seller will make an appropriate filing of a financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
Unless otherwise specified in the 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 assignment, the trustee's interest in contracts could be defeated.
ASSIGNMENT OF PRIVATE SECURITIES. The sponsor 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. See "The Trust Funds--Private
Securities."
Each loan will be identified in a schedule appearing as an exhibit to
the agreements. The schedule will specify with respect to each 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; if the loan is an adjustable rate loan, the
lifetime rate cap, if any, and the current index.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING PRIMARY ASSETS. If any
document required to be in the file relating to the primary assets is found by
the trustee within a specified period to be defective in any material respect
and the seller does not cure the defect within a specified period, the seller
will repurchase the affected primary asset.
The seller may, rather than repurchase the primary asset as described
above, remove the primary asset from the trust fund and substitute in its place
one or more other qualifying substitute primary assets. However, (1) with
respect to a trust fund for which no REMIC election is made, the substitution
must be effected within 120 days of the date of initial issuance of the
securities and (2) 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 the substitution will not cause the trust
fund to lose its status as a REMIC or otherwise subject the trust fund to a
prohibited transaction tax.
Any substitute primary asset will have, on the date of substitution,
(1) 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, (2) an interest rate not less than the
interest rate of the deleted primary asset, (3) 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 in the applicable agreement as of
the date of substitution.
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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 seller will make representations and warranties with respect to
primary assets for a series. If the seller cannot cure a breach of the
representations and warranties in all material respects within the specified
time period after notification by the trustee of the breach, and if the breach
is of a nature that materially and adversely affects the value of the primary
asset, the seller is obligated to repurchase the affected primary asset or, if
provided in the prospectus supplement, provide a substitute primary asset,
subject to the same conditions and limitations on purchases and substitutions as
described above.
No security holder, solely by virtue of the holder's status as a
holder, will have any right under the applicable agreement for a series to
institute any proceeding with respect to that agreement, unless the holder
previously has given to the trustee for the series written notice of default and
unless the majority holders have made written request upon the trustee to
institute a proceeding and have offered to the trustee reasonable indemnity, and
the trustee has failed to do so within a specified period.
REPORTS TO HOLDERS
The trustee or other entity specified in the prospectus supplement will
prepare and forward to each holder on each distribution date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
o the amount of principal distributed to the security holders and
the outstanding principal balance of the securities following the
distribution;
o the amount of interest distributed to the security holders and
the current interest on the securities;
o the amounts of (a) any overdue accrued interest included in the
distribution, (b) any remaining overdue accrued interest with
respect to the securities or (c) any current shortfall in amounts
to be distributed as accrued interest to security holders;
o the amounts of (a) any overdue payments of scheduled principal
included in the distribution, (b) any remaining overdue principal
amounts with respect to the securities, (c) any current shortfall
in receipt of scheduled principal payments on the primary assets
or (d) any realized losses or liquidation proceeds to be
allocated as reductions in the outstanding principal balances of
the securities;
o the amount received from credit enhancement, and the remaining
amount available under any credit enhancement;
o the amount of any payment delinquencies on the primary assets;
and
o the book value of any primary assets or mortgaged properties
acquired through or in lieu of foreclosure acquired by the trust
fund.
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 the calendar year the information specified in the agreements to enable
holders to prepare their tax returns. 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 servicing of the mortgage loans. See "Servicing --Evidence as to
Compliance."
29
A series of securities or one or more classes of the series may be
issued in book-entry form. In that event, owners of beneficial interests in the
securities will not be considered holders and will not receive the reports
directly from the trustee. The trustee will forward reports only to the entity
or its nominee which is the registered holder of the global certificate which
evidences the book-entry securities. Beneficial owners will receive reports from
the participants and indirect participants of the applicable book-entry system
in accordance with their practices and procedures.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
SERVICING AGREEMENT. Events of default under each servicing agreement
generally include:
o any failure by the servicer to deposit any required amounts in
the collection account, which failure continues unremedied for a
specified period after the giving of written notice of the
failure to the servicer,
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
applicable servicing agreement which continues unremedied for the
number of days specified in the prospectus supplement after the
giving of written notice of the failure to the servicer by the
trustee, or to the servicer and the trustee by the holders of the
series evidencing not less than a specified percentage of the
aggregate voting rights of the securities for that series, and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and actions by the
servicer indicating its insolvency, reorganization or inability
to pay its obligations.
The servicing 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
loans, other than its right to recovery of other expenses and amounts advanced
under the terms of the servicing agreement which rights the servicer will retain
under all circumstances, whereupon the trustee will succeed to all the
responsibilities, duties and liabilities of the servicer under the servicing
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
the servicing 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 prospectus supplement to act as successor servicer under the provisions of
the applicable servicing agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
and the other servicing compensation.
During the continuance of any event of default of a servicer, the
trustee will have the right to protect and enforce the rights of the holders,
and the majority holders may direct the time, method and place of conducting any
proceeding for exercising any trust power. However, the trustee will not be
under any obligation to pursue any remedy or to exercise any trusts or powers
unless the holders have offered the trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the trustee.
The trustee may decline to follow any 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 may include:
30
o a default in the payment of any principal or interest on any
note, which continues for a specified period of time;
o failure to perform any other covenant of the issuer in the
indenture which continues for a specified period of time after
notice is given;
o any representation or warranty made by the issuer in the
indenture having been incorrect in a material respect as of the
time made, and the breach is not cured within a specified period
of time after notice is given; or
o events of bankruptcy, insolvency, receivership or liquidation of
the issuer.
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 outstanding notes may declare the notes to be due and payable
immediately. The declaration may, under some circumstances, be rescinded and
annulled by the majority holders.
If, following an event of default with respect to any series of notes,
the notes have been declared due and payable, the trustee may, in its
discretion, notwithstanding the acceleration, elect to maintain possession of
the collateral and to continue to apply distributions as if there had been no
acceleration if the collateral continues to provide sufficient funds for the
payment of principal and interest on the notes as they would have otherwise
become due. In addition, the trustee may not sell or otherwise liquidate the
collateral following an event of default other than a default in the payment of
any principal or interest on any note of the series for a specified period,
unless the all of the holders consent to the sale, the proceeds of the sale are
sufficient to pay in full the principal and interest due on the notes or the
trustee determines that the collateral would not be sufficient on an ongoing
basis to make all payments on the notes as those payments would have become due,
and the trustee obtains the consent of the holders of a specified amount of the
notes.
In the event that the trustee liquidates the collateral in connection
with an event of default involving a payment default, the trustee will have a
prior lien on the proceeds of any liquidation for unpaid fees and expenses. As a
result, upon the occurrence of an event of default, the amount available for
distribution to the holders may be less than would otherwise be the case.
If the principal of the notes of a series is declared due and payable,
the holders of any 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 the discount which is unamortized.
If an event of default shall occur and be continuing, the trustee will
not be obligated to exercise any rights or powers under the indenture at the
request of the holders, unless the holders provide security satisfactory to the
trustee against the expenses and liabilities which might be incurred by it. The
majority holders shall have the right to direct the time, method and place of
conducting any proceeding for any remedy or exercising any power conferred on
the trustee with respect to the notes. The majority holders may waive the
default, except a default in the payment of principal or interest or a default
caused by a breach of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the affected note holders.
THE TRUSTEE
The prospectus supplement will identify the trustee for the series. The
trustee may have normal banking relationships with the sponsor or the servicer.
In addition, for the purpose of meeting the legal requirements of 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 an appointment,
31
all rights, powers, duties and obligations conferred or imposed upon the trustee
will be conferred or imposed upon the trustee and each separate trustee or
co-trustee jointly, or, in any jurisdiction in which the trustee shall be
incompetent or unqualified to perform as trustee, singly upon the separate
trustee or co-trustee who will exercise and perform 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
appointment; although 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 agreements, the securities or of any primary asset or
documents. If no event of default as defined in the 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 furnished to it, the trustee is required to examine
them to determine whether they are in the form required by the agreements.
However, the trustee will not be responsible for the accuracy or content of any
of the documents furnished to it by the holders or the servicer under the
agreement.
The trustee may be held liable for its negligent action or failure to
act, or for its misconduct. The trustee will not be liable, however, 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 its own funds or incur any financial liability
in the performance of its duties, or in the exercise of any of its rights or
powers, if repayment of those funds or adequate indemnity against risk is not
reasonably assured to it.
RESIGNATION OF TRUSTEE
The trustee may, upon written notice to the sponsor, resign at any
time, in which event the sponsor 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 a 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 (1) if the trustee ceases to be eligible to continue as a
trustee under the agreement, (2) if the trustee becomes insolvent or (3) by the
majority holders. 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
Each agreement may be amended by the parties to the agreement, without
notice to or consent of the holders, to correct any ambiguity or any defective
provisions, to supplement any provision, or to comply with any requirements
imposed by the Internal Revenue Code. Any amendment will not adversely affect in
any material respect the interests of any holders.
Each agreement may also be amended by the parties with the consent of a
specified percentage of the holders, for the purpose of adding, changing or
eliminating any provision of the agreement. No amendment may reduce or delay the
payments on any security without the consent of the holder of the security.
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VOTING RIGHTS
The prospectus supplement will state the method of determining
allocation of voting rights with respect to a series.
LIST OF HOLDERS
No agreement will provide for the holding of any annual or other
meeting of holders.
REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made,
preparation of reports and other administrative duties with respect to the trust
fund may be performed by a REMIC administrator, who may be an affiliate of the
sponsor.
TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The pooling and
servicing agreement or trust agreement for a series will terminate upon the
distribution to holders of all amounts payable to them after the final payment
or liquidation of the primary assets and the disposition of all foreclosure
property or the sale by the trustee of the primary assets. For a description of
the ways in which securities may be retired early, see "Description of the
Securities--Optional Redemption, Purchase or Termination" and "--Mandatory
Termination; Auction Sale."
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.
INDENTURE. The indenture will be discharged with respect to a series of
notes upon the delivery to the trustee for cancellation of all the notes or,
with limitations, upon deposit with the trustee of funds sufficient for the
payment in full of all of the notes of the series. See "Description of the
Securities--Defeasance."
LEGAL ASPECTS OF LOANS
The following discussion contains summaries of legal aspects of loans,
which are general in nature. Because these legal aspects are to a degree
governed by state law, the summaries do not purport to be complete, reflect the
laws of any particular state, nor encompass the laws of all states in which the
properties securing the mortgage loans are situated.
MORTGAGE LOANS
The mortgage loans will be represented by a note and an accompanying
mortgage. The borrower is personally liable to repay the indebtedness evidenced
by the mortgage loan under the note. The mortgage creates a lien on the related
mortgaged property to secure the indebtedness.
ENFORCEMENT OF THE NOTE. Under the note, the borrower is personally
liable to repay the indebtedness evidenced by the mortgage loan. In some 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 the security; however, in some of these states the lender, following
judgment on a personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with
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respect to the related property security. Consequently, the practical effect of
the election requirement, in those states permitting the election, is that
lenders will usually proceed against the property first rather than bringing a
personal action against the borrower on the note.
Some 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 a 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 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 on 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.
Some 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, courts have limited the right of the lender to foreclose if the
default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
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Tax liens arising under the Internal Revenue Code may 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 as 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 the 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 under
the laws of the jurisdiction in which the mortgaged property is located.
Priority with respect to the instruments depends on their terms, the knowledge
of the parties to the mortgage and generally on the order of recording with the
applicable state, county or municipal office. There are two parties to a
mortgage, the mortgagor, who is the borrower/property owner or the land trustee,
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,
under 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 some states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the 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
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notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. In addition, some
state laws require that a copy of the notice of sale be posted on the mortgaged
property and sent to all parties having an interest of record in the mortgaged
property. The trustor, borrower, or any person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the mortgaged property, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct warranting a court of equity to refuse
affirmative relief to the mortgagee. A court of equity may relieve the mortgagor
from an entirely technical default where that 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 the sale occurred while the mortgagor was insolvent and within
one year, or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law, of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty third party purchasers 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 that 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 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.
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RIGHTS OF REDEMPTION. In some states, after sale under 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.
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 the
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in any 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 sometimes given the right 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.
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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS. Due-on-sale clauses permit the
lender to accelerate the maturity of the loan if the borrower sells or
transfers, whether voluntarily or involuntarily, all or part of the real
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
preempts state law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, with
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 the clauses with respect to loans that were (1) 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 (2) originated by lenders
other than national banks, federal savings institutions and federal credit
unions. The Federal Home Loan Mortgage Corporation 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 in 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 if resulting from the bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES. Forms of notes,
mortgages and deeds of trust used by lenders may contain provisions obligating
the borrower to pay a late charge if payments are not timely made, and in some
circumstances may provide for prepayment fees or penalties if the obligation is
paid prior to maturity. In some states, there are or may be specific
limitations, upon the late charges which a lender may collect from a borrower
for delinquent payments. Some 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 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
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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 the loans.
APPLICABILITY OF USURY LAWS. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980, provides
that state usury limitations shall not apply to specified types of residential
first loans originated by specified lenders after March 31, 1980. Similar
federal statutes were in effect with respect to loans made during the first
three months of 1980. The Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. Title V
authorizes any state to reimpose interest rate limits by adopting, before April
1, 1983, a state law, or by certifying that the voters of a 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. Those 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 the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the personal property must generally be perfected by a timely fixture filing. In
general, a security interest does not exist in ordinary building material
incorporated into an improvement on land. Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
their characterization, upon incorporation of the 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 the property securing a contract by voluntary surrender, by
"self-help" repossession that is peaceful 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. Most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting the sale. Most states also require that the debtor be given notice of
any sale prior to resale of the unit that the debtor may redeem it at or before
the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
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.
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CONTRACTS
As a result of the assignment of the contracts to the trustee, the
trust fund will succeed collectively to all of the rights and will assume the
obligations of the obligee under the contracts. Each contract evidences both the
obligor's obligation to repay the loan, and the grant of a security interest in
the manufactured home.
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 in effect in the states in which the manufactured homes
initially were registered. The Uniform Commercial Code treats the sale of
chattel paper in a manner similar to perfection of a security interest in
chattel paper. The seller 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 seller will make an appropriate
filing of a financing statement in the appropriate states to give notice of the
trustee's ownership of the contracts. Unless otherwise specified in the
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 the assignment, the
trustee's interest in contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The manufactured homes securing the contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection is
governed by the Uniform Commercial Code. The servicer may effect the 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
the notation or delivery, or files the security interest under the wrong law,
the trustee 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 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 Uniform Commercial Code 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
Uniform Commercial Code, and the notation of the security interest on the
certificate of title or the filing of a 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 issuer. With
respect to a series of securities and if so described in the 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.
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The sponsor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the holders. 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, continues to be named
as the secured party on the certificate of title relating to the manufactured
homes. In many states, the assignment is an effective conveyance of the 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, the assignment of the security interest in the
manufactured home might not be effective or perfected or that, in the absence of
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 holders 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, that
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 holders could be released.
In the event that the owner of a manufactured home moves it to a state
other than the state in which that manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and thereafter
until the owner re-registers the manufactured home in the state. If the owner
were to relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the trustee must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states which provide for notation of lien, 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 the 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 servicing
agreement, the servicer is obligated to take steps as are necessary to maintain
perfection of security interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest. The seller will represent that it has no knowledge
of any liens with respect to any manufactured home securing payment on any
contract. However, those liens could arise at any time during the term of a
contract. No notice will be given to the trustee or holders in the event that a
lien arises.
41
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The servicer on behalf of the trustee, to the extent required by the
related 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 the 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 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 Uniform Commercial Code and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit so that the debtor may redeem at or before the
resale. In the event of the repossession and resale of a manufactured home, the
trustee would be entitled to be paid out of the sale proceeds before those
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 that 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.
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 related lenders and assignees, to transfer the contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of 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 the obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination of 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 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 generally
42
preempts state laws prohibiting enforcement of "due-on-sale" clauses applicable
to the manufactured homes, with some exemptions and conditions. Consequently, in
some states the servicer may be prohibited from enforcing a "due-on-sale" clause
in the contracts.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that, subject to the following conditions, state
usury limitations shall not apply to any loan which is secured by a first lien
on specified kinds of manufactured housing. The contracts would be covered if
they satisfy specified 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 components of manufactured housing such 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 that claim constitutes a breach of a representation or warranty of
the person specified in the prospectus supplement, and the holders would suffer
a loss only to the extent that (1) the person breached its obligation to
repurchase the contract in the event an obligor is successful in asserting the
claim, and (2) the person, the servicer or the trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the holders
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 those 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, (1) 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, (2) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on those obligations entered into prior to
military service for the duration of military service and (3) may have the
maturity of the obligations incurred prior to military service extended, the
payments lowered and the payment
43
schedule readjusted for a period of time after the completion of military
service. However, the benefits of (1), (2), or (3) above are subject to
challenge by creditors and if, in the opinion of the court, the ability of a
person to comply with the 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 under the Soldiers' and Sailors' Civil Relief Act
of 1940, none of the trust fund, the servicer, the sponsor nor the trustee will
be required to advance the amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the holders of the securities of that
series.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
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. References in this
section to "sections" and the "code" refer to the Internal Revenue Code of 1986.
The following discussion addresses securities of five general types:
o securities representing interests in a grantor trust which the
sponsor will covenant not to elect to have treated as a REMIC or
a FASIT;
o securities representing interests in a trust, or a portion
thereof, which the sponsor will covenant to elect to have treated
as a REMIC under sections 860A through 860G;
o securities that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans;
o securities representing interests in a trust that is intended to
be treated as a partnership under the code; and
o 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.
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 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 sponsor, will deliver its opinion to
the sponsor that the related grantor trust will be classified as a
44
grantor trust and not as a partnership or an association taxable as a
corporation. The opinion shall be attached on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the securities or filed with the Securities and Exchange 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 loans included in the grantor trust.
For purposes of the following discussion, a grantor trust security
representing an undivided equitable ownership interest in the principal of the
loans constituting the related grantor trust, together with interest thereon at
a pass-through rate, will be referred to as a "grantor trust fractional interest
security." A grantor trust security representing ownership of all or a portion
of the difference between interest paid on the loans constituting the related
grantor trust and interest paid to the beneficial owners of grantor trust
fractional interest securities issued with respect to the 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 loans (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 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
pass-through entities will be allowed a deduction for reasonable servicing fees
and expenses only to the extent that the aggregate of the beneficial owner's
miscellaneous itemized deductions exceeds 2% of the 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 the securities as "stripped coupons" under section 1286.
Accordingly, that beneficial owner will be required to treat the excess of the
total amount of payments on the security over the amount paid for the security
as original issue discount and to include the discount in income as it accrues
over the life of the 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 that 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 loans and (ii) the difference between the outstanding principal
balance on the security and the amount paid for the security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security.
SALES OF GRANTOR TRUST SECURITIES
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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 the 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). The adjusted basis of a
grantor trust security will generally equal its cost, increased by any income
reported by the seller (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 the distribution allocable to principal on the underlying loans
and to interest thereon at the related interest rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master servicer, the trustee will furnish to each beneficial
owner during the year any customary factual information that 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 prospectus supplement, an election will be made to
treat a trust as a REMIC. With respect to each series of securities for which
that election is made, Dewey Ballantine LLP, special tax counsel to the sponsor,
will deliver its opinion to the sponsor 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 in this prospectus 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 REMIC regular security or a REMIC
residual security. The opinion shall be attached on Form 8-K to be filed with
the securities and Exchange Commission within fifteen days after the initial
issuance of the securities or filed with the securities and Exchange 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 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 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) and "real estate assets" within the meaning of section
856(c)(5)(A). 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)) then the portion of the
46
REMIC regular securities and REMIC residual securities that are qualifying
assets under those sections during the calendar year may be limited to the
portion of the assets of the 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) , subject to the same
limitation as described 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 fund 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
applies will be treated as evidences of indebtedness for purposes of section
582(c)(1). 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 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 those 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 the 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 the quarter and by allocating the amount so
allocated among the beneficial owners of residual securities (on that day) in
accordance with their percentage interests on that day. Any amount included in
the gross income or allowed as a loss of any beneficial owner of a residual
security 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) any information as is necessary to
enable them to prepare their federal income tax returns and (ii) any reports
regarding the securities of the 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. The
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 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) ) on the REMIC regular securities (but not
the REMIC
47
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 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 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). Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 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, the 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) ) 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 the 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 that
REMIC residual security. That 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 the 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 the 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 that the net
loss exceeds the beneficial owner's adjusted basis in its REMIC residual
security as of the close of the calendar quarter (determined without regard to
the net
48
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 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 a quarter that
the REMIC residual security was held by the 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 the 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 the REMIC
residual security before the beginning of that 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 that 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 ), an excess inclusion of a beneficial owner
is treated as unrelated business taxable income. With respect to variable
contracts (within the meaning of section 817 ), 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 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 this rule. If that rule were adopted, it is unclear how
significant value would be determined for these purposes. If no similar 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 REMIC
residual securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of section 857(b)(2) , excluding any
net capital gain) will be allocated among the shareholders of that trust in
proportion to the dividends received by the shareholders from the 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 the shareholder. Similar rules
will apply in the case of regulated investment companies, common trust funds and
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 these fees will be allowed to a beneficial owner only to the
extent that
49
those fees, along with some of the beneficial owner's other miscellaneous
itemized deductions exceed 2% of the 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 the fees in computing a beneficial owner's alternative
minimum tax liability. A beneficial owner's share of the fees will generally be
determined by (i) allocating the amount of the 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 that 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
under specified exceptions, the receipt of investment income from a source other
than a mortgage loan or 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
Except as provided below, if a REMIC regular 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 that security
to the seller, increased by any original issue discount or market discount
included in the seller's gross income with respect to the security and reduced
by distributions on that 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 the 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) , any gain or loss will be capital
gain or loss, provided the security is held as a "capital asset" (generally,
property held for investment) within the meaning of section 1221.
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 the 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
50
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 the beneficial owner's
income. In addition, gain recognized on a sale by a beneficial owner of a REMIC
regular security who purchased the security at a market discount would also be
taxable as ordinary income in an amount not exceeding the portion of the
discount that accrued during the period a security was held by the 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, the beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool (as defined in section 7701(i) ) comparable to a residual
interest in a REMIC. That 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) 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, cooperatives, and nominees) that owns a REMIC residual security
if the 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 by purchase, by 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 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 the 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 the
entity are not held by disqualified organizations and (ii) information necessary
for the application of the REMIC tax will be made available. Restrictions on the
transfer of a REMIC residual security and 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 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 of an
interest in that entity. 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 that 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 tax will be imposed on a pass-through entity for a
period with respect to an interest in that entity is owned by a disqualified
organization if (i) the record-holder of the interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during that 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). An exception to this tax,
otherwise available to a pass-through entity
51
that is furnished with affidavits by record holders of interests in the entity
and that does not know the 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 that 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 the
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
the 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 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 the transfers.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. For purposes of the
administrative provisions , 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 that year a
statement setting forth the portions of any distributions that constitute
interest distributions, original issue discount, and any other information
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 the REMIC trust for each day
during the 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.
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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 fund. If a beneficial owner of a REMIC residual security's adjusted
basis in its REMIC residual security at the time the termination occurs exceeds
the amount of cash distributed to the 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 that excess.
DEBT SECURITIES
With respect to each series of debt securities, Dewey Ballantine LLP,
special tax counsel to the sponsor, will deliver its opinion to the sponsor that
the securities will be classified as debt secured by the related loans.
Consequently, the debt securities will not be treated as ownership interests in
the loans or the trust. Beneficial owners will be required to report income
received with respect to the debt securities in accordance with their normal
method of accounting. For additional tax consequences relating to debt
securities purchased at a discount or with premium, see "--Discount and
Premium," below.
SPECIAL TAX ATTRIBUTES
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions. In general, debt securities will
not possess these special tax attributes. Investors to whom these 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 the
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 financial institutions subject to section 582(c) ,
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 ), 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 sponsor, will deliver its opinion to the sponsor
that the trust will be treated as a partnership and not an association taxable
as a corporation for federal income tax purposes. The opinion shall be attached
on Form 8-K to be filed with the Securities and Exchange Commission within
fifteen days after the initial issuance of the securities or filed with the
Securities and Exchange 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 loans.
53
SPECIAL TAX ATTRIBUTES
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions. In general, partnership interests
will not possess these special tax attributes. Investors to whom these
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.
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 the
holder under the code.
Under section 708 , 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 the 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 the partnership interest, and upon sale or other
disposition of some of the partnership interests, allocate a portion of the
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).
54
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, that 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.
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 those nominees will be required to
forward the 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 the inconsistencies.
Under section 6031 , 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 information on the nominee, the beneficial owners and the
partnership interests so held. Required 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 the person,
(y) whether the 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) information on
partnership interests that were held, bought or sold on behalf of the 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 Securities Exchange Act of
1934 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 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 prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of section 860L(a). With respect
to each series of securities for which an election is made, Dewey Ballantine
LLP, special tax counsel to the sponsor, will deliver its opinion to the sponsor
that, assuming compliance with the pooling and servicing agreement, the trust
will be treated as a FASIT
55
for federal income tax purposes. A trust for which a FASIT election is made will
be referred to in this prospectus 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). The
opinion shall be attached on Form 8-K to be filed with the securities and
Exchange Commission within fifteen days after the initial issuance of the
securities or filed with the securities and Exchange 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 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 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
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 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 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 that treatment. FASIT regular securities held by a regulated
investment company will not constitute "government securities" within the
meaning of section 851(b)(4)(A)(i). FASIT regular securities held by financial
institutions will constitute an "evidence of indebtedness" within the meaning of
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 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 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 those 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 of 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, 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,
sections 860H through 860L, also require the FASIT
56
ownership interest and "high-yield regular interests" to be held only by 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 sponsor had no
knowledge or reason to know as of the date the asset was acquired by the FASIT
that a default had occurred or would occur.
The various interests in a FASIT also must meet additional
requirements. All of the interests in a FASIT must be either one or more classes
of regular interests or 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 (1) unconditionally entitles the
holder to receive a specified principal amount (or other similar amount), (2)
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,
(3) has a stated maturity of not longer than 30 years, (4) has an issue price
not greater than 125% of its stated principal amount, and (5) has a yield to
maturity not greater than 5 percentage points higher than the related applicable
federal rate, as defined in 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 (1), (2) (4) or (5) is a "high-yield regular
interest." A high-yield regular interest that fails requirement (2) 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 the 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 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
in that association. 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 "prohibited transactions" by a FASIT are taxable to the
holder of the ownership interest in a FASIT at a 100% rate. Prohibited
transactions generally include (1) 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
57
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; (2) the
receipt of income from nonpermitted assets; (3) the receipt of compensation for
services; or (4) the receipt of any income derived from a loan originated by the
FASIT. It is unclear the extent to which tax on these 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 some
grantor trust fractional interest securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286. In very
general terms, (1) 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;
(2) 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 (3) 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 the 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 distribution
date over the interest that accrues for the period from the settlement date to
the first distribution date.
Notwithstanding the general definition, original issue discount will be
treated as zero if the 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 (1) the number of complete years (rounding down for
partial years) from the settlement date until the date on which each
distribution is expected to be made under the assumption that the mortgage loans
prepay at the rate specified in the prospectus supplement by (2) a fraction, the
numerator of which is the amount of the 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 distribution is received, gain equal to the discount allocated to the
distribution will be recognized.
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Section 1272(a)(6) 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, (1)
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 the variable rate is based remains equal to the
value of that rate on the settlement date, and (2) 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) requires that the prepayment assumption used
to calculate original issue discount be determined in the manner prescribed in
treasury regulations. To date, no such regulations have been promulgated. The
legislative history of this Code provision indicates that the assumed prepayment
rate must be the rate used by the parties in pricing the particular transaction.
The sponsor anticipates that the prepayment assumption for each series of
securities will be consistent with this standard. The sponsor makes no
representation, however, that the mortgage loans for a given series will prepay
at the rate reflected in the prepayment assumption for that series or at any
other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the securities.
Each beneficial owner must include in gross income the sum of the
"daily portions" of original issue discount on its security for each day during
its taxable year on which it held the 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 (1)
beginning on a distribution date or, in the case of the first accrual period,
the settlement date, and ending on the day before the next distribution date or
(2) beginning on the next day following a distribution date and ending on the
next distribution date.
Under section 1272(a)(6), the portion of original issue discount
treated as accruing for any accrual period will equal the excess, if any, of (1)
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 the security during the accrual period of amounts included
in the stated redemption price at maturity, over (2) the adjusted issue price of
the 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 (1) the yield to maturity of the security, calculated as of the
settlement date, giving effect to the prepayment assumption, (2) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (3) the prepayment assumption, and (4) in the case of a security
calling for a variable rate of interest, an assumption that the value of the
index upon which the variable rate is based remains the same as its value on the
settlement date over the entire life of the security. The adjusted issue price
of a security at any time will equal the issue price of the security, increased
by the aggregate amount of previously accrued original issue discount with
respect to that security, and reduced by the amount of any distributions made on
the 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 some 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 the negative
amounts. The legislative history to section 1272(a)(6) indicates that the
negative amounts may be used to offset
59
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 the securities should consult their own
tax advisors concerning the treatment of negative accruals.
A subsequent purchaser of a security that purchases the 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 the security,
the daily portion of original issue discount with respect to that security, but
reduced, if the cost of the security to the purchaser exceeds its adjusted issue
price, by an amount equal to the product of (1) the daily portion and (2) a
constant fraction, the numerator of which is the excess and the denominator of
which is the sum of the daily portions of original issue discount on the
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 the 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 that the distribution does not exceed the
aggregate amount of accrued market discount on the security not previously
included in income. With respect to securities that have unaccrued original
issue discount, the 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 the 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
(1) under a constant yield method or (2) 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 that discount is less than 0.25% of the remaining
stated redemption price at maturity of the 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 distribution is received, gain equal to the discount allocated to that
distribution will be recognized.
SECURITIES PURCHASED AT A PREMIUM
A purchaser of a security that purchases the security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased that "premium security" at a premium. The purchaser need not
include in income any remaining original issue discount and may elect, under
section 171(c)(2) , to treat the premium as an "amortizable bond premium." If a
beneficial owner makes that election, the amount of any interest payment that
must be included in the beneficial owner's income for each period ending on a
distribution date will be reduced by the portion of the premium allocable to
each period based on the plan's yield to maturity. The premium amortization
should be made using constant yield principles. If the 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 held by the beneficial owner at the
beginning of the first taxable year to which the election applies and to all the
fully taxable bonds
60
thereafter acquired by it, and is irrevocable without the consent of the IRS. If
the election is not made, (1) the beneficial owner must include the full amount
of each interest payment in income as it accrues, and (2) the premium must be
allocated to the principal distributions on the plan and, when each principal
distribution is received, a loss equal to the premium allocated to that
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 plan.
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 some securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that 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 that event, section 1272(a)(6) would govern the accrual
of the 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). Unless and until the Treasury
Department or the IRS publishes specific guidance relating to the tax treatment
of these securities, the trustee intends to furnish tax information to
beneficial owners of the securities in accordance with the rules described in
the preceding paragraph.
SPECIAL ELECTION
For any security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all "interest" that accrues on the security
by using a constant yield method. For purposes of the election, the term
"interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
acquisition premium. A beneficial owner should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
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 at a rate of 31% if recipients of the distributions fail
to furnish to the payor information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from the tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against that recipient's federal income tax. Furthermore, 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 withholding
regulations, that change the rules relating to 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, 2001, although valid withholding certificates that are held on
December 31, 2000 remain valid until the earlier of December 31, 2001 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 information, including a United States taxpayer
identification number. See "--Backup Withholding" above. A look-through rule
would apply in the case of tiered partnerships.
61
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 the beneficial owner is not a U.S. Person, and provides the
name and address of that beneficial owner, and (c) the last U.S. Person in the
chain of payment to the beneficial owner receives a statement from the
beneficial owner or a financial institution holding on its behalf and does not
have actual knowledge that the 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).
REMIC RESIDUAL SECURITIES AND FASIT OWNERSHIP SECURITIES
Amounts distributed to a beneficial owner of a REMIC residual security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary treasury
regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC residual security or a FASIT ownership security to a
beneficial owner that is not a U.S. Person generally will be exempt from U.S.
federal income and withholding tax, subject to the same conditions applicable to
distributions on grantor trust securities, debt securities and REMIC regular
securities, as described above, but only to the extent that the obligations
directly underlying the REMIC or FASIT trust that issued the REMIC residual
security or FASIT ownership security, e.g., mortgage loans or regular interests
in another REMIC or FASIT, were issued after July 18, 1984. In no case will any
portion of REMIC or FASIT income that constitutes an excess inclusion be
entitled to any 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."
PARTNERSHIP INTERESTS
Depending upon the particular terms of the trust agreement 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 those 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 those 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.
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FASIT REGULAR SECURITIES
"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 the high-yield FASIT
regular securities will be restored to ownership thereof as completely as
possible. The last preceding owner will, in any event, be taxable on all income
with respect to the 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
Section 406 of ERISA and section 4975 of the Internal Revenue Code
prohibit a "plan," which is a pension, profit sharing or other employee benefit
plan and individual retirement arrangements from engaging in transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Internal Revenue Code with respect to the
plan, unless a statutory or administrative exemption applies to the transaction.
ERISA and the Internal Revenue Code also prohibit generally actions involving
conflicts of interest by persons who are fiduciaries of those plans or
arrangements. A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Internal Revenue Code for
those 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 church plans,
as defined in section 3(33) of ERISA, are not subject to ERISA requirements.
Accordingly, assets of these 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 plan which is qualified and exempt
from taxation under section 401(a) and 501(a) of the Internal Revenue Code,
however, is subject to the prohibited transaction rules of section 503 of the
Internal Revenue Code.
Transactions involving the trust might be deemed to constitute
prohibited transactions under ERISA and the Internal Revenue Code with respect
to a plan, including an individual retirement arrangement, that purchased
securities. Therefore, in the absence of an exemption, the purchase, sale or
holding of a security by a plan, including individual retirement arrangements,
subject to section 406 of ERISA or section 4975 of the Internal Revenue Code
might result in prohibited transactions and the imposition of excise taxes and
civil penalties.
63
CERTIFICATES
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of section 406(a), 406(b)(1), 406(b)(2)
and 407(a) of ERISA and the excise taxes imposed by sections 4975(a) and (b) of
the Internal Revenue Code, 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:
o the acquisition of the certificates by a plan is on terms,
including the price for the certificates, that are at least as
favorable to the plan as they would be in an arm's-length
transaction with an unrelated party;
o the rights and interests evidenced by the certificates acquired
by the plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
o the certificates acquired by the plan have received a rating at
the time of the acquisition that is one of the three highest
generic rating categories from Standard & Poor's, Moody's
Investors Service, Duff & Phelps Credit Rating Co. or Fitch
Investors Service;
o the trustee is not an affiliate of any other member of the
restricted group, as defined below)
o the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting
the certificates; the sum of all payments made to and retained by
the originators and the sponsor in exchange for the assignment of
the loans to the trust estate represents not more than the fair
market value of the loans; the sum of all payments made to and
retained by any servicer represents not more than reasonable
compensation for that person's services under the pooling and
servicing agreement and reimbursement of that person's reasonable
expenses;
o the plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of
1933; and
o 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:
o the corpus of the trust estate must consist solely of assets of
the type that have been included in other investment pools;
64
o certificates in the other investment pools must have been rated
in one of the three highest rating categories of Standard &
Poor's, Moody's Investors Service, Fitch Investors Service or
Duff & Phelps Credit Rating Co. for at least one year prior to
the plan's acquisition of certificates; and
o certificates evidencing interests in 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
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;
although, among other requirements, (1) 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; (2) the 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; (3) 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 (4) immediately after the acquisition, no more than
twenty-five percent of the assets of the plan with respect to which the 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 "restricted
group," which is the sponsor, the underwriters, the trustee, any servicer, any
obligor with respect to mortgage loans included in the trust fund constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the trust fund, or any affiliate of the parties.
In addition to the underwriter exemptions, the Department of Labor has
issued Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an
exemption for transactions involving the sale or exchange of 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 that
are notes. Under the "plan assets regulation" issued by the United States
Department of Labor, the assets of the trust would be treated as plan assets of
a plan for the purposes of ERISA and the Internal Revenue 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. Accordingly, 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 Internal Revenue
Code. If the notes are treated as indebtedness without substantial equity
features, the trust's assets would not be deemed assets of a plan. However, in
that case, the acquisition or holding of the notes by or on behalf of a plan
could nevertheless give rise to a prohibited transaction, if the acquisition and
holding of notes by or on behalf of a plan was deemed to be a prohibited loan to
a party in interest with respect to the plan. Exemptions from the 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 the notes. Included among these exemptions are: PTCE 84-14,
regarding transactions effected by "qualified professional asset managers"; PTCE
90-1, regarding transactions entered into by insurance company pooled separate
accounts; PTCE 91-38, regarding transactions entered into by bank collective
investment funds; PTCE 95-60, regarding transactions entered into by insurance
company general accounts; and PTCE 96-23, regarding transactions effected by
"in-house asset
65
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 the 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.
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.
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.
AVAILABLE INFORMATION
The sponsor has filed a registration statement with respect to the
securities with the Securities and Exchange Commission. 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 agreements, but do not contain all of the information in the registration
statement. For further information, reference is made to the registration
statement and its exhibits. The registration statement and exhibits can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Securities and Exchange 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 Securities and Exchange
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 sponsor, that file electronically with the Securities
and Exchange Commission.
Each trust fund will be required to file reports with the Securities
and Exchange Commission as required by the Securities Exchange Act of 1934. The
sponsor intends to cause each trust fund to suspend filing the reports if and
when the 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 and you must not rely upon such
66
information or representations. This prospectus and any prospectus supplement 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 that
offer would be unlawful. You should not assume that information in this
prospectus is correct as of any time subsequent to its date.
INCORPORATION OF DOCUMENTS BY REFERENCE
All documents that we subsequently file with the Securities and
Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, after the date of this prospectus shall be incorporated by
reference in this prospectus and be a part of this prospectus. Any statement
contained in a document incorporated by reference shall be modified or
superseded if a statement contained in this prospectus, the prospectus
supplement or in any other document subsequently incorporated by reference
modifies or replaces that statement.
The sponsor will provide without charge, on request of each person to
whom this prospectus is delivered, a copy of any of the documents that are
incorporated by reference in this prospectus. Requests should be directed to the
sponsor at One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-0630, telephone no. (704) 374- 4868.
PLAN OF DISTRIBUTION
The sponsor may offer each series of securities through First Union
Capital Markets, a division of Wheat First Securities, Inc. or one or more other
firms that may be designated at the time of each offering of the 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 will describe the specific terms of the offering of the series and of
each class within the series, the names of the underwriters, the purchase price
of the securities, the proceeds to the sponsor from the sale, any securities
exchange on which the securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to dealers. The place and
time of delivery of each series will be stated in the prospectus supplement.
First Union is an affiliate of the sponsor.
LEGAL MATTERS
Dewey Ballantine LLP, New York, New York, or any other counsel
identified in the prospectus supplement, will pass upon legal matters for the
sponsor.
FINANCIAL INFORMATION
The sponsor has determined that its financial statements are not
material to the offering made hereby.
A new trust will be formed to own the primary assets and to issue each
series of securities. Each new 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 in this prospectus. Accordingly, no financial statements with
respect to the trusts will be included in this prospectus or any prospectus
supplement.
A prospectus supplement and the related Form 8-K may contain financial
statements of any credit enhancer.
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$125,000,000
RBMG FUNDING CO. MORTGAGE LOAN TRUST 1999-2
ASSET-BACKED NOTES, SERIES 1999-2
RBMG, INC.
SERVICER
RESIDENTIAL ASSET FUNDING CORPORATION
SPONSOR
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PROSPECTUS SUPPLEMENT
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FIRST UNION SECURITIES
UNDERWRITER
November 18, 1999
We suggest that you rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the securities offered hereby in any state where the offer
is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the securities offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
securities, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until ninety days after the date
of this prospectus supplement.
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