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PROSPECTUS SUPPLEMENT
To Prospectus Dated March 10, 1998)
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First Alliance Mortgage Loan Trust 1998-1A
$54,600,000 Adjustable Rate Mortgage Loan
Asset Backed Notes, Series 1998-1A
Due April 20, 2028
[GRAPHIC OMITTED]
Seller and Servicer
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The First Alliance Mortgage Loan Trust 1998-1A (the "Issuer") will be
formed pursuant to an owner trust agreement to be dated as of March 1, 1998 (the
"Trust Agreement") between First Alliance Mortgage Company (the "Seller") and
Wilmington Trust Company, as owner trustee (the "Owner Trustee"). The Issuer is
hereby offering $54,600,000 aggregate principal amount of its Adjustable Rate
Mortgage Loan Asset Backed Notes, Series 1998-1A (the "Notes"). The Notes will
be issued pursuant to an indenture, dated as of March 1, 1998 (the "Indenture"),
between the Issuer and The Chase Manhattan Bank, as indenture trustee (the
"Indenture Trustee"), and will be secured by a trust estate (the "Trust Estate")
consisting primarily of (i) a pool (the "Pool") of adjustable rate mortgage
loans secured by liens on one-to-four family residential properties (the
"Mortgage Loans"), (ii) the Issuer's rights under the Sale and Servicing
Agreement (as defined herein), (iii) the Note Insurance Policy, as described
herein and (iv) certain other assets described in the Indenture. The Issuer also
will issue instruments evidencing the residual interest in the Trust Estate (the
"Residual Interest"). The Residual Interest and the Notes are collectively
referred to as the "Securities." Only the Notes are offered hereby.
For a discussion of significant matters affecting investment in the
Notes, see "Risk Factors" beginning on page S-11 herein and beginning on page 13
in the Prospectus.
(Cover continued on next page)
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THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF THE ISSUER ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE SELLER, THE INDENTURE TRUSTEE, THE
OWNER TRUSTEE, ANY ORIGINATOR, THE NOTE INSURER OR ANY OF THEIR AFFILIATES.
NEITHER THE NOTES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Notes will be purchased by the Underwriter from the Issuer and will
be offered by the Underwriter from time to time in negotiated transactions or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Seller are expected to be approximately 99.70% of the aggregate principal
balance of the Notes before deducting expenses payable by the Seller estimated
to be $125,000. See "Underwriting" herein.
The Notes are offered subject to prior sale, when, as, and if accepted
by the Underwriter and subject to the approval of certain legal matters. It is
expected that delivery of the Notes in book-entry form will be made on or about
March 27, 1998 only through the facilities of The Depository Trust Company,
Cedel Bank S.A. and Euroclear.
Prudential Securities Incorporated
March 10, 1998
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(Cover continued from previous page)
The Sale and Servicing Agreement provides that additional
adjustable-rate Mortgage Loans (the "Subsequent Mortgage Loans") may be
purchased by the Issuer from the Seller from time to time on or before March 31,
1998 from funds on deposit in the Pre-Funding Account. On the Closing Date an
aggregate cash amount of $12,400,254.47 will be deposited with the Indenture
Trustee in the Pre-Funding Account to be used to acquire Subsequent Mortgage
Loans.
Distributions on the Residual Interest are subordinate to distributions
on the Notes to the extent described herein. Payments of principal and interest
payable to the Owners of the Notes will be made on the 20th day of each month or
if the 20th day is not a business day, the first business day thereafter (each,
a "Payment Date"), beginning in April 1998.
[GRAPHIC OMITTED]
On or before the issuance of the Notes, the Seller will obtain from
MBIA Insurance Corporation (the "Note Insurer") a financial guaranty insurance
policy (the "Note Insurance Policy") in favor of the Indenture Trustee. The Note
Insurance Policy will provide for 100% coverage of the principal amount of, and
scheduled interest due on, the Notes.
The Final Payment Date for the Notes is April 20, 2028. It is expected
that the actual last Payment Date will occur significantly earlier than the
Final Payment Date. The yield to maturity on the Notes will depend on, among
other things, the rate and timing of principal payments (including prepayments,
which rate may vary significantly over time, repurchases, defaults and
liquidations) on the Mortgage Loans. See "Prepayment and Yield Considerations"
in this Prospectus Supplement.
The Notes will constitute non-recourse obligations of the Issuer. The
Seller will have limited obligations arising in respect of certain
representations and warranties on the Mortgage Loans in connection with the
conveyance thereof to the Issuer. The Servicer will have limited obligations
that arise pursuant to certain representations and warranties and to its
contractual servicing obligations under that certain agreement to be entered
into among the Seller, the Servicer, the Indenture Trustee and the Issuer (the
"Sale and Servicing Agreement"), including any obligation it may have to advance
delinquent interest payments on the Mortgage Loans.
The Notes are subject to optional redemption in full by the holders of
more than 50% of the Residual Interest at any time after the aggregate Loan
Balance of the Mortgage Loans has declined to less than 10% of the original
aggregate loan balance of the Mortgage Loans. In addition, the Note Insurer will
have rights, under the limited circumstances described in the Sale and Servicing
Agreement, to acquire all of the Mortgage Loans from the Issuer and thereby
effect a redemption of the Notes. See "Administration--Redemption of the Notes"
herein.
It is a condition to the issuance of the Notes that they be rated "Aaa"
by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc.
No election will be made to treat any part of the Trust Estate as a
real estate mortgage investment conduit (a "REMIC") for federal income tax
purposes. See "Certain Federal Income Tax Consequences" herein.
Prior to their issuance there has been no market for the Notes nor can
there be any assurance that one will develop, or if it does develop, that it
will provide the Owners of the Notes with liquidity or will continue for the
life of the Notes. Prudential Securities Incorporated (the "Underwriter")
intends, but is not obligated, to make a market in the Notes.
--------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE NOTES, INCLUDING PURCHASES OF THE NOTES TO STABILIZE THEIR MARKET PRICE AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING" IN THIS PROSPECTUS SUPPLEMENT.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------
To the extent statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the payments to be made on, or the yield of, the Notes, which
risks and uncertainties are discussed under "Risk Factors" and "Prepayment and
Yield Considerations" herein. As a consequence, no assurance can be given as to
the actual payments, or the yield of, the Notes.
The Notes offered by this Prospectus Supplement will be part of a
separate series of Notes being offered by the Seller pursuant to its Prospectus
dated March 10, 1998 of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Notes. This Prospectus Supplement and the related
Prospectus, which form a part of the Registration Statement, omit certain
information contained in such Registration Statement pursuant to the Rules and
Regulations of the Commission. The Registration Statement can be inspected and
copied at the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. and the Commission's regional offices at Seven World Trade
Center, 13th Floor, New York, New York, 10048 and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
electronically through the Commissioner's Electronic Data Gathering, Analysis
and Retrieval System at the Commission's web site (http:\\www.sec.gov).
REPORTS TO OWNERS
The Indenture Trustee will mail monthly reports concerning the Notes to
all registered Owners pursuant to the Sale and Servicing Agreement.
TABLE OF CONTENTS
Prospectus Supplement
Page
SUMMARY.............................................................. S-1
RISK FACTORS......................................................... S-11
THE PORTFOLIO OF MORTGAGE LOANS...................................... S-13
General......................................................... S-13
Acquisitions.................................................... S-13
Delinquencies................................................... S-13
THE ISSUER........................................................... S-14
USE OF PROCEEDS...................................................... S-14
THE MORTGAGE LOAN POOL............................................... S-14
General......................................................... S-14
Initial Mortgage Loans.......................................... S-15
Conveyance of Subsequent Mortgage Loans......................... S-20
Interest Payments on the Mortgage Loans.. ...................... S-20
PREPAYMENT AND YIELD CONSIDERATIONS.................................. S-20
Mandatory Prepayment............................................ S-21
Projected Prepayments and Yields for Notes...................... S-21
ADDITIONAL INFORMATION............................................... S-23
DESCRIPTION OF THE NOTES............................................. S-23
General......................................................... S-23
Payment Dates................................................... S-24
Payments........................................................ S-24
Overcollateralization Provisions................................ S-24
Credit Enhancement Does Not Apply to Prepayment Risk............ S-26
Payments and Insured Payments to the Owners of the Notes........ S-26
Pre-Funding Account............................................. S-26
Capitalized Interest Account.................................... S-26
Calculation of LIBOR............................................ S-27
Book Entry Registration of the Notes............................ S-27
Certain Activities.............................................. S-30
Page
THE SELLER........................................................... S-30
THE NOTE INSURANCE POLICY AND THE NOTE INSURER....................... S-31
THE OWNER TRUSTEE.................................................... S-34
THE INDENTURE TRUSTEE................................................ S-34
ADMINISTRATION....................................................... S-34
Formation of the Issuer......................................... S-34
Sale of Mortgage Loans.......................................... S-34
Removal and Resignation of the Servicer......................... S-35
Redemption of the Notes......................................... S-36
Provisions Relating to the Indenture Trustee.................... S-36
The Indenture................................................... S-37
Voting.......................................................... S-37
Governing Law................................................... S-37
Termination of the Trust Estate................................. S-38
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.............................. S-38
STATE TAX CONSEQUENCES............................................... S-38
ERISA CONSIDERATIONS................................................. S-38
RATINGS.............................................................. S-40
LEGAL INVESTMENT CONSIDERATIONS...................................... S-40
UNDERWRITING......................................................... S-40
REPORT OF EXPERTS.................................................... S-41
CERTAIN LEGAL MATTERS................................................ S-41
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES........ I-1
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS......................... A-1
Prospectus
Page
Available Information................................................ 2
Reports to Owners.................................................... 3
Incorporation of Certain Documents by Reference...................... 3
Prospectus Supplement................................................ 3
Summary of Prospectus................................................ 4
Risk Factors......................................................... 13
The Trusts........................................................... 18
The Mortgage Loans--General................................. 18
Single Family Loans......................................... 21
The Mortgage Pools................................................... 21
General..................................................... 21
The Mortgage Pools.......................................... 22
Mortgage Loan Program................................................ 23
Underwriting Guidelines..................................... 23
Qualifications of Originators............................... 26
Sub-Servicers............................................... 27
Representations by Originators.............................. 27
Sub-Servicing by Originators................................ 29
Master Servicer............................................. 30
Description of the Securities........................................ 30
General..................................................... 30
General Payment Terms of Securities......................... 31
Form of Securities.......................................... 32
Assignment of Mortgage Loans................................ 34
Forward Commitments; Pre-Funding............................ 34
Payments on Mortgage Loans; Deposits to
Distribution Account........................................ 35
Withdrawals from the Principal and Interest Account......... 38
Distributions............................................... 38
Principal and Interest on the Securities.................... 38
Advances.................................................... 39
Reports to Securityholders.................................. 40
Collection and Other Servicing Procedures................... 41
Realization upon Defaulted Mortgage Loans................... 43
Subordination........................................................ 43
Description of Credit Enhancement.................................... 44
Letter of Credit............................................ 45
Mortgage Pool Insurance Policies............................ 45
Special Hazard Insurance Policies........................... 46
Bankruptcy Bonds............................................ 46
Reserve Funds............................................... 46
Financial Guaranty Insurance Policies....................... 47
Other Insurance, Guarantees and Similar Instruments or
Agreements.................................................. 47
Cross-Support............................................... 47
Overcollateralization....................................... 47
Cross-Collateralization..................................... 48
Maintenance of Credit Enhancement........................... 48
Reduction or Substitution of Credit Enhancement............. 49
Hazard Insurance; Claims Thereunder.................................. 49
Page
Hazard Insurance Policies........................................... 49
The Company.......................................................... 50
The Servicer......................................................... 50
The Master Servicer.................................................. 50
The Pooling and Servicing Agreement.................................. 50
Servicing and Other Compensation and Payment
of Expenses; Originator's Retained Yield.................. 50
Evidence as to Compliance................................... 51
Removal and Resignation of the Servicer..................... 51
Resignation of the Master Servicer.......................... 52
Rights Upon Event of Default................................ 52
Amendment................................................... 52
Termination; Retirement of Securities....................... 53
The Trustee................................................. 54
Yield Considerations................................................. 54
Maturity and Prepayment Considerations............................... 56
Certain Legal Aspects of Mortgage Loans and
Related Matters............................................. 57
General..................................................... 57
Foreclosure................................................. 58
Rights of Redemption........................................ 58
Anti-Deficiency Legislation and Other Limitations
on Lenders................................................ 59
Environmental Legislation................................... 60
Enforceability of Certain Provisions........................ 60
Certain Provisions of California Deeds of Trust............. 61
Applicability of Usury Laws................................. 61
Alternative Mortgage Instruments............................ 61
Soldiers' and Sailors' Civil Relief Act of 1940............. 62
Certain Federal Income Tax Consequences.............................. 62
General..................................................... 62
Grantor Trust Securities.................................... 62
REMIC Securities............................................ 64
Sales of REMIC Securities................................... 67
Debt Securities............................................. 69
Discount and Premium........................................ 69
Backup Withholding.......................................... 72
Foreign Investors........................................... 72
ERISA Considerations................................................. 73
Plan Asset Regulations...................................... 73
Prohibited Transaction Class Exemption...................... 74
Tax Exempt Investors........................................ 75
Consultation with Counsel................................... 75
Legal Investment Matters............................................. 75
Use of Proceeds...................................................... 76
Methods of Distribution.............................................. 76
Legal Matters........................................................ 77
Financial Information................................................ 77
Rating............................................................... 77
Index of Principal Definitions....................................... 78
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" herein and "Index of Principal Definitions" in the
Prospectus for the definitions of certain capitalized terms.
Securities Offered: $54,600,000 Adjustable Rate Mortgage Loan Asset
Backed Notes, Series 1998-1A (the "Notes"). The
Notes represent non-recourse obligations of the
Issuer. Proceeds of the assets in the Trust
Estate will be the sole source of payments on the
Notes.
Note Issuer: First Alliance Mortgage Loan Trust 1998-1A (the
"Issuer"), a Delaware business trust established
by the Seller pursuant to an owner trust
agreement, dated as of March 1, 1998 (the "Trust
Agreement"), between the Seller and the Owner
Trustee. The Issuer does not have, nor is it
expected in the future to have, any significant
assets, other than the assets included in the
Trust Estate. See "The Issuer" herein.
Seller and Servicer: First Alliance Mortgage Company, a California
corporation (the "Seller" and in its separate
capacity as servicer, the "Servicer"). The
Seller's principal executive offices are located
at 17305 Von Karman Avenue, Irvine, California
92614-6203, and its phone number is (714)
224-8500.
Indenture Trustee: The Chase Manhattan Bank, a New York banking
corporation, as Indenture Trustee (the "Indenture
Trustee"). The Indenture Trustee shall receive a
fee (the "Indenture Trustee Fee") as provided in
the Sale and Servicing Agreement.
Owner Trustee: Wilmington Trust Company, a Delaware banking
corporation, as owner trustee under the Trust
Agreement (the "Owner Trustee"). The Owner
Trustee shall receive a fee (the "Owner Trustee
Fee") as provided in the Trust Agreement.
Originators: The Seller and any entity from which the Seller,
on or prior to the Closing Date with respect to
the Initial Mortgage Loans and on or prior to any
Subsequent Transfer Date with respect to the
Subsequent Mortgage Loans, acquires Mortgage
Loans is an "Originator" of the related Mortgage
Loans for purposes of this Prospectus Supplement.
Cut-Off Date: March 1, 1998.
Closing Date: On or about March 27, 1998.
Description of the Notes: The Notes represent non-recourse obligations of
the Issuer and will be issued pursuant to an
indenture to be dated as of March 1, 1998 (the
"Indenture"), between the Issuer and the
Indenture Trustee. The assets included in the
trust estate created by the Indenture (the "Trust
Estate") will be the sole source of payments on
the Notes. The Notes will be issued in a single
class.
The assets of the Trust Estate initially will
include (i) a pool of closed-end mortgage loans
(the "Initial Mortgage Loans") secured by
mortgages or deeds of trust (the "Mortgages") on
one-to-four family residential properties (the
"Mortgaged Properties") to be conveyed to the
Issuer on the Closing Date; (ii) all payments in
respect of principal and interest on the Mortgage
Loans (other than any principal or interest
payments due thereon on or prior to the Cut-Off
Date whether or not received); (iii) security
interests in the Mortgaged Properties; (iv) the
Issuer's rights under the Sale and Servicing
Agreement; (v) the Note Insurance Policy and (vi)
certain other property specified in the
Indenture.
On the Closing Date, an aggregate cash amount of
$12,400,254.47 (the "Original Pre-Funded Amount")
will be deposited in a trust account in the name
of the Indenture Trustee (the "Pre-Funding
Account"). It is intended that additional
Mortgage Loans satisfying the criteria specified
in the Sale and Servicing Agreement (the
"Subsequent Mortgage Loans") will be purchased by
the Issuer
S-1
from the Seller from time to time on or before
March 31, 1998 from funds on deposit in the
Pre-Funding Account and that such Subsequent
Mortgage Loans, including any payment received
thereon after the related Subsequent Cut-Off
Date, become part of the Trust Estate. As a
result, the aggregate principal balance of the
Mortgage Loans will increase by an amount equal
to the aggregate principal balance of the
Subsequent Mortgage Loans so purchased and the
amount in the Pre-Funding Account will decrease
proportionately.
As described below, on the Closing Date, cash
will be deposited in the name of the Indenture
Trustee in the Capitalized Interest Account (as
defined herein). Funds in the Capitalized
Interest Account will be applied by the Indenture
Trustee to cover shortfalls in interest during
the Funding Period (as described under
"Pre-Funding Account") on the Notes attributable
to the provisions allowing for purchase of
Subsequent Mortgage Loans.
Other Securities: In addition to the Notes, the Issuer will issue a
class of security (the "Residual Interest") which
will represent the residual ownership interest in
the Trust Estate. The Notes and the Residual
Interest are herein referred to collectively as
the "Securities." Only the Notes are offered
hereby.
Denominations: The Notes are issuable in book entry form in
minimum denominations of original principal
amounts of $25,000 and multiples of $1,000
thereof.
The Mortgage Loans: Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
approximate and are measured by the aggregate
principal balance of the Initial Mortgage Loans
(the "Original Aggregate Loan Balance") as of the
Cut-Off Date. See "Additional Information"
herein. The statistical characteristics of the
Mortgage Loans as a whole will vary upon the
transfer of Subsequent Mortgage Loans.
The Initial Mortgage Loans to be conveyed by the
Seller to the Issuer on the Closing Date consist
of 486 adjustable rate Mortgage Loans on
single-family homes, including investment
properties (which may be condominiums,
one-to-four family residences or homes in planned
unit developments), which are located in 18
states and the District of Columbia. The Initial
Mortgage Loans are secured by Mortgages all of
which are first mortgages or deeds of trust. The
Initial Mortgage Loans in the Trust Estate are
all closed-end mortgage loans in that the
mortgagee is not required to make future advances
thereunder. All of the Initial Mortgage Loans are
actuarial loans, as discussed herein under "The
Mortgage Loan Pool -- Interest Payments on the
Mortgage Loans."
As of the Cut-Off Date, the Initial Mortgage
Loans had an Original Aggregate Loan Balance of
$42,199,745.53.
All of the Initial Mortgage Loans were originated
or acquired by the Seller in accordance with the
Seller's mortgage loan program as described in
the Prospectus. As a general matter, the Seller's
mortgage loan programs consist of the origination
and packaging of Mortgage Loans relating to
non-conforming credits. A non-conforming credit
means a mortgage loan which is ineligible for
purchase by the Fannie Mae ("Fannie Mae") due to
credit characteristics that do not meet Fannie
Mae guidelines. Mortgage Loans originated under
the Seller's mortgage loan programs are likely to
experience rates of delinquency, bankruptcy and
loss that are higher than mortgage loans
originated under Fannie Mae guidelines. 1.04% of
the Initial Mortgage Loans by aggregate principal
balance were 30 days or more delinquent in their
monthly payments as of the Cut-Off Date. However,
investors in the Notes should be aware that
approximately 18.06% (by aggregate principal
balance as of the Cut-Off Date) of the Initial
Mortgage Loans had a first monthly payment due on
or before January 30, 1998. Therefore, it was not
possible for any Mortgage Loan other than such
Mortgage Loans to have had a monthly payment that
was delinquent 30 days or more. See "Risk Factors
-- Risk of Higher Delinquencies Associated with
Underwriting Standards" herein.
S-2
The Loan-to-Value Ratio ("LTV") of a Mortgage
Loan is equal to the ratio (expressed as a
percentage) of the original principal balance of
the Mortgage Loan and the appraised value of the
Mortgaged Property at the time of origination.
The weighted average LTV of the Initial Mortgage
Loans as of the Cut-Off Date was 57.29%, and the
weighted average remaining term to stated
maturity of the Initial Mortgage Loans as of the
Cut-Off Date was 350 months, with a range from
120 months to 360 months. The average principal
balance of the Initial Mortgage Loans was
$86,830.75, with a range from $14,986.64 to
$324,950.00. All of the Initial Mortgage Loans
have initial and maximum Mortgage Rates. The
initial Mortgage Rates are the minimum Mortgage
Rates for the Initial Mortgage Loans. The
weighted average current Mortgage Rate of Initial
Mortgage Loans was 8.874% per annum, with current
Mortgage Rates that ranged from 6.990% to 13.750%
per annum. The weighted average maximum Mortgage
Rate of the Initial Mortgage Loans was 15.683%
per annum, with maximum Mortgage Rates that
ranged from 13.925% to 20.250% per annum. The
gross margin range for the Initial Mortgage Loans
was 3.650% to 8.490%. The weighted average gross
margin for the Initial Mortgage Loans was 5.412%.
As of the Cut-Off Date, substantially all of the
Initial Mortgage Loans had interest rates which
were not fully indexed (i.e., the entire gross
margin had not yet been added to the rate given
by the index).
All of the Initial Mortgage Loans were secured by
first mortgages. As a percentage of the aggregate
principal balance of the Initial Mortgage Loans
as of the Cut-Off Date, 88.01% were secured by
mortgages on one-family detached dwellings, 9.73%
by mortgages on two-to-four family dwellings,
1.60% by mortgages on condominiums and 0.66% by
mortgages on planned unit developments. See "The
Mortgage Loan Pool" herein.
Approximately $32,569,615.95 or 77.18% of the
Initial Mortgage Loans by aggregate principal
balance as of the Cut-Off Date bear interest at
rates that adjust, along with the related monthly
payments, semiannually based on the London
interbank offered rate for six-month United
States Dollar deposits in the London Market based
on quotations of major banks published in The
Wall Street Journal (the "Six-Month LIBOR
Loans").
Approximately $9,332,931.56 or 22.12% of the
Initial Mortgage Loans by aggregate principal
balance as of the Cut-Off Date bear interest at a
fixed rate for two years after origination and
thereafter have periodic adjustments at
frequencies in the same manner as the Six-Month
LIBOR Loans (as described above) (the "2/28 or
2/13 Loans").
Approximately $297,198.02 or 0.70% of the Initial
Mortgage Loans by aggregate principal balance as
of the Cut-Off Date bear interest at a fixed rate
for three years after origination and thereafter
have periodic adjustments at frequencies in the
same manner as the Six-Month LIBOR Loans (as
described above) (the "3/27 Loans").
The Mortgage Loans are not insured by either
primary or pool mortgage insurance policies;
however, certain payments due to the Owners of
the Notes are insured by the Note Insurance
Policy. The Note Insurance Policy will provide
for 100% coverage of the ultimate principal
amount of, and scheduled interest due on, the
Notes. See "Credit Enhancement" in this Summary
and "The Note Insurance Policy and the Note
Insurer" in this Prospectus Supplement. The
Mortgage Loans are not guaranteed by the Issuer,
the Seller the Servicer, any Originator or any of
their respective affiliates. The Mortgage Loans
are required to be serviced by the Servicer in
accordance with the terms of the Sale and
Servicing Agreement and with reasonable care,
using that degree of skill and attention that the
Servicer exercises with respect to comparable
mortgage loans that it services for itself and
others. See "The Sale and Servicing Agreement"
herein.
S-3
Note Rate: On each Payment Date, the Note Rate will be equal
to the lesser of (i) with respect to any Payment
Date which occurs on or prior to the Clean-Up
Call Date, the London interbank offered rate for
one-month United States dollar deposits ("LIBOR")
(calculated as described under "Description of
the Notes -- Calculation of LIBOR" herein) as of
the second to last business day prior to the
immediately preceding Payment Date (or in the
case of the first Payment Date, March 25, 1998)
plus 0.21% per annum and with respect to any
Payment Date thereafter, LIBOR plus 0.42% per
annum and (ii) the "Available Funds Cap", which
is defined to be the weighted average of the
Mortgage Rates, less the sum of (a) the Servicing
Fee (as defined herein), (b) beginning on the
third Payment Date following the Closing Date,
the premiums due to the Note Insurer with respect
to the Note Insurance Policy, (c) the fees due to
the Indenture Trustee and the Owner Trustee, and
(d) beginning on the seventh Payment Date
following the Closing Date, 0.50%, expressed as a
percentage of the Mortgage Loans, calculated as
of the first day of the related Remittance
Period.
The Sale and Servicing Agreement provides that
if, on any Payment Date, the Available Funds Cap
limits the Note Rate (i.e., the rate set by the
Available Funds Cap is less than the Formula Note
Rate), the amount of any such shortfall will be
carried forward and will be payable on future
Payment Dates (to the extent there are funds
available for such purpose) and shall accrue
interest at the Formula Note Rate, until paid
(such shortfall, together with such accrued
interest, the "Available Funds Cap Carry-Forward
Amount"). The Note Insurance Policy does not
cover the Available Funds Cap Carry-Forward
Amount; the payment of such amount may be funded
only from (i) any excess interest in the Mortgage
Loan Pool resulting from the Available Funds Cap
being in excess of the Formula Note Rate on
future Payment Dates, (ii) any Net Monthly Excess
Cashflow which would otherwise be paid to the
Servicer on account of certain reimbursable
amounts and (iii) any funds paid to effect the
early retirement of the Notes on any Remittance
Date after the Clean-Up Call Date.
The "Formula Note Rate" for a Payment Date is the
rate determined by clause (i) of the definition
of "Note Rate" on such Payment Date.
The "Clean-Up Call Date" is the first Payment
Date on which the outstanding aggregate principal
balance of the Mortgage Loans has declined to 10%
or less of the sum of (x) the aggregate principal
balance of the Initial Mortgage Loans as of the
Cut-Off Date plus (y) the Original Pre-Funded
Amount (such amount, the "Maximum Collateral
Amount").
Payments, Generally: Payments on the Notes will be made on the
twentieth day of each calendar month, or if such
day is not a business day, the next succeeding
business day (each, a "Payment Date") commencing
in April 1998, to the Owners of record (see
"Description of the Notes -- General" herein).
The Owners of record shall be such Owners as of
the last day of the calendar month immediately
preceding the calendar month in which such
Payment Date occurs, whether or not such day is a
business day (the "Record Date") in an amount
equal to the product of such Owner's Percentage
Interest and the amount distributed in respect of
the Note on such Payment Date.
The "Percentage Interest" represented by any Note
will be equal to the percentage obtained by
dividing the Note Principal Balance of such Note
by the Note Principal Balance of all Notes as of
the Cut-Off Date.
Payments of Interest: On each Payment Date, the Notes will be entitled
to payments in respect of Current Interest.
"Current Interest" means, with respect to a
Payment Date, the sum of (i) the aggregate amount
of interest accrued from the preceding Payment
Date (or from the Closing Date in the case of the
first Payment Date) to and including the day
prior to the current Payment Date at the Note
Rate on the outstanding principal balance of the
Notes (the "Note Principal Balance") and (ii) any
Interest Carry
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Forward Amount. Such period referred to in clause
(i) of the prior sentence relating to the accrual
of interest is the "Accrual Period". Calculations
of interest on the Notes will be made on the
basis of the actual number of days elapsed in the
related Accrual Period and a year of 360 days.
The "Interest Carry Forward Amount" for any
Payment Date is the sum of (x) the amount, if
any, by which (i) the Current Interest as of the
immediately preceding Payment Date exceeded (ii)
the amount of the actual payments of interest
made on such immediately preceding Payment Date
plus (y) 30 days' interest on such amount,
calculated at the Note Rate.
Payments of Principal: The Owners of the Notes are entitled to receive
certain monthly payments of principal on each
Payment Date which generally reflect collections
of principal during the prior calendar month.
The credit enhancement provisions described
herein result in a limited acceleration of the
principal payments to the Owners of each of the
Notes; such credit enhancement provisions are
more fully described under "Description of the
Notes -- Overcollateralization Provisions"
herein. Such credit enhancement provisions also
have the effect of accelerating and shortening
the weighted average lives of the Notes by
increasing the rate at which principal is
distributed to the Owners. See "Prepayment and
Yield Considerations" herein. In addition, the
following discussion makes use of a number of
technical defined terms which are defined under
"Description of the Notes --
Overcollateralization Provisions" herein.
On each Payment Date, payments in reduction of
the Note Principal Balance will be made in the
amounts described herein. The "Principal Payment
Amount" with respect to each Payment Date shall
be the lesser of:
(a) the Total Available Funds plus any Insured
Payment minus the Current Interest and
Fees and Expenses; and
(b)(i) the sum, without any duplication of:
(a) the Principal Carry-Forward Amount;
(b) the principal portion of all scheduled
monthly payments on the Mortgage Loans
due during the related Due Period, to
the extent actually received by the
Indenture Trustee on or prior to the
related Remittance Date or to the
extent actually advanced by the
Servicer on or prior to the related
Remittance Date and the principal
portion of all full and partial
principal prepayments made by the
respective Mortgagors during the
related Remittance Period;
(c) the scheduled principal balance of
each Mortgage Loan that either was
repurchased by the Seller or an
Originator or purchased by the
Servicer on the related Remittance
Date, to the extent such scheduled
principal balance is actually received
by the Indenture Trustee on or prior
to the related Remittance Date;
(d) any Substitution Amounts delivered by
the Seller or an Originator on the
related Remittance Date in connection
with a substitution of a Mortgage Loan
(to the extent such Substitution
Amounts relate to principal), to the
extent such Substitution Amounts are
actually received by the Indenture
Trustee on or prior to the related
Remittance Date;
(e) all Net Liquidation Proceeds actually
collected by the Servicer with respect
to the Mortgage Loans during the
related Remittance
S-5
Period (to the extent such Net
Liquidation Proceeds relate to
principal) to the extent actually
received by the Indenture Trustee on
or prior to the related Remittance
Date;
(f) the amount of any Subordination
Deficit for such Payment Date;
(g) the proceeds received by the Indenture
Trustee with respect to any
liquidation of the Trust Estate (to
the extent such proceeds relate to
principal); and
(h) any moneys released from the
Pre-Funding Account as a prepayment of
the Notes on the Payment Date which
immediately follows the end of the
Funding Period; and
(i) the amount of any Subordination
Increase Amount for such Payment Date
consisting of the amount of any Net
Monthly Excess Cash Flow to be
actually applied for the accelerated
payment of principal on the Notes;
minus
(ii) the amount of any Subordination Reduction
Amount for such Payment Date consisting of
the amount of any Net Monthly Excess Cash
Flow to be actually paid to the Owners of
the Residual Interests.
In no event will the Principal Payment Amount
for any Payment Date (x) be less than zero or
(y) be greater than the then-outstanding Note
Principal Balance.
The sum of the Current Interest and the
Principal Payment Amount for any Payment Date
is the "Monthly Payment Amount" for such
Payment Date.
The "Principal Carry-Forward Amount" for any
Payment Date is the amount, if any, by which
(i) the Principal Payment Amount as of the
immediately preceding Payment Date exceeded
(ii) the amount of the actual payment of
principal made to the Owners of the Notes on
such immediately preceding Payment Date. See
"Description of the Notes -- Payments" herein.
A "Liquidated Mortgage Loan" is, in general, a
defaulted Mortgage Loan as to which the
Servicer has determined that all amounts that
it expects to recover on such Mortgage Loan
have been recovered (exclusive of any
possibility of a deficiency judgment).
Any loss on a Liquidated Mortgage Loan (i.e.,
a Realized Loss) may or may not be allocated
to the Owners of the Notes on the Payment Date
which immediately follows the event of loss.
However, the Owners of the Notes are entitled
to receive ultimate recovery of any Realized
Losses which receipt will be no later than the
Payment Date occurring after such Realized
Loss creates a Subordination Deficit and will
be in the form of an Insured Payment if not
covered through Net Monthly Excess Cashflow.
Insured Payments do not include Realized
Losses until such time as the aggregate
cumulative Realized Losses have created a
Subordination Deficit nor do Insured Payments
cover the Servicer's failure to make
Delinquency Advances until such time as the
aggregate cumulative amount of such unpaid
Delinquency Advances, when added to Realized
Losses have created a Subordination Deficit.
A "Subordination Deficit" with respect to a
Payment Date is the amount, if any, by which
(x) the Note Principal Balance, after taking
into account all payments to be made on such
Payment Date, exceeds (y) the sum of (i) the
aggregate principal balances of the Mortgage
Loans as of the close of business on the Due
Date in the calendar month in which such
Payment Date occurs and (ii) the
S-6
amount, if any, on deposit in the Pre-Funding
Account as of the close of business on the Due
Date in the calendar month in which such Payment
Date occurs.
Credit Enhancement: The Credit Enhancement provided for the benefit
of the Owners of the Notes consists of (x) the
overcollateralization mechanics which utilize
the excess interest created by the internal cash
flows of the Mortgage Loan Pool and (y) the Note
Insurance Policy.
Overcollateralization. The required application
of the cash flow from the Mortgage Loan Pool
results in a limited acceleration of the Notes
relative to the amortization of the Mortgage
Loans in the early months of the transaction.
The accelerated amortization is achieved by the
application of certain excess interest to the
payment of principal on the Notes. This
acceleration feature creates
overcollateralization which results from the
excess of the aggregate scheduled principal
balances of the Mortgage Loans plus the amount,
if any, on deposit in the Pre-Funding Account
over the Note Principal Balance. Once the
required level of overcollateralization is
reached, and subject to the provisions described
in the next paragraph, the acceleration feature
will cease, unless necessary to maintain the
required level of overcollateralization.
The Sale and Servicing Agreement provides that,
subject to certain floors, caps and triggers,
the required level of overcollateralization may
increase or decrease over time. An increase
would result in a temporary period of
accelerated amortization of the Notes to
increase the actual level of
overcollateralization to its required level; a
decrease would result in a temporary period of
decelerated amortization to reduce the actual
level of overcollateralization to its required
level. See "Description of the
Notes--Overcollateralization Provisions" herein.
The Note Insurance Policy. The Seller will
obtain the Note Insurance Policy, which is
noncancelable, in favor of the Indenture Trustee
on behalf of the Owners of the Notes. On each
Payment Date, the Note Insurer will be required
to make available to the Indenture Trustee the
amount by which the Current Interest and any
Subordination Deficit exceeds the Total
Available Funds (after deducting the amount
necessary to pay the Fees and Expenses) as of
such Payment Date. The Note Insurance Policy
does not guarantee to Owners of the Notes any
specified rate of Prepayments and does not
insure the payment of the Available Funds Cap
Carry-Forward Amount. See "The Note Insurance
Policy and the Note Insurer" herein and
"Description of Credit Enhancement" in the
Prospectus.
The "Fees and Expenses" are the premium amount
payable to the Note Insurer, the Indenture
Trustee Fee and the Owner Trustee Fee.
Pre-Funding Account: On the Closing Date, the Original Pre-Funded
Amount will be deposited in the Pre-Funding
Account which account will be in the name of,
and maintained by, the Indenture Trustee in
trust for the benefit of the Owners of the
Notes. During the period (the "Funding Period")
from and including the Closing Date until the
earliest of (i) the date on which the amount on
deposit in the Pre-Funding Account is less than
$100,000 and (ii) March 31, 1998, the Pre-Funded
Amount will be maintained in the Pre-Funding
Account. The Original Pre-Funded Amount will be
reduced during the Funding Period by the amount
thereof used to purchase Subsequent Mortgage
Loans in accordance with the Sale and Servicing
Agreement. The amount on deposit in the
Pre-Funding Account at any time is the
"Pre-Funded Amount". Subsequent Mortgage Loans
purchased by and added to the Mortgage Loan Pool
on any date (each, a "Subsequent Transfer Date")
must satisfy the criteria set forth in the Sale
and Servicing Agreement. Any Pre-Funded Amount,
less any interest and other investment earnings
on amounts on deposit in the Pre-Funding Account
(the "Pre-Funding Account Earnings"), remaining
at the end of the Funding Period will be
distributed to the Owners of the Notes on the
Payment Date that immediately follows the end of
the Funding Period in reduction of the Note
Principal Balance, thus resulting in a partial
principal prepayment of the Notes as specified
herein under
S-7
"Description of the Notes--Payments." All
interest and other investment earnings on
amounts on deposit in the Pre-Funding Account
will be deposited in the Capitalized Interest
Account.
Although no assurance can be given, it is
intended that the principal amount of Subsequent
Mortgage Loans added to the Trust Estate will
require application of substantially all of the
Original Pre-Funded Amount and it is not
intended that there will be any material amount
of principal prepaid to the Owners of the Notes
from the Pre-Funding Account. In the event that
the Seller is unable to sell Subsequent Mortgage
Loans to the Issuer in an amount equal to the
Original Pre-Funded Amount, a principal
prepayment to Owners of the Notes will occur on
the Payment Date in April 1998 in an amount
equal to the Pre-Funded Amount, less any
Pre-Funding Account Earnings remaining at the
end of the Funding Period.
Capitalized Interest Account: On the Closing Date, cash in an amount
satisfactory to the Note Insurer will be
deposited in a trust account (the "Capitalized
Interest Account") in the name of, and
maintained by, the Indenture Trustee in trust
for the Owners of the Notes. The amount on
deposit in the Capitalized Interest Account,
including reinvestment income thereon, will be
used by the Indenture Trustee to fund the
excess, if any, of (i) the sum of (a) the
aggregate amount of interest accruing during the
related Accrual Period at the Note Rate on the
amount by which the aggregate Note Principal
Balance exceeds the aggregate principal balance
of the Initial Mortgage Loans plus (b) the
Indenture Trustee Fee and the Owner Trustee Fees
over (ii) the amount of any Pre-Funding Account
Earnings; such amounts on deposit will be so
applied by the Indenture Trustee on each Payment
Date in the Funding Period to fund such excess,
if any. Any amounts remaining in the Capitalized
Interest Account not needed for such purpose
will be paid to the Seller on the first business
day immediately following the end of the Funding
Period.
Mandatory Prepayment of Notes: In the event that at the end of the Funding
Period, not all of the $12,400,254.47 funded
from the sale of the Notes has been used to
acquire Subsequent Mortgage Loans, the Owners of
the Notes will receive a prepayment on the
Payment Date in April 1998 in an amount equal to
the Pre-Funded Amount, less any Pre-Funding
Account Earnings remaining at the end of the
Funding Period.
Note Insurer: MBIA Insurance Corporation (the "Note Insurer").
Delinquency Advances
and Compensating Interest: The Servicer will be obligated to make advances
("Delinquency Advances") with respect to
delinquent payments of interest (at the related
Mortgage Rate less the Servicing Fee, as defined
below) and scheduled principal due on each
Mortgage Loan to the extent that such
Delinquency Advances, in good faith and in the
Servicer's reasonable judgment, are reasonably
recoverable from the related Mortgage Loan.
Delinquency Advances are recoverable from (i)
future collections on the Mortgage Loan which
gave rise to the Delinquency Advance, (ii)
Liquidation Proceeds for such Mortgage Loan and
(iii) from certain excess moneys which would
otherwise be paid to the Owners of the Residual
Interest.
In addition, the Servicer will also be required
to deposit in the Principal and Interest Account
with respect to any full Prepayment received on
a Mortgage Loan during the related Remittance
Period out of its own funds without any right of
reimbursement therefor, an amount equal to the
difference between (x) 30 days' interest at such
Mortgage Loan's Mortgage Rate (less the
Servicing Fee) on the principal balance of such
Mortgage Loan as of the first day of the related
Remittance Period and (y) to the extent not
previously advanced, the interest (less the
Servicing Fee) paid by the Mortgagor with
respect to such Mortgage Loan during such
Remittance Period (any such amount paid by the
Servicer, "Compensating Interest"). The Servicer
will not be required to pay Compensating
Interest with respect to any Remittance Period
in an amount in
S-8
excess of the aggregate Servicing Fee received
by the Servicer for such Remittance Period or to
cover shortfalls in collections of interest due
to curtailments.
Any failure by the Servicer to remit to the
Indenture Trustee a Delinquency Advance or
Compensating Interest to the extent required
under the Sale and Servicing Agreement will
constitute an event of default under the Sale
and Servicing Agreement, in which case, upon the
removal of the Servicer, the Indenture Trustee
or the successor Servicer will be obligated to
make such advances in accordance with the terms
of the Sale and Servicing Agreement. See
"Description of the Securities -- Advances" in
the Prospectus.
Book-Entry Registration of the
Notes: The Notes will initially be issued in book-entry
form. Persons acquiring beneficial ownership
interests in such Notes ("Beneficial Owners")
may elect to hold their interests through The
Depository Trust Company ("DTC"), in the United
States, or Cedel Bank, S.A. ("Cedel") or the
Euroclear System ("Euroclear"), in Europe.
Transfers within DTC , Cedel or Euroclear, as
the case may be, will be in accordance with the
usual rules and operating procedures of the
relevant system. So long as the Notes are
Book-Entry Notes (as defined herein), such Notes
will be evidenced by one or more Notes
registered in the name of Cede & Co. ("Cede"),
as the nominee of DTC or one of the European
Depositaries (as defined below). Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other, will
be effected in DTC through Citibank N.A.
("Citibank") or The Chase Manhattan Bank
("Chase," and together with Citibank, the
"European Depositaries"), the relevant
depositaries of Cedel and Euroclear,
respectively, and each a participating member of
DTC. The Notes will initially be registered in
the name of Cede. The interests of the Owners of
such Notes will be represented by book-entries
on the records of DTC and participating members
thereof. No Beneficial Owner will be entitled to
receive a definitive certificate representing
such person's interest, except in the event that
Definitive Notes (as defined herein) are issued
under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Notes reflect the rights of
Beneficial Owners only as such rights may be
exercised through DTC and its participating
organizations for so long as such Notes are held
by DTC. See "Description of the
Notes--Book-Entry Registration of the Notes"
herein and Annex I hereto.
Monthly Servicing Fee: The Servicer will retain a fee equal to 0.50%
per annum (the "Servicing Fee"), payable monthly
at one-twelfth the annual rate, of the
then-outstanding principal amount of each
Mortgage Loan, payable monthly at one-twelfth
the annual rate, of the then-outstanding
principal amount of each Mortgage Loan.
Optional Redemption
- -- Clean-Up Call: The holders of Residual Interests exceeding in
the aggregate a 50% percentage interest (the
"Majority Residualholder") may, at their option,
effect an early termination of the Notes on the
Clean-Up Call Date, or any Payment Date
thereafter, by purchasing all of the Mortgage
Loans at a price equal to or greater than the
Termination Price (as defined under
"Administration -- Redemption of the Notes"
herein). The proceeds from any such purchase of
the Mortgage Loans will be used by the Issuer to
redeem the Notes and terminate the Indenture. In
addition, the Note Insurer will have the right,
under the limited circumstances described in the
Sale and Servicing Agreement, to acquire all of
the Mortgage Loans from the Issuer and thereby
effect a redemption of the Notes and terminate
the Indenture. See "Administration--Redemption
of the Notes" herein.
Ratings: It is a condition of the original issuance of
the Notes that the Notes receive ratings of
"AAA" by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc.
("Standard & Poor's") and "Aaa" by Moody's
S-9
Investors Service, Inc. ("Moody's"). Standard &
Poor's and Moody's are referred to herein
collectively as the "Rating Agencies." The
ratings issued by the Rating Agencies on the
payment of principal and interest on the Notes
do not cover the payment of the Available Funds
Cap Carry-Forward Amount. A security rating is
not a recommendation to buy, sell or hold
securities, and may be subject to revision or
withdrawal at any time by the assigning entity.
See "Prepayment and Yield Considerations" and
"Ratings" herein and "Prepayment and Yield
Considerations" in the Prospectus.
Risk Factors: Credit Considerations. For information with
regard to the Mortgage Loans and their related
risks, see "The Mortgage Loan Pool" herein.
Prepayment Considerations. For information
regarding the consequences of prepayments of the
Mortgage Loans and of the failure of the Seller
to purchase Subsequent Mortgage Loans during the
Funding Period in an amount equal to the
Original Pre-Funded Amount, see "Prepayment and
Yield Considerations" and "Risk Factors -- The
Subsequent Mortgage Loans and the Pre-Funding
Account" herein.
Other Considerations. For a discussion of other
risk factors that should be considered by
prospective investors in the Notes, see "Risk
Factors" herein and in the Prospectus.
Federal Income Tax Aspects: No election will be made to treat the Trust
Estate or any portion thereof as a "real estate
mortgage investment conduit" (a "REMIC") for
federal income tax purposes.
Upon the issuance of the Notes, Arter & Hadden
LLP, counsel to the Issuer, will deliver its
opinion that the Notes will be treated as debt
obligations and not as representing an ownership
interest in the Trust Estate or an equity
interest in the Issuer or the Seller. In
addition, for federal income tax purposes, the
Issuer will not be (i) classified as an
association taxable as a corporation, (ii) a
taxable mortgage pool as defined in Section
7701(i) of the Code, or (iii) a "publicly traded
partnership" as defined in Treasury Regulation
Section 1.7704-1. An Owner of a Note, by its
acceptance of a Note, will be deemed to have
agreed to treat the Note as indebtedness. An
Owner will not be required to report income with
respect to the Note under an accrual method
unless the Owner otherwise uses the accrual
method or purchases a Note which has original
issue discount.
The Notes will not represent "real estate
assets" for purposes of Section 856(c)(5)(A) of
the Internal Revenue Code of 1986, as amended
(the "Code"), or "[l]oans . . . principally
secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the
Code.
Investors are advised to consult their tax
advisors and to review "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
ERISA Considerations: Subject to the limitations described under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be purchased by
employee benefit plans that are subject to the
Employee Retirement Income Security Act of 1974,
as amended. See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment
Considerations: The Notes will not constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"). Accordingly, many institutions with
legal authority to invest in comparably rated
securities based on first mortgage loans may not
be legally authorized to invest in the Notes.
S-10
RISK FACTORS
Prospective investors in the Notes should consider the following
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Notes.
Risk of Mortgage Loan Yield Reducing the Note Rate. Subject to the
Available Funds Cap, the Note Rate is based upon the value of an index (LIBOR)
which is different from the value of the indices applicable to the Mortgage
Loans, as described under "The Mortgage Pool" herein (either as a result of the
use of a different index rate determination date, rate adjustment date or rate
cap or floor). 77.18% of the Initial Mortgage Loans are Six-Month LIBOR Loans
which adjust semi-annually based upon a six-month LIBOR index, whereas the Note
Rate adjusts monthly based upon a one-month LIBOR index and is limited by the
Available Funds Cap. Consequently, the Note Rate for any Payment Date may not
equal the interest which becomes due on the Mortgage Loans (net of Servicing Fee
and certain other required reductions) during the related Remittance Period. In
addition, 22.12% of the Initial Mortgage Loans by aggregate principal balance as
of the Cut-Off Date are 2/28 or 2/13 Loans that provide for a fixed interest
rate for a period of approximately two years following origination and 0.70% of
the Initial Mortgage Loans by aggregate principal balance as of the Cut-Off Date
are 3/27 Loans that provide for a fixed interest rate for a period of
approximately three years following origination. Thereafter, such Mortgage Loans
provide for interest rate and payment adjustments in a manner similar to the
Six-Month LIBOR Loans. In particular, the Note Rate adjusts monthly, while the
interest rates of the Mortgage Loans adjust less frequently, with the result
that the Available Funds Cap may be lower than the otherwise applicable Note
Rate for extended periods in a rising interest rate environment. Moreover,
one-month LIBOR and the index applicable to such Mortgage Loans may respond to
different economic and market factors, and there is not necessarily any
correlation between them. Thus, it is possible, for example, that one-month
LIBOR may rise during periods in which the Mortgage Loan's index is stable or is
falling or that, even if both one-month LIBOR and such index rise during the
same period, one-month LIBOR may rise much more rapidly than such index.
The Subsequent Mortgage Loans and the Pre-Funding Account. If the
principal amount of eligible Mortgage Loans available during the Funding Period
is less than 100% of the Original Pre-Funded Amount, the Seller will have
insufficient Mortgage Loans to sell to the Issuer for addition to the Trust
Estate on the Subsequent Transfer Dates, thereby resulting in a prepayment of
principal to Owners of the Notes as described herein. See "Social, Economic and
Other Factors" below. In addition, any conveyance of Subsequent Mortgage Loans
is subject to the following conditions, among others: (i) each such Subsequent
Mortgage Loan must satisfy the representations and warranties specified in the
agreement pursuant to which such Subsequent Mortgage Loans are transferred to
the Issuer (each a "Subsequent Transfer Agreement") and in the Sale and
Servicing Agreement; (ii) the Subsequent Mortgage Loans must be selected by the
Seller in a manner that it believes is not adverse to the interest of the Owners
of the Notes or the Note Insurer; (iii) certain opinions of counsel with respect
to the validity of the conveyance of such Subsequent Mortgage Loans must be
delivered by the Seller; and (iv) as of each cut-off date (each, a "Subsequent
Cut-Off Date") applicable thereto, the Mortgage Loans, including the Subsequent
Mortgage Loans to be conveyed by the Seller as of such Subsequent Cut-Off Date,
must satisfy the criteria set forth in the Sale and Servicing Agreement, as
described herein under "The Mortgage Loan Pool--Conveyance of Subsequent
Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the
Issuer for inclusion in the Trust Estate by the end of the Funding Period, the
Owners of the Notes then entitled to payments of principal will receive a
prepayment of principal in an amount equal to the Pre-Funded Amount, less any
Pre-Funding Account Earnings, remaining in the Pre-Funding Account on the first
Payment Date following the end of the Funding Period (in no event later than the
April 1998 Payment Date). Although no assurances can be given, the Seller
intends that the principal amount of Subsequent Mortgage Loans sold to the
Issuer will require the application of substantially all amounts on deposit in
the Pre-Funding Account and that there will be no material principal prepayment
to the Owners of the Notes from the Pre-Funded Amount.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Mortgage
Loans may be of a different credit quality. Therefore, following the transfer of
Subsequent Mortgage Loans to the Trust Estate, the aggregate characteristics of
the Mortgage Loans then comprising the Trust Estate may vary from those of the
Initial Mortgage Loans. See "The Mortgage Loan Pool--Conveyance of Subsequent
Mortgage Loans."
Social, Economic and Other Factors. The ability of the Issuer to
purchase the Subsequent Mortgage Loans is largely dependent upon the ability of
the Seller to originate or purchase additional mortgage loans. The ability of
the Seller to originate or purchase additional loans may be affected by a
variety of social and economic factors. Economic factors include interest rates,
unemployment levels, the rate of inflation and consumer perception of economic
conditions generally. However, the Seller is unable to determine and has no
basis to predict whether or to what extent economic or social factors will
affect its origination ability and the availability of Subsequent Mortgage
Loans.
S-11
Risk of Higher Delinquencies Associated with Underwriting Standards.
All of the Mortgage Loans were originated or acquired by the Seller in
accordance with the Seller's mortgage loan programs described in the Prospectus.
See "Mortgage Loan Program -- Underwriting Guidelines" in the Prospectus. As a
general matter, the Seller's mortgage loan programs consist of the origination
and packaging of mortgage loans relating to non-conforming credits. A
non-conforming credit means a mortgage loan which is ineligible for purchase by
Fannie Mae due to credit characteristics that do not meet Fannie Mae guidelines.
Mortgage Loans originated under the Seller's mortgage loan program may
experience rates of delinquency, foreclosure and bankruptcy that are higher than
mortgage loans originated under Fannie Mae guidelines. 1.04% of the Initial
Mortgage Loans were 30 days or more delinquent in their monthly payments as of
the Cut-Off Date. However, investors in the Notes should be aware that
approximately 18.06% (by aggregate principal balance as of the Cut-Off Date) of
the Initial Mortgage Loans had a first monthly payment due on or before January
30, 1998. Therefore, it was not possible for any Mortgage Loan other than such
Mortgage Loans to have had a monthly payment that was delinquent 30 days or
more.
Risk of Higher Default Rates Associated with California Real Property.
Since 22.47% of the Mortgaged Properties relating to the Initial Mortgage Loans
are located in California, an overall decline in the California residential real
estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans, causing the principal balances of the related
Mortgage Loans to equal or exceed the value of such Mortgaged Properties.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"Hazard Insurance; Claims Thereunder" in the Prospectus. Accordingly, should
such event cause losses in respect of the Mortgage Loans, if the protection
afforded by the overcollateralization of the Notes is insufficient and upon the
occurrence of a Subordination Deficit the Note Insurer is unable to meet its
obligations under the Note Insurance Policy, then the Owners of the Notes could
experience a loss on their investment.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Seller. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Mortgage Loans. The Seller will be required to
repurchase any Mortgage Loans which, at the time of origination, did not comply
with applicable federal and state laws and regulations. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Seller to damages and
administrative enforcement. See "Certain Legal Aspects of Mortgage Loans and
Related Matters" in the Prospectus.
61.76% of the Initial Mortgage Loans will be subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act"),
which incorporates the Home Ownership and Equity Protection Act of 1994. The
Riegle Act adds certain additional provisions to Regulation Z, which is the
implementing regulation of the Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money home equity loans with high interest rates or high upfront
fees and charges. In general, home equity loans within the purview of the Riegle
Act have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle Act
apply on a mandatory basis to all home equity loans originated on or after
October 1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the home equity loan. The Seller will represent and warrant in the Sale and
Servicing Agreement that each Mortgage Loan was originated in compliance with
all applicable laws including the Truth-in-Lending Act, as amended.
Risk of Seller Insolvency. The Seller believes that the transfer of the
Mortgage Loans to the Issuer constitutes a sale by the Seller to the Issuer and,
accordingly, that such Mortgage Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller and will not be available to
the creditors of the Seller. However, in the event of an insolvency of the
Seller, it is possible that a bankruptcy trustee or a creditor of the Seller may
argue that the transaction between the Seller and the Issuer was a pledge of
such Mortgage Loans in connection with a borrowing by the Seller rather than a
true sale. Such an attempt, even if unsuccessful, could result in delays in
payments on the Notes.
On the Closing Date, the Indenture Trustee, the Owner Trustee, the
Issuer, the Seller, the Underwriter, the Rating Agencies and the Note Insurer
will have received an opinion of Arter & Hadden LLP, counsel to the Seller, with
respect to the true sale of the Mortgage Loans from the Seller to the Issuer, in
form and substance satisfactory to the Note Insurer and the Rating Agencies.
S-12
THE PORTFOLIO OF MORTGAGE LOANS
General
The Mortgage Loan Pool includes newly-originated adjustable rate loans
which were originated directly by the Seller or one or more unrelated third
party Originators.
Substantially all of the Initial Mortgage Loans adjust based on the
London interbank offered rate for six-month United States Dollar deposits in the
London Market based on quotations of major banks published in The Wall Street
Journal and have a periodic semi-annual rate adjustment cap of 1.00% per annum
to 1.50% per annum and a lifetime cap of 6.00% per annum to 7.00% per annum
above the startup rate. Furthermore, all mortgage loans originated under the
retail adjustable rate program are in a first lien position and generally do not
allow for balloon payments. Such retail adjustable rate mortgage loans are
originated in accordance with the Seller's guidelines. See "Mortgage Loan
Program -- Underwriting Guidelines" in the Prospectus.
Acquisitions
All of the Mortgage Loans were originated by the Seller and were
underwritten pursuant to the Seller's Guidelines or acquired by the Seller from
an Originator based on Approved Guidelines or Bulk Guidelines as described in
the Prospectus. See "Mortgage Loan Program" in the Prospectus. Initial Mortgage
Loans representing an aggregate principal balance of $14,785,785.48 or
approximately 35.04% of the Initial Mortgage Loans by aggregate principal
balance were acquired from an Originator other than the Seller. All of the 2/28
or 2/13 Loans and the 3/27 Loans were acquired by the Seller from the
Originators. The Seller reviewed 100% of the acquisitions included in the Trust
Estate.
Delinquencies
The following tables provide data on loan delinquency, REO and net
losses for the Servicer's servicing portfolio. The Servicer is not an approved
seller/servicer by Fannie Mae.
As of December 31,
(Dollars in Thousands)
-----------------------------------------------------
1997 1996 1995
---- ---- ----
Total Servicing Portfolio $799,085 $641,191 $613,791
30-59 days delinquent.................... 7,994 9,359 8,339
60-89 days delinquent.................... 7,654 6,704 6,538
90 days or more delinquent............... 17,378 19,081 21,002
------- -------- --------
Total delinquencies(1).......... $33,026 $35,144 $ 35,879
======= ======= ========
Total Delinquency Percentage...................... 4.1% 5.5% 5.8%
REO Properties(2)................................. $1,668 $3,951 $7,854
- ----------
(1) The period of delinquency is based on the number of days payments are
contractually past due and includes all loans in foreclosure.
(2) Includes REO Properties owned by the Seller as well as REO
Properties owned by REMIC Trusts and serviced by the Seller; however,
excludes private investor REO Properties not serviced by the Seller.
S-13
For the Years Ended December 31,
(Dollars in Thousands)
------------------------------------------------------
1997 1996 1995
---- ---- ----
Average servicing portfolio(1)................... $705,928 $615,393 $583,943
Net losses(2).................................... $1,705 $2,160 $169
Percentage of average servicing portfolio........ 0.24% 0.35% 0.03%
- --------------------------
(1) Average servicing portfolio equals the quarterly average of the
servicing portfolio computed as the average of the balance at the
beginning and end of each quarter.
(2) "Net Losses" represent losses realized with respect to disposition of
REO properties.
THE ISSUER
First Alliance Mortgage Loan Trust 1998-1A is a Delaware business trust
established by the Seller pursuant to the Trust Agreement under the laws of the
State of Delaware. After its formation, the Issuer will not engage in any
activity other than (i) acquiring, holding and managing the Mortgage Loans and
the other assets of the Trust Estate and the proceeds therefrom, (ii) issuing
the Notes and the Residual Interest, (iii) making payments on the Notes and the
Residual Interest and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
in connection therewith. The Residual Interest represents the residual interest
in the assets of the Trust Estate. The net proceeds of the Notes and the
Residual Interests will be delivered by the Issuer to the Seller as
consideration for the Mortgage Loans pursuant to the Sale and Servicing
Agreement. The Issuer does not have, nor is it expected in the future to have,
any significant assets, other than the assets included in the Trust Estate.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company as Owner Trustee.
USE OF PROCEEDS
The Seller will sell the Mortgage Loans to the Issuer concurrently with
the delivery of the Notes. Net proceeds from the issuance of the Notes will be
distributed by the Seller. Such net proceeds less the Pre-Funded Amount and the
amount deposited in the Capitalized Interest Account will (together with the
Residual Interest retained by the Seller or its affiliates) represent the amount
to be distributed by the Issuer to the Seller for the Initial Mortgage Loans.
THE MORTGAGE LOAN POOL
General
Unless otherwise noted, all references to statistical percentages in
this Prospectus Supplement appearing "as of the Cut-Off Date," together with all
dollar amount references herein to aggregate principal balances appearing "as of
the Cut-Off Date" have been calculated using the aggregate scheduled principal
balances of the Initial Mortgage Loans as of the close of business on the
Cut-Off Date. Subsequent Mortgage Loans are intended to be purchased from the
Seller by the Issuer for inclusion in the Trust Estate from time to time on or
before March 31, 1998 from funds on deposit in the Pre-Funding Account. The
Initial Mortgage Loans and the Subsequent Mortgage Loans are referred to herein
collectively as the "Mortgage Loans." The Subsequent Mortgage Loans, if
available, will be sold by the Seller to the Issuer.
This subsection describes generally certain characteristics of the
Initial Mortgage Loans. Unless otherwise specified herein, references herein to
percentages of Initial Mortgage Loans refer in each case to the approximate
percentage of the aggregate principal balance of the Initial Mortgage Loans as
of the Cut-Off Date, based on the outstanding principal balances of the Initial
Mortgage Loans as of the Cut-Off Date, and giving effect to all payments due on
or prior to the Cut-Off Date. The Mortgage Loan Pool will initially consist of
486 adjustable rate loans evidenced by promissory notes (the "Mortgage Notes")
secured by deeds of trust, security deeds or mortgages on the Mortgaged
Properties, which are located in 18 states and the District of Columbia. The
Mortgaged Properties securing
S-14
the Mortgage Loans consist of single-family residences (which may be detached,
part of a two-to-four family dwelling, a condominium unit or a unit in a planned
unit development). The Mortgaged Properties may be owner-occupied (which
includes second and vacation homes) or non-owner occupied investment properties.
The Initial Mortgage Loans are secured by first lien mortgages on the related
Mortgage Properties.
The Initial Mortgage Loans were required to satisfy the following
criteria as of the Cut-Off Date: have remaining terms to stated maturity of no
greater than 360 months; have a Mortgage Rate as of the Cut-Off Date of at least
6.990%; and, have a LTV not in excess of 80.00%.
Initial Mortgage Loans
All of the Initial Mortgage Loans are Actuarial Loans and are secured
by first mortgages. All of the Initial Mortgage Loans require monthly payments
of principal that will fully amortize such Initial Mortgage Loans by their
respective stated maturity dates. No Initial Mortgage Loan had a stated maturity
date later than May 1, 2028. As of the Cut-Off Date, the aggregate principal
balance of the Initial Mortgage Loans was 99.84% of the aggregate principal
balance of such Initial Mortgage Loans at the time of origination. Substantially
all of the Initial Mortgage Loans had interest rates which were not fully
indexed (i.e., the entire gross margin has not yet been added to the rate given
by the index).
The Initial Mortgage Loans had the following aggregate characteristics
as of the Cut-Off Date:
Aggregate Number of Initial Mortgage Loans................................. 486
Principal Balance
Aggregate......................................................... $42,199,745.53
Average........................................................... $86,830.75
Range............................................................. $14,986.64 - $324,950.00
Current Mortgage Rate
Weighted Average.................................................. 8.874%
Range............................................................. 6.990% - 13.750%
Original Term to Stated Maturity
Weighted Average.................................................. 351 months
Range............................................................. 120 - 360 months
Remaining Term to Stated Maturity
Weighted Average.................................................. 350 months
Range............................................................. 120 - 360 months
LTV
Weighted Average.................................................. 57.29%
Range............................................................. 9.09% - 80.00%
Gross Margin
Weighted Average.................................................. 5.412%
Range............................................................. 3.650% - 8.490%
Semi-Annual Rate Adjustment Cap Range...................................... 1.000% - 1.500%
Maximum Mortgage Rate
Weighted Average.................................................. 15.683%
Range............................................................. 13.925% - 20.250%
Minimum Mortgage Rate
Weighted Average.................................................. 8.872%
Range............................................................. 6.990% - 13.750%
S-15
DISTRIBUTION OF LTV's
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Range of LTV's Mortgage Loans Principal Balance Principal Balance
5.01 - 10.00%....................................... 1 $ 14,986.64 0.04%
10.01 - 15.00........................................ 1 30,859.72 0.07
15.01 - 20.00........................................ 8 261,019.87 0.62
20.01 - 25.00........................................ 16 632,204.75 1.50
25.01 - 30.00........................................ 17 850,154.89 2.01
30.01 - 35.00........................................ 22 1,373,449.26 3.25
35.01 - 40.00........................................ 38 2,313,650.43 5.48
40.01 - 45.00........................................ 37 2,604,505.16 6.17
45.01 - 50.00........................................ 39 3,126,045.44 7.41
50.01 - 55.00........................................ 54 4,524,075.73 10.72
55.01 - 60.00........................................ 75 6,921,814.86 16.40
60.01 - 65.00........................................ 79 7,847,132.04 18.60
65.01 - 70.00........................................ 49 5,105,714.73 12.10
70.01 - 75.00........................................ 42 5,546,797.56 13.14
75.01 - 80.00........................................ 8 1,047,334.45 2.48
- ------------ --------
Total.............................................. 486 $42,199,745.53 100.00%
=== ============== ========
The LTV's shown above were calculated based upon the appraised values
of the Mortgaged Properties at the time of origination (the "Appraised Values").
No assurance can be given that Appraised Values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Initial Mortgage Loans. If property values decline such that the
outstanding balances of the Initial Mortgage Loans become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those heretofore experienced by the
Servicer, as set forth above under "The Portfolio of Mortgage Loans," and by the
mortgage lending industry in general.
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Months Mortgage Loans Principal Balance Principal Balance
109 - 120.................................................. 1 $ 48,091.00 0.11%
169 - 180.................................................. 29 1,945,908.00 4.61
229 - 240.................................................. 2 194,559.03 0.46
349 - 360.................................................. 454 40,011,187.50 94.81
--- -------------- -------
Total................................................... 486 $42,199,745.53 100.00%
=== ============== =======
S-16
DISTRIBUTION OF PRINCIPAL BALANCES
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
$10,000.01 - 15,000.00 . . . . . . . . . . . 1 $ 14,986.64 0.04%
15,000.01 - 20,000.00 . . . . . . . . . . . 1 19,950.47 0.05
20,000.01 - 25,000.00 . . . . . . . . . . . 4 96,041.44 0.23
25,000.01 - 30,000.00 . . . . . . . . . . . 8 228,015.36 0.54
30,000.01 - 35,000.00 . . . . . . . . . . . 10 321,520.36 0.76
35,000.01 - 40,000.00 . . . . . . . . . . . 22 854,523.83 2.02
40,000.01 - 45,000.00 . . . . . . . . . . . 11 462,064.96 1.09
45,000.01 - 50,000.00 . . . . . . . . . . . 33 1,596,964.74 3.78
50,000.01 - 55,000.00 . . . . . . . . . . . 20 1,046,538.75 2.48
55,000.01 - 60,000.00 . . . . . . . . . . . 25 1,449,250.41 3.43
60,000.01 - 65,000.00 . . . . . . . . . . . 31 1,960,066.20 4.64
65,000.01 - 70,000.00 . . . . . . . . . . . 31 2,104,508.12 4.99
70,000.01 - 75,000.00 . . . . . . . . . . . 30 2,180,256.53 5.17
75,000.01 - 80,000.00 . . . . . . . . . . . 27 2,110,054.24 5.00
80,000.01 - 85,000.00 . . . . . . . . . . . 15 1,242,675.03 2.94
85,000.01 - 90,000.00 . . . . . . . . . . . 33 2,896,605.27 6.86
90,000.01 - 95,000.00 . . . . . . . . . . . 29 2,707,513.73 6.42
95,000.01 - 100,000.00 . . . . . . . . . . . 16 1,569,939.66 3.72
100,000.01 - 125,000.00 . . . . . . . . . . . 68 7,519,654.47 17.82
125,000.01 - 150,000.00 . . . . . . . . . . . 36 4,970,707.32 11.78
150,000.01 - 200,000.00 . . . . . . . . . . . 24 4,063,552.06 9.63
200,000.01 - 250,000.00 . . . . . . . . . . . 6 1,379,679.44 3.27
250,000.01 - 300,000.00 . . . . . . . . . . . 4 1,079,726.50 2.56
300,000.01 - 350,000.00 . . . . . . . . . . . 1 324,950.00 0.77
--- -------------- -------
Total . . . . . . . . . . . . . . . . . . . . . 486 $42,199,745.53 100.00%
==== ============== =======
DISTRIBUTION OF PROPERTY TYPES
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
Single Family........................................... 427 $37,140,655.99 88.01%
Two-to-Four Family...................................... 43 4,107,737.35 9.73
Condominium............................................. 11 673,154.67 1.60
Planned Unit Development................................ 5 278,197.52 0.66
---- -------------- -------
Total............................................... 486 $42,199,745.53 100.00%
==== ============== =======
DISTRIBUTION OF OCCUPANCY STATUS
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
Owner Occupied........................................... 456 $39,887,591.92 94.52%
Investor Property........................................ 25 2,019,165.18 4.78
Second Home.............................................. 5 292,988.43 0.69
--- -------------- -------
Total................................................ 486 $42,199,745.53 100.00%
==== ============== =======
S-17
DISTRIBUTION OF CURRENT MORTGAGE RATES
Aggregate % of Aggregate
Range of current Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
6.51 - 7.00%.......................... 3 $ 214,655.04 0.51%
7.01 - 7.50........................... 59 5,570,840.34 13.20
7.51 - 8.00........................... 80 6,986,542.06 16.56
8.01 - 8.50........................... 63 6,157,526.09 14.59
8.51 - 9.00........................... 72 6,874,813.38 16.29
9.01 - 9.50........................... 70 5,479,908.51 12.99
9.51 - 10.00........................... 61 5,129,073.48 12.15
10.01 - 10.50........................... 29 2,048,074.51 4.85
10.51 - 11.00........................... 32 2,523,564.41 5.98
11.01 - 11.50........................... 4 169,364.93 0.40
11.51 - 12.00........................... 9 716,628.43 1.70
12.01 - 12.50........................... 2 154,372.54 0.37
12.51 - 13.00........................... 1 84,489.00 0.20
13.51 - 14.00........................... 1 89,892.81 0.21
---- -------------- -------
Total.......................................... 486 $42,199,745.53 100.00%
==== ============== =======
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
Range of Aggregate % of Aggregate
Maximum Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
13.51 - 14.00%......................... 4 $ 294,447.73 0.70%
14.01 - 14.50.......................... 65 6,030,164.57 14.29
14.51 - 15.00.......................... 95 8,223,629.77 19.49
15.01 - 15.50.......................... 82 7,540,071.48 17.87
15.51 - 16.00.......................... 92 8,098,833.39 19.19
16.01 - 16.50.......................... 40 3,195,729.27 7.57
16.51 - 17.00.......................... 50 4,398,341.05 10.42
17.01 - 17.50.......................... 31 2,124,505.56 5.03
17.51 - 18.00.......................... 17 1,491,791.30 3.54
18.01 - 18.50.......................... 5 397,714.13 0.94
18.51 - 19.00.......................... 2 188,641.47 0.45
19.01 - 19.50.......................... 1 41,494.00 0.10
19.51 - 20.00.......................... 1 84,489.00 0.20
20.01 - 20.50.......................... 1 89,892.81 0.21
--- ------------- -------
Total....................................... 486 $42,199,745.53 100.00%
==== ============= =======
S-18
DISTRIBUTION OF MINIMUM MORTGAGE RATES
Range of Aggregate % of Aggregate
Minimum Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
6.51 - 7.00%............................. 3 $ 214,655.04 0.51%
7.01 - 7.50.............................. 59 5,570,840.34 13.20
7.51 - 8.00.............................. 80 6,986,542.06 16.56
8.01 - 8.50.............................. 63 6,157,526.09 14.59
8.51 - 9.00.............................. 72 6,874,813.38 16.29
9.01 - 9.50.............................. 70 5,479,908.51 12.99
9.51 - 10.00.............................. 61 5,129,073.48 12.15
10.01 - 10.50.............................. 29 2,048,074.51 4.85
10.51 - 11.00.............................. 33 2,584,027.67 6.12
11.01 - 11.50.............................. 4 169,364.93 0.40
11.51 - 12.00.............................. 8 656,165.17 1.55
12.01 - 12.50.............................. 2 154,372.54 0.37
12.51 - 13.00.............................. 1 84,489.00 0.20
13.51 - 14.00.............................. 1 89,892.81 0.21
--- --------------- ------
Total.......................................... 486 $42,199,745.53 100.00%
==== =============== =======
DISTRIBUTION OF MARGINS
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Margins Mortgage Loans Principal Balance Principal Balance
3.01 - 4.00%......................... 66 $ 5,842,105.61 13.84%
4.01 - 5.00.......................... 144 12,709,857.65 30.12
5.01 - 6.00.......................... 138 12,042,040.97 28.54
6.01 - 7.00.......................... 103 8,474,998.24 20.08
7.01 - 8.00.......................... 30 2,742,785.33 6.50
8.01 - 9.00.......................... 5 387,957.73 0.92
--- -------------- ------
Total...................................... 486 $42,199,745.53 100.00%
==== =============== ======
S-19
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Aggregate % of Aggregate
State Number of Initial Unpaid Unpaid
Mortgage Loans Principal Balance Principal Balance
Arizona.............................................. 15 $ 1,176,849.78 2.79%
California........................................... 79 9,481,543.99 22.47
Colorado............................................. 20 1,580,102.44 3.74
Connecticut.......................................... 1 49,902.52 0.12
District of Columbia................................. 7 670,438.31 1.59
Florida.............................................. 20 1,503,289.70 3.56
Georgia.............................................. 8 625,215.80 1.48
Illinois............................................. 59 4,496,190.94 10.65
Maryland............................................. 21 1,686,532.56 4.00
Massachusetts........................................ 28 2,188,461.56 5.19
Minnesota............................................ 20 1,376,610.76 3.26
New Jersey........................................... 63 4,799,578.96 11.37
New York............................................. 56 5,130,644.02 12.16
Ohio................................................. 10 680,106.59 1.61
Oregon............................................... 17 1,374,436.83 3.26
Pennsylvania......................................... 7 586,118.37 1.39
Utah................................................. 19 1,557,544.82 3.69
Virginia............................................. 11 1,146,896.72 2.72
Washington........................................... 25 2,089,280.86 4.95
--- -------------- ------
Total............................................ 486 $42,199,745.53 100.00%
==== =============== =======
Conveyance of Subsequent Mortgage Loans
The Sale and Servicing Agreement permits the Issuer to acquire
$12,400,254.47 in aggregate principal balance of Subsequent Mortgage Loans for
addition to the Trust Estate. Accordingly, the statistical characteristics of
the Mortgage Loan Pool will vary as of any Subsequent Cut-Off Date upon the
acquisition of Subsequent Mortgage Loans. Pursuant to the Sale and Servicing
Agreement, however, the Seller has covenanted to deliver Subsequent Mortgage
Loans for inclusion in the Trust Estate that will not materially change the
statistical characteristics of the Mortgage Loan Pool.
The obligation of the Issuer to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the satisfaction of the requirements set
forth in the Sale and Servicing Agreement.
Interest Payments on the Mortgage Loans
Each Mortgage Loan provides for monthly payments by the obligor (the
"Mortgagor") on the related Mortgage Note according to the actuarial method
("Actuarial Loans"). Actuarial loans provide that interest is charged to the
Mortgagors thereunder, and payments are due from such Mortgagors, as of a
scheduled day of each month which is fixed at the time of origination. Scheduled
monthly payments made by the Mortgagors on the actuarial loans either earlier or
later than the scheduled due dates thereof will not affect the amortization
schedule or the relative application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on a Note will be directly related to the rate of payment of
principal of the Mortgage Loans, including for this purpose voluntary payment in
full of Mortgage Loans prior to stated maturity (a "Prepayment"), liquidations
due to defaults, casualties and condemnations, and repurchases of Mortgage Loans
by the Seller or by the Note Insurer. The actual rate of principal prepayments
on pools of mortgage loans is influenced by a variety of economic, tax,
geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments may
differ among
S-20
pools of mortgage loans at any time because of specific factors relating to the
mortgage loans in the particular pool, including, among other things, the age of
the mortgage loans, the geographic locations of the properties securing the
loans, the extent of the mortgagors' equity in such properties, and changes in
the mortgagors' housing needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Notes will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments. Investors must make their own decisions as to
the appropriate prepayment assumptions to be used in deciding whether to
purchase any of the Notes. The Seller does not make any representations or
warranties as to the rate of prepayment or the factors to be considered in
connection with such determination.
Mandatory Prepayment
In the event that at the end of the Funding Period, not all of the
Original Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans
for inclusion in the Trust Estate, then the Owners of the Notes will receive a
partial prepayment on the Payment Date in April 1998.
Although no assurances can be given, the Seller expects that the
principal amount of Subsequent Mortgage Loans sold to the Issuer for inclusion
in the Trust Estate will require the application of substantially all the amount
on deposit in the Pre-Funding Account and that there should be no material
principal prepaid to the Owners of the Notes.
Projected Prepayments and Yields for Notes
If purchased at other than par, the yield to maturity on a Note will be
affected by the rate of the payment of principal of the Mortgage Loans. If the
actual rate of payments on the Mortgage Loans is slower than the rate
anticipated by an investor who purchases a Note at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the Mortgage Loans is faster than the rate
anticipated by an investor who purchases a Note at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield.
All of the Mortgage Loans are adjustable rate mortgage loans. As is the
case with conventional fixed rate mortgage loans, adjustable rate mortgage loans
may be subject to a greater rate of principal prepayments in a declining
interest rate environment. For example, if prevailing interest rates fall
significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance their adjustable rate mortgage loans to a
lower fixed interest rate. However, no assurance can be given as to the level of
prepayments that the Mortgage Loans will experience. The Seller does not believe
that data compiled by Fannie Mae or FHLMC is representative of the types of
borrowers included in the Seller's lending programs and cannot assure that such
prepayment experience is relevant to the Mortgage Loans.
As described under "Mortgage Loan Program" in the Prospectus, in
addition to direct origination, the Seller also purchases pools of Mortgage
Loans from Originators. The Seller has a policy of soliciting certain of the
Mortgagors from time to time with respect to such purchased Mortgage Loans for
refinancing. If any such Mortgage Loans are refinanced as a result, the
prepayment level of the Mortgage Loans may be increased over the level which
such Mortgage Loans would experience in the absence of such solicitations.
The prepayment behavior of the 2/28 or 2/13 Loans and the 3/27 Loans
may differ from that of the Six-Month LIBOR Loans. As a 2/28 or 2/13 Loan or a
3/27 Loan approaches its initial adjustment date, the borrower may become more
likely to refinance such loan to avoid an increase in the coupon rate, even if
fixed rate loans are only available at rates that are slightly lower or higher
than the coupon rate before adjustment. The existence of the applicable periodic
rate cap, lifetime cap and lifetime floor also may affect the likelihood of
prepayments resulting from refinancings.
The "Final Payment Date" for the Notes is April 20, 2028,
notwithstanding that certain Mortgage Loans have scheduled payment dates that
occur after such Final Payment Date. The weighted average life of the Notes is
likely to be shorter, and the actual final Payment Date with respect to the
Notes could occur significantly earlier than the Final Payment Date because (i)
Prepayments are likely to occur which shall be applied to the payment of the
Note Principal Balance, (ii) Net Monthly Excess Spread to the extent available
will be applied as an accelerated payment of principal on the Notes up to the
Specified Subordinated Amount and (iii) the Majority Residualholder or, in
limited
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circumstances, the Note Insurer, may cause a redemption of the Notes
when the aggregate outstanding principal balance of the Mortgage Loans in the
Trust Estate has declined to 10% or less of the Maximum Collateral Amount.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this Prospectus Supplement is
the Constant Prepayment Rate ("CPR") assumption. The CPR represents an assumed
constant rate of prepayment each month, expressed as an annual rate, relative to
the then outstanding principal balance on a pool of new mortgage loans for the
life of such Mortgage Loans. Such model does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
Seller believes that no existing statistics of which it is aware provide a
reliable basis for Owners of the Notes to predict the amount or the timing of
receipt of prepayments on the Mortgage Loans.
The tables entitled "Weighted Average Lives" have been prepared on the
basis of the following assumptions (collectively, the "Modeling Assumptions"):
(i) the Mortgage Loans prepay at the indicated CPR; (ii) payments on the Notes
are received, in cash, on the 20th day of each month, commencing in April 1998;
(iii) no defaults or delinquencies in, or modifications, waivers or amendments
respecting, the payment by the Mortgagors of principal and interest on the
Mortgage Loans occur; (iv) scheduled payments are assumed to be received on the
first day of each month commencing in April 1998 (or as set forth in the
following table) and prepayments represent payment in full of individual
Mortgage Loans and are assumed to be received on the last day of each month,
commencing in March 1998 (or as set forth in the following table) and include 30
days' interest thereon; (v) the level of Six-Month LIBOR remains constant at
5.6875% (vi) the Note Rate remains constant at 5.8975% per annum; (vii) the
Notes are purchased on March 27, 1998; (viii) the Mortgage Rate for each
Mortgage Loan is adjusted on its next Mortgage Rate change date (and on
subsequent Mortgage Rate change dates, if necessary) to equal the sum of (a) the
assumed level of the Six-Month LIBOR index and (b) the respective gross margin
(such sum being subject to the respective periodic adjustment, as applicable);
and (ix) the Mortgage Loans have the following characteristics:
Initial and Subsequent Mortgage Loans
Remaining Number of
Current Term to Months to Initial
Current Mortgage Rate Stated Next Mortgage Periodic Periodic
Principal Mortgage Net of Maturity Gross Rate Change Adjustment Adjustment
Balance Rate Servicing Fee (in months) Margin (in months) Cap Cap
- -------------- -------- ------------- --------- ------ ------------ -------- -----------
$ 9,626,945.95 8.377% 7.877% 344 5.161% 5 1.054% 1.054%
2,372,763.42 9.611 9.111 351 5.620 18 3.000 1.000
6,960,168.14 9.746 9.246 353 6.000 21 3.000 1.007
297,198.02 9.179 8.679 357 4.900 33 3.000 1.000
9,986,627.00 (1) 8.711 8.211 353 5.122 6 1.022 1.022
11,432,918.00 (2) 8.718 8.218 350 5.394 6 1.000 1.000
1,523,125.00 (3) 9.063 8.563 351 6.108 6 1.000 1.000
2,800,567.47 (3) 9.746 9.246 348 6.000 6 1.007 1.007
9,599,687.00 (3) 8.500 8.000 360 5.000 6 1.000 1.000
- --------------------------
(1) Interest only through March 1998. Commencing in April 1998, assumed to
be a single mortgage loan with the characteristics stated above.
Scheduled payments are assumed to be received on the first day of each
month commencing in May 1998. Prepayments are to be received on the
last day of each month commencing in April 1998 and include 30 days'
interest thereon. During the first Accrual Period, interest is assumed
to be available at the Mortgage Rate net of the Servicing Fee.
(2) Interest only through April 1998. Commencing in May 1998, assumed to
be a single mortgage loan with the characteristics stated above.
Scheduled payments are assumed to be received on the first day of each
month commencing in June 1998. Prepayments are to be received on the
last day of each month commencing in May 1998 and include 30 days'
interest thereon. During the first two Accrual Periods, interest is
assumed to be available at the Mortgage Rate net of the Servicing Fee.
(3) Interest only through May 1998. Commencing in June 1998, assumed to be
a single mortgage loan with the characteristics stated above. Scheduled
payments are assumed to be received on the first day of each month
commencing in July 1998. Prepayments are to be received on the last day
of each month commencing in June 1998 and include 30 days' interest
thereon. During the first three Accrual Periods, interest is assumed to
be available at the Mortgage Rate net of the Servicing Fee.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Note until each dollar of principal of
such Note will be repaid to the investor. The weighted average life of the Notes
will be influenced by the rate at which principal payments on the Mortgage Loans
are paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, liquidations due to
default or early liquidation of the Trust Estate). The weighted average lives of
the Notes also will be influenced by the overcollateralization of the Notes
because collections otherwise payable to the Residual Interest are applied as
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principal prepayments to the Notes until the outstanding aggregate principal
balance of the Notes is less than the aggregate outstanding principal balance of
the Mortgage Loans by the Specified Subordinated Amount. These prepayments have
the effect of accelerating the amortization of the Notes, thereby shortening
their respective weighted average lives.
Based on the foregoing Modeling Assumptions, the table below
indicates the weighted average life of the Notes, assuming that the Mortgage
Loans prepay according to the indicated percentages of the CPR:
Weighted Average Lives
Weighted
Average Life Earliest Retirement
CPR (years)(1) Date(1)
--- ------------ -------------------
0% . . . . . . . . . . . . 20.99 September 20, 2026
21% . . . . . . . . . . . . 3.73 October 20, 2007
30% . . . . . . . . . . . . 2.54 September 20, 2004
33% . . . . . . . . . . . . 2.29 January 20, 2004
39% . . . . . . . . . . . . 1.88 December 20, 2002
- ------------------
(1) Assuming early termination of the Trust at the Clean-Up Call Date.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage pool and
the Mortgaged Properties is based upon the pool of Initial Mortgage Loans as
constituted at the close of business on the Cut-Off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the issuance
of the Notes, Initial Mortgage Loans may be removed from the mortgage pool as a
result of incomplete documentation or non-compliance with representations and
warranties set forth in the Sale and Servicing Agreement, if the Seller deems
such removal necessary or appropriate. A limited number of other mortgage loans
may be included in the mortgage pool prior to the issuance of the Notes.
A current report on Form 8-K will be available to purchasers of the
Notes and will be filed with the Commission within fifteen days after the
initial issuance of the Notes and incorporated by reference to the Registration
Statement, together with the Sale and Servicing Agreement, the Trust Agreement
and the Indenture. In the event Initial Mortgage Loans are removed from or added
to the mortgage pool as set forth in the preceding paragraph, such removal or
addition will be noted in the current report on Form 8-K. Also, the Seller has
filed certain additional yield tables and other computational materials with
respect to the Notes with the Commission in a report on Form 8-K. Such tables
and materials were prepared at the request of certain prospective investors,
based on assumptions provided by, and satisfying the special requirements of,
such prospective investors. Such tables and assumptions may be based on
assumptions that differ from the Modeling Assumptions. Accordingly, such tables
and other materials may not be relevant to or appropriate for investors other
than those specifically requesting them.
DESCRIPTION OF THE NOTES
General
The Issuer will issue the Notes pursuant to the Indenture. The Issuer
will also issue the Residual Interest pursuant to the Trust Agreement, which
represents the residual ownership interest in the Trust Estate. The summaries of
certain provisions of the Indenture, the Sale and Servicing Agreement and the
Trust Agreement (collectively, the "Agreements") set forth below under the
caption "Administration" herein, while complete in material respects, do not
purport to be exhaustive. For more details regarding the terms of the
Agreements, prospective investors in the Notes are advised to review the
Agreements, a copy of each of which the Seller will provide (without exhibits)
without charge upon written request addressed to the Seller.
The Notes will be secured by the Trust Estate created by the Indenture.
The Notes represent non-recourse obligations of the Issuer and proceeds of the
assets in the Trust Estate will be the sole source of payments of the Notes. The
Notes will not represent an interest in or obligation of the Seller, the
Servicer, the Note Insurer, the Owner Trustee, the Indenture Trustee, the
Underwriter, any of their respective affiliates or any other entity.
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" of the Notes as
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the term "Owner" is used in the Agreements will be Cede. No Owner will be
entitled to receive a definitive certificate representing such person's interest
in the Trust Estate, except in the event that physical Notes are issued under
limited circumstances set forth in the Indenture. All references herein to the
Owners of Notes shall mean and include the rights of Owners as such rights may
be exercised through DTC and its participating organizations, except as
otherwise specified in the Agreements.
One-hundred percent of the Monthly Payment Amount due to the Owners of
the Notes on each Payment Date is insured by the Note Insurer pursuant to the
Note Insurance Policy. See "The Note Insurance Policy and the Note Insurer"
herein.
Payment Dates
The Sale and Servicing Agreement will require that the Indenture
Trustee create and maintain a Note Account, to be established as a trust account
held by the trust department of the Indenture Trustee (the "Note Account"). All
funds in the Note Account shall be invested and reinvested by the Indenture
Trustee for the benefit of the related Owners and the Note Insurer, as directed
by the Servicer, in Eligible Investments.
Two business days prior to the related Payment Date (or, if such day is
not a business day, the immediately preceding business day) (the "Remittance
Date") the Servicer is required to withdraw from the Principal and Interest
Account and remit to the Indenture Trustee, for deposit in the Note Account, the
Monthly Remittance Amount. The Monthly Remittance Amount is equal to (a) the sum
of (i) the balance on deposit in the Principal and Interest Account as of the
close of business on the related Determination Date, (ii) all Delinquency
Advances and Compensating Interest (collectively, the "Advances") and (iii)
certain amounts required to be deposited by the Servicer in the Note Account,
including Loan Purchase Prices and Substitution Amounts, reduced by (b) the sum
of (i) scheduled payments on the Mortgage Loans collected but due after the
related Due Date, (ii) reinvestment income on amounts in the Principal and
Interest Account, (iii) all amounts reimbursable to the Servicer and (iv) any
unscheduled payments, including Mortgagor prepayments on the Mortgage Loans,
Insurance Proceeds and Net Liquidation Proceeds occurring in the month of such
Payment Date. With respect to any Payment Date, (i) the Due Date is the first
day of the month in which such Payment Date occurs, and (ii) the Determination
Date is the 12th day of the month in which such Payment Date occurs or, if such
day is not a business day, the immediately preceding business day. "Remittance
Period" means, the period beginning on the first day of the calendar month
immediately preceding the month in which the related Remittance Date occurs and
ending on the last day of such month. See "The Pooling and Servicing Agreement
- -- Servicing and Other Compensation and Payment of Expenses; Originator's
Retained Yield" in the Prospectus.
The Compensating Interest for any Payment Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the related
net Mortgage Rates) resulting from principal prepayments in full on the Mortgage
Loans received in the corresponding Remittance Period. Such shortfalls will
result because interest on prepayments in full is distributed only to the date
of prepayment. The Servicer will be obligated to apply amounts otherwise payable
to it as servicing compensation in any month to cover any shortfalls in
collections of one full month's interest at the applicable net Mortgage Rate
resulting from principal prepayments in full. The Servicer is not obligated to
cover any shortfalls in collections of interest for prepayments in part. Such
prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loan as of the Due Date in the month of prepayment.
Payments
Payments on the Notes will be made on each Payment Date to Owners of
record of the Notes as of the immediately preceding Record Date in an amount
equal to the product of such Owner's Percentage Interest and the amount
distributed in respect of the Notes on such Payment Date.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Sale and
Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Spread be applied on such Payment Date as an accelerated payment of principal on
the Notes, but only to the limited extent hereafter described. The Net Monthly
Excess Spread equals (i) the excess (such excess being the "Total Monthly Excess
Spread"), if any, of (x) the interest which is collected on the Mortgage Loans
during a Remittance Period and with respect to Due Dates occurring in the month
in which such Payment Date occurs (net of the Servicing Fee and of certain
miscellaneous administrative amounts) plus the interest portion of any
Delinquency Advances and Compensating Interest over (y) the sum of (I) Current
Interest and (II) the Fees and Expenses, minus (ii) any portion of the Total
Monthly Excess Spread which is used to cover any shortfalls in Available Funds
on such Payment Date, or used to reimburse the Note Insurer on account of prior
Insured Payments.
S-24
Pursuant to the Sale and Servicing Agreement, Net Monthly Excess Spread
is required to be applied as a payment of principal on the Notes until the
Subordinated Amount has increased to the level required. "Subordinated Amount"
means, with respect to any Payment Date, the difference, if any, between (x) the
sum of (i) the aggregate principal balances of the Mortgage Loans as of the
close of business on the last day of the preceding Remittance Period after
taking into account payments of scheduled principal on the Mortgage Loans due on
the Due Date which immediately follows the last day of such Remittance Period
and (ii) any amount on deposit in the Pre-Funding Account less any Pre-Funding
Account Earnings at such time and (y) the Note Principal Balance as of such
Payment Date (and assuming all payments are made on such Payment Date). Any
amount of Net Monthly Excess Spread actually applied as a payment of principal
is a "Subordination Increase Amount". The required level of the Subordinated
Amount with respect to a Payment Date is the "Specified Subordinated Amount"
with respect to such Payment Date. The Sale and Servicing Agreement generally
provides that the Specified Subordinated Amount may, over time, decrease, or
increase, subject to certain floors, caps and triggers.
The application of Net Monthly Excess Spread to principal has the
effect of accelerating the amortization of the Notes relative to the
amortization of the Mortgage Loans. To the extent that any Net Monthly Excess
Spread is not so used, the Sale and Servicing Agreement provides that it will be
used to reimburse the Servicer or Indenture Trustee with respect to any amounts
owing to each, or paid to the Owners of the Residual Interest.
In the event that the required level of the Specified Subordinated
Amount is permitted to decrease or "step down" on a Payment Date in the future,
the Sale and Servicing Agreement provides that a portion of the principal which
would otherwise be distributed to the Owners of the Notes on such Payment Date
shall be distributed to the Owners of the Residual Interest on such Payment
Date. This has the effect of decelerating the amortization of the Notes relative
to the amortization of the Mortgage Loans, and of reducing the Subordinated
Amount. "Excess Subordinated Amount" means, with respect to any Payment Date,
the difference, if any, between (x) the Subordinated Amount that would apply on
such Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of Subordination Reduction Amounts as
described in this paragraph) and (y) the Specified Subordinated Amount for such
Payment Date. If, on any Payment Date, the Excess Subordinated Amount is, or,
after taking into account all other distributions to be made on such Payment
Date would be, greater than zero (i.e., the Subordinated Amount is or would be
greater than the Specified Subordinated Amount), then any amounts relating to
principal which would otherwise be distributed to the Owners of the Notes on
such Payment Date shall instead be distributed to the Owners of the Residual
Interest in an amount equal to the lesser of (x) the Excess Subordinated Amount
and (y) the amount available for distribution on account of principal with
respect to such Payment Date; such amount being the "Subordination Reduction
Amount" with respect to such Payment Date. As a technical matter regarding the
cash flow structure, Subordination Reduction Amounts may result even prior to
the occurrence of any decrease or "step down" in the Specified Subordinated
Amount. This is because the Owners of the Notes will generally be entitled to
receive 100% of collected principal, even though the Note Principal Balance
will, following the accelerated amortization resulting from the application of
the Net Monthly Excess Spread, represent less than 100% of the aggregate
scheduled principal balance. In the absence of the provisions relating to the
Subordination Reduction Amount, the foregoing may otherwise increase the
Subordinated Amount above its Specified Subordinated Amount requirement even
without the further application of any Net Monthly Excess Spread.
The Sale and Servicing Agreement provides that, on any Payment Date all
amounts (subject to the discussion in the preceding paragraph) collected on
account of principal (including the principal portion of any Delinquency
Advances and other than any such amount applied to the payment of a
Subordination Reduction Amount) during the prior Remittance Period together with
principal due on the Due Date which immediately follows the last day of such
Remittance Period will be distributed to the Owners of the Notes on such Payment
Date. If any Mortgage Loan became a Liquidated Mortgage Loan during such prior
Remittance Period, the Net Liquidation Proceeds related thereto and allocated to
principal may be less than the principal balance of the related Mortgage Loan;
the amount of any such insufficiency is a "Realized Loss." In addition, the Sale
and Servicing Agreement provides that the principal balance of any Mortgage Loan
which becomes a Liquidated Mortgage Loan shall thenceforth equal zero. The Sale
and Servicing Agreement does not contain any rule which requires that the amount
of any Realized Loss be distributed to the Owners of the Notes on the Payment
Date which immediately follows the event of loss; i.e., the Sale and Servicing
Agreement does not require the current recovery of losses. However, the
occurrence of a Realized Loss will reduce the Subordinated Amount, which, to the
extent that such reduction causes the Subordinated Amount to be less than the
Specified Subordinated Amount applicable to the related Payment Date, will
require the payment of a Subordination Increase Amount on such Payment Date (or,
if insufficient funds are available on such Payment Date, on subsequent Payment
Dates, until the Subordinated Amount equals the Specified Subordinated Amount).
The effect of the foregoing is to allocate losses to the Owners of the Residual
Interest by reducing, or eliminating entirely, payments of Monthly Excess Cash
Flow and of Subordination Reduction Amounts which such Owners would otherwise
receive.
Overcollateralization and the Note Insurance Policy. The Sale and
Servicing Agreement defines a "Subordination Deficit" with respect to a Payment
Date to be the amount, if any, by which (x) the Note Principal
S-25
Balance after taking into account all payments to be made on such Payment Date,
exceeds (y) the sum of (i) the aggregate principal balances of the Mortgage
Loans as of the close of business on the Due Date which immediately follows the
last day of the prior Remittance Period and (ii) the amount, if any, on deposit
in the Pre-Funding Account less any Pre-Funding Account Earnings on the last day
of the related Remittance Period. The Sale and Servicing Agreement requires the
Indenture Trustee to make a claim for an Insured Payment under the Note
Insurance Policy not later than the business day prior to any Payment Date as to
which the Indenture Trustee has determined that a Subordination Deficit will
occur for the purpose of applying the proceeds of such Insured Payment as a
payment of principal to the Owners of the Notes on such Payment Date. The Note
Insurance Policy is thus similar to the subordination provisions described above
insofar as the Note Insurance Policy guarantees ultimate, rather than current,
payment of the amounts of any Realized Losses to the Owners of the Notes.
Investors in the Notes should realize that, under extreme loss or delinquency
scenarios applicable to the related Mortgage Loan Pool, they may temporarily
receive no distributions of principal.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the subordination provisions and
by the Note Insurance Policy is protection for credit risk and not for
prepayment risk. The subordination provisions may not be adjusted, nor may a
claim be made under the Note Insurance Policy to guarantee or insure that any
particular rate of prepayment is experienced by the Mortgage Loan Pool.
Payments and Insured Payments to the Owners of the Notes
No later than three Business Days prior to each Payment Date the
Indenture Trustee will be required to determine the amounts to be on deposit in
the Note Account on such Payment Date and equal to the sum of (x) such amounts
excluding the amount of any Total Monthly Excess Cashflow amounts included in
such amounts, plus (y) any deposit to the Note Account from the Pre-Funding
Account and Capitalized Interest Account expected to be made in accordance with
the Sale and Servicing Agreement. The amounts described in clause (x) of the
preceding sentence are the "Available Funds," the sum of the amounts described
in clauses (x) and (y) of the preceding sentence are the "Total Available
Funds." If on any Payment Date the Monthly Payment Amount exceeds the Total
Available Funds for such Payment Date, the Indenture Trustee will be required to
draw the amount of such insufficiency from the Note Insurer under the Note
Insurance Policy. The Indenture Trustee will be required to deposit to the Note
Account the amount of any Insured Payment made by the Note Insurer. The Sale and
Servicing Agreement provides that amounts which cannot be distributed to the
Owners of the Notes as a result of proceedings under the United States
Bankruptcy Code or similar insolvency laws will not be considered in determining
the amount of Total Available Funds with respect to any Payment Date.
On each Payment Date, and following the making by the Indenture Trustee
of all allocations, transfers and deposits heretofore described under this
caption, from amounts (including any related Insured Payment) then on deposit in
the Note Account, the Indenture Trustee will be required to distribute to the
Owners of the Notes, the Monthly Payment Amount for such Payment Date, together
with any portion of any Available Funds Cap Carry-Forward Amount to be funded on
such Payment Date.
Pre-Funding Account
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Indenture Trustee for the benefit of the Owners of the Notes and the Note
Insurer and shall be part of the Trust Estate. During the Funding Period, the
Pre-Funded Amount will be maintained in the Pre-Funding Account. The Original
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Mortgage Loans for addition to the Trust
Estate in accordance with the Sale and Servicing Agreement. Any Pre-Funded
Amount remaining at the end of the Funding Period will be distributed to the
Owners of the Notes in accordance with the terms of the Sale and Servicing
Agreement on the Payment Date that immediately follows the end of the Funding
Period in reduction of the Note Principal Balance of such Owner's Notes, thus
resulting in a principal prepayment of the Notes.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on amounts
on deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the Funding Period.
Capitalized Interest Account
On the Closing Date, cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Indenture
Trustee and shall be part of the Trust Estate. The amount on deposit in the
S-26
Capitalized Interest Account, including reinvestment income thereon and amounts
deposited thereto from the Pre-Funding Account, will be used by the Indenture
Trustee to fund the excess, if any, of (i) the sum of (a) the aggregate amount
of interest accruing at the Note Rate on the amount by which the aggregate Note
Principal Balance of the Notes exceeds the aggregate principal balance of the
Initial Mortgage Loans plus (b) the Indenture Trustee Fee and the Owner Trustee
Fee over (ii) the amount of any Pre-Funding Account Earnings; such amounts on
deposit will be so applied by the Indenture Trustee on each Payment Date in the
Funding Period to fund such excess, if any. Any amounts remaining in the
Capitalized Interest Account at the end of the Funding Period and not needed for
such purpose will be paid to the Seller and will not thereafter be available for
distribution to the Owners of the Notes.
Calculation of LIBOR
On the second business day preceding each Payment Date, or in the case
of the first Payment Date (each such date, an "Interest Determination Date"),
the Indenture Trustee will determine the London interbank offered rate for
one-month U.S. dollar deposits ("LIBOR") for the next Accrual Period for the
Notes on the basis of the offered rates of the Reference Banks for one-month
U.S. dollar deposits, as such rates appear on the Telerate Page 3750, as of
11:00 a.m. (London time) on such Interest Determination Date. As used in this
section, "business day" means a day on which banks are open for dealing in
foreign currency and exchange in London and New York City; "Telerate Page 3750"
means the display page currently so designated on the Dow Jones Telerate Service
(or such other page as may replace that page on that service for the purpose of
displaying comparable rates or prices); and "Reference Banks" means leading
banks selected by the Indenture Trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on the
Telerate Page 3750 on the Interest Determination Date in question, (iii) which
have been designated as such by the Indenture Trustee and (iv) not controlling,
controlled by, or under common control with, the Seller or any Originator.
On each Interest Determination Date, LIBOR for the related Accrual
Period for the Notes will be established by the Indenture Trustee as follows:
(a) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations,
LIBOR for the related Accrual Period for the Notes
shall be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the
nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations,
LIBOR for the related Accrual Period for the Notes
shall be the higher of (x) LIBOR as determined on the
previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate"
shall be the rate per annum that the Indenture
Trustee determines to be either (i) the arithmetic
mean (rounded upwards if necessary to the nearest
whole multiple of 0.0625%) of the one-month U.S.
dollar lending rates which New York City banks
selected by the Indenture Trustee are quoting on the
relevant Interest Determination Date to the principal
London offices of leading banks in the London
interbank market or, in the event that the Indenture
Trustee can determine no such arithmetic mean, (ii)
the lowest one-month U.S. dollar lending rate which
New York City banks selected by the Indenture Trustee
are quoting on such Interest Determination Date to
leading European banks.
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 related Accrual Period shall (in the
absence of manifest error) be final and binding.
Book Entry Registration of the Notes
The Notes will be book-entry Notes (the "Book-Entry Notes"). Beneficial
Owners may elect to hold their Book-Entry Notes directly through DTC in the
United States, or Cedel or Euroclear (in Europe) if they are participants of
such systems ("Participants"), or indirectly through organizations which are
Participants. The Book-Entry Notes will be issued in one or more Notes which in
the aggregate equal the principal balance of such Notes and will initially be
registered in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear
will hold omnibus positions on behalf of their Participants through customers'
securities accounts in Cedel's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
will act as depositary for Cedel and Chase will act as depositary for Euroclear
(in such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Notes in minimum denominations representing principal amounts of
$1,000
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and in integral multiples in excess thereof. Except as described below,
no Beneficial Owner will be entitled to receive a physical certificate
representing such Note (a "Definitive Note"). Unless and until definitive Notes
are issued, it is anticipated that the only "Owner" of such Book-Entry Notes
will be Cede & Co., as nominee of DTC. Beneficial Owners will not be Owners as
that term is used in the Sale and Servicing Agreement. Beneficial Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Note will be recorded on the records
of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Notes from the Indenture Trustee through DTC and DTC
Participants. While such Notes are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
such Notes and is required to receive and transmit distributions of principal
of, and interest on, such Notes. Participants and indirect participants with
whom Beneficial Owners have accounts with respect to Book-Entry Notes are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess certificates, the Rules provide a
mechanism by which Beneficial Owners will receive distributions and will be able
to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Beneficial Owners who are not Participants may transfer ownership of
Notes only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer such Notes, by book-entry
transfer, through DTC for the account of the purchasers of such Notes, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of such Notes
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Notes, see "Certain Federal Income Tax
Consequences -- Backup Withholding" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Notes, whether held for its own
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account or as a nominee for another person. In general, beneficial ownership of
Book-Entry Notes will be subject to the rules, regulations and procedures
governing DTC and DTC Participants as in effect from time to time.
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more than
five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear Securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is a branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Notes will be made on each Payment Date
by the Indenture Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Notes that it represents and to each Financial Intermediary for which
it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Notes that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede. Distributions with respect to
Notes held through Cedel or Euroclear will be credited to the cash accounts of
Cedel Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Notes to persons or entities that do not participate in the
Depository system, or otherwise take actions in
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respect of such Book-Entry Notes, may be limited due to the lack of physical
certificates for such Book-Entry Notes. In addition, issuance of the Book-Entry
Notes in book-entry form may reduce the liquidity of such Notes in the secondary
market since certain potential investors may be unwilling to purchase Notes for
which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Estate provided by the Servicer
to Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes of such Beneficial Owners are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Sale and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Notes are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry Notes.
Cedel or the Euroclear Operator, as the case may be, will take any action
permitted to be taken by an Owner under the Indenture on behalf of a Cedel
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related Participants, with respect to some Notes which conflict with
actions taken with respect to other Notes.
None of the Seller, the Issuer, the Servicer, the Owner Trustee or the
Indenture Trustee will have any responsibility for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Book-Entry Notes held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Definitive Notes will be issued to Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, only if (a) DTC or the Seller
advises the Indenture Trustee and the Note Insurer in writing that DTC is no
longer willing, qualified or able to discharge properly its responsibilities as
a nominee and depository with respect to the Book-Entry Notes and the Seller or
the Indenture Trustee is unable to locate a qualified successor, (b) the Seller,
at its sole option, elects to terminate a book-entry system through DTC or (c)
DTC, at the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Notes, advises the Indenture Trustee in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners and the Note Insurer of the occurrence of such event and the
availability through DTC of Definitive Notes. Upon surrender by DTC of the
global certificate or certificates representing the Book-Entry Notes and
instructions for re-registration, the Indenture Trustee will issue Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as Owners under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of the Notes among Participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Certain Activities
The Issuer has not and will not: (i) issue securities (except for the
Notes and the Residual Interest); (ii) borrow money (except for the Notes);
(iii) make loans; (iv) invest in securities for the purpose of exercising
control; (v) underwrite securities; (vi) except as provided in the Sale and
Servicing Agreement, engage in the purchase and sale (or turnover) of
investments; (vii) offer securities in exchange for property (except the
Residual Interests for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Description of the Securities -- Reports To
Securityholders" in the Prospectus for information regarding reports to the
Owners.
THE SELLER
The Seller, First Alliance Mortgage Company, was incorporated in the
State of California on May 13, 1975. The Seller has been actively involved in
the mortgage lending business since its founding. In July 1996, the Seller
became a wholly owned subsidiary of First Alliance Corporation ("FACO") pursuant
to a reorganization in connection with the initial public offering of the Class
A Common Stock of FACO. The Seller and all of its predecessors have been located
in Orange County, California. All Mortgage Loans included in the Trust Estate
were originated in the United States and are secured by Mortgaged Properties
located in the United States.
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The Seller maintains its corporate headquarters at 17305 Von Karman
Avenue, Irvine, California 92614-6203. Its telephone number is (714) 224-8500.
THE NOTE INSURANCE POLICY AND THE NOTE INSURER
The following information has been supplied by the Note Insurer for
inclusion in this Prospectus Supplement.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Note Insurance Policy, thereby unconditionally and
irrevocably guarantees to any Owner (as defined below) that an amount equal to
each full and complete Insured Payment will be received by the Indenture
Trustee, or its successor, as trustee for the Owners, on behalf of the Owners
from the Note Insurer, for distribution by the Indenture Trustee to each Owner
of each Owner's proportionate share of the Insured Payment. The Note Insurer's
obligations under the Note Insurance Policy with respect to a particular Insured
Payment shall be discharged to the extent funds equal to the applicable Insured
Payment are received by the Indenture Trustee, whether or not such funds are
properly applied by the Indenture Trustee. Insured Payments shall be made only
at the time set forth in the Note Insurance Policy and no accelerated Insured
Payments shall be made regardless of any acceleration of the Notes, unless such
acceleration is at the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Note Insurance Policy does
not cover shortfalls, if any, attributable to the liability of the Issuer or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Note Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Note Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Note Insurer,
irrevocably assigning to the Note Insurer all rights and claims of the Owner
relating to or arising under the Notes against the debtor which made such
preference payment or otherwise with respect to such preference payment and (iv)
appropriate instruments to effect the appointment of the Note Insurer as agent
for such Owner in any legal proceeding related to such preference payment, such
instruments 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. Such
payments shall be disbursed to the receiver or trustee in bankruptcy named in
the final order of the court exercising jurisdiction on behalf of the Owner and
not to such Owner directly unless such Owner has returned principal or interest
paid on the Notes to any receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Note Insurer will pay any other amount payable under the Note
Insurance Policy no later than 12:00 noon New York City time on the later of the
Payment Date on which the Monthly Payment Amount is due or the Business Day
following receipt in New York, New York on a Business Day by its fiscal agent
(the "Fiscal Agent") of a Notice (as described below); provided that if such
Notice is received after 12:00 noon New York City time on such Business Day, it
will be deemed to be received on the following Business Day. If any such Notice
received by the Fiscal Agent is not in proper form or is otherwise insufficient
for the purpose of making claim under the related Note Insurance Policy it shall
be deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Note Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Indenture Trustee and the Indenture Trustee may submit an
amended Notice.
Insured Payments due under the Note Insurance Policy unless otherwise
stated in the Note Insurance Policy will be disbursed by the Fiscal Agent to the
Indenture Trustee on behalf of Owners by wire transfer of immediately available
funds in the amount of the Insured Payment less, in respect of Insured Payments
related to Preference Amounts, any amount held by the Indenture Trustee for the
payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal
Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or
any failure of the Note Insurer to deposit, or cause to be deposited, sufficient
funds to make payments due under the Note Insurance Policy.
Subject to the terms of the Agreement, the Note Insurer shall be
subrogated to the rights of each Owner to receive payments under the Notes to
the extent of any payment by the Note Insurer under the Note Insurance Policy.
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As used in the Note Insurance Policy, the following terms shall have
the following meanings:
"Agreement" means the Sale and Servicing Agreement dated as of
March 1, 1998 among First Alliance Mortgage Company, as Seller and
Servicer, First Alliance Mortgage Loan Trust 1998-1A, as Issuer and The
Chase Manhattan Bank, as Indenture Trustee, without regard to any
amendment or supplement thereto unless the Note Insurer shall have
consented in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which the Note Insurer or banking institutions in New York
City or in the city in which the corporate trust office of the
Indenture Trustee under the Agreement is located are authorized or
obligated by law or executive order to close.
"Insured Payment," as to any Payment Date, will equal the sum
of (i) the excess, if any, of (a) the Current Interest over (b) the
Total Available Funds (after deducting the amount necessary to pay Fees
and Expenses), (ii) the Subordination Deficit, if any, (iii) the
Preference Amount and (iv) as to (a) the Final Payment Date and (b) the
first Payment Date following the acceleration of the Notes at the
written direction or with the written consent of the Note Insurer, in
its sole discretion, an amount sufficient, after the application of
Total Available Funds, to reduce the Note Principal Balance to zero and
to pay any accrued and unpaid interest thereon. Insured Payments do not
include the payment of any Available Funds Cap Carry-Forward Amounts.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of the
exhibit attached to the Note Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be due and
owing on the applicable Payment Date.
"Owner" means each Owner of a Note (as defined in the
Agreement) who, on the applicable Payment Date, is entitled under the
terms of the Note to payment thereunder.
"Preference Amount" means any amount previously distributed to
an Owner on a Note that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Note Insurance Policy and not otherwise
defined therein shall have the respective meanings set forth in the Agreement as
of the date of execution of the Note Insurance Policy, without giving effect to
any subsequent amendment or modification to the Agreement unless such amendment
or modification has been approved in writing by the Note Insurer.
Any notice under the Note Insurance Policy or service of process on the
Fiscal Agent may be made at the address listed below for the Fiscal Agent of the
Note Insurer or such other address as the Note Insurer shall specify in writing
to the Indenture Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Note Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE NOTE INSURANCE POLICY IS NOT COVERED BY
THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Note Insurance Policy is not cancelable for any reason. The
premiums on the Note Insurance Policy are not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Notes.
The Note Insurer is the principal operating subsidiary of MBIA Inc., a
New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Note Insurer. The Note Insurer is domiciled in
the State of New York and licensed to do business in, and is subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. The Note
Insurer has two European
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branches, one in the Republic of France and the other in the Kingdom of Spain.
New York has laws prescribing minimum capital requirements, limiting classes and
concentrations of investments and requiring the approval of policy rates and
forms. State laws also regulate the amount of both the aggregate and individual
risks that may be insured, the payment of dividends by the Note Insurer, changes
in control and transactions among affiliates. Additionally, the Note Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC"), a New York domiciled
financial guarantee insurance company, through a merger with its parent CapMAC
Holdings Inc. MBIA Inc. then contributed the common stock of CMAC to the
Insurer. Pursuant to a reinsurance agreement, CMAC has ceded all of its net
insured risks, as well as its unearned premiums and contingency reserves, to the
Note Insurer and the Note Insurer has reinsured CMAC's net outstanding exposure.
MBIA Inc. is not obligated to pay the debts of or claims against CMAC.
The consolidated financial statements of the Note Insurer, a
wholly-owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1996 and December 31, 1995 and for each of the three years in the period ended
December 31, 1996, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the year
ended December 31, 1996 and the consolidated financial statements of the Note
Insurer and its subsidiaries as of September 30, 1997 and for the nine month
periods ended September 30, 1997 and September 30, 1996, included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ending September 30,
1997, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such 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 its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Note
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
SAP
-----------------------------
December 31, September 30,
1996 1997
(Audited) (Unaudited)
(In millions)
Admitted Assets.................. $4,476 $5,165
Liabilities...................... 3,009 3,457
Capital and Surplus.............. 1,467 1,708
GAAP
-----------------------------
December 31, September 30,
1996 1997
(Audited) (Unaudited)
(In millions)
Assets............................ $5,066 $5,819
Liabilities....................... 2,262 2,594
Shareholder's Equity.............. 2,804 3,225
Copies of the financial statements of the Note Insurer incorporated
by reference herein and copies of the Note Insurer's 1996 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Note Insurer is (914) 273-4545.
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The Note Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted heretofrom, other than with respect to the accuracy
of the information regarding the Note Insurance Policy and Note Insurer set
forth under the heading "The Note Insurance Policy and the Note Insurer."
Additionally, the Note Insurer makes no representations regarding the Notes or
the advisability of investing in the Notes.
Moody's rates the claims paying ability of the Note Insurer and CMAC
"Aaa."
Standard & Poor's rates the claims paying ability of the Note Insurer
and CMAC "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the claims paying ability of the Note Insurer "AAA." (CMAC has not
requested a rating from Fitch IBCA, Inc.)
Each rating of the Notes should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Notes, and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Notes. The Note
Insurer does not guaranty the market price of the Notes, nor does it guaranty
that the ratings on the Note Insurer will not be revised or withdrawn.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust
Agreement. The Owner Trustee is a Delaware banking corporation and its principal
offices are located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of
the Owner Trustee will be under any liability to the Issuer or the Owners under
the Trust Agreement under any circumstances, except for the Owner Trustee's own
misconduct, gross negligence, bad faith or grossly negligent failure to act or
in the case of the inaccuracy of certain representations made by the Owner
Trustee in the Trust Agreement. All persons into which the Owner Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
THE INDENTURE TRUSTEE
The Chase Manhattan Bank, a New York banking company, will act as
Indenture Trustee. A copy of the Indenture will be provided by the Indenture
Trustee without charge upon written request. Requests should be addressed to the
Indenture Trustee at 450 West 33rd Street, 15th Floor, New York, New York 10001,
Attention: First Alliance Mortgage Loan Trust 1998-1A.
ADMINISTRATION
In addition to the provisions of the Agreements summarized elsewhere
in this Prospectus Supplement, there is set forth below a summary of certain
other provisions of the Agreements.
Formation of the Issuer
On the Closing Date, the Issuer will be created and established
pursuant to the Trust Agreement. On such date, the Seller will sell without
recourse the Initial Mortgage Loans to the Issuer and the Issuer will issue the
Notes to the Owners thereof pursuant to the Indenture.
Sale of Mortgage Loans
On the Closing Date the Seller will sell without recourse to the
Issuer all right, title and interest of the Seller in each Mortgage Loan listed
on the related schedules of the Mortgage Loans delivered to the Indenture
Trustee, prior to the Closing Date with respect to the Initial Mortgage Loans
and prior to each Subsequent Transfer Date with respect to the Subsequent
Mortgage Loans (the "Schedules of Mortgage Loans") and all of its right, title
and interest in all
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scheduled payments due on each Initial Mortgage Loan after
the Cut-Off Date (or on each Subsequent Mortgage Loan after the related
Subsequent Cut-Off Date) and all principal and all interest collected on each
such Initial Mortgage Loan after the Cut-Off Date (or on each Subsequent
Mortgage Loan after the related Subsequent Cut-Off Date). The Issuer will pledge
each Mortgage Loan to the Indenture Trustee for the benefit of the Owners of the
Notes and the Note Insurer pursuant to the Indenture.
In connection with the sale and subsequent pledge of the Initial
Mortgage Loans on the Closing Date and the Subsequent Mortgage Loans on each
Subsequent Transfer Date, the Seller will be required to deliver to the
Indenture Trustee, at least five Business Days prior to the Closing Date a file
consisting of (i) the original Mortgage Notes or certified copies thereof,
endorsed by the Originator thereof in blank or to the order of the holder, (ii)
originals of all intervening assignments, showing a complete chain of title from
origination to the applicable Originators, if any, including warehousing
assignments, with evidence of recording thereon, (iii) originals of all
assumption and modification agreements, if any, and, unless such Mortgage Loan
is covered by a counsel's opinion as described in the next paragraph, (iv)
either: (a) the original Mortgage, with evidence of recording thereon, or a
certified copy of the Mortgage as recorded, or (b) if the original Mortgage has
not yet been returned from the recording office, a certified copy of the
Mortgage, (v) evidence of title insurance with respect to the mortgaged property
in the form of a binder or commitment and (vi) at the Seller's expense, an
opinion of counsel with respect to the sale and perfection of all Subsequent
Mortgage Loans delivered to the Indenture Trustee in form and substance
satisfactory to the Indenture Trustee and the Note Insurer. The Indenture
Trustee will agree, for the benefit of the Owners and the Note Insurer, as their
interests may appear, to review each such file on or before the Closing Date and
again within 90 days after the Closing Date or to ascertain that all required
documents (or certified copies of documents) have been executed and received.
Pursuant to the terms of the Sale and Servicing Agreement, the Seller
shall assign to the Indenture Trustee for the benefit of the holders of the
Notes and the Note Insurer, as their interests may appear, all of the Seller's
right, title and interest in each Master Loan Transfer Agreement insofar as it
relates to the representations and warranties made therein by the Originators
and the Seller in respect of the origination of the Mortgage Loans and the
remedies provided for breach of such representations and warranties. Upon
discovery by the Indenture Trustee of a breach of any representation, warranty
or covenant which materially and adversely affects the interests of the Owners
of the Notes in a Mortgage Loan or of the Note Insurer, the Indenture Trustee
will promptly notify the Originator, the Seller and the Note Insurer. The
Originators and the Seller will have 60 days from its discovery or its receipt
of such notice to cure such breach or repurchase the Mortgage Loan.
The Seller is additionally required to cause to be prepared and
submitted for recording, within 75 business days of the Closing Date with
respect to the Initial Mortgage Loans, or Subsequent Transfer Date with respect
to the Subsequent Mortgage Loans (or, if original recording information is
unavailable, within such later period as is permitted by the Sale and Servicing
Agreement) assignments of the Mortgages from the Originators (other than the
Seller) to the Seller and then to the Indenture Trustee on behalf of the Owners
of the Notes, in the appropriate jurisdictions in which such recordation is
necessary to perfect the lien of the Issuer thereof as against creditors of or
purchasers from the Originators; provided, however, that if the Seller furnishes
to the Indenture Trustee executed recordable assignments of the Mortgages and to
the Indenture Trustee and the Note Insurer an opinion of counsel to the effect
that no such recording is necessary to perfect the Indenture Trustee's interests
in the Mortgages with respect to any of the relevant jurisdictions, then such
recording will not be required with respect to such jurisdictions. However, the
Note Insurer may require recordation at a future date at its reasonable
discretion.
Removal and Resignation of the Servicer
The Sale and Servicing Agreement provides that the Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it. No such resignation will become effective until the Indenture Trustee
(or an affiliate thereof) or a successor Servicer has assumed the Servicer's
obligations and duties under the Sale and Servicing Agreement. The Note Insurer,
the Indenture Trustee or the Owners with the consent of the Note Insurer, will
have the right, pursuant to the Sale and Servicing Agreement, to remove the
Servicer upon the occurrence of any of (a) the continuing failure of the
Servicer to deliver to the Indenture Trustee any proceeds or required payment
for a period of five business days after written notice; (b) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Servicer and certain actions by the Servicer
indicating its insolvency or inability to pay its obligations; (c) the
continuing failure of the Servicer to perform any one or more of its material
obligations under the Sale and Servicing Agreement for a period of sixty (60)
days after notice by the Indenture Trustee or the Note Insurer of said failure;
or (d) the failure of the Servicer to cure any breach of any of its
representations and warranties set forth in the Sale and Servicing Agreement
which materially and adversely affects the interests of the Owners or the Note
Insurer for a period of sixty (60) days after the Servicer's discovery or
receipt of notice thereof.
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The Sale and Servicing Agreement additionally provides that the Note
Insurer may remove the Servicer upon the occurrence of any of the following
events:
(i) with respect to any Payment Date, if the Total
Available Funds will be less than the Monthly
Payment Amount, in respect of such Payment Date;
provided, however, that the Note Insurer will have
no right to remove the Servicer pursuant to the
provision described in this clause (i) if the
Servicer can demonstrate to the reasonable
satisfaction of the Note Insurer that such event was
due to circumstances beyond the control of the
Servicer;
(ii) the failure by the Servicer to make any required
Servicing Advance;
(iii) the failure of the Servicer to perform one or more
of its obligations under the Sale and Servicing
Agreement and the continuance thereof for a period
of thirty (30) days or such longer period as agreed
to in writing by the Note Insurer;
(iv) the failure by the Servicer to make any required
Delinquency Advance or to pay any Compensating
Interest by the related Remittance Date; or
(v) if the delinquency or loss levels applicable to the
Mortgage Loans exceed certain "trigger" levels set
forth in the Sale and Servicing Agreement.
Redemption of the Notes
The Majority Residualholder may, at its option, purchase all of the
Mortgage Loans on the Clean-Up Call Date, or any Payment Date thereafter, at a
price equal to the Termination Price. The proceeds from any such purchase of the
Mortgage Loans will be used by the Issuer to redeem the Notes. Upon such
redemption, the Indenture shall be terminated. The Notes will be redeemed upon
payment of the Termination Price, and the payment of the amount set forth in
clause (i) of the definition of Termination Price to the Owners of the Notes
shall be in lieu of the payment otherwise required to be made to the Owners on
such Payment Date in respect of the Notes. The "Termination Price" is equal to
the sum of (i) the then outstanding Note Principal Balance plus all accrued and
unpaid interest thereon (and any Available Funds Cap Carry-Forward Amount), (ii)
any Fees and Expenses due and unpaid on such date, (iii) the payment of all
amounts owed to the Note Insurer and (iv) any unreimbursed Delinquency Advances
and Servicing Advances (as defined in the Sale and Servicing Agreement). The
proceeds from such sale will be distributed first, to the payment of any
outstanding Fees and Expenses, second, to the Note Insurer, all amounts owed
thereto, third, to the Servicer for unreimbursed Servicing Advances and
Delinquency Advances, fourth, to the Owners of the Notes in an amount equal to
the then outstanding Note Principal Balance plus all accrued and unpaid interest
thereon (plus any Available Funds Cap Carry-Forward Amount) and, fifth, to the
holders of the Residual Interest, the remainder. Under certain circumstances
described in the Sale and Servicing Agreement, the Note Insurer may acquire all
the Mortgage Loans from the Issuer and thereby effect a redemption of the Notes
and terminate the Indenture.
Provisions Relating to the Indenture Trustee
The Indenture will provide that the Indenture Trustee may resign at
any time, upon notice to the Issuer, the Note Insurer, the Servicer and each
Rating Agency, in which event the Issuer (with the consent of the Note Insurer)
will be obligated to appoint a successor Indenture Trustee. The Issuer or the
Note Insurer may remove the Indenture Trustee if the Indenture Trustee ceases to
be eligible to continue as such under the Indenture Trustee and appointment of a
successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee. The Indenture will provide that
the Indenture Trustee is under no obligation to exercise any of the rights or
powers vested in it by the Indenture at the request or direction of any of the
Owners, unless such Owners shall have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or direction. The
Indenture Trustee may execute any of the rights of powers granted by the
Indenture or perform any duties thereunder either directly or by or through
agents or attorneys, and the Indenture Trustee is responsible for any misconduct
or negligence on the part of any agent or attorney appointed and supervised with
due care by it thereunder. Pursuant to the Indenture, the Indenture Trustee is
not liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Indenture. The Indenture Trustee and any
director, officer, employee or agent of the Indenture Trustee may rely and will
be protected in acting or refraining from acting in good faith in reliance on
any certificate, notice or other document of any kind prima facie properly
executed and submitted by the authorized officer of any person respecting any
matters arising under the Indenture.
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The Indenture
Pursuant to the Indenture, the Indenture Trustee shall, upon the
direction of the Note Insurer (unless a Note Insurer Default (as defined in the
Sale and Servicing Agreement) has occurred and is continuing), direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee (including acceleration of the Notes) or exercising any trust
or power conferred on the Indenture Trustee.
An "Event of Default" with respect to the Notes is defined in the
Indenture as follows: (a) a default by the Issuer in the payment of any Current
Interest or Principal Payment Amount on any Note when the same becomes due and
payable (provided that for purposes of this clause, the Available Funds Cap
Carry-Forward Amount does not constitute interest due and payable); (b) a
default in the observance or performance of any covenant or agreement of the
Issuer in the Indenture, or any representation or warranty of the Issuer made in
the Indenture, the Insurance Agreement, the Sale and Servicing Agreement or in
any certificate or other writing delivered pursuant thereto proving to have been
incorrect in any material respect as of the time made, and the continuation of
any such default, or the circumstance in respect of which any representation or
warranty not having been cured, as the case may be, for a period of thirty days
after notice is given to the Issuer by the Indenture Trustee, or to the Issuer
and the Indenture Trustee by the Owners of a majority of the Percentage Interest
of the Notes and, (c) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
In case an Event of Default should occur and be continuing, the
Indenture Trustee shall, but only upon receipt of the prior written consent of
the Note Insurer or, if a Note Insurer Default has occurred and is continuing,
the Owners of Notes representing not less than a majority of the Percentage
Interest of the Notes may declare all the Notes to be immediately due and
payable. Such declaration may under certain circumstances be rescinded by the
Note Insurer, or if a Note Insurer Default exists, the Owners of Notes
representing a majority of the Percentage Interest of the Notes.
If, following an Event of Default, the Notes have been declared to be
due and payable, the Indenture Trustee may, with the prior written consent of
the Note Insurer (unless a Note Insurer Default has occurred and is continuing),
in its discretion, refrain from selling such assets and continue to apply all
amounts received on such assets to payments due on the Notes in accordance with
their terms, notwithstanding the acceleration of the maturity of such Notes. In
addition, upon an Event of Default, the Indenture Trustee may, with the consent
of Owners of 100% of the Percentage Interest of the Notes, sell all or part of
the assets included in the Trust Estate, in which event the collections on, or
the proceeds from the sale of, such assets will be applied as follows: (i) to
the payment of the fees of the Indenture Trustee and the Owner Trustee which
have not been previously paid; (ii) to the Note Insurer, any premium amount then
due and unpaid; (iii) to the Servicer for the Servicing Fee then due and unpaid;
(iv) to the Owners, the amount of interest then due and unpaid on the Notes, pro
rata; (v) to the Owners, the amount of principal then due and unpaid on the
Notes, pro rata; (vi) to the payment of amounts due and owing to the Note
Insurer, to the extent not previously reimbursed; (vii) to the Owners , the
Available Funds Cap Carry-Forward Amount then unpaid; and (viii) to the Trust
Paying Agent, the amounts to be distributed, pro rata, to the
Certificateholders.
No Owner of any Note shall have any right to institute any proceeding
with respect to the Indenture unless (i) such Owner has previously given written
notice to the Indenture Trustee of a Continuing Event of Default; (ii) the
Owners of a majority of the Percentage Interest of the Notes have made written
request to the Indenture Trustee to institute proceedings in respect of such
Event of Default in its own name as Indenture Trustee; (iii) such Owner has
offered the Indenture Trustee reasonable indemnity against the costs, expenses
and liabilities to be incurred in complying with such request; (iv) the
Indenture Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute such proceeding; and (v) no direction
inconsistent with such written request has been given to the Indenture Trustee
during such 60-day period by the Owners of a majority of the Percentage Interest
of the Notes.
Voting
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of the
Owners evidencing specified "Voting Interests", each Owner will have a Voting
Interest equal to the Percentage Interest represented by such Owner's Note. Any
Note registered in the name of the Issuer or any affiliate thereof will be
deemed not to be outstanding, and the Percentage Interest evidenced thereby
shall not be taken into account in determining whether the requisite amount of
Voting Interests necessary to take any such action, or effect any such consent,
has been obtained.
Governing Law
The Agreements and each Note will be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed therein.
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Termination of the Trust Estate
The Indenture will provide that the Trust Estate will terminate upon
the payment to the Owners of all Notes from amounts other than those available
under the Note Insurance Policy of all amounts required to be paid such Owners
upon the later to occur of (a) the final payment or other liquidation (or any
advance made with respect thereto) of the last Mortgage Loan, (b) the
disposition of all property acquired in respect of any Mortgage Loan remaining
in the Trust Estate or (c) the Final Payment Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Notes. Such section must be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Notes.
No election will be made to treat the Trust Estate or any portion
thereof as a REMIC for federal income tax purposes.
Upon issuance of the Notes, Arter & Hadden LLP, special tax counsel,
will deliver its opinion that the Notes will be treated as newly originated debt
obligations and not as representing an ownership interest in the Trust Estate or
an equity interest in the Issuer or the Seller. In addition, for federal income
tax purposes, the Issuer will not be classified (i) as an association taxable as
a corporation, (ii) a taxable mortgage pool as defined in Section 7701(i) of the
Code or (iii) a "publicly traded partnership" as defined in Treasury Regulations
Section 1.7704-1. Each Owner of a Note, by its acceptance of a Note, will agree
to treat the Notes as indebtedness. It is anticipated that the Notes will be
issued without original issue discount for federal income tax purposes. However,
it is possible that the Internal Revenue Service could treat a portion of the
additional interest which would become payable on the Notes after the Clean-Up
Call Date as original issue discount. Owners are urged to consult their tax
advisor with respect to the tax consequences of holding the Notes.
The prepayment assumption to be used in determining whether the Notes
are issued with original issue discount and the rate of accrual of original
issue discount is a CPR of 30%. No representation is made as to the actual rate
at which the Mortgage Loans will prepay. See "Certain Federal Income Tax
Consequences -- Discount and Premium -- Original Issue Discount" in the
Prospectus.
The Notes will not represent "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code or "[l]oans . . . principally secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code. The Notes will also not be treated as "qualified mortgages" under
Section 860G(a)(3)(C) of the Code.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Notes. State income tax law may differ substantially from the
corresponding federal tax law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Notes.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA) and plans described in Code section
4975(e)(1), including individual retirement accounts (the "Plans") and (b)
persons who have certain specified relationships to such Plans or who constitute
"disqualified persons" under Code section 4975(e)(2) with respect to such Plans
("parties in interest"). Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under section 410(d) of the
Code), are not subject to the restrictions of ERISA, and assets of such plans
may be invested in the Notes without regard to the ERISA considerations
described below, subject to other applicable federal and state law. However, any
such governmental or church plan which is qualified under section 401(a) of the
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Code and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Notes should
consult with its counsel with respect to the potential consequences under ERISA,
and the Code, of the Plan's acquisition and ownership of the Notes. See "ERISA
Considerations" in the Prospectus. Investments by Plans are also 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.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions") involving
a Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) concerning the definition of what
constitutes the assets of a Plan for purposes of ERISA and the prohibited
transaction provisions of the Code (the "Plan Asset Regulation"). The Plan Asset
Regulation describes the circumstances under which the assets of an entity in
which a Plan invests will be considered to be "plan assets" such that any person
who exercises control over such assets would be subject to ERISA's fiduciary
standards. Under the Plan Asset Regulation, generally when a Plan invests in
another entity, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the Plan Asset
Regulation provides that, if a Plan acquires an "equity interest" in any entity
that is neither a "publicly-offered security" (as defined therein) nor a
security issued by an investment company registered under the Investment Company
Act of 1940, the assets of the entity will be treated as assets of the Plan
investor unless certain exceptions apply. If the Notes were deemed to be equity
interests and no statutory, regulatory or administrative exemption applies, the
Issuer could be considered to hold plan assets by reason of a Plan's investment
in the Notes. Such plan assets would include an undivided interest in any assets
held by the Issuer. In such an event, the Servicer and other persons, in
providing services with respect to the Issuer's assets, may be parties in
interest with respect to such Plans, subject to fiduciary responsibility
provisions of Title I of ERISA, including the general fiduciary duties of
Section 404 of ERISA, the prohibited transaction provisions of Section 406 of
ERISA, and to Section 4975 of the Code with respect to transactions involving
the assets of the Trust Estate. Under the Plan Asset Regulation, the term
"equity interest" is defined as any interest in an entity other than an
instrument that is treated as indebtedness under "applicable local law" and
which has no "substantial equity features." Although the Plan Asset Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, the DOL has stated that these determinations should
be made under the state law governing interpretation of the instrument in
question. In the preamble to the Plan Asset Regulation, the DOL declined to
provide a precise definition of what features are equity features or the
circumstances under which such features would be considered "substantial,"
noting that the question of whether a plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect provision
of investment management services. The Seller believes that the Notes should be
treated as indebtedness without substantial equity features for purposes of the
Plan Asset Regulations.
Without regard to whether the Notes are treated as an equity interest
under the Plan Asset Regulation, the acquisition or holding of the Notes by or
on behalf of a Plan could be considered to give rise to a prohibited transaction
if such acquisition or holding is deemed to be a prohibited loan to a party in
interest with respect to such Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of the 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:
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
95-60, regarding certain transactions entered into by insurance company general
accounts; PTCE 96-23, regarding certain transactions effected by "in-house asset
managers"; PTCE 91-38, regarding certain transactions entered into by bank
collective investment funds; and PTCE 84-14, regarding certain transactions
effected by "qualified professional asset managers." Each investor using the
assets of a Plan which acquires the Notes, or to whom the Notes are transferred,
will be deemed to have represented that the acquisition and continued holding of
the Notes will be covered by one of the exemptions listed above or by another
DOL Class Exemption.
Any Plan fiduciary considering whether to purchase any Notes on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Issuer,
as obligor on the Notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Investors
should analyze whether the decision may have an impact with respect to purchases
of the Notes.
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RATINGS
It is a condition of the original issuance of the Notes that they
receive ratings of "AAA" by Standard & Poor's and "Aaa" by Moody's. The ratings
issued by the Rating Agencies on the payment of principal and interest on the
Notes do not cover the payment of the Available Funds Cap Carry-Forward Amount.
The ratings assigned to the Notes will be based on the claims-paying ability of
the Note Insurer.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. The security rating assigned to the Notes should
be evaluated independently of similar security ratings assigned to other kinds
of securities.
Explanations of the significance of such ratings may be obtained from
Moody's Investors Service, Inc., 99 Church Street, New York, New York, 10007 and
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. 25 Broadway, New York, New York 10004. Such ratings will be the views only
of such rating agencies. There is no assurance that any such ratings will
continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price of the Notes.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Accordingly, many institutions with legal authority to invest in comparably
rated securities may not be legally authorized to invest in the Notes.
The Seller makes no representations as to the proper characterization
of the Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the Notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Notes. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Notes, dated March 10, 1998, the
Seller has agreed to cause the Issuer to sell to Prudential Securities
Incorporated (the "Underwriter") and the Underwriter has agreed to purchase the
Notes.
The Underwriter has advised the Seller that it proposes to offer the
Notes for sale from time to time in one or more negotiated transactions or
otherwise, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices. The Underwriter may effect such
transactions by selling such Notes to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter or purchasers of the Notes for whom they may
act as agent. Any dealers that participate with the Underwriter in the
distribution of the Notes purchased by the Underwriter may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriter and any profit on the resale of Notes by them or the Underwriter may
be deemed to be underwriting discounts or commissions under the Securities Act.
Proceeds to the Seller are expected to be approximately 99.70%
aggregate principal balance of the Notes, before deducting expenses payable by
the Seller in connection with the Notes, estimated to be $125,000. In connection
with the purchase and sale of the Notes, the Underwriter may be deemed to have
received compensation from the Seller in the form of underwriting discounts.
The Seller has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
The Seller has been advised by the Underwriter that the Underwriter
presently intends to make a market in the Notes, as permitted by applicable laws
and regulations. 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.
S-40
In connection with the offering, the Underwriter and its respective
affiliates may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Notes. Such transactions may include
stabilization transactions effected in accordance with Rule 104 of Regulation M,
pursuant to which such persons may bid for or purchase the Notes for the purpose
of stabilizing its market price. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Notes at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
REPORT OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation
and Subsidiaries, as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996, incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon incorporated by reference
herein in reliance upon the authority of such firm as experts in accounting and
auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Notes will be passed upon for the Seller and the Servicer by Arter & Hadden LLP,
Washington, D.C. Certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Notes will be passed upon for the
Seller by Arter & Hadden LLP. Certain legal matters relating to the validity of
the Notes will be passed upon for the Underwriter by Dewey Ballantine LLP, New
York, New York. Certain legal matters relating to the Note Insurer and the Note
Insurance Policy will be passed upon for the Note Insurer by Kutak Rock, Omaha,
Nebraska.
S-41
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered First
Alliance Mortgage Loan Trust 1998-1A Adjustable Rate Mortgage Loan Asset-Backed
Notes (the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, Cedel or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedel and Euroclear and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior
asset-backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement
I-1
has been completed, the Global Securities will be credited to the respective
clearing system and by the clearing system, in accordance with its usual
procedures, to the Cedel Participant's or Euroclear Participant's account. The
securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist 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 Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is
at least one day prior to the value date for the sale to the Cedel
Participant or Euroclear Participant.
I-2
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification require ments and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of
Global Securities that are Non-U.S. Persons (as defined below) can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income
(Form 4224). A Non-U.S. Person (as defined below), including a non-U.S.
corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
2/28 or 2/13 Loans................................................. S-3
3/27 Loans......................................................... S-3
Accrual Period..................................................... S-5
Actuarial Loans.................................................... S-20
Advances........................................................... S-24
Agreements......................................................... S-23
Appraised Values................................................... S-16
Available Funds.................................................... S-26
Available Funds Cap................................................ S-4
Available Funds Cap Carry-Forward Amount........................... S-4
Beneficial Owners.................................................. S-9
Book-Entry Notes................................................... S-27
Capitalized Interest Account....................................... S-8
CEDEL.............................................................. S-9
CEDEL Participants................................................. S-29
Cede............................................................... S-9
Chase.............................................................. S-9
Citibank........................................................... S-9
Clean-Up Call Date................................................. S-4
Closing Date S-1CMAC............................................... S-33
Compensating Interest.............................................. S-8
Cooperative........................................................ S-29
Current Interest................................................... S-4
Cut-Off Date....................................................... S-1
Definitive Note.................................................... S-28
Delinquency Advances............................................... S-8
DOL ............................................................... S-39
DTC................................................................ S-9
DTC Participants................................................... S-28
ERISA.............................................................. S-38
Euroclear.......................................................... S-9
Euroclear Operator................................................. S-29
Euroclear Participants............................................. S-29
European Depositaries.............................................. S-9
Event of Default................................................... S-37
Excess Subordinated Amount......................................... S-25
Fannie Mae......................................................... S-2
Fees and Expenses.................................................. S-7
Final Payment Date................................................. S-21
Financial Intermediary............................................. S-28
Fiscal Agent....................................................... S-31
Formula Note Rate.................................................. S-4
Funding Period..................................................... S-7
GAAP............................................................... S-33
Indenture.......................................................... S-1
Indenture Trustee Fee.............................................. S-1
Indenture Trustee.................................................. S-1
Initial Mortgage Loans............................................. S-1
Insured Payment.................................................... S-32
Interest Determination Date........................................ S-27
Issuer............................................................. S-1
LIBOR.............................................................. S-4
Liquidated Mortgage Loan........................................... S-6
LTV................................................................ S-3
Majority Residualholder............................................ S-9
Maximum Collateral Amount.......................................... S-4
Modeling Assumptions............................................... S-22
Monthly Payment Amount............................................. S-6
Moody's............................................................ S-10
Mortgage Notes..................................................... S-14
Mortgaged Properties............................................... S-1
Mortgages.......................................................... S-1
Mortgagor.......................................................... S-20
Note Account....................................................... S-24
Note Insurance Policy.............................................. 2
Note Insurer....................................................... S-8
Note Principal Balance............................................. S-4
Note Rate.......................................................... S-4
Notes.............................................................. S-1
Original Aggregate Loan Balance.................................... S-2
Original Pre-Funded Amount......................................... S-1
Originator......................................................... S-1
Owner Trust......................................................... S-1
Owner Trustee Fee................................................... S-1
Participants........................................................ S-27
Payment Date........................................................ S-4
Percentage Interest................................................. S-4
Plan Asset Regulation............................................... S-39
Plans............................................................... S-38
Prepayment.......................................................... S-20
Pre-Funded Amount................................................... S-7
Pre-Funding Account................................................. S-1
Pre-Funding Account Earnings........................................ S-7
Principal Carry-Forward Amount...................................... S-6
Principal Payment Amount............................................ S-5
Rating Agencies..................................................... S-10
REMIC............................................................... S-10
Realized Loss....................................................... S-25
Record Date......................................................... S-4
Reference Banks..................................................... S-27
Relevant Depositary................................................. S-27
Remittance Date..................................................... S-24
Remittance Period................................................... S-24
Residual Interest................................................... S-2
Riegle Act.......................................................... S-12
Rules............................................................... S-28
SAP................................................................. S-33
Securities.......................................................... S-2
Seller.............................................................. S-1
Servicer............................................................ S-1
Servicing Fee....................................................... S-9
Six-Month LIBOR Loans............................................... S-3
SMMEA............................................................... S-10
Specified Subordinated Amount....................................... S-25
Standard & Poor's................................................... S-9
Subordinated Amount................................................. S-25
Subordination Deficit............................................... S-6
Subordination Increase Amount....................................... S-25
Subordination Reduction Amount...................................... S-25
Subsequent Cut-Off Date............................................. S-11
Subsequent Mortgage Loans........................................... S-1
Subsequent Transfer Agreement....................................... S-11
Subsequent Transfer Date............................................ S-7
Telerate Page 3750.................................................. S-27
Termination Price................................................... S-36
Terms and Conditions................................................ S-29
Total Available Funds............................................... S-26
Total Monthly Excess Spread......................................... S-24
Trust Agreement..................................................... S-1
Trust Estate........................................................ S-1
Underwriter......................................................... S-40
A-1
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PROSPECTUS
- --------------------------------------------------------------------------------
Mortgage Loan Asset Backed Securities, Issuable in Series
First Alliance Mortgage Company
This Prospectus describes certain Mortgage Loan Asset Backed Securities
(the "Securities") that may be issued from time to time in series and certain
classes of which may be offered hereby from time to time as described in the
related Prospectus Supplement. Each series of Securities will be issued by a
separate trust (each, a "Trust") and will evidence either a beneficial ownership
interest in or the debt obligation of such Trust. The primary assets of each
Trust will consist of a segregated pool (a "Mortgage Pool") of conventional one-
to four-family residential mortgage loans or certificates of interest or
participation therein (the "Mortgage Loans"), to be acquired by such Trust from
First Alliance Mortgage Company (the "Company"). The Company will originate
and/or acquire the Mortgage Loans from one or more affiliated or unaffiliated
institutions (together with the Company, the "Originators"). See "The Mortgage
Pools."
The Mortgage Loans in each Mortgage Pool and certain other assets
described herein and in the related Prospectus Supplement (collectively with
respect to each Trust, the "Trust Estate") will be held by the related Trust for
the benefit of the holders of the related series of Securities (the
"Securityholders") to the extent and as more fully described herein and in the
related Prospectus Supplement. Each Mortgage Pool will consist of one or more of
the various types of Mortgage Loans described under "The Mortgage Pools."
Each series of Securities will include one or more classes. The
Securities of any particular class may represent beneficial ownership interests
in the related Mortgage Loans held by the related Trust, or may represent debt
secured by such Mortgage Loans, as described herein and in the related
Prospectus Supplement. A series may include one or more classes of Securities
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. The rights of one or more classes of
Securities of any series may be senior or subordinate to the rights of one or
more of the other classes of Securities. A series may include two or more
classes of Securities which differ as to the timing, sequential order, priority
of payment, interest rate or amount of distributions of principal or interest or
both. Information regarding each class of Securities of a series, and certain
characteristics of the Mortgage Loans to be evidenced by such Securities, will
be set forth in the related Prospectus Supplement.
The Company's and the related Originators' only obligations with
respect to a series of Securities will be pursuant to the servicing requirements
relating thereto, and pursuant to certain representations and warranties made by
the Company or by such Originators, except as described in the related
Prospectus Supplement. The Prospectus Supplement for each series of Securities
will name the Company or some other entity or entities as Servicer (the
"Servicer") which will act, directly or through one or more sub-servicers (the
"Sub-Servicer(s)"). The principal obligations of the Servicer will be pursuant
to its contractual servicing obligations (which include its limited obligation
to make certain advances in the event of delinquencies in payments on the
Mortgage Loans and interest shortfalls due to prepayment of Mortgage Loans). See
"Description of the Securities."
If so specified in the related Prospectus Supplement, the Trust Estate
for a series of Securities may include any combination of a mortgage pool
insurance policy, letter of credit, financial guaranty insurance policy,
bankruptcy bond, special hazard insurance policy, reserve fund or other form of
credit enhancement. In addition to or in lieu of the foregoing, credit
enhancement with respect to certain classes of Securities of any series may be
provided by means of subordination, cross-support among Mortgage Assets as
defined herein or over-collateralization. See "Description of Credit
Enhancement."
See "Risk Factors" beginning on page 13 herein and in the related
Prospectus Supplement for a discussion of significant matters affecting
investments in the Securities.
The rate of payment of principal of each class of Securities entitled
to principal payments will depend on the priority of payment of such class and
the rate of payment (including prepayments, defaults, liquidations and
repurchases of Mortgage Loans) of the related Mortgage Loans. A rate of
principal payment lower or higher than that anticipated may affect the yield on
each class of Securities in the manner described herein and in the related
Prospectus Supplement. The various types of Securities, the different classes of
such Securities and certain types of Mortgage Loans in a given Mortgage Pool may
have different prepayment risks and credit risks. The Prospectus Supplement for
a series of Securities will contain information as to (i) types, maturities and
certain statistical information relating to credit risks of the Mortgage Loans
in the related Mortgage Pool, (ii) projected prepayment and yields based upon
certain specified assumptions for a series of Securities and (iii) priority of
payment and maturity dates of the Securities. See "Yield Considerations." A
Trust may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
An investor should carefully review the information in the related
Prospectus Supplement concerning the different consequences of the risks
associated with the different types and classes of Securities.
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
RELATED SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE COMPANY, THE SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE SERVICER, THE
MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH
IN THE RELATED PROSPECTUS SUPPLEMENT.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Methods of Distribution" herein and "Underwriting" in the related Prospectus
Supplement. There will be no secondary market for any series of Securities prior
to the offering thereof. There can be no assurance that a secondary market for
any of the Securities will develop or, if it does develop, that it will offer
sufficient liquidity of investment or will continue.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
- -------------------------------------------------------------------------------
The date of this Prospectus is March 10, 1998.
If specified in a Prospectus Supplement for a series of Certificates,
one or more separate elections may be made to treat a Trust, or specified
portions thereof, as a real estate mortgage investment conduit ("REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
series of Securities will specify which class or classes of the related series
of Securities will be considered to be regular interests in a REMIC and which
classes of Securities or other interests will be designated as the residual
interest in a REMIC. Alternatively, a Trust may be treated as a grantor trust or
as a partnership for federal income tax purposes, or may be treated for federal
income tax purposes as a mere security device which constitutes a collateral
arrangement for the issuance of secured debt. See "Certain Federal Income Tax
Consequences" herein and in the related Prospectus Supplement.
TABLE OF CONTENTS
Caption Page
- ------- ----
Available Information...................................................2
Reports to Owners.......................................................3
Incorporation of Certain Documents by Reference.........................3
Prospectus Supplement...................................................3
Summary of Prospectus...................................................4
Risk Factors...........................................................13
The Trusts.............................................................18
The Mortgage Loans--General..........................................18
Single Family Loans..................................................21
The Mortgage Pools.....................................................21
General..............................................................21
The Mortgage Pools...................................................22
Mortgage Loan Program..................................................23
Underwriting Guidelines..............................................23
Qualifications of Originators........................................26
Sub-Servicers........................................................27
Representations by Originators.......................................27
Sub-Servicing by Originators.........................................29
Master Servicer......................................................30
Description of the Securities..........................................30
General..............................................................30
General Payment Terms of Securities..................................31
Form of Securities...................................................32
Assignment of Mortgage Loans.........................................34
Forward Commitments; Pre-Funding.....................................34
Payments on Mortgage Loans; Deposits to
Distribution Account............................................ 35
Withdrawals from the Principal and Interest Account................. 38
Distributions........................................................38
Principal and Interest on the Securities.............................38
Advances.............................................................39
Reports to Securityholders.......................................... 40
Collection and Other Servicing Procedures............................41
Realization upon Defaulted Mortgage Loans............................43
Subordination..........................................................43
Description of Credit Enhancement......................................44
Letter of Credit.....................................................45
Mortgage Pool Insurance Policies.....................................45
Special Hazard Insurance Policies....................................46
Bankruptcy Bonds.....................................................46
Reserve Funds........................................................46
Financial Guaranty Insurance Policies................................47
Other Insurance, Guarantees and Similar Instruments or
Agreements.......................................................47
Cross-Support........................................................47
Overcollateralization................................................47
Cross-Collateralization..............................................48
Maintenance of Credit Enhancement....................................48
Reduction or Substitution of Credit Enhancement......................49
Hazard Insurance; Claims Thereunder....................................49
Hazard Insurance Policies........................................... 49
The Company............................................................50
The Servicer...........................................................50
The Master Servicer....................................................50
The Pooling and Servicing Agreement....................................50
Servicing and Other Compensation and Payment
of Expenses; Originator's Retained Yield.........................50
Evidence as to Compliance............................................51
Removal and Resignation of the Servicer..............................51
Resignation of the Master Servicer...................................52
Rights Upon Event of Default.........................................52
Amendment............................................................52
Termination; Retirement of Securities................................53
The Trustee..........................................................54
Yield Considerations...................................................54
Maturity and Prepayment Considerations.................................56
Certain Legal Aspects of Mortgage Loans and
Related Matters......................................................57
General..............................................................57
Foreclosure..........................................................58
Rights of Redemption.................................................58
Anti-Deficiency Legislation and Other Limitations
on Lenders......................................................59
Environmental Legislation............................................60
Enforceability of Certain Provisions.................................60
Certain Provisions of California Deeds of Trust......................61
Applicability of Usury Laws..........................................61
Alternative Mortgage Instruments.....................................61
Soldiers' and Sailors' Civil Relief Act of 1940......................62
Certain Federal Income Tax Consequences................................62
General..............................................................62
Grantor Trust Securities.............................................62
REMIC Securities.....................................................64
Sales of REMIC Securities............................................67
Debt Securities......................................................69
Discount and Premium.................................................69
Backup Withholding...................................................72
Foreign Investors....................................................72
ERISA Considerations...................................................73
Plan Asset Regulations...............................................73
Prohibited Transaction Class Exemption...............................74
Tax Exempt Investors.................................................75
Consultation with Counsel............................................75
Legal Investment Matters...............................................75
Use of Proceeds........................................................76
Methods of Distribution................................................76
Legal Matters..........................................................77
Financial Information..................................................77
Rating.................................................................77
Index of Principal Definitions.........................................78
AVAILABLE INFORMATION
The Company has filed a Registration Statement under the Securities Act
of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Securities. The Registration
Statement and amendments thereof and to the exhibits thereto, as well as such
reports and other information, are available for inspection without charge at
the public reference facilities maintained by the Commission at its Public
Reference Section 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of the Registration Statement and amendments thereof
2
and exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http://www.sec.gov).
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any accompanying
Prospectus Supplement with respect hereto do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Securities
offered hereby and thereby nor an offer of the Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO OWNERS
Periodic and annual reports concerning any Securities and the related
Trust will be provided to the Securityholders. See "Description of the
Securities - Reports to Securityholders." If specified in the related Prospectus
Supplement, a series of Securities may be issuable in book-entry form. In such
event, the related Securities will be registered in the name of DTC (as defined
herein) and, therefore, DTC will be the Securityholder for purposes hereof. All
reports will be provided to DTC, which in turn will provide such reports to its
Participants (as defined herein). Such Participants will then forward such
reports to the beneficial owners of Securities. See "Description of the
Securities - Form of Securities" herein. The Company will file or cause to be
filed with the Commission such periodic reports with respect to each Trust as
are required under the Exchange Act and the rules and regulations of the
Commission thereunder. It is the Company's intent to suspend filing such reports
as soon as such reports are no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by each respective trust pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities of
such trust offered hereby shall be deemed to be incorporated by reference into
this Prospectus when delivered with respect to such trust. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the documents expressly incorporated therein by reference). Requests
should be directed to First Alliance Mortgage Company, 17305 Von Karman Avenue,
Irvine, California 92714 (telephone number 714-224-8600).
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Securities of each series to
be offered hereunder will, among other things, set forth with respect to such
Securities, as appropriate: (i) a description of the class or classes of
Securities and the interest rate or method of determining the rate or the amount
of interest, if any, to be paid to each such class; (ii) the aggregate principal
amount and Payment Dates relating to such series and, if applicable, the initial
and final scheduled Payment Dates for each class; (iii) information as to the
assets comprising the Trust, including the general characteristics of the Trust
Estate and, if applicable, the insurance policies, surety bonds, guarantees,
letters of credit, reserve funds, cash accounts, reinvestment income or other
instruments or agreements included in the Trust or otherwise, and the amount and
source of any reserve account or cash account; (iv) the circumstances, if any,
under which the Trust may be subject to early termination; (v) the methods used
to calculate the amount of principal to be distributed with respect to each
class of Securities; (vi) the order of application of distributions to each of
the classes within such series, whether sequential, pro rata, or otherwise;
(vii) additional information with respect to the method of distribution of such
Securities; (viii) whether one or more REMIC elections will be made and
designation of the regular interests and residual interests; (ix) the aggregate
original percentage ownership interest in the Trust to be evidenced by each
class of Securities; (x) information as to the Trustee or Indenture Trustee;
(xi) information as to the nature and extent of subordination with respect to
any class of Securities that is subordinate in right of payment to any other
class; and (xii) information as to the Master Servicer, if any.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligations of dealers to deliver a Prospectus Supplement and the Prospectus
when acting as underwriters of the Securities covered by such Prospectus
Supplement and with respect to their unsold allotments or subscriptions.
3
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. Capitalized terms used
in this summary that are not otherwise defined shall have the meanings ascribed
thereto in this Prospectus. An index indicating where certain terms used herein
are defined appears at the end of this Prospectus.
Securities Offered...................... Mortgage Loan Asset Backed Securities.
Company................................. First Alliance Mortgage Company. See "The Company."
Originators............................. The Company will originate and/or acquire the Mortgage Loans from one
or more institutions affiliated with the Company ("Affiliated Originators")
or institutions unaffiliated with the Company ("Unaffiliated Originators")
(the Affiliated Originators, the Unaffiliated Originators and the Company
are collectively referred to as the "Originators"). Unaffiliated Originators
that enter into agreements to sell Mortgage Loans to the Company and
that meet certain qualifications described herein are referred to as
"Participating Originators" or "Designated Originators"; such designation
is dependent upon types of duties retained by an Originator (i.e.,
sub-servicing) and satisfaction of the Company's requirements for such
qualification.
Servicer................................ First Alliance Mortgage Company or any entity or entities named as
Servicer in the related Prospectus Supplement will act as servicer with
respect to the Mortgage Loans included in the related Trust. An affiliate
of the Company may act as the Servicer. See "The Servicer" and "The
Pooling and Servicing Agreement--Certain Matters Regarding the
Servicer and the Company."
Master Servicer......................... A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Securities. See "Mortgage Loan
Program--Master Servicer" and "The Pooling and Servicing
Agreement--Certain Matters Regarding the Servicer and the Company."
Sub-Servicers........................... Affiliated Originators may act as Sub-Servicers for Mortgage Loans
acquired by the Company from such Affiliated Originators unless
servicing is released to the Servicer or has been transferred to a servicer
approved by the Servicer. Unaffiliated Originators (including Designated
Originators, Participating Originators or Originators of Bulk Acquisitions)
may or may not act as Sub-Servicers for Mortgage Loans acquired by the
Company from such Unaffiliated Originators. In addition, third-party
unaffiliated contract servicers may act as Sub-Servicers. See "Mortgage
Loan Program--Sub-Servicers."
Trustee................................. The trustee (the "Trustee") for each series of Certificates will be specified
in the related Prospectus Supplement. The owner trustee (the "Owner
Trustee") and the indenture trustee (the "Indenture Trustee") for each
series of Notes will be specified in the related Prospectus Supplement.
Unless otherwise noted, references to the Trustee herein will mean either
the Trustee with respect to a series of Certificates or the Indenture Trustee
with respect to a series of Notes.
Issuer of Notes......................... With respect to each series of Notes, the issuer (the "Issuer") will be an
owner trust established by the Company for the purpose of issuing such
Series of Notes. Each such owner trust will be created pursuant to a Trust
4
Agreement between the Company and the Owner Trustee. Each series of Notes
will represent indebtedness of the Issuer and will be issued pursuant to
an Indenture between the Issuer and the Trustee whereby the Issuer will
pledge the related Trust to secure the Notes under the lien of the
Indenture. As to each series of Notes where the Issuer is an owner trust,
the ownership of the related Trust will be evidenced by certificated or
noncertificated interests issued under the Trust Agreement, which, unless
otherwise specified in the Prospectus Supplement, are not offered hereby.
The Notes will represent nonrecourse obligations solely of the Issuer, and
the proceeds of the related Trust will be the sole source of payments on
the Notes, except as described herein under "Description of Credit
Enhancement" and in the related Prospectus Supplement.
The Securities.......................... Issuance of Securities. Each series of Securities will be issued at the
direction of the Company by a separate Trust (each, a "Trust"). The
primary assets of each Trust will consist of a segregated pool (each a
"Mortgage Pool") of conventional, one-to-four family residential
mortgage loans (the "Mortgage Loans") or certificates of interest or
participation therein, acquired by such Trust from the Company. The
Company will originate and/or acquire the Mortgage Loans from one or
more of the Originators. The Securities issued by any Trust may represent
beneficial ownership interests in the related Mortgage Loans held by the
related Trust, or may represent debt secured by such Mortgage Loans, as
described herein and in the related Prospectus Supplement. Securities
which represent beneficial ownership interests in the related Trust will be
referred to as "Certificates" in the related Prospectus Supplement;
Securities which represent debt issued by the related Trust will be referred
to as "Notes" in the related Prospectus Supplement.
Each Trust will be established pursuant to an agreement (each, a "Trust
Agreement") by and between the Company and the Trustee or Owner Trustee,
as applicable, named therein. Each Trust Agreement will describe the
related pool of assets to be held in trust (each such asset pool, the
"Trust Estate"), which will include the related Mortgage Loans and, if so
specified in the related Prospectus Supplement, may include any
combination of a mortgage pool insurance policy, letter of credit,
financial guaranty insurance policy, special hazard policy, reserve fund
or other form of credit enhancement.
The Mortgage Loans held by each Trust will be serviced by the Servicer
pursuant to a servicing agreement (each, a "Servicing Agreement") by and
between the Servicer and the related Trustee.
With respect to Securities that represent debt issued by the related
Trust, the related Trust will enter into an indenture (each, an
"Indenture") by and between such Trust and the trustee named on such
Indenture (the "Indenture Trustee"), as set forth in the related
Prospectus Supplement. Securities that represent beneficial ownership
interests in the related Trust will be issued pursuant to the related
Trust Agreement.
In the case of any individual Trust, the contractual arrangements relating
to the establishment of the Trust, the servicing of the related Mortgage
Loans and the issuance of the related Securities may be contained in a
single agreement, or in several agreements which combine certain aspects
of the Trust Agreement, the Servicing Agreement and the Indenture
described above (for example, a pooling and servicing agreement, or a
servicing and collateral management agreement). For purposes of this
5
Prospectus, the term "Pooling and Servicing Agreement" as used with
respect to a Trust means, collectively, and except as otherwise specified,
any and all agreements relating to the establishment of the related Trust,
the servicing of the related Mortgage Loans and the issuance of the
related Securities.
Securities Will Be Recourse to the Assets of the Related Trust Only. The
sole source of payment for any series of Securities will be the assets of
the related Trust (i.e., the related Trust Estate). The Securities will
not be obligations, either recourse or non-recourse (except for certain
non-recourse debt described under "Certain Federal Income Tax
Consequences"), of the Company, the Master Servicer, the Servicer, any
Originator or any Person other than the related Trust. In the case of
Securities that represent beneficial ownership interest in the related
Trust Estate, such Securities will represent the ownership of such Trust
Estate; with respect to Securities that represent debt issued by the
related Trust, such Securities will be secured by the related Trust
Estate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain types of credit enhancement, such
as a financial guaranty insurance policy or a letter of credit, may
constitute a full recourse obligation of the issuer of such credit
enhancement.
General Nature of the Securities as Investments. The Securities will
consist of two basic types: (i) Securities of the fixed-income type
("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities
will be offered pursuant to this Prospectus or any Prospectus Supplement
related hereto. Fixed-Income Securities will generally be styled as debt
instruments, having a principal balance and a specified interest rate
("Interest Rate"). Fixed-Income Securities may be either beneficial
ownership interests in the related Mortgage Loans held by the related
Trust, or may represent debt secured by such Mortgage Loans. Each series
or class of Fixed-Income Securities may have a different Interest Rate,
which may be a fixed or adjustable Interest Rate. The related Prospectus
Supplement will specify the Interest Rate for each series or class of
Fixed-Income Securities, or the initial Interest Rate and the method for
determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities
("Strip Securities") entitled (i) to principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) to
interest distributions, with disproportionate, nominal or no principal
distributions. In addition, a series may include two or more classes of
Fixed-Income Securities that differ as to timing, sequential order,
priority of payment, Interest Rate or amount of distributions of principal
or interest or both, or as to which distributions of principal or interest
or both on any class may be made upon the occurrence of specified events,
in accordance with a schedule or formula, or on the basis of collections
from designated portions of the related Mortgage Pool, which series may
include one or more classes of Fixed-Income Securities ("Accrual
Securities"), as to which certain accrued interest will not be distributed
but rather will be added to the principal balance (or nominal principal
balance, in the case of Accrual Securities which are also strip
Securities) thereof on each Payment Date, as hereinafter defined and in
the manner described in the related Prospectus Supplement.
6
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more other classes of Fixed-Income
Securities (collectively, the "Senior Securities") that are senior to one
or more other classes of Fixed-Income Securities (collectively, the
"Subordinate Securities") in respect of certain distributions of principal
and interest and allocations of losses on Mortgage Loans. In addition,
certain classes of Senior (or Subordinate) Securities may be senior to
other classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior
Securities and Subordinate Securities), and following any required
deposits to any reserve account which may be established for the benefit
of the Fixed-Income Securities. Equity Securities may constitute what are
commonly referred to as the "residual interest," "seller's interest" or
the "general partnership interest," depending upon the treatment of the
related Trust for federal income tax purposes. As distinguished from the
Fixed-Income Securities, the Equity Securities will not be styled as
having principal and interest components. Any losses suffered by the
related Trust will first be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus
or any Prospectus Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to a separate
Registration Statement to be filed by the Company. In addition, the
Company and its affiliates may initially or permanently hold any Equity
Securities issued by any Trust.
General Payment Terms of Securities. As provided in the related Pooling
and Servicing Agreement and as described in the related Prospectus
Supplement, Securityholders will be entitled to receive payments on their
Securities on specified dates ("Payment Dates"). Payment Dates with
respect to Fixed-Income Securities will occur monthly, quarterly or
semiannually, as described in the related Prospectus Supplement; Payment
Dates with respect to Equity Securities will occur as described in the
related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record Date")
preceding each Payment Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date. Unless otherwise described
in the related Prospectus Supplement, the Payment Date will be the
twentieth day of each month (or, in the case of quarterly-pay Securities,
the twentieth day of every third month; and in the case of
semi-annually-pay Securities, the twentieth day of every sixth month) and
the Record Date will be the close of business as of the last day of the
calendar month that precedes the calendar month in which such Payment Date
occurs.
Each Pooling and Servicing Agreement will describe different periods (a
"Remittance Period" or "Due Period") antecedent to each Payment Date (for
example, in the case of monthly-pay Securities, the calendar month (or the
30-day period) preceding the month in which a Payment Date occurs or such
other specified period). Unless otherwise provided in the related
Prospectus Supplement, collections received on or with respect to
7
the related Mortgage Loans during a Remittance Period will be required to
be remitted by the Servicer to the related Trustee prior to the related
Payment Date, and will be used to fund payments to Securityholders on such
Payment Date. As may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a
portion of the principal collected on or with respect to the related
Mortgage Loans may be applied by the related Trustee to the acquisition of
additional Mortgage Loans during a specified period (rather than be used
to fund payments of principal to Securityholders during such period) with
the result that the related securities will possess an interest-only
period, also commonly referred to as a revolving period, which will be
followed by an amortization period. Any such interest-only or revolving
period may, upon the occurrence of certain events to be described in the
related Prospectus Supplement, terminate prior to the end of the specified
period and result in the earlier than expected amortization of the related
Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a
portion of such collected principal may be retained by the Trustee (and
held in certain temporary investments, including Mortgage Loans) for a
specified period prior to being used to fund payments of principal to
Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related
Securities relative to the amortization rate of the related Mortgage
Loans, or to attempt to match the amortization rate of the related
Securities to an amortization schedule established at the time such
Securities are issued. Any such feature applicable to any Securities may
terminate upon the occurrence of events to be described in the related
Prospectus Supplement, resulting in the current distribution of principal
payments to the specified Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality or the Company, the
Servicer, the Master Servicer, any Sub-Servicer, any Originator or any of
their affiliates; however, certain distributions to the Securityholders
may be insured by a Financial Guaranty Insurer pursuant to a Financial
Guaranty Insurance Policy.
No Investment
Companies............................. Neither the Company nor any Trust will register as an "investment
company" under the Investment Company Act of 1940, as amended (the
"Investment Company Act").
Cross-Collateralization................. Unless otherwise provided in the related Pooling and Servicing
Agreement and described in the related Prospectus Supplement, the source
of payment for Securities of each series will be the assets of the related
Trust Estate only. However, as may be described in the related Prospectus
Supplement, a Trust Estate may include the right to receive moneys from
a common pool of credit enhancement which may be available for more
than one series of Securities, such as a master reserve account or a master
insurance policy. Notwithstanding the foregoing, no collections on any
Mortgage Loans held by any Trust may be applied to the payment of
8
Securities issued by any other Trust (except to the limited extent that
certain collections in excess of amounts needed to pay the related
Securities may be deposited in a common, master reserve account that
provides credit enhancement for more than one series of Securities).
The Mortgage Pools...................... Each Trust Estate will consist primarily of Mortgage Loans secured by
liens on one- to four-family residential properties ("Mortgages"), located
in any one of the fifty states, the District of Columbia, Puerto Rico, any
other Territories of the United States or in the United Kingdom (the
"Mortgaged Properties"). All Mortgage Loans will have been acquired by
the related Trust from the Company. All Mortgage Loans will have been
originated either by (i) the Company; (ii) one or more Affiliated
Originators generally pursuant to standard underwriting guidelines
described herein, as modified from time to time ("Company's
Guidelines"); (iii) one or more Unaffiliated Originators, generally
pursuant to the Company's Guidelines; (iv) certain Unaffiliated
Originators, including Participating Originators or Designated Originators,
generally pursuant to such Unaffiliated Originators' underwriting
guidelines approved by the Company ("Approved Guidelines"); and (v)
the Originators of a portfolio of Mortgage Loans, subsequently purchased
in whole or in part by the Company as bulk acquisitions ("Bulk
Acquisitions"), generally pursuant to such Originators' underwriting
guidelines. See "Mortgage Loan Program." For a description of the types
of Mortgage Loans that may be included in the Mortgage Pools, see "The
Mortgage Pools--The Mortgage Loans."
A Current Report on Form 8-K will be available to purchasers or
underwriters of the related series of Securities and will generally be
filed, together with the related Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such series or in the case of a Forward Purchase Agreement,
within fifteen days of the end of the related Funding Period. See
"Description of the Securities - Forward Commitments; Pre-Funding."
Forward Commitments;
Pre-Funding........................... A Trust may enter into an agreement (each, a "Forward Purchase
Agreement") with the Company whereby the Company will agree to
transfer Subsequent Mortgage Loans (each, a "Subsequent Mortgage
Loan") to such Trust following the date on which such Trust is established
and the related Securities are issued. All Subsequent Mortgage Loans
transferred to the Trust pursuant to a Forward Purchase Agreement will
be originated by the Company or an Originator. Any Forward Purchase
Agreement will require that any Mortgage Loans so transferred to a Trust
conform to the requirements specified in such Forward Purchase
Agreement. If a Forward Purchase Agreement is to be utilized the related
Trustee will be required to deposit in a segregated account (each, a
"Pre-Funding Account") all or a portion of the proceeds received by the
Trustee in connection with the sale of one or more classes of Securities of
the related series; subsequently, the Subsequent Mortgage Loans will be
transferred to the related Trust in exchange for money released to the
Company from the related Pre-Funding Account in one or more transfers.
The maximum amount of money deposited in the Pre-Funding Account
to acquire Subsequent Mortgage Loans for transfer to the Trust will not
exceed 25% of the aggregate principal amount of the Securities offered
pursuant to the related Prospectus Supplement. Each Forward Purchase
Agreement will set a specified period (the "Funding Period") during
which any such transfers must occur, which such period shall not exceed
9
90 days from the date such Trust is established. The Forward Purchase
Agreement or the related Pooling and Servicing Agreement will require
that, if all moneys originally deposited to such Pre-Funding Account are
not so used by the end of such specified period, then any remaining moneys
will be applied as a mandatory prepayment of the related class or classes
of Securities as specified in the related Prospectus Supplement. See "Risk
Factors" herein and in the related Prospectus Supplement. All moneys on
deposit in the Pre-Funding Account will be invested in Permitted
Investments with all earnings thereon available to make interest payments
on the Securities.
Credit Enhancement...................... If so specified in the Prospectus Supplement, the Trust Estate with respect
to any series of Securities may include any one or any combination of a
letter of credit, mortgage pool insurance policy, special hazard insurance
policy, bankruptcy bond, financial guaranty insurance policy, reserve fund
or other type of credit enhancement to provide full or partial coverage for
certain defaults and losses relating to the Mortgage Loans. Credit support
also may be provided in the form of the related class of Equity Securities,
and/or by subordination of one or more classes of Fixed-Income
Securities in a series under which losses in excess of those absorbed by
any related class of Equity Securities are first allocated to any Subordinate
Securities up to a specified limit, cross-support among groups of
Mortgage Assets or overcollateralization. Any mortgage pool insurance
policy may have certain exclusions from coverage thereunder, which will
be described in the related Prospectus Supplement, which may be
accompanied by one or more separate credit enhancements that may be
obtained to cover certain of such exclusions. To the extent not set forth
herein, the amount and types of coverage, the identification of any entity
providing the coverage, the terms of any subordination and related
information will be set forth in the Prospectus Supplement relating to a
series of Securities. See "Description of Credit Enhancement" and
"Subordination."
Advances................................ The Servicer, directly or through Sub-Servicers, may be obligated to make
certain cash advances with respect to delinquent scheduled payments on
the Mortgage Loans, but only to the extent that the Servicer believes that
such amounts will be recoverable by it. Any such advance made by the
Servicer with respect to a Mortgage Loan is recoverable by it as provided
herein under "Description of the Securities--Advances" either from
recoveries on the specific Mortgage Loan or, with respect to any advance
subsequently determined to be nonrecoverable, out of funds otherwise
distributable to the holders of the related series of Securities, which may
include the holders of any Senior Securities of such series.
The Servicer may be required to advance Compensating Interest as
defined hereafter under "Description of the Securities--Advances."
In addition, the Servicer will be required to pay all "out of pocket"
costs and expenses incurred in the performance of its servicing
obligations, but only to the extent that the Servicer reasonably believes
that such amounts will increase Net Liquidation Proceeds on the related
Mortgage Loan. See "Description of the Securities--Advances."
Optional Termination.................... The Servicer, the Company, or, if specified in the related Prospectus
Supplement, the holders of the related class of Equity Securities or the
credit enhancer may at their respective option effect early retirement of a
series of Securities through the purchase of the Mortgage Loans and other
10
assets in the related Trust Estate under the circumstances and in the
manner set forth herein under "The Pooling and Servicing
Agreement--Termination; Retirement of Securities" and in the related
Prospectus Supplement.
Mandatory Termination................... The Trustee, the Servicer or certain other entities specified in the related
Prospectus Supplement may be required to effect early retirement of a
series of Securities by soliciting competitive bids for the purchase of the
related Trust Estate or otherwise, under other circumstances and in the
manner specified in "The Pooling and Servicing
Agreement--Termination; Retirement of Securities" and in the related
Prospectus Supplement.
Legal Investment........................ Not all of the Mortgage Loans in a particular Mortgage Pool may
represent first liens. Accordingly, as disclosed in the related Prospectus
Supplement, certain classes of Securities offered hereby and by the related
Prospectus Supplement may not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") and, if so, will not be legal investments for certain
types of institutional investors under SMMEA.
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by certain regulatory authorities may be
subject to additional restrictions on investment in certain classes of
Securities. Any such institution should consult its own legal advisors in
determining whether and to what extent a class of Securities constitutes
legal investments for such investors. See "Legal Investment" herein.
ERISA Considerations.................... A fiduciary of an employee benefit plan and certain other retirement plans
and arrangements, including individual retirement accounts and annuities,
Keogh plans, and collective investment funds and separate accounts in
which such plans, accounts, annuities or arrangements are invested, that
is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code (each such entity, a
"Plan") should carefully review with its legal advisors whether the
purchase or holding of Securities could give rise to a transaction that is
prohibited or is not otherwise permissible either under ERISA or Section
4975 of the Code. Investors are advised to consult their counsel and to
review "ERISA Considerations" herein and in the related Prospectus
Supplement. Certain classes of Securities may not be transferred unless
the Trustee is furnished with a letter of representations or an opinion of
counsel to the effect that such transfer will not result in a violation of the
prohibited transaction provisions of ERISA and the Code and will not
subject the Trustee, the Company or the Servicer to additional obligations.
Certain Federal Income Tax
Consequences.......................... Securities of each series offered hereby will, for federal income tax
purposes, constitute either (i) interests ("Grantor Trust Securities") in a
Trust treated as a grantor trust under applicable provisions of the Code,
(ii) "regular interests" ("REMIC Regular Securities") or "residual
interests" ("REMIC Residual Securities") in a Trust treated as a REMIC
(or, in certain instances, containing one or more REMIC's) under Sections
860A through 860G of the Code, (iii) debt issued by a Trust ("Debt
Securities"), (iv) interests in a Trust which is treated as a partnership
("Partnership Interests"), and (v) "regular interests" ("FASIT Regular
Securities"), "high-yield interests" ("FASIT High-Yield Securities") or an
ownership interest in a Trust treated as a FASIT (or, in certain
11
circumstances containing one or more FASITs under Sections 860H through
860L of the Code.
Unless otherwise specified in the related Prospectus Supplement,
Securities that are Notes will be treated as Debt Securities for federal
income tax purposes and the Securityholders, in accepting such Notes, will
agree to treat such Notes as indebtedness. See "Certain Federal Income Tax
Consequences" herein and in the related Prospectus Supplement.
Investors are advised to consult their tax advisors and to review "Certain
Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
Registration of Securities.............. Securities may be represented by global securities registered in the name
of Cede & Co. ("Cede"), as nominee of The Depository Trust Company
("DTC"), or another nominee. In such case, Securityholders will not be
entitled to receive definitive securities representing such holders' interests,
except in certain circumstances described in the related Prospectus
Supplement. See "Description of the Securities--Form of Securities"
herein.
Ratings................................. Each class of Fixed-Income Securities offered pursuant to the related
Prospectus Supplement will be rated in one of the four highest rating
categories by one or more "national statistical rating organizations," as
defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and commonly referred to as "Rating Agencies." Such
ratings will address, in the opinion of such Rating Agencies, the
likelihood that the related Trust will be able to make timely payment of
all amounts due on the related Fixed-Income Securities in accordance with
the terms thereof. Such ratings will neither address any prepayment or
yield considerations applicable to any Securities nor constitute a
recommendation to buy, sell or hold any Securities.
The ratings expected to be received with respect to any Securities will be
set forth in the related Prospectus Supplement.
12
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. Prior to their issuance, there will have been no
market for the Securities of any Series. There can be no assurance that a
secondary market for the Securities of any series or class will develop or, if
it does develop, that it will provide Securityholders with liquidity of
investment or that it will continue for the life of the Securities of any
series. The Prospectus Supplement for any series of Securities may indicate that
an underwriter specified therein intends to establish a secondary market in such
Securities; however, no underwriter will be obligated to do so. The Securities
will not be listed on any securities exchange. Accordingly, there can be no
assurance that sufficient liquidity will exist at any particular time for any
series or class of Securities. Consequently, Securityholders may not be able to
dispose of their investment in the event of an emergency or for any other reason
and must be prepared to bear the economic risk of an investment in the
Securities for an indefinite period. Such factors may also adversely affect the
price that a Securityholder may be able to obtain for the Securities that such
investor is able to sell.
Limited Obligations. The Securities will not represent an interest in
or obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Company,
the Master Servicer, the Servicer, any Originator (as defined herein) or any
person other than the related Trust. Notwithstanding the foregoing, and as to be
described in the related Prospectus Supplement, certain types of credit
enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such credit
enhancement. The only obligations of the foregoing entities with respect to the
Securities or the Mortgage Loans will be the obligations (if any) of the
Company, the related Originators and the Servicer pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans, the
Servicer's servicing obligations and the Master Servicer's secondary servicing
obligations under the related Pooling and Servicing Agreement (including their
respective limited obligation to make certain advances in the event of
delinquencies on the Mortgage Loans, but only to the extent deemed recoverable)
and, if and to the extent expressly described in the related Prospectus
Supplement, certain limited obligations of the Company, Servicer, applicable
Sub-Servicer, or another party in connection with a purchase obligation
("Purchase Obligation"). Except as described in the related Prospectus
Supplement, neither the Securities nor the underlying Mortgage Loans will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Company, the Master Servicer, the Servicer, any Sub-Servicer or any of their
affiliates. Proceeds of the assets included in the related Trust Estate for each
series of Securities (including the Mortgage Loans and any form of credit
enhancement) will be the sole source of payments on the Securities, and there
will be no recourse to the Company or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Securities. Accordingly, investors in Securities could experience
delays in payment or losses to the extent such sources of payment are
insufficient to make required distributions on any series or class of
Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, credit enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a mortgage pool
insurance policy; a special hazard insurance policy; a bankruptcy bond; a
reserve fund; a financial guaranty insurance policy or other type of credit
enhancement to provide partial coverage for certain defaults and losses relating
to the Mortgage Loans. Credit enhancement also may be provided in the form of
the related class of Equity Securities, subordination of one or more classes of
Fixed-Income Securities in a series under which losses in excess of those
absorbed by any related class of Equity Securities are first allocated to any
Subordinate Securities up to a specified limit, cross-support among Mortgage
Assets and/or overcollateralization. See "Subordination" and "Description of
Credit Enhancement" herein. Regardless of the form of credit enhancement
provided, the coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such credit enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, credit enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
13
Risks Related to the Mortgage Loans
Risk of the Losses Associated with Junior Liens. Certain of the
Mortgage Loans will be secured by junior liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust. As
a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a mortgage
loan only to the extent that the claims, if any, of each such senior mortgagee
or beneficiary are satisfied in full, including any related foreclosure costs.
In addition, a mortgagee secured by a junior lien may not foreclose on the
related mortgaged property unless it forecloses subject to the related senior
mortgage or mortgages, in which case it must either pay the entire amount of
each senior mortgage to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on each senior mortgage in the
event of default thereunder. In servicing junior lien loans in its portfolio, it
has been the practice of the Company when acting as the Servicer to satisfy each
such senior mortgage at or prior to the foreclosure sale only to the extent that
it determines any amounts so paid will be recoverable from future payments and
collections on such junior lien loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Securities that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
credit enhancement, holders of Securities of the series evidencing interests in
the related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors 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 Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and
Non-Traditional Loans. The Company's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Company's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. For purposes hereof,
"non-conforming credit" means a mortgage loan which, based upon standard
underwriting guidelines, is ineligible for purchase by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. Certain of the types of loans that may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans may
provide for escalating or variable payments by the borrower under the Mortgage
Loan (the "Mortgagor"), as to which the Mortgagor is generally qualified on the
basis of the initial payment amount. In some instances the Mortgagors' income
may not be sufficient to enable them to continue to make their loan payments as
such payments increase and thus the likelihood of default will increase. For a
more detailed discussion, see "Mortgage Loan Program."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
14
Although a low interest rate environment may facilitate the refinancing
of a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Company,
the Originators, the Master Servicer, the Servicer, any Sub-Servicer or the
Trustee will be obligated to provide funds to refinance any Mortgage Loan,
including Balloon Loans.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties.
Even assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Securityholders could occur. An action to foreclose
on a Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated Mortgage Loan ("Liquidated Mortgage Loan")
and not yet repaid, including payments to prior lienholders, accrued servicing
fees, legal fees and costs of legal action, real estate taxes, and maintenance
and preservation expenses. In the event that any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable credit enhancement, Securityholders could
experience a loss on their investment.
Many liquidation expenses with respect to defaulted mortgage loans do
not vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer takes the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a larger
principal balance, the amount realized after expenses of liquidation would be
less as a percentage of the outstanding principal balance of the smaller
principal balance mortgage loan than would be the case with a larger principal
balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party who takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property and who, prior to
foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up the
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain Legal
Aspects of Mortgage Loans and Related Matters--Environmental Legislation."
Certain of the Mortgaged Properties relating to Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by non-owner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Company will be
specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset backed securities
without such concentrations.
15
Information with respect to geographic concentration of Mortgaged Properties
will be specified in the related Prospectus Supplement or Current Report on Form
8-K filed by the Trust.
The Subsequent Mortgage Loans and the Pre-Funding Account. If the
principal amount of eligible Mortgage Loans available during the Funding Period
and sold by the Company to the Trust is less than 100% of the aggregate
principal amount, the Company will have insufficient Mortgage Loans to sell to
the Trust, thereby resulting in a prepayment of principal to Owners of the
Securities as described herein. See "Social, Economic and Other Factors" below.
In addition, any conveyance of Subsequent Mortgage Loans is subject to the
following conditions, among others (i) each such Subsequent Mortgage Loan must
satisfy the representations and warranties specified in the agreement pursuant
to which such Subsequent Mortgage Loans are transferred to the Trust (each a
"Subsequent Transfer Agreement") and in the Pooling and Servicing Agreement;
(ii) the Company will not select such Subsequent Mortgage Loans in a manner that
it believes is adverse to the interest of the Owners of the Securities; (iii)
the Depositor will deliver certain opinions of counsel with respect to the
validity of the conveyance of such Subsequent Mortgage Loans; and (iv) as of
each cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the
Subsequent Mortgage Loans to be conveyed by the Company as of such Subsequent
Cut-Off Date, will satisfy the criteria set forth in the Pooling and Servicing
Agreement.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
by the end of the Funding Period, the Owners of the Securities then entitled to
receive payments of principal will receive a prepayment of principal in an
amount equal to the amount remaining in the Pre-Funding Account on the first
Payment Date following the end of the Funding Period. Although no assurances can
be given, the Company intends that the principal amount of Subsequent Mortgage
Loans sold to the Trust will require the application of substantially all amount
on deposit in the Pre-Funding Account and that there will be no material
principal prepayment to the Owners of the Securities.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Mortgage
Loans may be originated or purchased by the Company using credit criteria
different from those which were applied to the initial Mortgage Loans and may be
of a different credit quality. Therefore, following the transfer of Subsequent
Mortgage Loans, the aggregate characteristics of the pool of Mortgage Loans may
vary from those of the initial Mortgage Loans.
Social, Economic and Other Factors. The ability of the Trust to invest
in Subsequent Mortgage Loans is largely dependent upon the ability of the
Company to originate or purchase additional mortgage loans. The ability of the
Company to originate or purchase additional mortgage loans may be affected as a
result of a variety of social and economic factors. Economic factors include
interest rates, unemployment levels, the rate of inflation and consumer
perception of economic conditions generally. However, the Company is unable to
determine and has no basis to predict whether or to what extent economic or
social factors will affect the Company's origination ability and the
availability of Subsequent Mortgage Loans.
Applicability of State and Federal Lending Laws. Applicable state laws
generally regulate interest rates and other charges, require certain
disclosures, and require licensing of the Originators, the Servicer and
Sub-Servicers. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices that may apply to the origination, servicing
and collection of the Mortgage Loans. In California, for example, a mortgage
lender is subject to the California Fair Debt Collection Practices Act which
regulates practices used to effect collection on consumer loans. See "Certain
Legal Aspects of Mortgage Loans and Related Matters."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience and (iv) the Home Ownership and Equity Protection Act of 1994, which
imposes additional disclosure and other requirements on creditors with respect
to non- purchase money home equity loans with interest rates or high upfront
fees and charges. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and general principles of equity may limit the ability of the Servicer to
collect all or part of the principal of or interest on the Mortgage Loans, may
entitle the borrower to rescind the loan or to a refund of amounts previously
paid and, in addition, could subject the Servicer to damages and administrative
sanctions. If the Servicer is unable to collect all or part of the
16
principal or interest on the Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity then the
Trust may be delayed or unable to repay all amounts owed to Securityholders.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer or an Originator, such violations may materially impact the
financial ability of the Company to continue to act as Servicer or the ability
of an Originator to repurchase or replace Mortgage Loans if such violations
breach a representation or warranty contained in a Pooling and Servicing
Agreement.
Yield and Prepayment Considerations. The yield to maturity of the
Securities of each series will depend on the rate of payment of principal
(including prepayments, liquidations due to defaults, and repurchases due to
conversion of adjustable-rate mortgage loans ("ARM Loans") to fixed-rate loans
or breaches of representations and warranties) on the Mortgage Loans and the
price paid by Securityholders. Such yield may be adversely affected by a higher
or lower than anticipated rate of prepayments on the related Mortgage Loans. The
yield to maturity on Strip Securities or Securities purchased at premiums to or
discounts from par will be extremely sensitive to the rate of prepayments on the
related Mortgage Loans. In addition, the yield to maturity on certain other
types of classes of Securities, including Accrual Securities or certain other
classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
The Mortgage Loans may be prepaid in full or in part at any time;
however, a prepayment penalty or premium may be imposed in connection therewith.
Such penalties may not become the property of the related Trust. The rate of
prepayments of the Mortgage Loans cannot be predicted and is influenced by a
wide variety of economic, social, and other factors, including prevailing
mortgage market interest rates, the availability of alternative financing, local
and regional economic conditions and homeowner mobility. Therefore, no assurance
can be given as to the level of prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused
moneys held in Pre-Funding Accounts, if any, voluntary early payments by
borrowers (including payments in connection with refinancings of the related
senior Mortgage Loan or Loans), sales of Mortgaged Properties subject to
"due-on-sale" provisions and liquidations due to default, as well as the receipt
of proceeds from physical damage, credit life and disability insurance policies.
In addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. The Mortgage Loans may contain "due-on-sale" provisions,
and the Servicer will be required to enforce such provisions unless (i) such
enforcement would materially increase the risk of default or delinquency on, or
materially decrease the security for, such Mortgage Loan or (ii) such
enforcement is not permitted by applicable law, in which case the Servicer is
authorized to permit the purchaser of the related Mortgaged Property to assume
the Mortgage Loan. See "The Pooling and Servicing Agreement" in the related
Prospectus Supplement.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
Book-entry Registration. Issuance of the Securities in book-entry form
may reduce the liquidity of such Securities in the secondary trading market
since investors may be unwilling to purchase Securities for which they cannot
obtain definitive physical securities representing such Securityholders'
interests, except in certain circumstances described in the related Prospectus
Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Securities, may be limited due to lack of a physical security representing the
Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Trustee to DTC and, in such a case, DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities--Form of Securities."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Company or an Originator. In the event of the bankruptcy of the Company or an
Originator at a time when it or any affiliate thereof holds an Equity Security,
a trustee in bankruptcy of the Company, an Originator or its creditors could
attempt to recharacterize the sale
17
of the Mortgage Loans to the related Trust as a borrowing by the Company, the
Originator or such affiliate with the result, if such recharacterization is
upheld, that the Securityholders would be deemed creditors of the Company, the
Originator or such affiliate, secured by a pledge of the Mortgage Loans. If such
an attempt were successful, it could prevent timely payments of amounts due to
the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
Security Rating. The rating of Securities credit enhanced through
external credit enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external credit enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
related Securities would likely result in a reduction in the rating of the
Securities. The rating of Securities credit enhanced through subordination or
reserve amounts will depend on the actual performance of the related Mortgage
Pool, and a reduction in such rating could occur if defaults and losses on the
related Mortgage Loans exceed the rate assumed in determining the original level
of credit enhancement. Reduction of a rating would adversely affect the market
value and possibly the liquidity of the related Securities. See "Rating" in the
Prospectus Supplement.
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ("Mortgage Assets") consisting of (A) a Mortgage Pool comprised of (i)
Single Family Loans or (ii) other loans (each hereinafter defined) or (B)
certificates of interest or participation in the items described in clause (A)
or in pools of such items, in each case, as specified in the related Prospectus
Supplement, together with payments in respect of such primary Mortgage Assets
and certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement.
The Securities will be entitled to payment only from the assets of the
related Trust (i.e., the related Trust Estate) and will not be entitled to
payments in respect of the assets of any other related Trust Estate established
by the Company, the Originators or any of their affiliates. If specified in the
related Prospectus Supplement, certain Securities will evidence the entire
fractional undivided ownership interest in the related Mortgage Loans held by
the related Trust or may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to
be included in the related Trusts. If specific information respecting the
primary Mortgage Assets is not known at the time the related series of
Securities initially is offered, information of the nature described below will
be provided in the Prospectus Supplement, and specific information (the
"Detailed Description") will be set forth in a report on Form 8-K to be filed
with the Commission within fifteen days after the initial issuance of such
Securities, or, in the case of a series including a Forward Purchase Agreement,
within fifteen days of the related Funding Period. See "Description of the
Securities Forward Commitments; Pre-Funding" herein. A copy of the Pooling and
Servicing Agreement with respect to each Series of Securities will be attached
to the Form 8-K and will be available for inspection at the corporate trust
office of the Trustee specified in the related Prospectus Supplement. A schedule
of the Mortgage Assets relating to such Series (the "Mortgage Asset Schedule")
will be attached to the Pooling and Servicing Agreement delivered to the Trustee
upon delivery of the Securities.
The Mortgage Loans--General
The real properties which secure repayment of the Mortgage Loans (the
"Mortgaged Properties") may be located in any one of the fifty states, the
District of Columbia, Puerto Rico, any other Territories of the United States or
in the United Kingdom. The Mortgage Loans will generally be "Conventional Loans"
(i.e., loans that are not insured or guaranteed by any governmental agency). If
specified in the related Prospectus Supplement, Mortgage Loans with
18
certain loan-to-value ratios and/or certain principal balances may be covered
wholly or partially by primary mortgage insurance policies. The Mortgage Loans
will be generally covered by standard hazard insurance policies (which may be in
the form of a blanket or forced placed hazard insurance policy). The existence,
extent and duration of any such coverage will be described in the applicable
Prospectus Supplement. The Mortgage Loans will not be guaranteed or insured by
any government agency or other insurer; however, certain distributions to
Securityholders may be guaranteed by a Financial Guaranty Insurer.
All of the Mortgage Loans in a Mortgage Pool will provide for payments
to be made monthly ("monthly pay") or bi-weekly. The payment terms of the
Mortgage Loans to be included in a Trust will be described in the related
Prospectus Supplement and may include any of the following features or
combination thereof or other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for period of time and under certain
circumstances is followed by an adjustable rate, a rate that otherwise
varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate). The specified rate of interest on a
Mortgage Loan is its "Mortgage Rate." Changes to an Adjustable Rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and
added to the principal of a Mortgage Loan for such periods and under
such circumstances as may be specified in the related Prospectus
Supplement. If provided for in the Prospectus Supplement, certain
Mortgage Loans may be subject to temporary buydown plans ("Buydown
Mortgage Loans") pursuant to which the monthly payments made by the
Mortgagor during the early years of the Mortgage Loan (the "Buydown
Period") will be less than the scheduled monthly payments on the
Mortgage Loan, and the amount of any difference may be contributed from
(i) an amount (such amount, exclusive of investment earnings thereon,
being hereinafter referred to as "Buydown Funds") funded by the
originator of the Mortgage Loan or another source (including the
Servicer or the related Originator and the builder of the Mortgaged
Property) and placed in a custodial account (the "Buydown Account") and
(ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the Mortgage 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 ("balloon" payments).
Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time ("graduated payments") or may change from period to period.
Mortgage Loans may include limits on periodic increases or decreases in
the amount of monthly payments and may include maximum or minimum
amounts of monthly payments. Mortgage Loans having graduated payment
provisions may provide for deferred payment of a portion of the
interest due monthly during a specified period, and recoup the deferred
interest through negative amortization during such period whereby the
difference between the interest paid during such period and the
interest accrued during such period is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as
"growing equity" mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for a period of time, or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection therewith. Other
Mortgage Loans may permit prepayments without payment of a fee unless
the prepayment occurs during specified time periods. The Mortgage Loans
may include due-on-sale clauses which permit the mortgagee to demand
payment of the entire Mortgage Loan in connection with the sale or
certain transfers of the related Mortgaged Property.
(e) Other Mortgage Loans may be assumable by persons meeting
the then applicable Underwriting Guidelines of the Company.
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The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool; such
information, insofar as it may relate to statistical information relating to
such Mortgage Loans will be presented as of a date certain (the "Statistic
Calculation Date") which may also be the related cut-off date (the "Cut-Off
Date"). Such information will include to the extent applicable to the particular
Mortgage Pool (in all cases as of the Statistic Calculation Date) (i) the
aggregate outstanding principal balance and the average outstanding principal
balance of the Mortgage Loans, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Property securing the Mortgage Loans (e.g., one-to-four-family houses,
vacation and second homes or other real property), (iv) the original terms to
stated maturity of the Mortgage Loans, (v) the weighted average remaining term
to maturity of the Mortgage Loans and the range of the remaining terms to
maturity; (vi) the earliest origination date and latest maturity date of any of
the Mortgage Loans, (vii) the weighted average Combined Loan-to-Value Ratio and
the range of Combined Loan-to-Value Ratios of the Mortgage Loans at origination,
(viii) the weighted average Mortgage Rate or annual percentage rate (as
determined under Regulation Z) (the "APR") and ranges of Mortgage Rates or APRs
borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
adjustable rates, the weighted average of the adjustable rates and indexes, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Mortgage Loans having graduated payment provisions; (xi) the amount of any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond to be maintained with respect to such Mortgage Pool; (xii) the amount of
any standard hazard insurance required to be maintained with respect to each
Mortgage Loan; (xiii) the amount, if any, and terms of any credit enhancement to
be provided with respect to all or any Mortgage Loans or the Mortgage Pool; and
(xiv) the geographical distribution of the Mortgage Loans on a state-by-state
basis. In addition, preliminary or more general information of the nature
described above may be provided in the Prospectus Supplement, and specific or
final information may be set forth in a Current Report on Form 8-K, together
with the related Pooling and Servicing Agreement, which will be filed with the
Securities and Exchange Commission and will be made available to holders of the
related series of Securities within fifteen days after the initial issuance of
such Securities, or, in the case of a series of Securities including a Forward
Purchase Agreement, within fifteen days of the end of the related Funding
Period.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan at any given time
is the ratio, expressed as a percentage, determined by dividing (x) the sum of
the original principal balance of such Mortgage Loan plus the then current
principal balance of all mortgage loans secured by liens on the related
Mortgaged Property having priorities senior to that of the lien which secures
such Mortgage Loan, if any, by (y) the value of the related Mortgaged Property,
based upon the appraisal or valuation made at the time of origination of the
Mortgage Loan or, in the case where there is no senior lien to the Mortgage Loan
and such Mortgage represents a purchase money instrument, the lesser of (a) the
appraisal or valuation, or (b) the purchase price. If the Mortgagor will use the
proceeds of the Mortgage Loan to refinance an existing Mortgage Loan which is
being serviced directly or indirectly by the Servicer, the requirement of an
appraisal or other valuation at the time the new Mortgage Loan is made may be
waived.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans (plus any additional financing by other lenders
on the same Mortgaged Properties) in a particular Mortgage Pool become equal to
or greater than the value of such Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the nonconforming credit mortgage lending industry. An overall
decline in the market value of residential real estate, the general condition of
a Mortgaged Property, or other factors, could adversely affect the values of the
Mortgaged Properties such that the outstanding balances of the Mortgage Loans,
together with any additional liens on the Mortgaged Properties, equal or exceed
the value of the Mortgaged Properties. Under such circumstances, the actual
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the nonconforming credit mortgage lending industry.
Certain Mortgage Loans may be secured by junior liens ("Junior Lien
Loans") subordinate to the rights of the mortgagee under each related senior
mortgage(s). The proceeds from any liquidation, insurance or condemnation of
Mortgaged Properties relating to Junior Lien Loans in a Mortgage Pool will be
available to satisfy the principal balance of such Junior Lien Loans only to the
extent that the claims, if any, of all related senior mortgagees, including any
related foreclosure costs, are satisfied in full. In addition, the Servicer may
not foreclose on a Mortgaged Property relating to a Junior Lien Loan unless it
forecloses subject to the related senior mortgage or mortgages, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder.
Generally, in servicing Junior Lien Loans in its loan portfolios, it has been
the Company's practice when acting as the Servicer to satisfy each senior
mortgage at or prior to a foreclosure sale only to the extent that it determines
any amounts
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so paid will be recoverable from future payments and collections on the Mortgage
Loans or otherwise. The Trusts will not have any source of funds to satisfy any
such senior mortgage or make payments due to any senior mortgagee. See "Certain
Legal Aspects of Mortgage Loans and Related Matters--Foreclosure."
Other factors affecting mortgagors' ability to repay Mortgage Loans
include excessive building resulting in an oversupply of housing stock or a
decrease in employment reducing the demand for units in an area; federal, state
or local regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that losses
on the Mortgage Loans are not covered by credit enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
The Company will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Servicer
will service the Mortgage Loans, either directly or through Sub-Servicers,
pursuant to the Pooling and Servicing Agreement and will receive a fee for such
services. A Master Servicer, if required by a Prospectus Supplement, will have
the primary function of reviewing the Servicer's monthly servicing reports for
any material inconsistencies, and secondarily, the Master Servicer will assume
the Servicer's obligations in the event of a default by the Servicer. The
Servicer or the Trust will be liable for fees and expenses of the Master
Servicer. See "Mortgage Loan Program" and "The Pooling and Servicing Agreement."
With respect to Mortgage Loans serviced through a Sub-Servicer, the Servicer
will remain liable for its servicing obligations under the related Pooling and
Servicing Agreement as if the Servicer alone were servicing such Mortgage Loans.
The only obligations of the Company and the Originators with respect to
a series of Securities will be related to servicing and/or providing (or, where
the Company or an Originator acquired a Mortgage Loan from another originator,
obtaining from such originator) certain representations and warranties
concerning the Mortgage Loans and to assign to the Trustee for such series of
Securities the Company's or Originator's rights with respect to such
representations and warranties. See "The Pooling and Servicing Agreement." The
obligations of the Servicer with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Pooling
and Servicing Agreement (including its obligation to enforce the obligations of
the Sub-Servicers or Originators as more fully described herein under "Mortgage
Loan Program--Qualifications of Originators" and "The Pooling and Servicing
Agreement") and its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Securities--Advances." The
obligations of a Servicer to make advances may be subject to limitations, to the
extent provided herein and in the related Prospectus Supplement. The Master
Servicer's contractual obligations for servicing the Mortgage Loans and making
advances will consist primarily of acting as a back-up Servicer in the event of
the removal of the Servicer in accordance with the terms of the Pooling and
Servicing Agreement.
Single Family Loans
Single family loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first or junior
liens on one- to four-family residential properties ("Single Family Loans"). The
Mortgaged Properties relating to Single Family Loans will consist of detached or
semi-detached one-family dwelling units, two-to four-family dwelling units,
townhouses, rowhouses, individual condominium units in condominium developments,
individual units in planned unit developments, and certain mixed use and other
dwelling units. Such Mortgage Properties may include owner-occupied (which
includes vacation and second homes) and non-owner occupied investment
properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low-or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments.
THE MORTGAGE POOLS
General
Each Mortgage Pool will consist primarily of (i) conventional Mortgage
Loans, minus any stripped portion of the interest payments due under the related
Mortgage Note that may have been retained by any Originator ("Originator's
Retained Yield"), or any other interest retained by the Company or any affiliate
of the Company, evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on single-family (i.e., one- to four-family) residential properties, or
(ii) certificates of interest or participations in such Mortgage Notes. The
Mortgaged Properties will consist primarily of owner-occupied attached
21
or detached one-family dwelling units, two-to four-family dwelling units,
condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other dwelling units, and the fee, leasehold or other
interests in the underlying real property. The Mortgage Properties may include
manufactured housing. The Mortgaged Properties may include vacation, second and
non-owner occupied homes.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among mortgage loans originated by the Company, one or more
institutions affiliated with the Company, (such affiliated institutions, the
"Affiliated Originators") or from banks, savings and loan associations, mortgage
bankers, mortgage brokers, investment banking firms, the RTC and the FDIC (as
defined herein) and other mortgage loan originators or sellers not affiliated
with the Company (such unaffiliated institutions, the "Unaffiliated Originators"
and, collectively with the Affiliated Originators and the Company, the
"Originators"), all as described below under "Mortgage Loan Program." The
characteristics of the Mortgage Loans will be described in the related
Prospectus Supplement. Other mortgage loans available for acquisition by a Trust
may have characteristics that would make them eligible for inclusion in a
Mortgage Pool but may not be selected by the Company for inclusion in such
Mortgage Pool.
Each series of Securities will evidence interests in one or more
Mortgage Pool(s) containing Mortgage Loans having an aggregate principal balance
of not less than approximately $5,000,000 as of, unless otherwise specified in
the applicable Prospectus Supplement, the related Cut-Off Date. Each Security
will evidence an interest in only the related Mortgage Pool and corresponding
Trust Estate, and not in any other Mortgage Pool or any other Trust Estate
(except in those limited situations whereby certain collections on any Mortgage
Loans in a related Mortgage Pool in excess of amounts needed to pay the related
Securities may be deposited in a master reserve account or otherwise applied in
a manner that provides credit enhancement for more than one series of
Securities).
The Mortgage Pools
Unless otherwise specified below, all of the Mortgage Loans in a
Mortgage Pool will (i) have payments that are due monthly or bi-weekly, (ii) be
secured by Mortgaged Properties located in any of the fifty states, the District
of Columbia, Puerto Rico, any other Territories of the United States or in the
United Kingdom and (iii) consist of one or more of the following types of
mortgage loans:
(a) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of generally not
more than 30 years;
(b) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that
adjusts periodically, at the intervals described in the related
Prospectus Supplement (which may have adjustments in the amount of
monthly payments at periodic intervals) over the term of the mortgage
loan to equal the sum of a fixed percentage set forth in the related
Mortgage Note (the "Note Margin") and an index (the "Index") to be
specified in the related Prospectus Supplement, such as, by way of
example: (i) U.S. Treasury securities of a specified constant maturity,
(ii) weekly auction average investment yield of U.S. Treasury bills of
specified maturities, (iii) the daily Bank Prime Loan rate made
available by the Federal Reserve Board or as quoted by one or more
specified lending institutions, (iv) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco, or (v)
the interbank offered rates for U.S. dollar deposits in the London
Markets, each calculated as of a date prior to each scheduled interest
rate adjustment date that will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will set forth the
relevant Index and the related Prospectus Supplement or the related
Current Report on Form 8-K will indicate the highest, lowest and
weighted-average Note Margin with respect to the ARM Loans in the
related Mortgage Pool. If specified in the related Prospectus
Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at
some point during the term of such ARM Loan subsequent to the initial
payment date;
(c) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of generally not more than 30
years with monthly payments during the first year calculated on the
basis of an assumed interest rate that will be lower than the Mortgage
Rate applicable to such mortgage loan in subsequent years. Deferred
Interest, if any, will be added to the principal balance of such
mortgage loans;
(d) Balloon mortgage loans ("Balloon Loans"), which are
fixed-rate mortgage loans having original or modified terms to maturity
of generally 5 to 15 years as described in the related Prospectus
Supplement and that may have level monthly payments of principal and
interest based generally on a 10 to
22
30-year amortization schedule. The amount of the monthly payment may
remain constant until the maturity date, upon which date the full
outstanding principal balance on such Balloon Loan will be due and
payable (such amount, the "Balloon Amount");
(e) Modified mortgage loans ("Modified Loans"), which are
fixed or adjustable-rate mortgage loans providing for terms at the time
of modification of generally not more than 30 years. Modified Loans may
be mortgage loans which have been consolidated and/or have had various
terms changed, mortgage loans which have been converted from adjustable
rate mortgage loans to fixed rate mortgage loans, or construction loans
which have been converted to permanent mortgage loans; or
(f) Another type of mortgage loan described in the related
Prospectus Supplement.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be Buydown Mortgage Loans pursuant to which the monthly
payments made by the Mortgagor during the Buydown Period will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) Buydown Funds funded by the Originator of the Mortgaged
Property or another source (including the Servicer or the related Originator)
and placed in the Buydown Account and (ii) if the Buydown Funds are contributed
on a present value basis, investment earnings on such Buydown Funds. See
"Description of the Securities--Payments on Mortgage Loans; Deposits to
Distribution Account." The terms of the Buydown Mortgage Loans, if such loans
are included in a Trust, will be as set forth in the related Prospectus
Supplement.
The Company and/or certain Originators may make certain representations
and warranties regarding the Mortgage Loans, but the Company's assignment of the
Mortgage Loans to the Trustee will be without recourse. See "Description of the
Securities--Assignment of Mortgage Loans." The Servicer's obligations with
respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling and Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Sub-Servicers and of Originators, as more fully described herein under "Mortgage
Loan Program--Representations by Originators," "--Sub-Servicing by Originators"
and "Description of the Securities--Assignment of Mortgage Loans," and its
obligation to make certain cash advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans and interest shortfalls due to
prepayment of Mortgage Loans, in amounts described herein under "Description of
the Securities--Advances"). The obligation of the Servicer to make delinquency
advances will be limited to amounts which the Servicer believes ultimately will
be reimbursable out of the proceeds of liquidation of the Mortgage Loans. The
Master Servicer's obligations consist primarily of acting as a back-up Servicer
in the event of the removal of the Servicer in accordance with the terms and
conditions of the Pooling and Servicing Agreement. See "Mortgage Loan
Program--Master Servicer." In the event that the Master Servicer assumes the
role of Servicer, the Master Servicer will assume all of the obligations of the
Servicer except for obligations to repurchase or substitute for Mortgage Loans
which breach representations and warranties under the Pooling and Servicing
Agreement. See "Description of the Securities--Advances."
MORTGAGE LOAN PROGRAM
As a general matter, the Company's Mortgage Loan program will consist
of the origination and packaging of Mortgage Loans relating to non-conforming
credits. For purposes hereof, "non-conforming credit" means a mortgage loan
which, based upon standard underwriting guidelines, is ineligible for purchase
by FNMA due to credit characteristics that do not meet FNMA guidelines. However,
certain of the Mortgage Loans will relate to FNMA conforming credits.
The Mortgagors generally will have taken out the related Mortgage Loans
for one of four reasons: (i) to purchase the related Mortgaged Property, (ii) to
refinance an existing mortgage loan on more favorable terms, (iii) to
consolidate debt, or (iv) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property. The Mortgage Loans
described in (i) are commonly referred to as purchase money loans and the
Mortgage Loans described in (ii), (iii) and (iv) on the whole are commonly
referred to as home equity loans.
Underwriting Guidelines
As more fully described below under "Qualifications of Originators" and
as may also be described in greater detail in the related Prospectus Supplement,
there are various types of Originators that may participate in the Company's
Mortgage Loan Program. Under the Company's Mortgage Loan Program, the Company
purchases and originates Mortgage Loans pursuant to three types of underwriting
guidelines: (1) standard underwriting guidelines according to the Company's
Originator Guide, as modified from time to time, used by Affiliated Originators
and Unaffiliated Originators ("Company's Guidelines"), (2) underwriting
guidelines utilized by Participating Originators or Designated
23
Originators and approved by the Company ("Approved Guidelines"), and (3)
underwriting guidelines ("Bulk Guidelines") used by Unaffiliated Originators of
a portfolio of Mortgage Loans subsequently purchased in whole or part by the
Company as a bulk acquisition ("Bulk Acquisition"). The respective underwriting
guidelines are described below.
Company's Guidelines. The Company's Guidelines are set forth in the
Company's Guides. The Company's Guides are revised continuously based on
opportunities and prevailing conditions in the nonconforming credit residential
mortgage market, as well as the expected market for the resulting Securities.
Substantially all loans originated or purchased by the Company are
subjected to the Company's Guidelines. The underwriting process is intended to
assess both the prospective borrower's ability to repay and equally, if not more
important, the adequacy of the real property security. The fixed-rate and
adjustable-rate loans are generally fully amortized over a ten, fifteen or
thirty year schedule. To a limited extent, the Company will originate balloon
loans which generally are based on a 30-year amortization schedule with a single
payment of the remaining balance of the balloon loan generally 15 years after
origination. Loan amounts range from a minimum of $12,000 to a maximum of
$350,000, unless a higher amount is approved by the Company's loan committee.
The properties securing the loans are primarily single family detached, owner
occupied residences. Occasionally, loans are originated or acquired on one- to
four-family residential properties, condominiums or townhouses. No mobile home,
co-operative or land loans are currently originated or acquired.
The decision of the Company to approve a loan is based upon a number of
factors, including the appraised value of the property, the applicant's
creditworthiness and the Company's perception of the applicant's ability to
repay the loan. With respect to the value of the collateral, generally, loans
secured by first mortgages are limited to a maximum of 75% combined
loan-to-value ratio; however, the Company will originate loans with a combined
loan-to-value ratio of up to 90%. Loans secured by second mortgages are limited
to a maximum of 80% combined loan-to-value ratio. With respect to
creditworthiness, the Company has established classifications with respect to
the credit profiles of loans and subject properties based on certain of the
applicant's characteristics. Each loan application is placed into one of the
Company's four ratings ("A" through "D," with subratings within those
categories), depending upon the following three primary factors: (i) an
applicant's FICO score (a"FICO" score is a predictive performance measure
developed by Fair, Isaac and Co., which the Company believes is an important
quantitative tool for evaluating the creditworthiness of borrowers), (ii)
combined loan-to-value ratios and (iii) debt-to-income ratios. Terms of loans
made by the Company vary depending upon the classification of the application.
Applications with lower classifications generally are subject to higher interest
rates due to the increased risk inherent in the loan. A loan application must
obtain the following thresholds with respect to each of the three primary
factors to be included in the particular ratings shown below:
"A" "B" "C" "D"
--- --- --- ---
Minimum FICO Score 659 585 511 0
Maximum of Loan-to-Value 75% 73% 72% 65%
Maximum of Debt-to-Income Ratio 40% 49% 59% 65%
While the Company primarily analyzes the three factors noted above, the
Company also reviews other factors to determine whether an application will be
subject to a higher interest rate than the interest rate applicable to the
rating under which such application has initially been placed. These include
factors such as an unsubstantiated employment history, a recent foreclosure
proceeding, a number of recent delinquent payments on an existing mortgage, a
recent bankruptcy filing, a non-owner occupied property or the presence of a
senior mortgage or zoning restrictions on the subject property.
Each loan applicant is required to provide personal financial
information on a loan application and a statement of obligations. A credit
report is obtained for each borrower at the time of application which confirms
and reconciles amounts disclosed in the statement of obligations and which
discloses the applicant's payment and credit history. Generally, the borrower is
required to have an acceptable credit history given the amount of equity
available, the strength of the employment history and income stability. Income,
employment, and deed of trust status is verified for
24
each applicant by telephone and/or written inquiry, examination of tax returns,
pay check stubs, court supported documents or bank statements. Self-employed
applicants provide personal and business financial statements. The Company rates
a borrower's credit score, property value and debt ratio and then determines the
interest rate to be charged.
In general, with respect to Company originated Mortgage Loans, the
value of each property proposed as security for a mortgage loan is required to
be determined by a full appraisal conducted by a Company employee or, in the
case of loans related to Mortgage Properties in the United Kingdom, by a
certified appraiser or independent appraiser. After evaluation of a minimum of
three neighborhood comparables, a Company appraiser will complete his appraisal
with an inspection of the subject property and a meeting with the prospective
borrower. The Company hires certified appraisers in those states which require
such designation. Appraisers at the Company's headquarters, not third party fee
appraisers, perform a review of the property appraisal on the following loan
applications: (i) all properties with a market value above $150,000, (ii) all
loans with a combined loan-to-value ratio of equal to or greater than 55% (62%
in California), (iii) all loan applications prepared by a new retail branch
office for the first 90 days of its existence, (iv) all income properties, and
(v) all properties with a value less than $100,000 and (v) approximately 10% of
the loan applications not otherwise reviewed.
In connection with prior securitizations of the Company's loans,
independent appraisers have conducted appraisals of a sample of the subject
properties that are the collateral for the securitized loans. The appraisals
performed by the Company's appraisers have been within less than 2 % of the
aggregate appraisal values on securitized loans to date as calculated by the
independent appraisers.
Certain laws protect loan applicants by offering them a timeframe after
loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to funding a loan and may not be waived by the applicant except as
permitted by law. The Company discourages waiving the rescission period but does
permit such waivers with proper documentation.
The Company's Guidelines generally require title insurance coverage
issued by an approved American Land Title Association title insurance company
(as defined below) on each loan the Company originates or purchases. The
Company, the related Originator and their assignees are generally named as the
insured. Title insurance policies indicate the lien position of the mortgage
loan and protect the insured against loss if the title or lien position is not
as indicated.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the related loan exceeds replacement
value, insurance equal to replacement value may be accepted. The Company or its
designee is required to ensure that its name and address is properly added to
the "Mortgagee Clause" of the insurance policy. In the event the Company or the
related Originator's name is added to a "Loss Payee Clause" and the policy does
not provide for written notice of policy changes of cancellation, an endorsement
adding such provision is required.
Approved Guidelines. The Company may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Company's Guidelines. Certain of the Mortgage Loans will be acquired in
negotiated transactions, and such negotiated transactions may be governed by
agreements ("Master Commitments") relating to ongoing acquisitions of Mortgage
Loans by the Company from Originators who will represent that the Mortgage Loans
have been originated in accordance with underwriting guidelines agreed to by the
Company; the Company will generally review or cause to be reviewed only a
portion of the Mortgage Loans in any delivery of Mortgage Loans from the related
Originator for conformity with the Approved Guidelines.
The underwriting standards utilized in negotiated transactions and
Master Commitments may vary substantially from the Company's Guidelines. The
Approved Guidelines are designed to provide an underwriter with information to
evaluate either the security for the related Mortgage Loan, which security
consists primarily of the borrower's repayment ability, or the adequacy of the
Mortgaged Property as collateral, or a combination of both. Due to the variety
of Approved Guidelines and review procedures that may be applicable to the
Mortgage Loans included in any Mortgage Pool, the related Prospectus Supplement
will not distinguish among the various Approved Guidelines applicable to the
Mortgage Loans nor describe any review for compliance with applicable Approved
Guidelines performed by the Company. Moreover, there can be no assurance that
every Mortgage Loan was originated in conformity with the applicable Approved
Guidelines in all material respects, or that the quality or performance of
Mortgage Loans underwritten pursuant to varying guidelines as described above
will be equivalent under all circumstances. Notwithstanding the foregoing, in
the case of a Designated Originator transaction or a Participating Originator
transaction, the applicable underwriting guidelines may not be those
pre-approved by the Company, as in the case of
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Approved Guidelines, but may be those of the related Designated Originator or
Participating Originator, and will be described in the related Prospectus
Supplement.
Bulk Guidelines. Bulk portfolios of Mortgage Loans may be originated by
a variety of Originators under several different underwriting guidelines.
Because bulk portfolios are generally seasoned for a period of time, the
Company's underwriting review of bulk portfolios of Mortgage Loans focuses
primarily on payment histories and estimated current values based on estimated
property appreciation or depreciation and loan amortization. As a result,
Mortgage Loans that conform to the related Bulk Guidelines may not conform to
the requirements of the Company's Guidelines or any Approved Guidelines. For
example, the Company may purchase Mortgage Loans in bulk acquisitions with
Loan-to-Value Ratios in excess of 80%, without title insurance, or with
nonconforming appraisal methods such as tax assessments. Bulk Acquisition
portfolios may be purchased servicing released or retained. If servicing is
retained, the Originator must meet certain minimum requirements, as modified
from time to time, by the Company. The Company generally will cause the Mortgage
Loans acquired in a Bulk Acquisition to be reviewed for the purpose of
determining whether such Mortgage Loans were originated in accordance with the
applicable Bulk Guidelines. Such underwriting may consist of a review of all
such Mortgage Loans or may be performed on a sample basis. In addition, such
reunderwriting may be performed by the Company or by a third party acting at the
direction of the Company.
Quality Control. The Company maintains a quality control department.
All files originated by the Company are reviewed for the accuracy of certain
data fields as well as for legal compliance of documentation prior to approval
by the underwriting department. In addition each file originated by the Company
is reviewed again by the quality control department prior to disbursement of
loan funds. The Company performs a quality control review on all loans acquired
from other Originators.
The Company generally will cause Mortgage Loans acquired from
Unaffiliated Originators to be reunderwritten for the purpose of determining
whether such Mortgage Loans were originated in accordance with the loan
submission underwriting guidelines. Such reunderwriting may consist of a review
of all such Mortgage Loans or may be performed on a sample basis. Such
reunderwriting may be performed by the Company or a third party acting at the
direction of the Company.
Qualifications of Originators
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Company for participation in the Company's mortgage loan
program. Unaffiliated Originators that enter into agreements to sell mortgage
loans to the Company ("Master Commitments") and which meet the following
qualifications are hereinafter referred to as "Participating Originators." As of
the date of approval, each Participating Originator is generally required to
have a specified minimum level of experience in originating conventional
non-conforming mortgage loans. Furthermore, an Originator that will retain the
servicing of the related Mortgage Loans will be required to have a Mortgage Loan
servicing portfolio of a required amount and to have a specified minimal level
of experience servicing comparable mortgage loans. An Unaffiliated Originator
that would qualify as a "Participating Originator" is a "Designated Originator"
if it meets certain additional requirements. Notwithstanding these requirements,
however, there can be no assurance that any Originator presently meets such
qualifications or will continue to meet such qualifications at the time of
inclusion of mortgage loans sold by it in the Trust Estate for a series of
Securities, or thereafter.
The Company may waive or modify in an appropriate case any of the
foregoing requirements for Participating Originators and Designated Originators.
Unless otherwise described in the related Prospectus Supplement, the Company
will make directly, or will guarantee compliance with, any representations and
warranties made by any Unaffiliated Originator, other than a Designated
Originator, with respect to the Mortgage Loans originated by it and acquired by
a Trust; provided, however, that the Company will not directly make or guarantee
compliance with such representations and warranties made by a Designated
Originator. In the event of a breach of any such representation or warranty made
by a Designated Originator the only remedies will lie against such Designated
Originator.
All Unaffiliated Originators are required to originate mortgage loans
in accordance with the applicable underwriting standards. However, with respect
to any Originator, some of the generally applicable underwriting standards
described herein and in the Company's Guidelines may be modified or waived with
respect to certain Mortgage Loans originated by such Originators.
The Federal Deposit Insurance Corporation (the "FDIC") (either in its
corporate capacity or as receiver or conservator for a depository institution)
may also be an Originator of the Mortgage Loans. The FDIC is an independent
executive agency originally established by the Banking Act of 1933 to insure the
deposits of all banks entitled to federal deposit insurance under the Federal
Reserve Act and Federal Deposit Insurance Act. The FDIC administers the system
26
of nationwide deposit insurance (mutual guaranty of deposits) for United States
Banks and together with the United States Comptroller of the Currency regulates
in areas related to the maintenance of reserves for certain types of deposits,
the maintenance of certain financial ratios, transactions with affiliates and a
broad range of other banking practices.
The Company monitors the Originators and the Sub-Servicers under the
control of the FDIC, as well as those Originators and Sub-Servicers that are
insolvent or in receivership or conservatorship or otherwise financially
distressed. Such Originators may not be able or permitted to repurchase Mortgage
Loans for which there has been a breach of representation and warranty.
Moreover, any such Originator may make no representations and warranties with
respect to Mortgage Loans sold by it. The FDIC (either in its corporate capacity
or as receiver for a depository institution) may also originate Mortgage Loans,
in which event neither the FDIC nor the depository institution for which the
FDIC is acting as receiver may make representations and warranties with respect
to the Mortgage Loans that the FDIC sells, or the FDIC may make only limited
representations and warranties (for example, that the related legal documents
are enforceable). The FDIC may have no obligation to repurchase any Mortgage
Loan for a breach of a representation and warranty. If, as a result of a breach
of representation and warranty, an Originator is required to repurchase a
Mortgage Loan but is not permitted or otherwise fails to do so or if
representations and warranties are not made by an Originator, to the extent that
neither the Company nor any other entity has assumed the representations and
warranties or made representations and warranties, neither the Company nor that
entity will be required to repurchase such Mortgage Loan and, consequently such
Mortgage Loan will remain in the related Mortgage Pool and any related losses
will be borne by the Securityholders or by the related credit enhancement, if
any. In addition, loans which are purchased either directly or indirectly from
the FDIC may be subject to a contract right of the FDIC to repurchase such loans
under certain limited circumstances.
To the extent the Originator in a Designated Originator transaction
fails to or is unable to repurchase any Mortgage Loan due to a breach of
representation and warranty, neither the Company nor any other entity has
assumed the representations and warranties and any related losses will be borne
by the Securityholders or by the credit enhancement, if any.
Sub-Servicers
Each Originator of a Mortgage Loan will act as Sub-Servicer for such
Mortgage Loan pursuant to an agreement between the Servicer and the Sub-Servicer
(a "Sub-Servicing Agreement") unless the servicing obligations are released to
the Servicer or transferred to a servicer approved by the Servicer. An
Affiliated Originator of a Mortgage Loan may act as the Sub-Servicer for such
Mortgage Loan unless the other related servicing obligations are released or
transferred. The Servicer may employ Sub-Servicers that neither originate
mortgage loans nor originated the Mortgage Loans, such Sub-Servicers shall be
referred to as "Contract Sub-Servicers."
Unaffiliated Originators (except for Designated Originators and
Participating Originators) will be required to release such servicing
obligations to the Servicer. Designated Originators and Participating
Originators may act as Sub-Servicers for such Mortgage Loans pursuant to a
Sub-Servicing Agreement or may release such servicing obligations to the
Servicer. An Unaffiliated Originator acting as a Sub-Servicer for the Mortgage
Loans will be required to meet certain standards specified in the Prospectus
Supplement with respect to its conventional Mortgage Loan servicing portfolio,
GAAP tangible net worth, cash/warehouse line availability, mortgage servicing
licensing status and other specified qualifications. Contract Sub-Servicers
shall be required to satisfy standards similar to those for Unaffiliated
Originators; however, the Servicer will be directly responsible to the Trusts
for Servicing Mortgage Loans in compliance with the standards set forth in the
Pooling and Servicing Agreement. The Servicer will be responsible for the
compensation of any Contract Sub-Servicer and such compensation shall be
inclusive in the Servicer's fees.
Representations by Originators
Each Originator will generally make representations and warranties in
respect of the Mortgage Loans sold by such Originator and evidenced by a series
of Securities. Such representations and warranties generally include, among
other things, that at the time of the sale by the Originator to the Company of
each Mortgage Loan: (i) the information with respect to each Mortgage Loan set
forth in the Schedules of Mortgage Loans is true and correct as of the related
Cut-Off Date; (ii) each Mortgage Loan being transferred to the Trust which is a
REMIC is a qualified mortgage under the REMIC provisions of the Code and is a
Mortgage; (iii) each Mortgaged Property is improved by a single (one-to-four)
family residential dwelling, which may include condominiums and townhouses; (iv)
each Mortgage Loan had, at the time of origination, either an attorney's
certification of title or a title search or title policy; (v) as of the related
Cut-Off Date each Mortgage Loan is secured by a valid and subsisting lien of
record on the Mortgaged Property having the priority indicated on the related
Schedule of Mortgage Loans subject in all cases to exceptions to title set forth
in
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the title insurance policy, if any, with respect to the related Mortgage Loan;
(vi) each Originator held good and indefeasible title to, and was the sole owner
of, each Mortgage Loan conveyed by such Originator; and (vii) each Mortgage Loan
was originated in accordance with law and is the valid, legal and binding
obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement all of
the representations and warranties of an Originator in respect of a Mortgage
Loan will be made as of the date on which such Originator sells the Mortgage
Loan to the Company; the date as of which such representations and warranties
are made thus may be a date prior to the date of the issuance of the related
series of Securities. A substantial period of time may elapse between the date
as of which the representations and warranties are made and the later date of
issuance of the related series of Securities. Accordingly, the Originator's
purchase obligation (or, if specified in the related Prospectus Supplement,
limited replacement option) will not arise if, during the period commencing on
the date of sale of a Mortgage Loan by the Originator to the Company, an event
occurs that would give rise to such an obligation if the event had occurred
prior to sale of the affected Mortgage Loan.
The Company will assign to the Trustee for the benefit of the holders
of the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach of
any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Company will be obligated to
purchase from the related Trust such Mortgage Loan at a price (the "Loan
Purchase Price") set forth in the related Pooling and Servicing Agreement which
Loan Purchase Price will be equal to the principal balance thereof as of the
date of purchase plus one month's interest at the Mortgage Rate less the amount,
expressed as a percentage per annum, payable in respect of master servicing
compensation or sub-servicing compensation, as applicable, and the Originator's
Retained Yield, if any, and certain miscellaneous administrative amounts,
together with, without duplication, the aggregate amount of all delinquent
interest, if any.
As to any such Mortgage Loan required to be purchased by an Originator
and/or the Company, as provided above, rather than repurchase the Mortgage Loan,
the Servicer may, at its sole option, remove such Mortgage Loan (a "Deleted
Mortgage Loan") from the related Trust and cause the Company to substitute in
its place another Mortgage Loan of like kind (a "Qualified Replacement Mortgage"
as such term is defined in the related Pooling and Servicing Agreement);
however, such substitution must be effected within 90 days of the date of the
initial issuance of the Securities with respect to a Trust for which no REMIC
election is to be made. With respect to a Trust for which a REMIC election is to
be made, except as otherwise provided in the Prospectus Supplement relating to a
series of Securities, such substitution of a defective Mortgage Loan must be
effected within two years of the date of the initial issuance of the Securities,
and may not be made if such substitution would cause the Trust to not qualify as
a REMIC or result in a prohibited transaction tax under the Code. Except as
otherwise provided in the related Prospectus Supplement, any Qualified
Replacement Mortgage generally will, on the date of substitution, (i) have an
outstanding principal balance, after deduction of all scheduled payments due in
the month of substitution, not in excess of the outstanding principal balance of
the Deleted Mortgage Loan (the amount of any shortfall to be paid to the related
Trust in the month of substitution for distribution to the Securityholders),
(ii) have a Mortgage Rate neither one percentage point less than nor one
percentage point more than the Mortgage Rate of the Deleted Mortgage Loan as of
the date of substitution, (iii) have a remaining term to maturity neither one
year less than nor one year more than that of the Deleted Mortgage Loan, and
(iv) comply with all of the representations and warranties set forth in the
related Pooling and Servicing Agreement as of the date of substitution. The
related Pooling and Servicing Agreement may include additional requirements
relating to ARM Loans or other specific types of Mortgage Loans or additional
provisions relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. Unless otherwise
specified in the related Prospectus Supplement or Pooling and Servicing
Agreement, an Originator will also have the option to substitute a replacement
Mortgage Loan for a Mortgage Loan that it is obligated to repurchase in
connection with a breach of a representation and warranty.
The Servicer will be required under the applicable Pooling and
Servicing Agreement to enforce such purchase or substitution obligations for the
benefit of the Trustee and the Securityholders, following the practices it would
employ in its good faith business judgment if it were the owner of such Mortgage
Loan; provided, however, that this purchase or substitution obligation will in
no event become an obligation of the Servicer in the event the Originator fails
to honor such obligation. If the Originator fails to repurchase or substitute a
loan and no breach of the Company's representations has occurred, the
Originator's purchase or substitution obligation will in no event become an
obligation of the Company.
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In the case of a Designated Originator transaction where the Originator fails to
repurchase or substitute a Mortgage Loan and neither the Company, nor any other
entity has assumed the representations and warranties, such repurchase or
substitute obligation of the Originator will in no event become an obligation of
the Company. The foregoing will constitute the sole remedy available to
Securityholders or the Trustee for a breach of representation by an Originator
in its capacity as a seller of Mortgage Loans to the Company.
Unless otherwise described in the related Prospectus Supplement, the
Company will make directly, or will guarantee compliance with, any
representations and warranties made by any Unaffiliated Originator with respect
to the Mortgage Loans originated or purchased by it and acquired by a Trust;
provided, however, that the Company will not directly make or guarantee
compliance with such representations and warranties made by a Designated
Originator. In the event of a breach of any such representation or warranty made
by a Designated Originator the only remedies will lie against such Designated
Originator.
Notwithstanding the foregoing with respect to any Originator that
requests the Servicer's consent to the transfer of sub-servicing rights relating
to any Mortgage Loans to a successor servicer, the Servicer may release such
Originator from liability, under its representations and warranties described
above, upon the assumption by such successor servicer of the Originator's
liability for such representations and warranties as of the date they were made.
In that event, the Servicer's rights under the instrument by which such
successor servicer assumes the Originator's liability will be assigned to the
Trustee, and such successor servicer shall be deemed to be the "Originator" for
purposes of the foregoing provisions.
Sub-Servicing by Originators
Each Originator of a Mortgage Loan will act as the Sub-Servicer for
such Mortgage Loan pursuant to a Sub-Servicing Agreement unless servicing is
released to the Servicer or has been transferred to a servicer approved by the
Servicer. The Servicer may, in turn, assign such subservicing to designated
Sub-Servicers that will be qualified Originators and may include affiliates of
the Company. While such a Sub-Servicing Agreement will be a contract solely
between the Servicer and the Sub-Servicer, the Pooling and Servicing Agreement
pursuant to which a series of Securities is issued will provide that, the
Trustee, the Servicer or any Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
With the approval of the Servicer, a Sub-Servicer generally may
delegate its servicing obligations to third-party servicers, but such
Sub-Servicer will remain obligated under the related Sub-Servicing Agreement.
Each Sub-Servicer will be required to perform the customary functions of a
servicer, including collection of payments from Mortgagors and remittance of
such collections to the Servicer; maintenance of hazard insurance and filing and
settlement of claims thereunder, subject in certain cases to the right of the
Servicer to approve in advance any such settlement; maintenance of escrow or
impound accounts of Mortgagors for payment of taxes, insurance and other items
required to be paid by the Mortgagor pursuant to the Mortgage Loan; processing
of assumptions or substitutions; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing of Mortgaged Properties under certain
circumstances; and maintaining accounting records relating to the Mortgage
Loans. A Sub-Servicer also may be obligated to make advances to the Servicer in
respect of delinquent installments of principal and/or interest (net of any
sub-servicing or other compensation) on Mortgage Loans, as described more fully
under "Description of the Securities--Advances," and in respect of certain taxes
and insurance premiums not paid on a timely basis by Mortgagors. A Sub-Servicer
may also be obligated to pay to the Servicer any Compensating Interest with
respect to the related Mortgage Loans. No assurance can be given that the
Sub-Servicers will carry out their advance or payment obligations, if any, with
respect to the Mortgage Loans. A Sub-Servicer may transfer its servicing
obligations to another entity that has been approved for participation in the
Company's loan purchase programs, but only with the approval of the Servicer.
As compensation for its servicing duties, the Sub-Servicer may be
entitled to a monthly servicing fee in a minimum amount set forth in the related
Prospectus Supplement. The Sub-Servicer may also be entitled to collect and
retain, as part of its servicing compensation, any late charges or prepayment
penalties provided in the Mortgage Note or related instruments. The Sub-Servicer
will be reimbursed by the Servicer for certain expenditures that it makes,
generally to the same extent that the Servicer would be reimbursed under the
applicable Pooling and Servicing Agreement from the loan proceeds. Unless
specified in the related Prospectus Supplement and Pooling and Servicing
Agreement, compensation for the services of the Sub-Servicer shall be paid by
the Servicer as a general corporate obligation of the Servicer. See "The Pooling
and Servicing Agreement--Servicing and Other Compensation and Payment of
Expenses; Originator's Retained Yield."
Each Sub-Servicer will be required to agree to indemnify the Servicer
for any liability or obligation sustained by the Servicer in connection with any
act or failure to act by the Sub-Servicer in its servicing capacity. Each
29
Sub-Servicer will be required to maintain a fidelity bond and an errors and
omission policy with respect to its officers, employees and other persons acting
on its behalf or on behalf of the Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is terminated earlier by the
Servicer or the Sub-Servicer or unless servicing is released to the Servicer.
The Servicer generally may terminate a Sub-Servicing Agreement immediately upon
the giving of notice upon certain stated events, including the violation of such
Sub-Servicing Agreement by the Sub-Servicer, or upon thirty days' notice to the
Sub-Servicer without cause upon payment of an amount equal to a specified
termination fee calculated as a specified percentage of the aggregate
outstanding principal balance of all mortgage loans, including the Mortgage
Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing Agreement and
certain transfer fees.
The Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Servicer may act
as servicer of the related Mortgage Loans or enter into one or more new
Sub-Servicing Agreements. If the Servicer acts as servicer, it will not assume
liability for the representations and warranties of the Sub-Servicer that it
replaces. If the Servicer enters into a new Sub-Servicing Agreement, each new
Sub-Servicer either must be an Originator, meet the standards for becoming an
Originator or have such servicing experience that is otherwise satisfactory to
the Servicer. The Servicer may make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur and, in any event, if the new Sub-Servicer is an affiliate of the
Servicer, the liability for such representations and warranties will not be
assumed by such new Sub-Servicer. In the event of such an assumption, the
Servicer may in the exercise of its business judgment release the terminated
Sub-Servicer from liability in respect of such representations and warranties.
Any amendments to a Sub-Servicing Agreement or to a new Sub-Servicing Agreement
may contain provisions different from those described above that are in effect
in the original Sub-Servicing Agreements. However, the Pooling and Servicing
Agreement for each Trust Estate will provide that any such amendment or new
agreement may not be inconsistent with such Pooling and Servicing Agreement to
the extent that it would materially and adversely affect the interests of the
Securityholders.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Securities. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool in the Trust Estate will be
provided by the Servicer directly or through one or more Sub-Servicers subject
to supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Mortgage Loans, then the Master Servicer will (i) administer and
supervise the performance by the Servicer of its servicing responsibilities
under the Pooling and Servicing Agreement with the Master Servicer, (ii)
maintain a current data base with the payment histories of each Mortgagor, (iii)
review monthly servicing reports and data relating to the Mortgage Pool for
discrepancies and errors, and (iv) act as back-up Servicer during the term of
the transaction unless the Servicer is terminated or resigns in such case the
Master Servicer shall assume the obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing
Agreement for any Series for which Mortgage Loans comprise the Trust Estate. The
Master Servicer generally will be required to be a FNMA- or FHLMC-approved
seller/servicer and, in the case of FHA Loans, approved by HUD as an FHA
mortgagee. The Master Servicer will be compensated for the performance of its
services and duties under each Pooling and Servicing Agreement as specified in
the related Prospectus Supplement.
DESCRIPTION OF THE SECURITIES
General
The Securities will be issued in series. Each series of Securities (or,
in certain instances, two or more series of Securities) will be issued pursuant
to a Pooling and Servicing Agreement. The following summaries (together with
additional summaries under "The Pooling and Servicing Agreement" below) describe
all material terms and provisions relating to the Securities common to each
Pooling and Servicing Agreement. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for the related Trust and to
the related Prospectus Supplement.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as Debt Instruments, having a
principal balance and a specified interest rate ("Interest Rate").
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Fixed-Income Securities may be either beneficial ownership interests in the
related Mortgage Loans held by the related Trust, or may represent debt secured
by such Mortgage Loans. Each series or class of Fixed-Income Securities may have
a different Interest Rate, which may be a fixed, variable or adjustable Interest
Rate. The related Prospectus Supplement will specify the Interest Rate for each
series or class of Fixed-Income Securities, or the initial Interest Rate and the
method for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities
("Strip Securities") entitled to (i) principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) interest
distributions, with disproportionate, nominal or no principal distributions. In
addition, a series may include two or more classes of Fixed-Income Securities
that differ as to timing, sequential order, priority of payment, Interest Rate
or amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or formula, or on
the basis of collections from designated portions of the related Mortgage Pool,
which series may include one or more classes of Fixed-Income Securities
("Accrual Securities"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance (or nominal
principal balance in the case of Accrual Securities which are also Strip
Securities) thereof on each Payment Date, as hereinafter defined and in the
manner described in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more classes of Fixed-Income Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Fixed-Income Securities (collectively, the "Subordinate Securities") in
respect of certain distributions of principal and interest and allocations of
losses on Mortgage Loans. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of Senior (or
Subordinate) Securities in respect of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest," "seller's interest" or the "general partnership interest," depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this
Prospectus or any Prospectus Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to a separate Registration
Statement to be filed by the Company. In addition, the Company and its
affiliates may initially or permanently hold any Equity Securities issued by any
Trust.
General Payment Terms of Securities
As provided in the related Pooling and Servicing Agreement and as
described in the related Prospectus Supplement, Securityholders will be entitled
to receive payments on their Securities on specified dates ("Payment Dates").
Payment Dates with respect to Fixed-Income Securities will occur monthly,
quarterly or semi-annually, as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record
Date") preceding such Payment Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date. Unless otherwise described in the
related Prospectus Supplement, the Payment Date will be the twentieth day of
each month (or, in the case of quarterly-pay Securities, the twentieth day of
every third month; and in the case of semi-annually-pay Securities, the
twentieth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month which precedes such Payment
Date.
The related Prospectus Supplement and Pooling and Servicing Agreement
will describe the periods (each, a "Remittance Period" or "Due Period")
antecedent to each Payment Date (for example, in the case of monthly-pay
Securities, the calendar month (or the 30 days) preceding the month in which a
Payment Date occurs or such other specified period). Unless otherwise provided
in the related Prospectus Supplement, collections received on or with respect to
the related Mortgage Loans during a Remittance Period will be required to be
remitted by the Servicer to the related Trustee prior to the related Payment
Date, and will be used to distribute payments to Securityholders on such Payment
Date. As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used
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to distribute payments of principal to Securityholders during such period) with
the result that the related securities possess an interest-only period, also
commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to distribute payments of principal to
Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Neither the Securities nor the underlying Mortgage Loans will be
guaranteed or insured by any governmental agency or instrumentality or the
Company, the Servicer, any Sub-Servicer, any Master Servicer, any Originator or
any of their affiliates; provided, however, that certain distributions to
Securityholders may be guaranteed by a Financial Guaranty Insurer.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Securities of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interest in a
separate Trust Estate created pursuant to such Pooling and Servicing Agreement.
A Trust Estate will consist of, to the extent provided in the Pooling and
Servicing Agreement: (i) a pool of Mortgage Loans (and the related mortgage
documents) or certificates of interest or participations therein underlying a
particular series of Securities as from time to time are subject to the Pooling
and Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Company or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation, all
payments due on the Mortgage Loans after the related Cut-Off Date, as from time
to time are identified as deposited in respect thereof in the Principal and
Interest Account and in the related Distribution Account; (iii) property
acquired by foreclosure of the Mortgage Loans or deed in lieu of foreclosure;
(iv) hazard insurance policies and primary insurance policies, if any, and
certain proceeds thereof; and (v) any combination, as specified in the related
Prospectus Supplement, of a letter of credit, financial guaranty insurance
policy, purchase obligation, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, reserve fund or other type of credit
enhancement as described under "Description of Credit Enhancement." To the
extent that any Trust Estate includes certificates of interest or participations
in Mortgage Loans, the related Prospectus Supplement will describe the material
terms and conditions of such certificates or participations.
Form of Securities
If so specified in the related Prospectus Supplement, the Securities of
each series will be issued as physical certificates ("Physical Certificates") in
fully registered form only in the denominations specified in the related
Prospectus Supplement, and will be transferable and exchangeable at the
corporate trust office of the registrar of the Securities (the "Security
Registrar") named in the related Prospectus Supplement. No service charge will
be made for any registration of exchange or transfer of Securities, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect
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access to the DTC system also is available to others such as brokers, dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participant").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders 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, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders. Accordingly, although Securityholders will not
possess Securities, the rules provide a mechanism by which Securityholders will
receive distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who
are not Participants may transfer ownership of Securities only through
Participants by instructing such Participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be
taken by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Securities to the extent that such actions are
taken on behalf of Participants whose holdings include such current principal
amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Securities"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for reregistration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
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Assignment of Mortgage Loans
At the time of issuance of a series of Securities, the Company will
cause the Mortgage Loans being included in the related Trust Estate to be
assigned to the Trustee together with all principal and interest due on or after
the Cut-Off Date with respect to such Mortgage Loan, other than principal and
interest due before the Cut-Off Date. If specified in the related Prospectus
Supplement, the Company or any of its affiliates may retain the Originator's
Retained Yield, if any, for itself or transfer the same to others. The Trustee
will, concurrently with such assignment, deliver a series of Securities to the
Company in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement. Such schedule will include, among other things, information
as to the principal balance of each Mortgage Loan as of the Cut-Off Date, as
well as information regarding the Mortgage Rate, the currently scheduled monthly
payment of principal and interest and the maturity of the Mortgage Note.
In connection with the transfer of the Mortgage Loans to the Trustee,
the Originators will be required to deliver to the Company, who in turn will
deliver to the Trustee, a file consisting of (i) the original Notes or certified
copies thereof, endorsed by the Originator thereof in blank or to the order of
the holder, (ii) originals of all intervening assignments, showing a complete
chain of title from origination to the applicable Originators, if any, including
warehousing assignments, with evidence of recording thereon, (iii) originals of
all assumption and modification agreements, if any, and, unless such Mortgage
Loan is covered by a counsel's opinion as described in the next paragraph, (iv)
either: (a) the original Mortgage, with evidence of recording thereon, (b) a
true and accurate copy of the Mortgage where the original has been transmitted
for recording, until such time as the original is returned by the public
recording office or (c) a copy of the Mortgage certified by the public recording
office in those instances where the original recorded Mortgage has been lost.
The Trustee will agree, for the benefit of the Securityholders, to review each
such file within 90 days after the execution and delivery of the applicable
Pooling and Servicing Agreement to ascertain that all required documents (or
certified copies of documents) have been executed and received.
The Originators are additionally required to cause to be prepared and
submitted for recording, within 75 business days of the execution and delivery
of the applicable Pooling and Servicing Agreement (or, if original recording
information is unavailable, within such later period as is permitted by the
Pooling and Servicing Agreement) assignments of the Mortgages from the
Originators to the Trustee, in the appropriate jurisdictions in which such
recordation is necessary to perfect the lien thereof as against creditors of or
purchasers from the Originators, to the Trustee; provided, however, that if the
Originators furnish to the Trustee an opinion of counsel to the effect that no
such recording is necessary to perfect the Trustee's interests in the Mortgages
with respect to one or more jurisdictions, then such recording will not be
required with respect to such jurisdictions.
If the Sub-Servicer or Originator does not cure an omission or defect
in a required document within 60 days after notice is given to the Servicer, the
Sub-Servicer or Originator, as the case may be, will be obligated to purchase on
the next succeeding Remittance Date the related Mortgage Loan from the Trustee
at its Loan Purchase Price (or, if specified in the related Prospectus
Supplement, will be permitted to substitute for such Mortgage Loan under the
conditions specified in the related Prospectus Supplement). The Servicer will be
obligated to enforce this obligation of the Sub-Servicer or Originator, as the
case may be, to the extent described above under "Mortgage Loan
Program--Representations by Originators." Neither the Servicer, the Master
Servicer nor the Company will, however, be obligated to purchase or substitute
for such Mortgage Loan if the Sub-Servicer or Originator, as the case may be,
defaults on its obligation to do so, and there can be no assurance that a
Sub-Servicer or Originator, as the case may be, will carry out any such
obligation. Such purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized at any time to appoint a custodian
pursuant to a custodial agreement to maintain possession of and, if applicable,
to review the documents relating to the Mortgage Loans as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Securities will be set forth in the related Prospectus
Supplement.
Pursuant to each Pooling and Servicing Agreement, the Servicer, either
directly or through Sub-Servicers, will service and administer the Mortgage
Loans assigned to the Trustee as more fully set forth below.
Forward Commitments; Pre-Funding
A Trust may enter into a Forward Purchase Agreement with the Company
whereby the Company will agree to transfer Subsequent Mortgage Loans to such
Trust following the date on which such Trust is established and the related
Securities are issued. All Subsequent Mortgage Loans transferred to the Trust
pursuant to a Forward Purchase
34
Agreement will be originated by the Company or an Originator. The Trust may
enter into Forward Purchase Agreements to permit the acquisition of Subsequent
Mortgage Loans that could not be delivered by the Company or have not formally
completed the origination process, in each case prior to the date on which the
Securities are delivered to the Securityholders (the "Closing Date"). Any
Forward Purchase Agreement will require that any Subsequent Mortgage Loans so
transferred to a Trust conform to the requirements specified in such Forward
Purchase Agreement. If a Forward Purchase Agreement is to be utilized the
related Trustee will be required to deposit in the Pre-Funding Account all or a
portion of the proceeds received by the Trustee in connection with the sale of
one or more classes of Securities of the related series; the Subsequent Mortgage
Loans will be transferred to the related Trust in exchange for money released to
the Company from the related Pre-Funding Account in one or more transfers. The
maximum amount of money deposited in the Pre-Funding Account to acquire
Subsequent Mortgage Loans for transfer to the Trust will not exceed 25% of the
aggregate principal amount of the Securities offered pursuant to the related
Prospectus Supplement. Each Forward Purchase Agreement will set a specified
period during which any such transfers must occur, which such period shall not
exceed 90 days from the date such Trust was established. The Forward Purchase
Agreement or the related Pooling and Servicing Agreement will require that, if
all moneys originally deposited to such Pre-Funding Account are not so used by
the end of such specified period, then any remaining moneys will be applied as a
mandatory prepayment of the related class or classes of Securities as specified
in the related Prospectus Supplement. See "Risk Factors" herein and in the
related Prospectus Supplement. All moneys on deposit in the Pre-Funding Account
will be invested in one or more Permitted Investments with all earnings thereon
available to make interest payments on the Securities.
Each additional Mortgage Loan will be of a type specified herein, will
be originated or underwritten in accordance with the Company's guidelines
discussed under "Mortgage Loan Program -- Underwriting Guidelines" and will
satisfy any additional eligibility criteria specified in the related Prospectus
Supplement. Such eligibility criteria will be determined in consultation with
each Rating Agency (and/or any credit enhancement provider for the related
series) prior to the issuance of such series to ensure that such additional
Mortgage Loans will not cause the aggregate characteristics of the related
Mortgage Pool to vary materially from those of the initial Mortgage Pool, or
that any such variation is within parameters that were taken into account at the
time the initial ratings were assigned to the Securities of the related series.
The Company will be required to certify that all conditions precedent to the
transfer of such additional Mortgage Loans, including the satisfaction of
specific eligibility criteria, have been satisfied. It will be a condition to
the transfer of any additional Mortgage Loans by the Company for inclusion in
the related Mortgage Pool that each Rating Agency, after receiving prior notice
of any such proposed transfer, shall not have advised the Company or the Trustee
or any credit enhancement provider for the series that the conveyance of such
additional Mortgage Loans will result in a qualification, modification or
withdrawal of its then current rating of the related Securities. The inclusion
of additional Mortgage Loans in a Mortgage Pool for a series of Securities may
affect, in some instances adversely, the performance of the related Securities,
even if the aggregate characteristics of such Mortgage Pool do not vary as a
result of the inclusion of such additional Mortgage Loans. The Company will
provide a schedule of such additional Mortgage Loans or tabular information on
such additional Mortgage Loans similar to that included in the related
Prospectus Supplement in the Detailed Description filed under cover of a Current
Report on Form 8-K within 15 days of the end of the Funding Period.
The ability of any Trust to invest in additional Mortgage Loans during
the related Funding Period and, in the case of a series of Securities, any
revolving period, will be dependent upon the ability of the Company to acquire
Mortgage Loans that satisfy the prerequisites to transfer for inclusion in the
related Mortgage Pool specified in the related Prospectus Supplement. The
ability of the Company to acquire such Mortgage Loans will be affected by a
variety of social and economic factors, including the prevailing level of market
interest rates, unemployment levels and consumer perceptions of general economic
conditions.
Payments on Mortgage Loans; Deposits to Distribution Account
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain an account (the "Sub-Servicing Account")
which generally meets the requirements set forth in the Company's Guidelines
from time to time, and is otherwise acceptable to the Servicer. A Sub-Servicing
Account will generally be a lock box account established with a Federal Home
Loan Bank or with a depository institution (including the Sub-Servicer itself)
whose accounts are insured by the National Credit Union Share Insurance Fund or
the FDIC, provided that any such depository institution must meet certain
minimum rating criteria set forth in the Company's Guidelines. Except as
otherwise permitted by the applicable Rating Agencies, a Sub-Servicing Account
must be segregated and may not be established as a general ledger account.
35
A Sub-Servicer is required to deposit into its Sub-Servicing Account
within one day of receipt all amounts described above under "Mortgage Loan
Program--Sub-Servicing by Originators" that are received by it in respect of the
Mortgage Loans, less its servicing fee or other compensation. On a daily basis
or on or before the date specified in the Sub-Servicing Agreement (which date
may be no later than the business day prior to the Determination Date referred
to below or, if such day is not a business day, the preceding business day), the
Sub-Servicer must remit or cause to be remitted to the Servicer or the Trustee
all funds held in the Sub-Servicing Account with respect to Mortgage Loans that
are required to be so remitted. A Sub-Servicer may also be required to make
Servicing Advances, and Delinquency Advances and to pay Compensating Interest as
set forth in the related Sub-Servicing Agreement.
The Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
received by it subsequent to the Cut-Off Date (other than payments due on or
before the Cut-Off Date), as specifically set forth in the related Pooling and
Servicing Agreement, which generally will include the following except as
otherwise provided therein:
(i) all payments on account of principal, including principal payments
received in advance of the date on which the related monthly payment is
due (the "Due Date") ("Principal Prepayments"), on the Mortgage Loans
comprising a Trust Estate;
(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Estate, net of the portion of each payment
thereof retained by the Servicer and the Sub-Servicer, if any, as their
servicing fee or other compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed advances made, by the Servicer or
the related Sub-Servicer) received and retained, if any, in connection
with the liquidation of any defaulted Mortgage Loan, by foreclosure,
deed in lieu of foreclosure or otherwise ("Liquidation Proceeds"),
including all proceeds of any special hazard insurance policy,
bankruptcy bond, mortgage pool insurance policy, financial guaranty
insurance policy and any title, hazard or other insurance policy
covering any Mortgage Loan in such Mortgage Pool (together with any
payments under any letter of credit, "Insurance Proceeds") or proceeds
from any alternative arrangements established in lieu of any such
insurance and described in the applicable Prospectus Supplement, other
than proceeds to be applied to the restoration of the related property
or released to the Mortgagor in accordance with the Servicer's normal
servicing procedures (such amounts, net of related unreimbursed
expenses and advances of the Servicer, "Net Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Securityholders, as described below;
(v) all proceeds of any Mortgage Loan in such Trust Estate purchased
(or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Servicer, the Company, the Master
Servicer, any Sub-Servicer or Originator or any other person pursuant
to the terms of the Pooling and Servicing Agreement. See "Mortgage Loan
Program--Representations by Originators," "--Assignment of Mortgage
Loans" above; and
(vi) any amounts required to be transferred from the Distribution
Account (as defined below) to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Servicer shall
cause to be established and the Trustee will maintain, at the corporate trust
office of the Trustee, in the name of the Trust for the benefit of the holders
of each series of Securities, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Securities (the "Distribution
Account"). Both the Principal and Interest Account and the Distribution Account
must be (x) maintained with a depository institution whose debt obligations at
the time of any deposit therein meet certain rating criteria, and (y) (i) an
account or accounts the deposits in which are fully insured to the limits
established by the FDIC, (ii) an account maintained at a federal savings and
loan or state banking institution, (iii) an account maintained at a principal
subsidiary of a bank holding company, (iv) an account maintained at a national
banking association, or (v) such other account or accounts acceptable to the
Rating Agency or Agencies that rated one or more classes of Securities of such
series (an "Eligible Account"). The collateral that is eligible to secure
amounts in an Eligible Account is limited to certain permitted investments
("Permitted Investments"). Permitted Investments include direct general
obligations of the United States or the obligations of any agency or
instrumentality of the United States that are fully guaranteed, Federal Funds,
certificates of deposit, time and demand deposits of any bank meeting certain
short term rating requirements described in a Pooling and Servicing Agreement,
certain investment agreements approved by the Financial
36
Guaranty Insurer, and commercial paper and no load mutual funds meeting certain
rating requirements described in a Pooling and Servicing Agreement. A
Distribution Account may be maintained as an interest-bearing or a
non-interest-bearing account, or funds therein may be invested in Permitted
Investments as described below. The Principal and Interest Account may contain
funds relating to more than one series of Securities as well as payments
received on other mortgage loans serviced or master serviced by the Servicer
that have been deposited into the Principal and Interest Account. The Servicer
will be entitled to any interest or other income or gain realized with respect
to the funds on deposit in the Principal and Interest Accounts.
Unless otherwise specified in the related Prospectus Supplement and
Pooling and Servicing Agreement, not later than the third day preceding each
Payment Date (the "Remittance Date"), the Servicer will withdraw from the
Principal and Interest Account and remit to the Trustee for deposit into the
applicable Distribution Account, in immediately available funds, the amount to
be distributed therefrom to Securityholders on such Payment Date. The Servicer
will remit to the Trustee for deposit into the Distribution Account the amount
of any advances made by the Servicer as described herein under "Advances," any
amounts required to be paid by the Servicer out of its own funds due to the
operation of a deductible clause in any blanket policy maintained by the
Servicer to cover hazard losses on the Mortgage Loans as described under "Hazard
Insurance; Claims Thereunder" below and any other amounts as specifically set
forth in the related Pooling and Servicing Agreement. The Trustee will cause all
payments under any credit enhancement such as a financial guaranty insurance
policy or a letter of credit to be deposited in the Distribution Account prior
to the close of business on the business day next preceding each Payment Date.
The portion of any payment received by the Servicer in respect of a
Mortgage Loan that is allocable to the Originator's Retained Yield generally
will be deposited into the Principal and Interest Account but will not be
deposited in the Distribution Account for the related series of Securities.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Payment Date. All income and gain realized from any such investment will
generally be for the account of the Servicer. Funds on deposit in the related
Distribution Account may be invested in Permitted Investments maturing, in
general, no later than the Payment Date.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will
deposit the related Buydown Funds provided to it in a Buydown Account that will
comply with the requirements set forth herein with respect to a Sub-Servicing
Account. The terms of all Buydown Mortgage Loans provide for the contribution of
Buydown Funds in an amount equal to or exceeding either (i) the total payments
to be made from such funds pursuant to the related buydown plan or (ii) if such
Buydown Funds are to be deposited on a discounted basis, that amount of Buydown
Funds which, together with investment earnings thereon at a rate as set forth in
the Company's Guidelines from time to time, will support the scheduled level of
payments due under the Buydown Mortgage Loan. Neither the Servicer nor the
Company will be obligated to add to any such discounted Buydown Funds any of its
own funds should investment earnings prove insufficient to maintain the
scheduled level of payments. To the extent that any such insufficiency is not
recoverable from the Mortgagor or, in an appropriate case, from the related
Originator or the related Sub-Servicer, distributions to Securityholders may be
affected. With respect to each Buydown Mortgage Loan, the Sub-Servicer will
withdraw from the Buydown Account and remit to the Servicer on or before the
date specified in the Sub-Servicing Agreement described above the amount, if
any, of the Buydown Funds (and, if applicable, investment earnings thereon) for
each Buydown Mortgage Loan that, when added to the amount due from the Mortgagor
on such Buydown Mortgage Loan, equals the full monthly payment which would be
due on the Buydown Mortgage Loan if it were not subject to the buydown plan.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Sub-Servicer will withdraw from
the Buydown Account and remit to the Mortgagor or such other designated party in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a Mortgagor during the Buydown Period
together with Buydown Funds will result in full prepayment of a Buydown Mortgage
Loan, the Sub-Servicer will generally be required to withdraw from the Buydown
Account and remit to the Servicer the Buydown Funds and investment earnings
thereon, if any, which together with such prepayment will result in a prepayment
in full; provided that Buydown Funds may not be available to cover a prepayment
under certain Mortgage Loan programs. Any Buydown Funds so remitted to the
Servicer in connection with a prepayment described in the preceding sentence
will be deemed to reduce the amount that would be required to be paid by the
Mortgagor to repay fully the related Mortgage Loan if the Mortgage Loan were not
subject to the buydown plan. Any investment earnings remaining in the Buydown
Account after prepayment or after termination of the Buydown Period will be
remitted to the related Mortgagor or such other designated party pursuant to the
agreement relating to each
37
Buydown Mortgage Loan (the "Buydown Agreement"). If the Mortgagor defaults
during the Buydown Period with respect to a Buydown Mortgage Loan and the
property securing such Buydown Mortgage Loan is sold in liquidation (either by
the Servicer, the Primary Insurer, the insurer under the mortgage pool insurance
policy (the "Pool Insurer") or any other insurer), the Sub-Servicer will be
required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and remit the same to the Servicer or, if
instructed by the Servicer, pay the same to the Primary Insurer or the Pool
Insurer, as the case may be, if the Mortgaged Property is transferred to such
insurer and such insurer pays all of the loss incurred in respect of such
default.
Withdrawals from the Principal and Interest Account
The Servicer may, from time to time, make withdrawals from the
Principal and Interest Account for certain purposes, as specifically set forth
in the related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit to the
Distribution Account in the amounts and in the manner provided in the
Pooling and Servicing Agreement and described in "--Payments on
Mortgage Loans; Deposits to Distribution Account" above;
(ii) to reimburse itself or any Sub-Servicer for Delinquency Advances
or Servicing Advances as to any Mortgaged Property, out of late
payments or collections on the related Mortgage Loan with respect to
which such Delinquency Advances or Servicing Advances were made;
(iii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iv) to pay the Company or its assignee all amounts allocable to the
Originator's Retained Yield out of collections or payments which
represent interest on each Mortgage Loan (including any Mortgage Loan
as to which title to the underlying Mortgaged Property was acquired);
(v) to withdraw amounts that have been deposited in the Principal and
Interest Account in error; and
(vi) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the
Pooling and Servicing Agreement, as described in "The Pooling and
Servicing Agreement--Termination, Retirement of Securities."
Distributions
Beginning on the Payment Date in the month following the month (or, in
the case of quarterly-pay Securities, the third month following such month and
each third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as the Securityholders of such Securities at the close of
business as of the last day of the preceding month (the "Record Date") in
proportion to their respective Percentage Interests. Interest that accrues and
is not payable on a class of Securities will generally be added to the principal
balance of each Security of such class in proportion to its Percentage Interest.
The undivided percentage interest (the "Percentage Interest") represented by a
Security of a particular class will be equal to the percentage obtained by
dividing the initial principal balance or notional amount of such Security by
the aggregate initial amount or notional balance of all the Securities of such
class. Distributions will be made in immediately available funds (by wire
transfer or otherwise) to the account of a Securityholder at a bank or other
entity having appropriate facilities therefor, if such Securityholder has so
notified the Trustee or the Paying Agent, as the case may be, and the applicable
Pooling and Servicing Agreement provides for such form of payment, or by check
mailed to the address of the person entitled thereto as it appears on the
Security Register; provided, however, that the final distribution in retirement
of the Securities (other than any Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice to Securityholders of such final distribution.
Principal and Interest on the Securities
The method of determining, and the amount of, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on a particular series of Securities will be described in the related
Prospectus Supplement. Each class of Securities (other than certain classes of
Strip Securities) may bear interest at a different
38
interest rate (the "Pass-Through Rate"), which may be a fixed or adjustable
Pass-Through Rate. The related Prospectus Supplement will specify the
Pass-Through Rate for each class, or in the case of an adjustable Pass-Through
Rate, the initial Pass-Through Rate and the method for determining the
Pass-Through Rate. Interest on the Securities generally will be calculated
either on the basis of a 360-day year consisting of twelve 30-day months or, in
the case of certain Securities bearing an adjustable Pass-Through Rate, on the
basis of the actual number of days elapsed in the period for which interest is
being paid, divided by 360.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
Principal Distribution Amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less the amount of any Deferred Interest added
to the principal balance of the Mortgage Loans and/or the outstanding balance of
one or more classes of Securities on the related Due Date, allocable to
Securityholders which are not covered by advances or the applicable credit
enhancement, in each case in such amount that is allocated to such class on the
basis set forth in the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes
of Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the 15th day (or if such day is not a business day,
the next succeeding business day or such other date specified in the Pooling and
Servicing Agreement) of the month of distribution (the "Determination Date"),
the Servicer will provide the Trustee, (and the Master Servicer and Credit
Enhancer, if any) with a monthly servicing report. Except as otherwise provided
in the related Pooling and Servicing Agreement, on or prior to one business day
after the related Remittance Date (or such earlier or later day as shall be
agreed by a Financial Guaranty Insurer, if applicable, and Trustee) of the month
of distribution, the Trustee will use the monthly servicing report to determine
the amounts of principal and interest which will be passed through to
Securityholders on the immediately succeeding Payment Date. If the amount in the
Principal and Interest Account is insufficient to cover the amount to be passed
through to Securityholders, no later than 12:00 noon New York City time on the
second business day preceding a Payment Date, the Trustee will notify a
Financial Guaranty Insurer or any other person required to be notified pursuant
to the related Pooling and Servicing Agreement.
Advances
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is required, not later than each Remittance Date, to deposit into the
Principal and Interest Account an amount equal to the sum of the scheduled
interest and principal payments (net of the Servicing Fees and certain
administrative amounts) due, but not collected, with respect to delinquent
Mortgage Loans during the prior Remittance Period, but only if, in its good
faith business judgment, the Servicer believes that such amount will ultimately
be recovered from the related Mortgage Loan. Such amounts are "Delinquency
Advances." The Servicer will be permitted to fund its payment of Delinquency
Advances on any Remittance Date from collections on any Mortgage Loan deposited
to the Principal and Interest Account
39
subsequent to the related Remittance Period and will be required to deposit into
the Principal and Interest Account with respect thereto (i) collections from the
Mortgagor whose delinquency gave rise to the shortfall which resulted in such
Delinquency Advance and (ii) Net Liquidation Proceeds recovered on account of
the related Mortgage Loan to the extent of the amount of aggregate Delinquency
Advances related thereto.
A Mortgage Loan is "delinquent" if any payment due thereon is not made
by the close of business on the day such payment is scheduled to be due.
Generally, on or prior to each Remittance Date, the Servicer will be
required to deposit in the Principal and Interest Account with respect to any
full prepayment received on a Mortgage Loan during the related Remittance Period
out of its own funds without any right of reimbursement therefor, an amount
equal to the difference between (x) 30 days' interest at the Mortgage Loan's
Mortgage Rate (less the Servicing Fee and certain miscellaneous administrative
amounts) on the loan balance of such Mortgage Loan as of the first day of the
related Remittance Period and (y) to the extent not previously advanced, the
interest (less the Servicing Fee and certain miscellaneous administrative
amounts) paid by the Mortgagor with respect to the Mortgage Loan during such
Remittance Period (any such amount paid by the Servicer, "Compensating
Interest"). The Servicer shall in no event be required to pay Compensating
Interest with respect to any Remittance Period in an amount in excess of the
aggregate Servicing Fee received by the Servicer with respect to all Mortgage
Loans for such Remittance Period.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that the Servicer reasonably believes that such amounts will increase
Net Liquidation Proceeds on the related Mortgage Loan. Each such amount so paid
will constitute a "Servicing Advance." The Servicer may recover Servicing
Advances to the extent permitted by the Mortgage Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from liquidation proceeds realized upon the liquidation of the related Mortgage
Loan. In no case may the Servicer recover Servicing Advances from the principal
and interest payments on any Mortgage Loan or from any amounts relating to any
other Mortgage Loan.
Notwithstanding the foregoing, if the Servicer exercises its option, if
any, to purchase the assets of a Trust Estate as described under "The Pooling
and Servicing Agreement--Termination; Retirement of Securities" below, the
Servicer will be deemed to have been reimbursed for all related advances
previously made by it and not theretofore reimbursed to it. The Servicer's
obligation to make advances may be supported by credit enhancement as described
in the related Pooling and Servicing Agreement. In the event that the provider
of such support is downgraded by a Rating Agency rating the related Securities
or if the collateral supporting such obligation is not performing or is removed
pursuant to the terms of any agreement described in the related Prospectus
Supplement, the Securities may also be downgraded.
Reports to Securityholders
With each distribution to Securityholders of a particular class the
Trustee will forward or cause to be forwarded to each holder of record of such
class of Securities a statement or statements with respect to the related Trust
setting forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any prepayments or other recoveries
of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage Loans after
giving effect to the distribution of principal on such Payment Date;
(v) with respect to a series consisting of two or more classes, the
outstanding principal balance or notional amount of each class after
giving effect to the distribution of principal on such Payment Date;
(vi) the amount of coverage under any letter of credit, mortgage pool
insurance policy or other form of credit enhancement covering default
risk as of the close of business on the applicable Determination Date
and a description of any credit enhancement substituted therefor;
(vii) information furnished by the Company pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
40
(viii) the total of any Substitution Amounts and any Loan Purchase
Price amounts included in such distribution; and
(ix) a number with respect to each class (the "Pool Factor") computed
by dividing the principal balance of all certificates in such class
(after giving effect to any distribution of principal to be made on
such Payment Date) by the original principal balance of certificates of
such class on the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year following any
year during which Securities are outstanding, the Trustee shall furnish a report
to each Securityholder of record at any time during each calendar year as to the
aggregate amounts reported pursuant to (i), (ii) and (iii) with respect to the
Securities for such calendar year. If a class of Securities are in book-entry
form, DTC will supply such reports to the Securityholders in accordance with its
procedures.
In addition, on each Payment Date the Trustee will forward or cause to
be forwarded additional information, as of the close of business on the last day
of the prior calendar month, as more specifically described in the related
Pooling and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Mortgage Loans and the aggregate
principal balances thereof, together with the number, percentage and
aggregate principal balances of Mortgage Loans (a) 30-59 days
delinquent, (b) 60-89 days delinquent and (c) 90 or more days
delinquent;
(ii) the number, percentage, aggregate Mortgage Loan balances
and status of all Mortgage Loans in foreclosure proceedings (and
whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i));
(iii) the number, percentage and aggregate Mortgage Loan
balances of all Mortgage Loans relating to Mortgagors in bankruptcy
proceedings (and whether any such Mortgage Loans are also included in
any of the statistics described in the foregoing clause (i));
(iv) the number, percentage and aggregate Mortgage Loan
balances of all Mortgage Loans relating to the status of any Mortgaged
Properties as to which title has been taken in the name of, or on
behalf of the Trustee (and whether any such Mortgage Loans are also
included in any of the statistics described in the foregoing clause
(i)); and
(v) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure.
Each Pooling and Servicing Agreement shall provide that the
Securityholders will have the right to request a Securityholder list. Any
Securityholder in a Trust may apply in writing to the related Trustee, and such
application shall state that the Securityholder desires to communicate with
other Securityholders with respect to their rights under the related Pooling and
Servicing Agreement. Such written request shall be accompanied by a copy of the
communication which such Securityholder proposes to transmit to other
Securityholders. The Trustee shall furnish such Securityholder list to such
requesting Securityholder within ten business days after receipt of the
application.
Collection and Other Servicing Procedures
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Servicer, is required to service
and administer the Mortgage Loans in accordance with the Pooling and Servicing
Agreement and with reasonable care, and using that degree of skill and attention
that the Servicer exercises with respect to comparable mortgage loans that it
services for itself or others.
The duties of the Servicer include collecting and posting of all
payments, responding to inquiries of Mortgagors or by federal, state or local
government authorities with respect to the Mortgage Loans, investigating
delinquencies, reporting tax information to Mortgagors in accordance with its
customary practices and accounting for collections and furnishing monthly and
annual statements to the Trustee with respect to distributions and making
Delinquency Advances and Servicing Advances. The Servicer is required to follow
its customary standards, policies and procedures in performing its duties as
Servicer.
The Servicer (i) is authorized and empowered to execute and deliver, on
behalf of itself, the Securityholders and the Trustee or any of them, any and
all instruments of satisfaction or cancellation, or of partial or full release
or
41
discharge and all other comparable instruments, with respect to the Mortgage
Loans and with respect to the related Mortgaged Properties; (ii) may consent to
any modification of the terms of any Note not expressly prohibited by the
Pooling and Servicing Agreement if the effect of any such modification (x) will
not materially and adversely affect the security afforded by the related
Mortgaged Property (other than as permitted by the related Pooling and Servicing
Agreement) or the timing of receipt of any payments required thereunder; and (y)
will not cause a Trust which is a REMIC to fail to qualify as a REMIC.
The related Pooling and Servicing Agreement will require the Servicer
to follow such collection procedures as it follows from time to time with
respect to mortgage loans in its servicing portfolio that are comparable to the
Mortgage Loans; provided that the Servicer is required always at least to follow
collection procedures that are consistent with or better than standard industry
practices. The Servicer may in its discretion (i) waive any assumption fees,
late payment charges, charges for checks returned for insufficient funds,
prepayment fees, if any, or the fees which may be collected in the ordinary
course of servicing the Mortgage Loans, (ii) if a Mortgagor is in default or
about to be in default because of a Mortgagor's financial condition, arrange
with the Mortgagor a schedule for the payment of delinquent payments due on the
related Mortgage Loan; provided, however, the Servicer shall not reschedule the
payment of delinquent payments more than one time in any twelve consecutive
months with respect to any Mortgagor or (iii) modify payments of monthly
principal and interest on any Mortgage Loan becoming subject to the terms of the
Relief Act in accordance with the Servicer's general policies for comparable
mortgage loans subject to the Relief Act.
The Servicer will be required to foreclose upon or otherwise comparably
effect the ownership on behalf of the Trust of Mortgaged Properties relating to
defaulted Mortgage Loans as to which no satisfactory arrangements can be made
for collection of delinquent payments. The related Pooling and Servicing
Agreement will require the Servicer to take into account the existence of any
hazardous substances, hazardous wastes or solid wastes, as such terms are
defined in the Comprehensive Environmental Response Compensation and Liability
Act, the Response Conservation and Recovery Act of 1976, or other federal, state
or local environmental legislation, in determining whether to foreclose upon a
Mortgaged Property, or otherwise comparably effect the ownership of such
Mortgaged Property on behalf of the Trust.
When a Mortgaged Property (other than Mortgaged Property subject to an
ARM Loan) has been or is about to be conveyed by the Mortgagor, the Servicer
will be required, to the extent it has knowledge of such conveyance or
prospective conveyance, to exercise its rights to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Note; provided, however, that the Servicer will not be required to
exercise any such right if (i) the "due-on-sale" clause, in the reasonable
belief of the Servicer, is not enforceable under applicable law or (ii) the
Servicer reasonably believes that to permit an assumption of the Mortgage Loan
would not materially and adversely affect the interests of Securityholders or
the Financial Guaranty Insurer, if any, or jeopardize coverage under any primary
insurance policy or applicable credit enhancement arrangements. In such event,
the Servicer will be required to enter into an assumption and modification
agreement with the person to whom such Mortgaged Property has been or is about
to be conveyed, pursuant to which such person becomes liable under the Mortgage
Note and, unless prohibited by applicable law or the related documents, the
Mortgagor remains liable thereon. If the foregoing is not permitted under
applicable law, the Servicer will be authorized to enter into a substitution of
liability agreement with such person, pursuant to which the original Mortgagor
is released from liability and such person is substituted as Mortgagor and
becomes liable under the Mortgage Note. The assumed loan must conform in all
respects to the requirements, representations and warranties of the Pooling and
Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable
and if, in the reasonable judgment of the Servicer or the Sub-Servicer, the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the loan and the security for such ARM Loan would not be impaired by the
assumption. If a Mortgagor transfers the Mortgaged Property subject to an ARM
Loan without consent, such ARM Loan may be declared due and payable. Any fee
collected by the Servicer or Sub-Servicer for entering into an assumption or
substitution of liability agreement will be retained by the Servicer or
Sub-Servicer as additional servicing compensation unless otherwise set forth in
the related Prospectus Supplement. See "Certain Legal Aspects of Mortgage Loans
and Related Matters--Enforceability of Certain Provisions" herein.
The Servicer will have the right under the Pooling and Servicing
Agreement to approve applications of Mortgagors seeking consent for (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for consent may be approved by
the Servicer unless: (i) the provisions of the related Mortgage Note and
Mortgage have been complied with; (ii) the loan-to-value ratio and
debt-to-income ratio after any release are consistent with the Company's
Guidelines then applicable to such Mortgage Loan; and (iii) the lien priority of
the related Mortgage is not affected.
42
Realization upon Defaulted Mortgage Loans
The Servicer shall foreclose upon or otherwise comparably effect the
ownership on behalf of the Trust of Mortgaged Properties relating to defaulted
Mortgage Loans as to which no satisfactory arrangements can be made for
collection of delinquent payments and which the Servicer has not purchased
pursuant to the related Pooling and Servicing Agreement (such Mortgage Loans,
"REO Property"). In connection with such foreclosure or other conversion, the
Servicer shall exercise such of the rights and powers vested in it under the
related Pooling and Servicing Agreement, and use the same degree of care and
skill in their exercise or use, as prudent mortgage lenders would exercise or
use under the circumstances in the conduct of their own affairs, including, but
not limited to, advancing funds for the payment of taxes, amounts due with
respect to Senior Liens and insurance premiums. Any amounts so advanced shall
constitute "Servicing Advances." Unless otherwise provided in the related
Prospectus Supplement, the Servicer shall sell any REO Property within 23 months
of its acquisition by the Trust, unless the Servicer obtains for the Trustee an
opinion of counsel experienced in federal income tax matters, addressed to the
Trustee, a Financial Guaranty Insurer, if applicable, and the Servicer, to the
effect that the holding by the Trust of such REO Property for any greater period
will not result in the imposition of taxes on "Prohibited Transactions" of the
Trust as defined in Section 860F of the Code or, if a REMIC election has been
made, cause the Trust to fail to qualify as a REMIC under the REMIC Provisions
at any time that any Securities are outstanding, in which case the Servicer
shall sell any REO Property by the end of any extended period specified in any
such opinion.
Notwithstanding the generality of the foregoing provisions, the
Servicer shall manage, conserve, protect and operate each REO Property for the
Securityholders solely for the purpose of its prompt disposition and sale in a
manner which does not cause such REO Property to fail to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code or result in the
receipt by the Trust of any "income from non-permitted assets" within the
meaning of Section 860F(a)(2)(B) of the Code or any "net income from foreclosure
property" which is subject to taxation under the REMIC Provisions. Pursuant to
its efforts to sell such REO Property, the Servicer shall either itself or
through an agent selected by the Servicer protect and conserve such REO Property
in the same manner and to such extent as is customary in the locality where such
REO Property is located and may, incident to its conservation and protection of
the interests of the Securityholders, rent the same, or any part thereof, as the
Servicer deems to be in the best interest of the Securityholders for the period
prior to the sale of such REO Property. The Servicer shall take into account the
existence of any hazardous substances, hazardous wastes or solid wastes, as such
terms are defined in the Comprehensive Environmental Response Compensation and
Liability Act, the Resource Conservation and Recovery Act of 1976, or other
federal, state or local environmental legislation, on a Mortgaged Property in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property. The Servicer shall determine, with respect
to each defaulted Mortgage Loan, when it has recovered, whether through
trustee's sale, foreclosure sale or otherwise, all amounts it expects to recover
from or on account of such defaulted Mortgage Loan, whereupon such Mortgage Loan
shall become a Liquidated Mortgage Loan.
If a defaulted Mortgage Loan or REO Property is not so removed from the
Trust Estate, then, upon the final liquidation thereof, if a loss is realized
that is not covered by any applicable form of credit enhancement or other
insurance, the Securityholders will bear such loss. However, if a gain results
from the final liquidation of an REO Property that is not required by law to be
remitted to the related Mortgagor, the Servicer will be entitled to retain such
gain as additional servicing compensation unless the related Prospectus
Supplement provides otherwise. For a description of the Servicer's obligations
to maintain and make claims under applicable forms of credit enhancement and
insurance relating to the Mortgage Loans, see "Description of Credit
Enhancement" and "Hazard Insurance; Claims Thereunder--Hazard Insurance
Policies."
SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Subordination of the
Subordinate Securities of any Senior/Subordinate Series of Securities will be
effected by the following method, unless an alternative method is specified in
the related Prospectus Supplement. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of Senior (or
Subordinate) Securities, as specified in the related Prospectus Supplement, in
which case the following discussion is qualified in its entirety by reference to
the related Prospectus Supplement with respect to the various priorities and
other rights as among the various classes of Senior Securities or Subordinate
Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for distribution will
43
be allocated first to interest on the Senior Securities of such series, and then
to principal of the Senior Securities up to the amounts determined as specified
in the related Prospectus Supplement, prior to allocation to the Subordinate
Securities of such series.
In the event of any Realized Losses (as defined below) on Mortgage
Loans not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that becomes
a Liquidated Mortgage Loan, the amount of loss realized, if any (as more fully
described in the related Pooling and Servicing Agreement, a "Realized Loss"),
will equal the portion of the stated principal balance remaining, after
application of all amounts recovered (net of amounts reimbursable to the
Servicer for related advances and expenses) towards interest and principal owing
on the Mortgage Loan. With respect to a Mortgage Loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
such reduction will be treated as a Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage
to Mortgaged Properties that are generally of the same type as are covered under
a special hazard insurance policy, the amount thereof that may be allocated to
the Subordinate Securities of the related series may be limited to an amount
(the "Special Hazard Amount") specified in the related Prospectus Supplement.
See "Description of Credit Enhancement--Special Hazard Insurance Policies." If
so, any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to
a Security in a Senior/Subordinate Series will be made by reducing the Principal
Balance thereof as of the Payment Date following the calendar month in which
such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in
the following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Company or the related
Originator) into which certain distributions otherwise allocable to the holders
of the Subordinate Securities may be placed; such funds would thereafter be
available to cure shortfalls in distributions to holders of the Senior
Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each Series of Securities shall have credit support
comprised of one or more of the following components. Each component will have a
monetary limit and will provide coverage with respect to Realized Losses that
are (i) attributable to the Mortgagor's failure to make any payment of principal
or interest as required under the Mortgage Note, but not including Special
Hazard Losses, Extraordinary Losses or other losses resulting from damage to a
Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such loss, a
"Defaulted Mortgage Loss"); (ii) of a type generally covered by a special hazard
44
insurance policy (as defined below) (any such loss, a "Special Hazard Loss");
(iii) attributable to certain actions which may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a reduction by a bankruptcy court
of the principal balance of or the Mortgage Rate on a Mortgage Loan or an
extension of its maturity (any such loss, a "Bankruptcy Loss"); and (iv)
incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such loss, a "Fraud Loss"). Losses
occasioned by war, civil insurrection, certain governmental actions, nuclear
reaction and certain other risks ("Extraordinary Losses") will not be covered
unless specified herein. To the extent that the credit enhancement for any
series of Securities is exhausted, the Securityholders will bear all further
risks of loss not otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, credit
enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Mortgage Assets in the related Trust. Credit
enhancement may be in the form of (i) the subordination of one or more classes
of Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under "Subordination," (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, another method of credit enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature or
overcollateralization, or (iii) any combination of the foregoing. Any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the Securities and
interest thereon. If losses occur that exceed the amount covered by credit
enhancement or are not covered by the credit enhancement, holders of one or more
classes of Securities will bear their allocable share of deficiencies. If a form
of credit enhancement applies to several classes of Securities, and if principal
payments equal to the aggregate principal balances of certain classes will be
distributed prior to such distributions to other classes, the classes that
receive such distributions at a later time are more likely to bear any losses
that exceed the amount covered by credit enhancement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
credit enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See "Reduction or Substitution of Credit
Enhancement." If specified in the applicable Prospectus Supplement, credit
enhancement for a series of Securities may cover one or more other series of
Securities.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit
If any component of credit enhancement as to any series of Securities
is to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
related Securities or, if specified in the related Prospectus Supplement,
support the Company's or any other person's obligation pursuant to a Purchase
Obligation to make certain payments to the Trustee with respect to one or more
components of credit enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
credit enhancement, will be specified in the applicable Prospectus Supplement
and in the related Form 8-K. The Letter of Credit will expire on the expiration
date set forth in the related Prospectus Supplement, unless earlier terminated
or extended in accordance with its terms. On or before each Payment Date, either
the Letter of Credit Bank or the Company (or other obligor under a Purchase
Obligation) will be required to make the payments specified in the related
Prospectus Supplement after notification from the Trustee, to be deposited in
the related Distribution Account, if and to the extent covered, under the
applicable Letter of Credit.
Mortgage Pool Insurance Policies
Any mortgage pool insurance policy ("Mortgage Pool Insurance Policy")
obtained by the Company for each related Trust Estate will be issued by the Pool
Insurer named in the related Prospectus Supplement. Each Mortgage Pool Insurance
Policy will, subject to limitations specified in the related Prospectus
Supplement described below, cover Defaulted Mortgage Losses in an amount equal
to a percentage specified in the related Prospectus Supplement (or in a Current
Report on Form 8-K) of the aggregate principal balance of the Mortgage Loans on
the Cut-Off Date. As set forth under "Maintenance of Credit Enhancement," the
Servicer will use reasonable efforts to maintain the Mortgage Pool Insurance
Policy and to present claims thereunder to the Pool Insurer on behalf of itself,
the Trustee and the Securityholders. The Mortgage Pool Insurance Policies,
however, are not blanket policies against loss (typically, such
45
policies do not cover Special Hazard Losses, Fraud Losses and Bankruptcy
Losses), since claims thereunder may only be made respecting particular
defaulted Mortgage Loans and only upon satisfaction of certain conditions
precedent described below due to a failure to pay irrespective of the reason
therefor.
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust will be issued by the
insurer named in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described in the related
Prospectus Supplement, protect holders of the related series of Securities from
(i) losses due to direct physical damage to a Mortgaged Property other than any
loss of a type covered by a hazard insurance policy or a flood insurance policy,
if applicable, and (ii) losses from partial damage caused by reason of the
application of the co-insurance clauses contained in hazard insurance policies.
See "Hazard Insurance; Claims Thereunder." A Special Hazard Insurance Policy
will not cover Extraordinary Losses. Aggregate claims under a Special Hazard
Insurance Policy will be limited to a maximum amount of coverage, as set forth
in the related Prospectus Supplement or in a Current Report on Form 8-K. A
Special Hazard Insurance Policy will provide that no claim may be paid unless
hazard and, if applicable, flood insurance on the Mortgaged Property securing
the Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the Servicer.
Subject to the foregoing limitations, in general a Special Hazard
Insurance Policy will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the Mortgagor or the
Servicer or the Sub-Servicer, the insurer will pay the lesser of (i) the cost of
repair or replacement of such property or (ii) upon transfer of the property to
the insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest at the Mortgage Rate to the date of claim settlement and
certain expenses incurred by the Servicer or the Sub-Servicer with respect to
such property. If the property is transferred to a third party in a sale
approved by the issuer of the Special Hazard Insurance Policy (the "Special
Hazard Insurer"), the amount that the Special Hazard Insurer will pay will be
the amount under (ii) above reduced by the net proceeds of the sale of the
property.
Bankruptcy Bonds
In the event of a personal bankruptcy of a Mortgagor, it is possible
that the bankruptcy court may establish the value of the Mortgaged Property of
such Mortgagor at an amount less than the then outstanding, principal balance of
the Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation").
The amount of the secured debt then could be reduced to such value, and, thus,
the holder of such Mortgage Loan would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition, certain
other modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including a reduction in the amount of the monthly payment on the
related Mortgage Loan or a reduction in the mortgage interest rate. See "Certain
Legal Aspects of Mortgage Loans and Related Matters--Anti-Deficiency Legislation
and Other Limitations on Lenders." Any bankruptcy bond ("Bankruptcy Bond") to
provide coverage for Bankruptcy Losses for proceedings under the federal
Bankruptcy Code obtained by the Company for a Trust Estate will be issued by an
insurer named in the related Prospectus Supplement. The level of coverage under
each Bankruptcy Bond will be set forth in the applicable Prospectus Supplement
or in a Current Report on Form 8-K.
Reserve Funds
If so provided in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, amounts otherwise distributable to
Subordinate Securityholders or the owners of any Originator's Retained Yield, or
any other instrument satisfactory to the Rating Agency or Agencies, which will
be applied and maintained in the manner and under the conditions specified in
such Prospectus Supplement. In the alternate or in addition to such deposit to
the extent described in the related Prospectus Supplement, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
any related Subordinate Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities as to which
credit enhancement includes a Letter of Credit, if so specified in the related
Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related
46
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, any such Reserve Fund will not be deemed to be part of the related
Trust Estate.
Financial Guaranty Insurance Policies
If so specified in the related Prospectus Supplement, a financial
guaranty insurance policy or surety bond ("Financial Guaranty Insurance Policy")
may be obtained and maintained for each class or series of Securities. The
issuer of any Financial Guaranty Insurance Policy (a "Financial Guaranty
Insurer") will be described in the related Prospectus Supplement.
A Financial Guaranty Insurance Policy will unconditionally and
irrevocably guarantee to Securityholders that an amount equal to each full and
complete insured payment will ultimately be received by an agent of the Trustee
(an "Insurance Paying Agent") on behalf of Securityholders, for distribution by
the Trustee to each Securityholder. The "insured payment" will be defined in the
related Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders of one or more
classes are entitled under the related Pooling and Servicing Agreement plus any
other amounts specified therein or in the related Prospectus Supplement (the
"Insured Payment").
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans. Financial Guaranty Insurance
Policies generally will not guarantee any specified rate of prepayments or
provide funds to redeem Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement,
the Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements
If specified in the related Prospectus Supplement, a Trust may include
in lieu of some or all of the foregoing or in addition thereto third party
guarantees, and other arrangements for maintaining timely payments or providing
additional protection against losses on the assets included in such Trust,
paying administrative expenses, or accomplishing such other purpose as may be
described in the Prospectus Supplement. The Trust may include a guaranteed
investment contract or reinvestment agreement pursuant to which funds held in
one or more accounts will be invested at a specified rate. If any class of
Securities has a floating interest rate, or if any of the Mortgage Assets has a
floating interest rate, the Trust may include an interest rate swap contract, an
interest rate cap agreement or similar contract providing limited protection
against interest rate risks.
Cross-Support
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust may be evidenced by separate
classes of the related series of Securities. In such case, credit support may be
provided by a cross-support feature which requires that distributions with
respect to one class of security be made with excess amounts available from
asset groups within the same Trust which support other classes of Securities.
The Prospectus Supplement for a series that includes a cross-support feature
will describe the manner and conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
Overcollateralization
If specified in the Prospectus Supplement, subordination provisions of
a Trust may be used to accelerate to a limited extent the amortization of one or
more classes of Securities relative to the amortization of the related Mortgage
Loans. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, with respect to the Mortgage
Loans or groups thereof, overcollateralization which results from the excess of
the aggregate principal balance of the related Mortgage Loans, or a group
thereof, over the principal balance of the related class of Securities. Such
acceleration may continue
47
for the life of the related security or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Cross-Collateralization
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust may be evidenced by separate
classes of the related series of Securities. In such case, credit support may be
provided by a cross-support feature that requires that distributions with
respect to one class of security be made with excess amounts available from
asset groups within the same Trust that support other classes of Securities. The
Prospectus Supplement for a series that includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
In addition, as may be described in the related Prospectus Supplement,
a Trust Estate may include the right to receive moneys from a common pool of
credit enhancement that may be available for more than one series of Securities,
such as a master reserve account or a master insurance policy. Notwithstanding
the foregoing, no collections on any Mortgage Loans held by any Trust may be
applied to the payment of Securities issued by any other Trust (except to the
limited extent that certain collections in excess of amounts needed to pay the
related Securities may be deposited in a common, master reserve account that
provides credit enhancement for more that one series of Securities).
Maintenance of Credit Enhancement
To the extent that the applicable Prospectus Supplement does not
expressly provide for credit enhancement arrangements in lieu of some or all of
the arrangements mentioned below, the following paragraphs shall apply.
If a form of credit enhancement has been obtained for a series of
Securities, the Company or the Servicer will be obligated to exercise its best
reasonable efforts to keep or cause to be kept such form of credit support in
full force and effect throughout the term of the applicable Pooling and
Servicing Agreement, unless coverage thereunder has been exhausted through
payment of claims or otherwise, or substitution therefor is made as described
below under "Reduction or Substitution of Credit Enhancement."
In lieu of the Company's or the Servicer's obligation to maintain a
particular form of credit enhancement, the Company or the Servicer may obtain a
substitute or alternate form of credit enhancement. If the Servicer obtains such
a substitute form of credit enhancement, it will maintain and keep such form of
credit enhancement in full force and effect as provided herein. Prior to its
obtaining any substitute or alternate form of credit enhancement, the Company or
the Servicer, as the case may be, will obtain written confirmation from the
Rating Agency or Agencies that rated the related series of Securities that the
substitution or alternate form of credit enhancement for the existing credit
enhancement will not adversely affect the then current ratings assigned to such
Securities by such Rating Agency or Agencies.
The Servicer, on behalf of itself, the Trustee and Securityholders,
will provide the Trustee information required for the Trustee to draw under a
Letter of Credit or Financial Guaranty Insurance Policy, will present claims to
each Pool Insurer, to the issuer of each Special Hazard Insurance Policy or
other special hazard instrument, to the issuer of each Bankruptcy Bond and will
take such reasonable steps as are necessary to permit recovery under such Letter
of Credit, Financial Guaranty Insurance Policy, Purchase Obligation, insurance
policies or comparable coverage respecting defaulted Mortgage Loans or Mortgage
Loans which are the subject of a bankruptcy proceeding. Additionally, the
Servicer will present such claims and take such steps as are reasonably
necessary to provide for the performance by another party of its Purchase
Obligation. As set forth above, all collections by the Servicer under any
Purchase Obligation, any Mortgage Pool Insurance Policy, or any Bankruptcy Bond
and, where the related property has not been restored, any Special Hazard
Insurance Policy, are to be deposited initially in the Principal and Interest
Account and ultimately in the Distribution Account, subject to withdrawal as
described above. All draws under any Letter of Credit or Financial Guaranty
Insurance Policy will be deposited directly in the Distribution Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of Credit
Enhancement, the Servicer is not required to expend its own funds to restore the
damaged property unless it determines (i) that such restoration will increase
the proceeds to one or more classes of Securityholders on liquidation of the
Mortgage Loan after reimbursement of the Servicer for its expenses and (ii) that
such expenses will be recoverable by it through Liquidation Proceeds or
Insurance Proceeds. If recovery under any applicable form of credit enhancement
is not available because the Servicer has been unable to make the above
determinations, has made such determinations incorrectly or recovery is not
available for any
48
other reason, the Servicer is nevertheless obligated to follow such normal
practices and procedures (subject to the preceding sentence) as it deems
necessary or advisable to realize upon the defaulted Mortgage Loan and in the
event such determination has been incorrectly made, is entitled to reimbursement
of its expenses in connection with such restoration.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided pursuant to any of the credit
enhancements (including, without limitation, a Mortgage Pool Insurance Policy,
Financial Guaranty Insurance Policy, Special Hazard Insurance Policy, Bankruptcy
Bond, Letter of Credit or any alterative form of credit enhancement) may be
reduced under certain specified circumstances. In addition, if provided in the
related Prospectus Supplement, any formula used in calculating the amount or
degree of credit enhancement may be changed without the consent of the
Securityholders upon written confirmation from each Rating Agency then rating
the Securities that such change will not adversely affect the then-current
rating or ratings assigned to the Securities. In most cases, the amount
available pursuant to any credit enhancement will be subject to periodic
reduction in accordance with a schedule or formula on a nondiscretionary basis
pursuant to the terms of the related Pooling and Servicing Agreement as the
aggregate outstanding principal balance of the Mortgage Loans declines.
Additionally, in certain cases, such credit support (and any replacements
therefor) may be replaced, reduced or terminated upon the written assurance from
each applicable Rating Agency that the then current rating of the related series
of Securities will not be adversely affected. Furthermore, in the event that the
credit rating of any obligor under any applicable credit enhancement is
downgraded, the credit rating of the related Securities may be downgraded to a
corresponding level, and, neither the Company nor the Servicer thereafter will
be obligated to obtain replacement credit support in order to restore the rating
of the Securities, and also will be permitted to replace such credit support
with other credit enhancement instruments issued by obligors whose credit
ratings are equivalent to such downgraded level and in lower amounts which would
satisfy such downgraded level, provided that the then-current rating of the
related series of Securities is maintained. Where the credit support is in the
form of a Reserve Fund, a permitted reduction in the amount of credit
enhancement will result in a release of all or a portion of the assets in the
Reserve Fund to the Company, one or more Originators, the Servicer or such other
person that is entitled thereto. Any assets so released will not be available to
fund distribution obligations in future periods.
HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below). The following is only a brief description of
certain insurance policies and does not purport to summarize or describe all of
the provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Servicer upon request.
Hazard Insurance Policies
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy for the Mortgage Loan. Additionally, the Pooling and
Servicing Agreement will require the Servicer to cause to be maintained with
respect to each Mortgage Loan a hazard insurance policy with a generally
acceptable carrier that provides for fire and extended coverage relating to such
Mortgage Loan in an amount not less than the least of (i) the outstanding
principal balance of the Mortgage Loan, (ii) the minimum amount required to
compensate for damage or loss on a replacement cost basis or (iii) the full
insurable value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards, the Servicer will be required
to maintain with respect thereto a flood insurance policy in a form meeting the
requirements of the then-current guidelines of the Federal Insurance
Administration with a generally acceptable carrier in an amount representing
coverage, and which provides for recovery by the Servicer on behalf of the Trust
of insurance proceeds relating to such Mortgage Loan of not less than the least
of (i) the outstanding principal balance of the Mortgage Loan, (ii) the minimum
amount required to compensate for damage or loss on a replacement cost basis,
(iii) the maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973. Pursuant to the related Pooling and Servicing Agreement,
the Servicer will be required to indemnify the Trust out of the Servicer's own
funds for any loss to the Trust resulting from the Servicer's failure to
maintain such flood insurance.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire with extended coverage and against flood hazards on all of
the Mortgage Loans, then, to the extent such policy names the Servicer as
49
loss payee and provides coverage in an amount equal to the aggregate unpaid
principal balance on the Mortgage Loans without co-insurance, and otherwise
complies with the requirements of the Pooling and Servicing Agreement, the
Servicer shall be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage under the Pooling and Servicing
Agreement. Such blanket policy may contain a deductible clause, in which case
the Servicer will be required, in the event that there shall not have been
maintained on the related Mortgaged Property a policy complying with the Pooling
and Servicing Agreement, and there shall have been a loss that would have been
covered by such policy, to deposit in the Principal and Interest Account from
the Servicer's own funds the difference, if any, between the amount that would
have been payable under a policy complying with the Pooling and Servicing
Agreement and the amount paid under such blanket policy.
While the Servicer does not actively monitor the maintenance of hazard
or flood insurance by borrowers, it responds to the notices of cancellation or
expiration as joint-loss payee by requiring verification of replacement
coverage.
THE COMPANY
The Company, First Alliance Mortgage Company, was incorporated in the
State of California on May 13, 1975. The Company or its affiliates have been
actively involved in the mortgage lending business since its founding. In July
1996, the Company became a wholly owned subsidiary of First Alliance Corporation
("FACO") pursuant to a reorganization in connection with the initial public
offering of the Class A Common Stock of FACO. The current corporation and all of
its predecessors have been located in Orange County, California.
The Company maintains its principal office at 17305 Von Karman Avenue,
Irvine, California 92614. Its telephone number is (714) 224-8500.
THE SERVICER
With respect to each series of Securities, the related Mortgage Loans
will be serviced by First Alliance Mortgage Company acting as the Servicer or
such other Servicer as provided for in the related Pooling and Servicing
Agreement. The Prospectus Supplement for each series of Securities will specify
the Servicer for such series. An affiliate of the Company may act as the
Servicer.
THE MASTER SERVICER
A Master Servicer may be appointed pursuant to a Pooling and Servicing
Agreement and named in the related Prospectus Supplement or Current Report on
Form 8-K.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe certain
additional provisions common to each Pooling and Servicing Agreement.
Servicing and Other Compensation and Payment of Expenses; Originator's Retained
Yield
The principal servicing compensation to be paid to the Servicer in
respect of its servicing activities for each series of Securities will be equal
to the percentage per annum specified in the related Prospectus Supplement or
Current Report on Form 8-K of the outstanding principal balance of the Mortgage
Loans, and such compensation will be retained by it from collections of interest
on the Mortgage Loans in the related Trust Estate (after provision has been made
for the payment of interest at the applicable Pass-Through Rate or Net Mortgage
Rate, as the case may be, to Securityholders and for the payment of any
Originator's Retained Yield) at the time such collections are deposited into the
applicable Principal and Interest Account. As compensation for its servicing
duties, the Servicer and/or a Sub-Servicer and any Master Servicer will be
entitled to a monthly servicing fee as set forth in the related Prospectus
Supplement. Certain Sub-Servicers may also receive additional compensation in
the amount of all or a portion of the interest due and payable on the applicable
Mortgage Loan which is over and above the interest rate specified at the time
the Company committed to purchase the Mortgage Loan. See "Mortgage Loan
Program--Sub-Servicing by Originators." In addition, the Servicer or a
Sub-Servicer will retain all prepayment charges, assumption fees and late
payment charges, to the extent collected from Mortgagors, and any benefit which
may accrue as a result of the investment of funds in the Principal and Interest
Account or the applicable Distribution Account or in a Sub-Servicing Account, as
the case may be.
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The Servicer generally will pay or cause to be paid certain ongoing
expenses associated with each Trust Estate and incurred by it in connection with
its responsibilities under the Pooling and Servicing Agreement, including,
without limitation, payment of any fee or other amount payable in respect of any
alternative credit enhancement arrangements, payment of the fees and
disbursements of the Master Servicer, the Trustee, any custodian appointed by
the Trustee, the Security Registrar and any Paying Agent, and payment of
expenses incurred in enforcing the obligations of Sub-Servicers and Originators.
The Servicer may be entitled to reimbursement of expenses incurred in enforcing
the obligations of Sub-Servicers and Originators under certain limited
circumstances. In addition, as indicated in the preceding section, the Servicer
will be entitled to reimbursements for certain expenses incurred by it in
connection with Liquidated Mortgage Loans and in connection with the restoration
of Mortgaged Properties, such right of reimbursement being prior to the rights
of Securityholders to receive any related Liquidation Proceeds (including
Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if
there will be any Originator's Retained Yield retained. Any such Originator's
Retained Yield will be a specified portion of the interest payable on each
Mortgage Loan in a Mortgage Pool. Any such Originator's Retained Yield will be
established on a loan-by-loan basis and the amount thereof with respect to each
Mortgage Loan in a Mortgage Pool will be specified on an exhibit to the related
Pooling and Servicing Agreement. Any Originator's Retained Yield in respect of a
Mortgage Loan will represent a specified portion of the interest payable thereon
and will not be part of the related Trust Estate. Any partial recovery of
interest in respect of a Mortgage Loan will be allocated between the owners of
any Originator's Retained Yield and the holders of classes of Securities
entitled to payments of interest as provided in the Prospectus Supplement and
the applicable Pooling and Servicing Agreement.
Evidence as to Compliance
The Servicer will be required to deliver to the Trustee, the Master
Servicer (if applicable), the Rating Agencies and any Credit Enhancer on or
before a specified date of each year, beginning the first such date that is at
least a specified number of months after the Cut-Off Date, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Servicer during such preceding calendar year and of
performance under the related Pooling and Servicing Agreement has been made
under such officers' supervision, and (ii) to the best of such officers'
knowledge, based on such review, the Servicer has fulfilled all its obligations
under the related Pooling and Servicing Agreement for such year, or, if there
has been a default in the fulfillment of any such obligations, specifying each
such default known to such officers and the nature and status thereof including
the steps being taken by the Servicer to remedy such defaults.
On or before the last day of a specified month of each year, beginning
the first such date that is at least a specified number of months after the
Cut-Off Date, the Servicer will be required to cause to be delivered to the
Trustee, the Master Servicer (if applicable), the Rating Agencies and any Credit
Enhancer, if applicable, a letter or letters of a firm of independent,
nationally recognized certified public accountants reasonably acceptable to the
Credit Enhancer, if applicable, stating that such firm has, with respect to the
Servicer's overall servicing operations (i) performed applicable tests in
accordance with the compliance testing procedures as set forth in Appendix 3 of
the Audit Guide for Audits of HUD Approved Nonsupervised Mortgagees or (ii)
examined such operations in accordance with the requirements of the Uniform
Single Audit Program for Mortgage Bankers, and in either case stating such
firm's conclusions relating thereto.
Removal and Resignation of the Servicer
Each Pooling and Servicing Agreement provides that the Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or subject to the consent of the Master Servicer or Financial Guaranty
Insurer and the Trustee. No such resignation will become effective until the
Trustee, the Master Servicer or a successor Servicer has assumed the Servicer's
obligations and duties under the Pooling and Servicing Agreement. The Trustee,
the Master Servicer, the Financial Guaranty Insurer or the Securityholders will
have the right, pursuant to the related Pooling and Servicing Agreement, to
remove the Servicer upon the occurrence of any of (a) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Servicer and certain actions by the Servicer
indicating its insolvency or inability to pay its obligations; (b) the failure
of the Servicer to perform any one or more of its material obligations under the
Pooling and Servicing Agreement as to which the Servicer shall continue in
default with respect thereto for a period of sixty (60) days after notice by the
Trustee, the Master Servicer or any Financial Guaranty Insurer of said failure;
(c) the failure of the Servicer to cure any breach of any of its representations
and warranties set forth in the Pooling and Servicing Agreement which materially
and adversely affects the interests of the Securityholders or any Financial
Guaranty Insurer, if applicable, for a period of sixty (60)
51
days after the Servicer's discovery or receipt of notice thereof; or (d) the
failure to deliver to Trustee any proceeds or required payments.
The Pooling and Servicing Agreement may also provide that a Financial
Guaranty Insurer may remove the Servicer, or the Master Servicer pursuant to
clause (iii) below, upon the occurrence of any of certain events including:
(i) with respect to any Payment Date, if the total available funds with
respect to the Mortgage Loans Group will be less than the related
distribution amount on the class of insured securities in respect of
such Payment Date; provided, however, that the Financial Guaranty
Insurer will have no right to remove the Servicer pursuant to the
provision described in this clause (i) if the Servicer can demonstrate
to the reasonable satisfaction of the Financial Guaranty Insurer that
such event was due to circumstances beyond the control of the Servicer;
(ii) the tailure by the Servicer to make any required Servicing
Advance;
(iii) the failure of the Servicer (or the Master Servicer, if
applicable) to perform one or more of its material obligations under
the Pooling and Servicing Agreement and such failure shall continue for
a period of 30 days;
or
(iv) the failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest.
Resignation of the Master Servicer
Each applicable Pooling and Servicing Agreement provides that the
Master Servicer may not resign from its obligations and duties thereunder,
unless such duties and obligations are no longer permissible under applicable
law or the Trustee resigns. No such resignation is acceptable until a successor
Master Servicer assumes such duties and obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied, the Trustee, the
Master Servicer or the Financial Guaranty Insurer (as provided in the related
Pooling and Servicing Agreement) may, by written notification to the Servicer,
terminate all of the rights and obligations of the Servicer under the Pooling
and Servicing Agreement (other than any rights of the Servicer as
Securityholder) covering such Trust Estate and in and to the Mortgage Loans and
the proceeds thereof, whereupon the Master Servicer, if designated in the
related Pooling and Servicing Agreement, the Trustee or, with the Financial
Guaranty Insurer's consent, its designee will succeed to all responsibilities,
duties and liabilities of the Servicer under such Pooling and Servicing
Agreement (other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Master Servicer and Trustee would be obligated to succeed the
Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, a FNMA-or FHLMC-approved
mortgage servicing institution with a net worth of at least $5,000,000 to act as
successor to the Servicer under the Pooling and Servicing Agreement (unless
otherwise set forth in the Pooling and Servicing Agreement). Pending such
appointment, the Master Servicer is obligated to act in such capacity.
Amendment
Each Pooling and Servicing Agreement may be amended by the Company, the
Servicer, the Master Servicer and the Trustee, with the prior approval of a
Financial Guaranty Insurer, if required, but without giving notice or the
consent of any of the holders of Securities covered by such Pooling and
Servicing Agreement, (i) to cure an ambiguity, (ii) to correct or supplement any
provision therein which may be inconsistent with any other provision therein,
(iii) to change the timing and/or nature of deposits in the Principal and
Interest Account or the Distribution Account or to change the name in which the
Principal and Interest Account is maintained to that of the Servicer alone;
provided that (a) the Remittance Date would in no event be later than the
related Payment Date, (b) such change would not adversely affect in any material
respect the interests of any Securityholder, as evidenced by an opinion of
counsel, and (c) such change would not adversely affect the then-current rating
of any rated classes of Securities, as evidenced by a letter from each
applicable Rating Agency, (iv) if a REMIC election has been made with respect to
the related Trust Estate, to modify, eliminate or add to any of its provisions
(A) to such extent as shall be necessary to maintain the qualification of the
Trust Estate as a REMIC or to avoid or minimize the risk of imposition of any
tax on the related Trust Estate, provided that the Trustee has received an
Opinion of Counsel to the effect that (1) such action is necessary or desirable
52
to maintain such qualifications or to avoid or minimize such risk, and (2) such
action will not adversely affect in any material respect the interests of any
holder of Securities covered by the Pooling and Servicing Agreement, or (B) to
restrict the transfer of the REMIC Residual Securities, provided that the
Company has determined that the then-current ratings of the classes of the
Securities that have been rated will not be adversely affected, as evidenced by
a letter from each applicable Rating Agency, and that any such amendment will
not give rise to any tax with respect to the transfer of the REMIC Residual
Securities to a non-permitted transferee, (v) to make any other provisions with
respect to matters or questions arising under such Pooling and Servicing
Agreement which are not materially inconsistent with the provisions thereof,
provided that such action will not adversely affect in any material respect the
interests of any Securityholder or (vi) to make any changes required by law.
The Pooling and Servicing Agreement may also be amended by the Company,
the Servicer, the Master Servicer and the Trustee with the consent of the
holders of Securities of each class affected thereby evidencing, in each case,
not less than 51% of the aggregate Percentage Interests constituting such class
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Pooling and Servicing Agreement or of
modifying in any manner the rights of the holders of Securities covered by such
Pooling and Servicing Agreement, except that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on a Security of any class without
the consent of the holder of such Security or (ii) reduce the aforesaid
percentage of Securities of any class the holders of which are required to
consent to any such amendment without the consent of the holders of all
Securities of such class covered by such Pooling and Servicing Agreement then
outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Estate, the Trustee will not be entitled to consent
to any amendment to a Pooling and Servicing Agreement without having first
received an Opinion of Counsel to the effect that such amendment or the exercise
of any power granted to the Servicer, the Company or the Trustee in accordance
with such amendment will not result in the imposition of a tax on the related
Trust Estate or cause such Trust Estate to fail to qualify as a REMIC.
Each Pooling and Servicing Agreement may also be amended by the
Trustee, the Servicer, the Company or the Master Servicer at any time and from
time to time, with the prior written approval of a Financial Guaranty Insurer,
if required, and not less than a majority of the Percentage Interest represented
by each related class of Securities then outstanding, for the purpose of adding
any provisions or changing in any manner or eliminating any of the provisions of
such Pooling and Servicing Agreement or of modifying in any manner the rights of
the Securityholders thereunder; provided, however, that no such amendment shall
(a) change in any manner the amount of, or delay the timing of, payments which
are required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the holders of all Securities of the class or classes affected then
outstanding.
Termination; Retirement of Securities
Each Pooling and Servicing Agreement will provide that a Trust will
terminate upon the earlier of (i) the payment to the Securityholders of all
Securities issued by the Trust from amounts other than those available under, if
applicable, a Financial Guaranty Insurance Policy of all amounts required to be
paid to such Securityholders upon the later to occur of (a) the final payment or
other liquidation (or any advance made with respect thereto) of the last
Mortgage Loan in the Trust Estate or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate, (ii) any
time when a Qualified Liquidation (as defined in the Code) of the Trust Estate
is effected. In no event, however, will the trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death of
the survivor of certain persons named in such Pooling and Servicing Agreement.
Written notice of termination of the Pooling and Servicing Agreement will be
given to each Securityholder, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency appointed by
the Trustee that will be specified in the notice of termination. If the
Securityholders are permitted to terminate the trust under the applicable
Pooling and Servicing Agreement, a penalty may be imposed upon the
Securityholders based upon the fee that would be foregone by the Servicer
because of such termination. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency appointed by the Trustee that will be specified in the
notice of termination. If the Securityholders are permitted to terminate the
trust under the applicable Pooling and Servicing Agreement, a penalty may be
imposed upon the Securityholders based upon the fee that would be foregone by
the Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Securities shall be made at the option
of the Servicer, the Company or, if applicable, the holder of the REMIC
53
Residual Securities at the price specified in the related Prospectus Supplement.
The exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Servicer, the Company or, if
applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series. The
Prospectus Supplement or Form 8-K for each series of Securities will set forth
the amounts that the holders of such Securities will be entitled to receive upon
such earlier than expected retirement. If a REMIC election has been made, the
termination of the related Trust Estate will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Company and/or its
affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Company will be obligated to appoint a
successor Trustee. The Trustee may also be removed at any time by the holders of
Securities evidencing not less than 51% of the aggregate undivided interests
(or, if so specified in the related Prospectus Supplement, voting rights) in the
related Trust Estate or by the related Financial Guaranty Insurer or Credit
Enhancer, if any. 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.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by
the holder for such Security, the Pass-Through Rate on any such Security
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate of payment of
principal on such Security (or the rate at which the notional amount thereof is
reduced if such Security is not entitled to payments of principal) and other
factors.
Each month the interest payable on an actuarial type of Mortgage Loan
will be calculated as one-twelfth of the applicable Mortgage Rate multiplied by
the principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made on the 20th day (or, if such day is
not a business day, the next succeeding business day) of the month (or, in the
case of quarterly-pay Securities, the twentieth day of every third month, or, in
the case of semi-annually-pay Securities, the twentieth day of every sixth
month) following the month of accrual.
A class of Securities may be entitled to payments of interest at a
fixed Pass-Through Rate specified in the related Prospectus Supplement, a
variable Pass-Through Rate or adjustable Pass-Through Rate calculated based on
the weighted average of the Mortgage Rates (net of Servicing Fees and any
Originator's Retained Yield (each, a "Net Mortgage Rate")) of the related
Mortgage Loans for the designated periods preceding the Payment Date if so
specified
54
in the related Prospectus Supplement, or at such other variable rate as may be
specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the
aggregate payments of interest on a class of Securities, and the yield to
maturity thereon, will be effected by the rate of payment of principal on the
Securities (or the rate of reduction in the notional balance of Securities
entitled only to payments of interest) and, in the case of Securities evidencing
interests in ARM Loans, by changes in the Net Mortgage Rates on the ARM Loans.
See "Maturity and Prepayment Considerations" below. The yield on the Securities
also will be effected by liquidations of Mortgage Loans following Mortgagor
defaults and by purchases of Mortgage Loans required by the Pooling and
Servicing Agreement in the event of breaches of representations made in respect
of such Mortgage Loans by the Company, the Originators, the Servicer and others,
or repurchases due to conversions of ARM Loans to a fixed interest rate. See
"Mortgage Loan Program--Representations by Originators" and "Descriptions of the
Securities--Assignment of Mortgage Loans" above. In general, if a class of
Securities is purchased at initial issuance at a premium and payments of
principal on the related Mortgage Loans occur at a rate faster than anticipated
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a class of Securities
is purchased at initial issuance at a discount and payments of principal on the
related Mortgage Loans occur at a rate slower than that assumed at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
originally anticipated. The effect of principal prepayments, liquidations and
purchases on yield will be particularly significant in the case of a series of
Securities having a class entitled to payments of interest only or to payments
of interest that are disproportionately high relative to the principal payments
to which such class is entitled. Such a class will likely be sold at a
substantial premium to its principal balance, if any, and any faster than
anticipated rate of prepayments will adversely affect the yield to holders
thereof. In certain circumstances, rapid prepayments may result in the failure
of such holders to recoup their original investment. In addition, the yield to
maturity on certain other types of classes of Securities, including Accrual
Securities or certain other classes in a series including more than one class of
Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid for the
number of days in the month actually elapsed up to the date of the prepayment,
at a daily rate determined by dividing the Mortgage Rate by 365. The effect of
prepayments in full will be to reduce the amount of interest paid in the next
succeeding month to holders of Securities entitled to payments of interest
because interest on the principal amount of any Mortgage Loan so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related Mortgage Loan as of the first day of the month in which
such partial prepayment is received. As a result, unless otherwise specified in
the related Prospectus Supplement, the effect of a partial prepayment on a
Mortgage Loan will be to reduce the amount of interest passed through to holders
of Securities on the Payment Date following the receipt of such partial
prepayment by an amount equal to one month's interest at the applicable
Pass-Through Rate or Net Mortgage Rate, as the case may be, on the prepaid
amount. With respect to amounts due the Servicer from Sub-Servicers in respect
of partial principal prepayments, see "Description of the Securities--Payment on
Mortgage Loans; Deposits to Distribution Account." Neither full nor partial
principal prepayments are passed through until the month following receipt. See
"Maturity and Prepayment Considerations."
The Mortgage Rates on certain ARM Loans subject to negative
amortization adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the indices applicable at origination and the related Note Margins) the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest that will be added to the principal balance thereof and
will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance will lengthen the weighted average
life of the Securities evidencing interests in such Mortgage Loans and may
adversely affect yield to holders thereof depending upon the price at which such
Securities were purchased. In addition, with
55
respect to certain ARM Loans subject to negative amortization, during a period
of declining interest rates, it might be expected that each minimum scheduled
monthly payment on such a Mortgage Loan would exceed the amount of scheduled
principal and accrued interest on the principal balance thereof, and since such
excess will be applied to reduce such principal balance, the weighted average
life of such Securities will be reduced and may adversely affect yield to
holders thereof depending upon the price at which such Securities were
purchased.
For each Mortgage Pool, if all necessary advances are made, if there is
no unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer is
not in default under its obligations or other credit enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of
semi-annually-pay Securities, six month's interest) at the applicable
Pass-Through Rate on such class' principal balance or notional balance, as
adjusted downward to reflect any decrease in interest caused by any principal
prepayments and the addition of any Deferred Interest to the principal balance
of any Mortgage Loan "Description of the Securities--Principal and Interest on
the Securities."
With respect to certain of the ARM Loans, the Mortgage Rate at
origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. Under the Company's underwriting
standards, the Mortgagor under each Mortgage Loan will be qualified on the basis
of the Mortgage Rate in effect at origination. The repayment of any such
Mortgage Loan may thus be dependent on the ability of the Mortgagor to make
larger level monthly payments following the adjustment of the Mortgage Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Generally, all of the Mortgage Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience with respect to the Mortgage
Loans in a Mortgage Pool will affect the maturity, average life and yield of the
related series of Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which,
based on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Neither
the Company, the Servicer, nor any of their affiliates will be obligated to
refinance or repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Generally all
Mortgage Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the Mortgage Loan upon sale or certain transfers by
the Mortgagor of the underlying Mortgaged Property. Unless the related
Prospectus Supplement indicates otherwise, the Servicer will generally enforce
any due-on-sale clause to the extent it has knowledge of the conveyance or
proposed conveyance of the underlying Mortgaged Property and it is entitled to
do so under applicable law; provided, however, that the Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. Certain ARM Loans may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the Mortgage Loan and, in the reasonable judgment of the Servicer or the
related Sub-Servicer, the security for the ARM Loan would not be impaired or
might be improved by the assumption. The extent to which ARM Loans are assumed
by purchasers of the Mortgaged Properties rather than prepaid by the related
Mortgagors in connection with the sales of the Mortgaged Properties will affect
the weighted average life of the related series of Securities. See "Description
of the Securities--Collection and Other Servicing Procedures" and "Certain Legal
Aspects of the Mortgage Loans and Related Matters--Enforceability of Certain
Provisions" for a description of certain provisions of the Pooling and Servicing
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Company is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans such as the Mortgage Loans over an extended period of time. All
statistics known to the Company that
56
have been compiled with respect to prepayment experience on mortgage loans
indicates that while some mortgage loans may remain outstanding until their
stated maturities, a substantial number will be paid prior to their respective
stated maturities.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments generally will, (i) not increase or decrease such
Mortgage Rates by more than a fixed percentage amount on each adjustment date,
(ii) not increase such Mortgage Rates over a fixed percentage amount during the
life of any ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with mortgage interest rates) plus the related Note Margin (which
may be different from margins being used at the time for newly originated
adjustable rate mortgage loans). As a result, the Mortgage Rates on the ARM
Loans in a Mortgage Pool at any time may not equal the prevailing rates for
similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings. There can
be no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Servicer, the Company or, if specified
in the related Prospectus Supplement, the holders of the REMIC Residual
Securities or the Credit Enhancer may have the option to purchase the Mortgage
Loans in a Trust Estate. See "The Pooling and Servicing Agreement--Termination;
Retirement of Securities."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state laws (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
General
The Mortgage Loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
Mortgaged Property subject to a Mortgage Loan is located. In California,
Mortgage Loans are secured by deeds of trust. In some states, a mortgage creates
a lien upon the real property encumbered by the mortgage. In other states, the
mortgage conveys legal title to the property to the mortgagee subject to a
condition subsequent (i.e., the payment of the indebtedness secured thereby).
The mortgage is not prior to the lien for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority between
mortgages depends on their terms in some cases or on the terms of separate
subordination or intercreditor agreements, and generally on the order of
recordation of the mortgage in the appropriate recording office. There are two
parties to a mortgage, the mortgagor, who is the borrower and homeowner, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower
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is the beneficiary; at origination of a mortgage loan, the borrower executes a
separate undertaking to make payments on the mortgage note. Although a deed of
trust is similar to a mortgage, a deed of trust has three parties; the
borrower-homeowner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
law, the express provisions of the deed of trust or mortgage, and, in some
cases, the directions of the beneficiary.
Foreclosure
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale (private sale) under a specific provision in the
deed of trust and state laws which authorize the trustee to sell the property
upon any default by the borrower under the terms of the note or deed of trust.
Beside the non-judicial remedy, a deed of trust may be judicially foreclosed. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and within a certain period
of time send a copy to the borrower trustor and to any person who has recorded a
request for a copy of notice of default and notice of sale. In addition, the
trustee must provide notice in some states to any other individual having an
interest of record in the real property, including any junior lienholders. If
the deed of trust is not reinstated within a specified period, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more local newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the real property.
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 may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other 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.
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 a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for new
purchaser to purchase the subject property at the sale. Rather, it is common for
the lender to purchase the property from the trustee or referee for a credit bid
less than or equal to the unpaid principal amount of the mortgage or deed of
trust, accrued and unpaid interest and the expense of foreclosure. Generally,
state law controls the amount of foreclosure costs and expenses, including
attorneys' fees, which may be recovered by a lender. 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 and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property and, in some states, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors or other parties are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states,
there is no right to redeem property after a Trustee's sale under a deed of
trust.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states 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 sale of the real property. In
the case of a Mortgage Loan secured by a property owned by a trust where the
Mortgage Note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust, even if
obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which such deficiency judgment
may be executed. Other statutes require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, in those states permitting
such election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower. Finally, in certain
other states, statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure to the excess of the outstanding debt
over the fair value of the property at the time of the public sale. The purpose
of these statutes is generally to prevent a beneficiary or mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Certain state courts have imposed general equitable principles upon
judicial foreclosure. These equitable principles are generally designed to
relieve the borrower from the legal effect of the borrower's default under the
related loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes for the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disabilities. In other cases, such courts have limited the right of the lender
to foreclose if the default under the loan is not monetary, such as the borrower
failing to adequately maintain the property or the borrower executing a second
deed of trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and the California Fair Debt
Collection Practices Act. These laws and regulations impose specific statutory
liabilities upon lenders who originate mortgage loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
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Environmental Legislation
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In some states, however, such a lien will not
have priority over prior recorded liens of a deed of trust. In addition, under
federal environmental legislation and under state law in a number of states, a
secured party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or assumes active control over the operation or
management of a property so as to be deemed an "owner" or "operator" of the
property may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a lender (such as a Trust Estate) secured by residential real
property. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust Estate was acquired by the Trust and cleanup costs were incurred
in respect of the Mortgaged Property, the holders of the related series of
Securities might realize a loss if such costs were required to be paid by the
Trust. The Servicer shall take into account the existence of any hazardous
substances, hazardous wastes or solid wastes, as such terms are defined in the
Comprehensive Environmental Response Compensation and Liability Act, the
Resource Conservation and Recovery Act of 1976, or other federal, state or local
environmental legislation, on a Mortgaged Property in determining whether to
foreclose upon or otherwise comparably convert the ownership of such Mortgaged
Property.
Enforceability of Certain Provisions
Unless the Prospectus Supplement indicates otherwise, generally all of
the Mortgage Loans contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers or
conveys the property. The enforceability of these clauses has been the subject
of legislation or litigation in many states including California, and in some
cases the enforceability of these clauses was limited or denied. However, the
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act") preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. 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.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, that may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are 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 for 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
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
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Certain Provisions of California Deeds of Trust
Most institutional lenders in California, including the Company, use a
form of deed of trust that confers on the beneficiary the right both to receive
all proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the deed of trust, in such order as the
beneficiary may determine; provided, however, that California law prohibits the
beneficiary from applying insurance and condemnation proceeds to the
indebtedness secured by the deed of trust unless the beneficiary's security has
been impaired by the casualty or condemnation, and, if such security has been
impaired, permits such proceeds to be so applied only to the extent of such
impairment. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, and, as a result thereof, the beneficiary's security is impaired,
the beneficiary under the underlying first deed of trust 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 first deed of trust. Proceeds in excess
of the amount of indebtedness secured by a first deed of trust will, in most
cases, be applied to the indebtedness of a junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the deed
of trust, to provide and maintain fire insurance on the property, to maintain
and repair the property and not to commit or permit any waste thereof, and to
appear in and defend any action or proceeding purporting to affect the property
or the rights of the beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges.
As indicated above under "Mortgage Loan Program--Representations by
Originators," each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
Alternative Mortgage Instruments
Alternative mortgage instruments, including ARM Loans and early
ownership mortgage loans, originated by non-federally chartered lenders have
historically been subjected to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining whether a
particular alternative mortgage instrument originated by a state-chartered
lender was in compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act ("Title VIII"). Title VIII provides that: notwithstanding any state law to
the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alterative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any
61
state may reject applicability of the provisions of Title VIII by adopting,
prior to October 15, 1985, a law or constitutional provision expressly rejecting
the applicability of such provisions. Certain states have taken such action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be effected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any Letter of Credit or any other form of credit
enhancement (other than a Financial Guaranty Insurance Policy) provided in
connection with the related series of Securities. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected Mortgage Loan during the Mortgagor's period of active duty
status, and, under certain circumstances, during an additional three month
period thereafter. Thus, in the event that the Relief Act or similar legislation
or regulations applies to any Mortgage Loan which goes into default, there may
be delays in payment and losses on the related Securities in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Mortgage Loans resulting from similar legislation or regulations may
result in delays in payments or losses to Securityholders of the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is based upon the opinion of Arter & Hadden LLP, special
tax counsel to the Company, with respect to the material federal income tax
consequences to investors of the purchase, ownership and disposition of the
Securities offered hereby. Opinions of counsel are not binding on the IRS,
however, and there is no assurance that the IRS could not challenge successfully
the opinions of counsel. 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 should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Securities.
The following discussion addresses securities of three general types:
(i) securities ("Grantor Trust Securities") representing interests in a Trust
Estate (a "Grantor Trust Estate") which the Company will covenant not to elect
to have treated as a real estate mortgage investment conduit ("REMIC"),(ii)
securities ("REMIC Securities") representing interests in a Trust Estate, or a
portion thereof, which the Company will covenant to elect to have treated as a
REMIC under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment of
partnership interests or interests in a FASIT. Such a discussion will be set
forth in the applicable Prospectus Supplement for any Trust issuing Securities
characterized as partnership interests or interests in a FASIT. 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 Estate 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 "ownership interest" in a FASIT. For purposes of this discussion,
references to a "Securityholder" or a "Holder" are to the beneficial owner of a
Security.
Grantor Trust Securities
With respect to each Series of Grantor Trust Securities, Arter & Hadden
LLP, special tax counsel to the Company, will deliver its opinion to the Company
that (unless otherwise limited in the applicable Prospectus Supplement) the
related Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an
62
association taxable as a corporation. Accordingly, each Holder of a Grantor
Trust Security will generally be treated as the owner of an interest in the
Mortgage Loans included in the Grantor Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
Special Tax Attributes
Unless otherwise disclosed in an applicable Prospectus Supplement,
Arter & Hadden LLP, special tax counsel to the Company, will deliver its opinion
to the Company that (a) Grantor Trust Fractional Interest Securities will
represent interests in (i) "qualifying real property loans" within the meaning
of section 593(d) of the Code; (ii) "loans . . . secured by an interest in real
property" within the meaning of section 7701(a)(19)(C)(v) of the Code; and (iii)
"obligation[s] (including any participation or certificate of beneficial
ownership therein) which . . . [are] principally secured by an interest in real
"property" within the meaning of section 860G(a)(3)(A) of the Code; and (b)
interest on Grantor Trust Fractional Interest Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of section 856(c)(3)(B) of the Code. In
addition, the Grantor Trust Strip Securities will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) . . .
principally secured by an interest in real "property" within the meaning of
section 860G(a)(3)(A) of the Code.
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will
be required to report on their federal income tax returns their respective
shares of the income from the Mortgage Loans (including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
Holders of any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See "Discount and Premium," below. Individuals holding a
Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds two percent of such Holder's adjusted
gross income. Further, Holders (other than corporations) subject to the
alternative minimum tax may not deduct miscellaneous itemized deductions in
determining alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the in the Holder's
income as it accrues (regardless of the Holder's method of accounting), as
described below under "Discount and Premium." The coupon stripping rules will
not apply, however, if (i) the pass-through rate is no more than 100 basis
points lower than the gross rate of interest payable on the underlying Mortgage
Loans and (ii) the difference between the outstanding principal balance on the
Security and the amount paid for such Security is less than 0.25% of such
principal balance times the weighted average remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security
(equal to the difference between the amount realized on the sale and the
adjusted basis of such Grantor Trust Security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the Code. The adjusted
basis of a Grantor Trust Security will generally equal its cost, increased by
any income reported by the seller (including original issue
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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 Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Servicer, the Trustee will furnish to each Holder during such
year such customary factual information as the Servicer deems necessary or
desirable to enable Holders 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 an applicable Prospectus Supplement, an election will be
made to treat a Trust Estate or one or more trusts or segregated pools of assets
therein as one or more REMICs under the Code. Qualification as a REMIC requires
ongoing compliance with certain conditions. A Trust Estate or a portion or
portions thereof as to which one or more REMIC elections will be made will be
referred to as a "REMIC Trust." With respect to each REMIC Trust for which such
an election is made, Arter & Hadden LLP, special tax counsel to the Company,
will deliver its opinion to the Company that (unless otherwise limited in the
applicable Prospectus Supplement), assuming compliance with the Pooling and
Servicing Agreement, the REMIC Trust will be treated as one or more REMICs for
federal income tax purposes. The Securities of each Class will be designated as
"regular interests" in the REMIC Trust except that a separate Class will be
designated as the "residual interest" in the REMIC Trust. The Prospectus
Supplement for each Series of Securities will state whether Securities of each
Class will constitute a regular interest (a "Regular Security") or a residual
interest (a "Residual Security").
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. See "Taxes on a REMIC Trust". Generally, the total income from
the Mortgage Loans in a REMIC Trust will be taxable to the Holders of the
Securities of that Series, as described below.
Special Tax Attributes
Regular and Residual Securities will be "regular or residual interests
in a REMIC" within the meaning of section 7701(a)(19)(C)(xi) of the Code,
"qualifying real property loans" within the meaning of section 593(d) of the
Code and "real estate assets" within the meaning of section 856(c)(5)(A) of the
Code. If at any time during a calendar year less than 95 percent of the assets
of a REMIC Trust consist of "qualified mortgages" (within the meaning of section
860G(a)(3) of the Code) then the portion of the Regular and Residual Securities
that are qualifying assets under those sections during such calendar year may be
limited to the portion of the assets of such REMIC Trust that are qualified
mortgages. Similarly, income on the Regular and Residual Securities will be
treated as "interest on obligations secured by mortgages on real property"
within the meaning of section 856(c)(3)(B) of the Code, subject to the same
limitation as set forth in the preceding sentence. For purposes of applying this
limitation, a REMIC Trust should be treated as owning the assets represented by
the qualified mortgages. The assets of the Trust Estate will include, in
addition to the Mortgage Loans, payments on the Mortgage Loans held pending
distribution on the Regular and Residual Securities and any reinvestment income
thereon. Regular and Residual Securities held by a financial institution to
which section 585, 586 or 593 of the Code applies will be treated as evidences
of indebtedness for purposes of section 582(c)(1) of the Code. Regular
Securities will also be qualified mortgages with respect to other REMICs.
Taxation of Holders of Regular Securities
Except as indicated below in this federal income tax discussion, the
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership interests in the
REMIC Trust or its assets. Holders of Regular Securities that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Securities under an accrual method. For additional tax
consequences relating to Regular Securities purchased at a discount or with
premium, see "Discount and Premium," below.
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Taxation of Holders of Residual Securities
Daily Portions. Except as indicated below, a Holder of a 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 Holder owned such Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a 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 Holder
of the Residual Security may have received full payment of the stated interest
and principal on its Residual Security.
The Trustee will provide to Holders of Residual Securities of each
Series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such Series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the Regular Securities
(but not the Residual Securities), even though Regular Securities are for
non-tax purposes evidences of beneficial ownership rather than indebtedness of a
REMIC Trust. Second, market discount or premium equal to the difference between
the total stated principal balances of the qualified mortgages and the basis to
the REMIC Trust therein generally will be included in income (in the case of
discount) or deductible (in the case of premium) by the REMIC Trust as it
accrues under a constant yield method, taking into account the Prepayment
Assumption. The basis to a REMIC Trust in the qualified mortgages is the
aggregate of the issue prices of all the Regular and Residual Securities in the
REMIC Trust on the Settlement Date. If, however, a substantial amount of a Class
of Regular or Residual Securities has not been sold to the public, then the fair
market value of all the Regular or Residual Securities in that Class as of the
date of the Prospectus Supplement should be substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC Trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the Regular and Residual Securities are not treated as expenses of the REMIC
Trust for which a deduction is allowed. If the deductions allowed to a REMIC
Trust exceed its gross income for a calendar quarter, such excess will be a net
loss for the REMIC Trust for that calendar quarter. The REMIC Regulations also
provide that any gain or loss to a REMIC Trust from the disposition of any
asset, including a qualified mortgage or "permitted investment" (as defined in
section 86OG(a)(5) of the Code) will be treated as ordinary gain or loss.
A Holder of a 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 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 Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such 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 Regular Securities, may increase over
time as the earlier Classes of 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.
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Basis Rules and Distributions
A Holder of a Residual Security has an initial basis in its Security
equal to the amount paid for such Residual Security. Such basis is increased by
amounts included in the income of the Holder and decreased by distributions and
by any net loss taken into account with respect to such Residual Security. A
distribution on a Residual Security to a Holder is not included in gross income
to the extent it does not exceed such Holder's basis in the Residual Security
(adjusted as described above) and, to the extent it exceeds the adjusted basis
of the Residual Security, shall be treated as gain from the sale of the Residual
Security.
A Holder of a Residual Security is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such
Holder's adjusted basis in its Residual Security as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the Residual Security.
Excess Inclusions. Any excess inclusions with respect to a Residual
Security are subject to certain special tax rules. With respect to a Holder of a
Residual Security, the excess inclusion for any calendar quarter is defined as
the excess (if any) of the daily portions of taxable income over the sum of the
"daily accruals" for each day during such quarter that such Residual Security
was held by such Holder. 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 Residual Security at the beginning of the calendar
quarter and 120 percent of the "federal long-term rate" in effect on the
Settlement Date, based on quarterly compounding, and properly adjusted for the
length of such quarter. For this purpose, the adjusted issue price of a Residual
Security as of the beginning of any calendar quarter is equal to the issue price
of the Residual Security, increased by the amount of daily accruals for all
prior quarters and decreased by any distributions made with respect to such
Residual Security before the beginning of such quarter. The issue price of a
Residual Security is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the 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.
Any excess inclusions cannot be offset by losses from other activities.
For Holders that are subject to tax only on unrelated business taxable income
(as defined in section 511 of the Code), an excess inclusion of such Holder is
treated as unrelated business taxable income. With respect to variable contracts
(within the meaning of section 817 of the Code), a life insurance company cannot
adjust its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a Holder of a Residual
Security is a member of an affiliated group filing a consolidated income tax
return, the taxable income of the affiliated group cannot be less than the sum
of the excess inclusions attributable to all residual interests in REMICs held
by members of the affiliated group. For a discussion of the effect of excess
inclusions on certain foreign investors that own 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
Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for "significant value" that is contained in the REMIC
Regulations would be applicable. If no such rule is applicable, excess
inclusions should be calculated as discussed above.
In the case of any Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such Residual
Securities reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, excluding
any net capital gain) will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
Residual Security as if held directly by such shareholder. Similar rules will
apply in the case of regulated investment companies, common trust funds and
certain cooperatives that hold a Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of
a Residual Security who is an individual will be required to include in income a
share of any servicing and guaranty fees. A deduction for such fees will be
allowed to such Holder only to the extent that such fees, along with certain of
such Holder's other miscellaneous itemized deductions exceed 2 percent of such
Holder's adjusted gross income. In addition, a Holder of a Residual Security may
not be able to deduct any portion of such fees in computing such Holder's
alternative minimum tax liability. A Holder's share of such fees will generally
be determined by (i) allocating the amount of such expenses for
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each calendar quarter on a pro rata basis to each day in the calendar quarter,
and (ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100
percent of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax
on a REMIC equal to 100 percent 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 Holder 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
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or 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 Regular Security generally will equal the cost of such Security to
the seller, increased by any original issue discount or market discount included
in the seller's gross income with respect to such Security and reduced by
distributions on such Security previously received by the seller of amounts
included in the stated redemption price at maturity and by any premium that has
reduced the seller's interest income with respect to such Security. See
"Discount and Premium." The adjusted basis of a Residual Security is determined
as described above under "Taxation of Holders of Residual Securities-Basis Rules
and Distributions." Except as provided in the following paragraph or under
section 582(c) of the Code, any such gain or loss will be capital gain or loss,
provided such Security is held as a "capital asset" (generally, property held
for investment) within the meaning of section 1221 of the Code.
Gain from the sale of a Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a Regular Security had income accrued
at a rate equal to 110 percent of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a Regular Security who purchased a
such Security at a market discount would also be taxable as ordinary income in
an amount not exceeding the portion of such discount that accrued during the
period such Security was held by such Holder, reduced by any market discount
includible in income under the rules described below under "Discount and
Premium."
If a Holder of a Residual Security sells its Residual Security at a
loss, the loss will not be recognized if, within six months before or after the
sale of the Residual Security, such Holder purchases another residual interest
in any REMIC or any interest in a taxable mortgage pool (as defined in section
7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
no such regulations have yet been published.
Transfers of Residual Securities. Section 860E(e) of the Code imposes a
substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a Residual Security to a disqualified organization
and upon a pass-through entity (including regulated investment companies, real
estate investment trusts, common trust funds, partnerships, trusts, estates,
certain cooperatives, and nominees) that owns a Residual Security if such
pass-through entity has a disqualified organization
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as a record-holder. For purposes of the preceding sentence, a transfer includes
any transfer of record or beneficial ownership, whether pursuant to a purchase,
a default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a Residual Security and certain
other provisions that are intended to meet this requirement are described in the
Pooling and Servicing Agreement, and will be discussed more fully in the
applicable Prospectus Supplement relating to the offering of any Residual
Security. In addition, a pass-through entity (including a nominee) that holds a
Residual Security may be subject to additional taxes if a disqualified
organization is a record- holder therein. A transferor of a Residual Security
(or an agent of a transferee of a Residual Security, as the case may be) will be
relieved of such tax liability if (i) the transferee furnishes to the transferor
(or the transferee's agent) an affidavit that the transferee is not a
disqualified organization, and (ii) the transferor (or the transferee's agent)
does not have actual knowledge that the affidavit is false at the time of the
transfer. Similarly, no such tax will be imposed on a pass-through entity for a
period with respect to an interest therein owned by a disqualified organization
if (i) the record-holder of such interest furnishes to the pass-through entity
an affidavit that it is not a disqualified organization, and (ii) during such
period, the pass-through entity has no actual knowledge that the affidavit is
false.
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 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 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
Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a Residual Security, determined as of the date such
Security is transferred and based on events that have occurred as of that date
and on the Prepayment Assumption. See "Discount and Premium" and "Taxation of
Holders of 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 Residual Security has "improper knowledge" (i.e., either knew,
or should have known, that the transferee would be unwilling or unable to pay
taxes due on its share of the taxable income of the REMIC Trust). A transferor
is presumed not to have improper knowledge if (i) the transferor conducts, at
the time of a transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor finds that
the transferee has historically paid its debts as they come due and finds no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and (ii) the transferee makes certain
representations to the transferor in the affidavit relating to disqualified
organizations discussed above. Transferors of a Residual Security should consult
with their own tax advisors for further information regarding such transfers.
Reporting and Other Administrative Matters
For purposes of the administrative provisions of the Code, each REMIC
Trust will be treated as a partnership and the Holders of 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 Holder that received a distribution during such
year a statement setting forth the portions of any such distributions that
constitute interest distributions, original issue discount, and such other
information as is required by Treasury regulations and, with respect to Holders
of Residual Securities in a REMIC Trust, information necessary to compute the
daily portions of the taxable income (or net loss) of such REMIC Trust for each
day during such year. The Trustee will also act as the tax matters partner for
each REMIC Trust, either in its capacity as a Holder of a Residual Security or
in a fiduciary capacity. Each Holder of a
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Residual Security, by the acceptance of its 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 Holder of a Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder 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. The Trustee does not intend to register any
REMIC Trust as a tax shelter pursuant to section 6111 of the Code.
Termination
In general, no special tax consequences will apply to a Holder of a
Regular Security upon the termination of a REMIC Trust by virtue of the final
payment or liquidation of the last Mortgage Loan remaining in the Trust Estate.
If a Holder of a Residual Security's adjusted basis in its Residual Security at
the time such termination occurs exceeds the amount of cash distributed to such
Holder in liquidation of its interest, although the matter is not entirely free
from doubt, it would appear that the Holder of the Residual Security is entitled
to a loss equal to the amount of such excess.
Debt Securities
General
With respect to each Series of Debt Securities, Arter & Hadden LLP,
special tax counsel to the Company, will deliver its opinion to the Company that
(unless otherwise limited in the applicable Prospectus Supplement) the
Securities will be classified as debt of the Company secured by the related
Mortgage Loans. Since different criteria are used to determine the non-tax
accounting treatment of the issuance of Debt Securities, the Company expects to
treat such transactions, for financial accounting purposes, as a transfer of an
ownership interest in the related Mortgage Loans to the related Trust and not as
the issuance of debt obligations. In this regard, it should be noted that the
IRS has issued a notice stating that, upon examination, it will scrutinize
instruments treated as debt for federal income tax purposes but as equity for
regulatory, rating agency or financial accounting purposes to determine if their
purported status as debt for federal income tax purposes is appropriate.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Assuming the Debt Securities are treated as
debt for federal income tax purposes, Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "Discount and Premium,"
below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain
special tax attributes by virtue of their being ownership interests in the
underlying Mortgage Loans. Similarly, REMIC Securities will possess similar
attributes by virtue of the REMIC provisions of the Code. In general, Debt
Securities will not possess such special tax attributes. Investors to whom such
attributes are important should consult their own tax advisors regarding
investment in Debt Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the
Holder will recognize gain or loss equal to the difference, in any, between the
amount received and the Holder's adjusted basis in the Security. The adjusted
basis in the Security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "Discount and Premium -- Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the
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coupon stripping rules in section 1286 of the Code. In very general terms, (i)
original issue discount is treated as a form of interest and must be included in
a Holder's income as it accrues (regardless of the Holder's regular method of
accounting) using a constant yield method; (ii) market discount is treated as
ordinary income and must be included in a Holder's income as principal payments
are made on the Security (or upon a sale of a Security) and (iii) if a Holder 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 amount of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Interest Accrual Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first 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 such discount is less than 0.25 percent of the stated
redemption price at maturity multiplied by its weighted average life. The
weighted average life of a Security is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Settlement Date until the date
on which each such distribution is expected to be made under the assumption that
the Mortgage Loans prepay at the rate specified in the applicable Prospectus
Supplement (the Prepayment Assumption) by (ii) a fraction, the numerator of
which is the amount of such distribution and the denominator of which is the
Security's stated redemption price at maturity. If original issue discount is
treated as zero under this rule, the actual amount of original issue discount
must be allocated to the principal distributions on the Security and, when each
such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Strip
Securities should be aware that there can be no assurance that the rules
described below will be applied to such Securities. Under these rules (described
in greater detail below), (i) the amount and rate of accrual of original issue
discount on each Series of Securities will be based on (x) the Prepayment
Assumption, and (y) in the case of a Security calling for a variable rate of
interest, an assumption that the value of the index upon which such variable
rate is based remains equal to the value of that rate on the Settlement Date,
and (ii) adjustments will be made in the amount of discount accruing in each
taxable year in which the actual prepayment rate differs from the Prepayment
Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Company anticipates that the Prepayment Assumption
for each Series of Securities will be consistent with this standard. The Company
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 Securityholder must include in gross income the sum of the "daily
portions" of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, 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
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
applicable Prospectus Supplement, the Trustee will report original issue
discount based on accrual periods of one month, each beginning on a payment date
(or, in the case of the first such period, the Settlement Date) and ending on
the day before the next payment date.
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Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The present
value of the remaining distributions referred to in the preceding sentence will
be calculated based on (i) the yield to maturity of the Security, calculated as
of the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Holders of such
Securities should consult their own tax advisors concerning the treatment of
such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also be required to defer the deduction of all or a portion of the interest
on such indebtedness until the corresponding amount of market discount is
included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25 percent of the
remaining stated redemption price at maturity of such Security multiplied by its
weighted average remaining life. Weighted average remaining life presumably
would be calculated in a manner similar to weighted average life, taking into
account payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a purchaser need not include in income any remaining original issue
discount and may elect, under section 171(c)(2) of
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the Code, to treat such premium as "amortizable bond premium." If a Holder makes
such an election, the amount of any interest payment that must be included in
such Holder's income for each period ending on a Distribution Date will be
reduced by the portion of the premium allocable to such period based on the
Premium Security's yield to maturity. Under recently issued Treasury
regulations, such premium amortization will be made under principles analogous
to those governing the accrual of market discount (as discussed above under
"Market Discount"). If such election is made by the Holder, the election will
also apply to all bonds the interest on which is not excludible from gross
income ("fully taxable bonds") held by the Holder at the beginning of the first
taxable year to which the election applies and to all such fully taxable bonds
thereafter acquired by it, and is irrevocable without the consent of the IRS. If
such an election is not made, (i) such a Holder must include the full amount of
each interest payment in income as it accrues, and (ii) the premium must be
allocated to the principal distributions on the Premium Security and, when each
such distribution is received, a loss equal to the premium allocated to such
distribution will be recognized. Any tax benefit from the premium not previously
recognized will be taken into account in computing gain or loss upon the sale or
disposition of the Premium Security.
Special Election
For any Security acquired on or after April 4, 1994, a Holder 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 Holder should consult its own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31 percent if recipients of
such distributions fail to furnish to the payor certain information, including
their taxpayer identification numbers, or otherwise fail to establish an
exemption from such tax. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against such recipient's federal
income tax. Furthermore, certain penalties may be imposed by the IRS on a
recipient of distributions that is required to supply information but that does
not do so in the proper manner.
Foreign Investors
Grantor Trust Securities and Regular Securities
Distributions made on a Grantor Trust Security or a Regular Security
to, or on behalf of, a Holder 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, or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income. This exemption is
applicable provided (a) the Holder 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
Holder signs a statement under penalties of perjury that certifies that such
Holder is not a U.S. Person, and provides the name and address of such Holder,
and (c) the last U.S. Person in the chain of payment to the Holder receives such
statement from such Holder or a financial institution holding on its behalf and
does not have actual knowledge that such statement is false. Holders should be
aware that the IRS might take the position that this exemption does not apply to
a Holder that also owns 10 percent or more of the Residual Securities, or to a
Holder that is a "controlled foreign corporation" described in section
881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a Holder of a Residual Security that is a not a
U.S. Person generally will be treated as interest for purposes of applying the
30 percent (or lower treaty rate) withholding tax on income that is not
effectively connected with a U.S. trade or business. Treasury Regulations
clarify that amounts not constituting excess inclusions that are distributed on
a Residual Security to a Holder 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 and Regular
Securities, as described above, but only to the extent that the obligations
directly underlying the REMIC Trust that issued the Residual Security (e.g.,
Mortgage Loans or regular interests in another REMIC) were issued after July 18,
1984. In no case will any portion of REMIC income that constitutes an excess
inclusion be entitled
72
to any exemption from the withholding tax or a reduced treaty rate for
withholding. See "Taxation of Holders of Residual Securities--Excess Inclusions.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code ("Qualified Retirement Plans") and on Individual Retirement Accounts
("IRAs") described in Section 408 of the Code (collectively, "Tax-Favored
Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Securities without
regard to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any such plan that is a Qualified Retirement
Plan and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan.
In addition, Section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
Plan Asset Regulations
A Plan's investment in Securities may cause the Mortgage Loans included
in a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the
"DOL") has promulgated regulations (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as a Trust Estate), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Security) in such entity. Because of the factual nature of
certain of the rules set forth in the DOL Regulations, an investing Plan's
assets either may be deemed to include an interest in the assets of a Trust
Estate or may be deemed merely to include its interest in the Securities.
Therefore, Plans should not acquire or hold Securities in reliance upon the
availability of any exception under the DOL Regulations.
The prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Code may apply to a Trust Estate and cause the Company, the
Servicer, any Sub-Servicer, the Trustee, the obligor under any credit
enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan.
If so, the acquisition or holding of Securities by or on behalf of the investing
Plan could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Securities
acquired by a Plan would be assets of that Plan. Under the DOL Regulations, the
Trust Estate, including the Mortgage Loans and the other assets held in the
Trust Estate, may also be deemed to be assets of each Plan that acquires
Securities. Special caution should be exercised before the assets of a Plan are
used to acquire a Security in such circumstances, especially if, with respect to
such assets, the Company, the Servicer, any Sub-Servicer, the Trustee, the
obligor under any credit enhancement mechanism or an affiliate thereof either
(i) has investment discretion with respect to the investment of Plan assets; or
(ii) has authority or responsibility to give (or regularly gives) investment
advice with respect to Plan assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust Estate, may constitute or involve a prohibited transaction under ERISA and
the Code.
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Prohibited Transaction Class Exemption
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which generally exempts from the prohibited
transaction provisions of Section 406(a) of ERISA, and from the excise taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of securities in the initial issuance of Securities and the servicing
and operation of "mortgage pools" (as defined below). PTCE 83-1 permits, subject
to certain general and specific conditions, transactions which might otherwise
be prohibited between Plans and Parties in Interest (or Disqualified Persons)
with respect to those Plans, related to the origination, maintenance and
termination of mortgage pools and the acquisition and holding of certain
mortgage pool pass-through Securities representing interests in such mortgage
pools by Plans, whether or not the Plan's assets would be deemed to include an
ownership interest in the mortgage loans in the mortgage pool. PTCE 83-1 does
not provide an exemption for Subordinate Securities.
PTCE 83-1 defines the term "mortgage pool" as "an investment pool the
corpus of which (1) is held in trust; and (2) consists solely of (a) interest
bearing obligations secured by either first or second mortgages or deeds of
trust on one-to four-family, residential property; (b) property which had
secured obligations and which has been acquired by foreclosure; and (c)
undistributed cash." The Company expects that each pool of Mortgage Loans will
be a "mortgage pool" within the meaning of PTCE 83-1.
PTCE 83-1 defines the term "mortgage pool pass-through certificate" as
a "certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." The Company has been advised by Arter & Hadden
LLP that, for purposes of applying PTCE 83-1, the term "mortgage pool
pass-through certificate" would include (i) Securities representing interests in
a Trust Estate consisting of Mortgage Loans issued in a series consisting of
only a single class of Securities; and (ii) Senior Securities representing
interests in a Trust Estate consisting of Mortgage Loans issued in a series in
which there is only one class of Senior Securities; provided that the Securities
described in clauses (i) and (ii) evidence the beneficial ownership of a
specified portion of both future interest payments and future principal payments
with respect to the Mortgage Loans.
It is not clear whether all types of Securities that may be offered
hereunder would be "mortgage pass-through certificates" for purposes of applying
PTCE 83-1, including, but not limited to, (a) a class of Securities that
evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Strip Securities; or (b) Securities
in a series including classes of Securities which differ as to timing,
sequential order, rate or amount of distributions of principal or interest or
both, or as to which distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula, or on the basis of collections from designated portions of
the Mortgage Pool; or (c) Securities evidencing an interest in a Trust Estate as
to which two or more REMIC elections have been made; or (d) a series including
other types of multiple classes. Accordingly, until further clarification by the
DOL, Plans should not acquire or hold Securities representing interests
described in this paragraph in reliance upon the availability of PTCE 83-1
without first consulting with their counsel regarding the application of PTCE
83-1 to the proposed acquisition and holding of such Securities.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction involving the purchase, sale and holding of "mortgage pool
pass-through certificates" and the servicing and operation of the "mortgage
pool" to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
securityholders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the greater of
one percent of the aggregate principal balance of all covered pooled mortgages,
or the principal balance of the largest covered mortgage, must be maintained;
and (3) the amount of the payment retained by the pool sponsor together with
other funds inuring to its benefit must be limited to not more than adequate
consideration for forming the mortgage pools plus reasonable compensation for
services provided by the pool sponsor to the mortgage pool. PTCE 83-1 also
imposes additional specific conditions for certain types of transactions
involving an investing Plan and for situations in which the Parties in Interest
or Disqualified Persons are fiduciaries.
The Prospectus Supplement for a series will set forth whether the
Trustee in respect of that series is affiliated with the Company. If the credit
enhancement mechanism for a series of Securities constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of one percent of the aggregate principal
balance of the Mortgage Loans or the principal balance of the largest Mortgage
Loan, then the Company has been advised that the second general condition
referred to above will be satisfied. The Company
74
will not receive total compensation for forming and providing services to the
Mortgage Pools which will be more than adequate consideration. Each Plan
fiduciary responsible for making the investment decision whether to acquire or
hold Securities must make its own determination as to whether (i) the Securities
constitute "mortgage pool pass-through certificates" for purposes of applying
PTCE 83-1, (ii) the second and third general conditions will be satisfied, and
(iii) the specific conditions, not discussed herein, of PTCE 83-1 have been
satisfied.
It should be noted that in promulgating PTCE 83-1 and its predecessor,
the DOL did not have under its consideration interests in pools of the exact
nature described herein. There are other class and individual prohibited
transaction exemptions issued by the DOL that could apply to a Plan's
acquisition or holding of Securities. There can be no assurance that any of
those exemptions will apply with respect to any particular Plan that acquires or
holds Securities or, even if all of the conditions specified therein were
satisfied, that the exemption would apply to all transactions involving the
Trust Estate. The applicable Prospectus Supplement under "ERISA Considerations"
may contain additional information regarding the application of PTCE 83-1, or
other prohibited transaction exemptions that may be available, with respect to
the series offered thereby.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is UBTI within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Security held by a Tax Exempt Investor will be considered UBTI and thus
will be subject to federal income tax. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Securities--Excess
Inclusions."
Consultation With Counsel
Any Plan fiduciary that proposes to cause a Plan to acquire or hold
Securities should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of PTCE 83-1 or any other prohibited transaction
exemption.
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related
Prospectus Supplement will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in at least the second highest rating category by any Rating
Agency, and as such may be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any State
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in "mortgage related securities," or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision. The
Policy Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a standard
fixed rate thirty-year mortgage security. According to the Policy Statement,
prior to purchase, a
75
depository institution will be required to determine whether a mortgage
derivative product that it is considering acquiring is high-risk, and if so that
the proposed acquisition would reduce the institution's overall interest rate
risk. Reliance on analysis and documentation obtained from a securities dealer
or other outside party without internal analysis by the institution would be
unacceptable. There can be no assurance as to which classes of Securities will
be treated as high-risk under the Policy Statement. In addition, although it has
not adopted the Policy Statement, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes of Securities. Similar policy statements have been issued by regulators
having jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities representing more than a specified percentage of the investors
assets. The Company will make no representations as to the proper
characterization of any class of Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Securities of any class constitute legal investments under SMMEA or
are subject to investment, capital or other restrictions, and whether SMMEA has
been overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
Securities will be applied by the Company to finance the origination or purchase
of, or to repay short-term loans incurred to finance the origination or purchase
of, the Mortgage Loans underlying the Securities or will be used by the Company
for general corporate purposes. The Company expects that it will make additional
sales of securities similar to the Securities from time to time, but the timing
and amount of any such additional offerings will be dependent upon a number of
factors, including the volume of mortgage loans purchased by the Company,
prevailing interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Company from such
sale.
The Company intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters (which may include affiliates of the
Company);
2. By placements by the Company with institutional investors through
dealers; and
3. By direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, a
series of Securities may be offered in whole or in part in exchange for the
Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool in respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Company whose identities and relationships to
the Company will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Securities will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement.
76
In connection with the sale of the Securities, underwriters may receive
compensation from the Company or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Company and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Company.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Company and
purchasers of Securities of such series.
The Company anticipates that the Securities offered hereby will be sold
primarily to institutional investors or be placed with individuals by the
Company or an affiliate of the Company. Purchasers of Securities, including
dealers, may, depending on the facts and circumstances of such purchases, be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with reoffers and sales by them of Securities. Holders of
Securities should consult with their legal advisors in this regard prior to any
such reoffer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Arter &
Hadden LLP, Washington, D.C..
FINANCIAL INFORMATION
The Company has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which shall be
incorporated by reference to this Registration Statement) may contain the
financial statements of the related Credit Enhancer, if any.
RATING
It is a condition to the issuance of each class of Securities offered
hereby that they shall have been rated in one of the four highest rating
categories by the related Raging Agencies.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of degree by which such prepayments might
differ from those originally anticipated. As a result, Securityholders might
suffer a lower than anticipated yield and, in addition, holders of stripped
pass-through certificates in extreme cases might fail to recoup their underlying
investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
77
INDEX OF PRINCIPAL DEFINITIONS
Page
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Accrual Securities...........................................................6
Advance.....................................................................10
Affiliated Originators.......................................................4
APR.........................................................................20
Approved Guidelines..........................................................9
ARM Loans...................................................................17
Balloon Amount..............................................................23
Balloon Loans...............................................................14
Bankruptcy Bond.............................................................46
Bankruptcy Loss.............................................................45
Bankruptcy Loss Amount......................................................44
Book-Entry Securities.......................................................32
Bulk Acquisitions............................................................9
Bulk Guidelines.............................................................24
Buydown Account.............................................................19
Buydown Agreement...........................................................38
Buydown Funds...............................................................19
Buydown Mortgage Loans......................................................19
Buydown Period..............................................................19
Cede........................................................................12
Certificates.................................................................5
Closing Date................................................................35
Code........................................................................62
Combined Loan-to-Value Ratio................................................20
Company......................................................................1
Company's Guidelines.........................................................9
Compensating Interest.......................................................40
Contract Sub-Servicers......................................................27
Conventional Loans..........................................................18
Credit Enhancer.............................................................18
Cut-Off Date................................................................20
Debt Securities.............................................................11
Defaulted Mortgage Loss.....................................................45
Deferred Interest...........................................................14
Deficient Valuation.........................................................46
Deleted Mortgage Loan.......................................................28
Delinquency Advances........................................................39
Designated Originator.......................................................26
Detailed Description........................................................18
Determination Date..........................................................39
Direct or Indirect Participants.............................................17
Disqualified Persons........................................................73
Distribution Account........................................................36
DOL.........................................................................73
DOL Regulations.............................................................73
DTC.........................................................................12
Due Date....................................................................36
Due Period...................................................................7
Eligible Account............................................................36
Equity Securities............................................................6
ERISA.......................................................................11
ERISA Plans.................................................................73
Exchange Act................................................................12
Extraordinary Losses........................................................45
FACO........................................................................50
FASIT High-Yield Securities.................................................11
FASIT Regular Securities....................................................11
FDIC........................................................................26
FHLMC.......................................................................14
Financial Guaranty Insurance Policy.........................................47
Financial Guaranty Insurer..................................................47
Fixed-Income Securities......................................................6
FNMA........................................................................14
Forward Purchase Agreement...................................................9
Fraud Loss..................................................................45
Fraud Loss Amount...........................................................44
Funding Period...............................................................9
Garn-St. Germain Act........................................................60
Grantor Trust Estate........................................................62
Grantor Trust Fractional Interest Security..................................63
Grantor Trust Securities....................................................11
Grantor Trust Strip Security................................................63
Indenture....................................................................5
Indenture Trustee............................................................5
Index.......................................................................22
Indirect Participant........................................................33
Insurance Paying Agent......................................................47
Insurance Proceeds..........................................................36
Insured Payment.............................................................47
Interest Rate................................................................6
Investment Company Act.......................................................8
IRAs........................................................................73
IRS.........................................................................64
Issuer.......................................................................4
Junior Lien Loans...........................................................20
Letter of Credit............................................................45
Letter of Credit Bank.......................................................45
Liquidated Mortgage Loan....................................................15
Liquidation Proceeds........................................................36
Loan Purchase Price.........................................................28
Loan-to-Value Ratio.........................................................18
Master Commitments..........................................................25
Master Servicer..............................................................4
Modified Loans..............................................................23
Mortgage Asset Schedule.....................................................18
Mortgage Assets.............................................................18
Mortgage Loan Program.......................................................22
Mortgage Loans...............................................................1
Mortgage Notes..............................................................21
Mortgage Pool................................................................1
Mortgage Pool Insurance Policy..............................................45
Mortgage Rate...............................................................19
Mortgaged Properties.........................................................9
Mortgages....................................................................9
Mortgagor...................................................................14
Net Liquidation Proceeds....................................................36
Net Mortgage Rate...........................................................54
Note Margin.................................................................22
Notes........................................................................5
Originator's Retained Yield.................................................21
Originators..................................................................1
Owner Trustee................................................................4
Participants................................................................32
Participating Originator....................................................26
Parties in Interest.........................................................73
Partnership Interests.......................................................11
Pass-Through Rate...........................................................39
Paying Agent................................................................38
Payment Dates................................................................7
Percentage Interest.........................................................38
Permitted Investments.......................................................36
Physical Certificates.......................................................32
78
Page
----
Physical Securities.........................................................33
Plan........................................................................11
Plans.......................................................................73
Policy Statement............................................................75
Pool Factor.................................................................41
Pool Insurer................................................................38
Pooling and Servicing Agreement..............................................6
Pre-Funding Account..........................................................9
Principal Prepayments.......................................................36
PTCE 83-1...................................................................74
Purchase Obligation.........................................................13
Qualified Replacement Mortgage..............................................28
Qualified Retirement Plans..................................................73
Rating Agencies.............................................................12
REMIC........................................................................2
REMIC Regular Securities....................................................11
REMIC Regulations...........................................................65
REMIC Residual Securities...................................................11
REMIC Securities............................................................62
REMIC Trust.................................................................64
REO Property................................................................43
Realized Loss...............................................................44
Record Date..................................................................7
Regular Security............................................................64
Relief Act..................................................................18
Remittance Date.............................................................37
Remittance Period............................................................7
Reserve Fund................................................................46
Residual Security...........................................................64
RTC.........................................................................27
Securities...................................................................1
Security Registrar..........................................................32
Securityholders..............................................................1
Senior Securities............................................................7
Servicer.....................................................................1
Servicing Advances..........................................................43
Servicing Agreement..........................................................5
Settlement Date.............................................................64
Single Family Loans.........................................................21
SMMEA.......................................................................11
Special Hazard Amount.......................................................44
Special Hazard Insurance Policy.............................................46
Special Hazard Insurer......................................................46
Special Hazard Loss.........................................................45
Statistic Calculation Date..................................................20
Strip Securities............................................................31
Sub-Servicer(s)..............................................................1
Sub-Servicing Account.......................................................35
Sub-Servicing Agreement.....................................................27
Subordinate Amount..........................................................44
Subordinate Securities.......................................................7
Subsequent Cut-Off Date.....................................................16
Subsequent Mortgage Loan.....................................................7
Tax Exempt Investor.........................................................75
Tax-Favored Plans...........................................................73
Title V.....................................................................61
Trust........................................................................1
Trust Agreement..............................................................5
Trust Estate.................................................................1
Trustee......................................................................4
U.S. Person.................................................................72
UCC.........................................................................32
Unaffiliated Originators.....................................................4
79
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No dealer, salesman or any other person has been authorized to give
any information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Seller
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an $ Notes, offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that information herein or therein is correct as of any
time since the date of this Prospectus Supplement or the Prospectus.
----------------------
TABLE OF CONTENTS
Prospectus Supplement
Summary................................................................ S-1
Risk Factors........................................................... S-11
The Portfolio of Mortgage Loans........................................ S-13
The Issuer............................................................. S-14
Use of Proceeds........................................................ S-14
The Mortgage Loan Pool................................................. S-14
Prepayment and Yield Considerations.................................... S-20
Additional Information................................................. S-23
Description of the Notes............................................... S-23
The Seller............................................................. S-30
The Note Insurance Policy and the Note Insurer......................... S-31
The Owner Trustee...................................................... S-34
The Indenture Trustee.................................................. S-34
Administration......................................................... S-34
Certain Federal Income Tax Consequences................................ S-38
State Tax Consequences................................................. S-38
ERISA Considerations................................................... S-38
Ratings................................................................ S-40
Legal Investment Considerations........................................ S-40
Underwriting........................................................... S-40
Report of Experts...................................................... S-41
Certain Legal Matters.................................................. S-41
Global Clearance, Settlement and Tax Documentation Procedures.......... I-1
Index to Location of Principal Defined Terms........................... A-1
Prospectus
Available Information................................................... 2
Reports to Owners....................................................... 3
Incorporation of Certain Documents by Reference......................... 3
Prospectus Supplement................................................... 3
Summary of Prospectus................................................... 4
Risk Factors............................................................ 13
The Trusts.............................................................. 18
The Mortgage Pools...................................................... 21
Mortgage Loan Program................................................... 23
Description of the Securities........................................... 30
Subordination........................................................... 43
Description of Credit Enhancement....................................... 44
Hazard Insurance; Claims Thereunder..................................... 49
The Company............................................................. 50
The Servicer............................................................ 50
The Master Servicer..................................................... 50
The Pooling and Servicing Agreement..................................... 50
Yield Considerations.................................................... 54
Maturity and Prepayment Considerations.................................. 56
Certain Legal Aspects of Mortgage Loans and Related Matters............. 57
Certain Federal Income Tax Consequences................................. 62
ERISA Considerations.................................................... 73
Legal Investment Matters................................................ 75
Use of Proceeds......................................................... 76
Methods of Distribution................................................. 76
Legal Matters........................................................... 77
Financial Information................................................... 77
Rating.................................................................. 77
Index to Principal Definitions.......................................... 78
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the related Securities, whether or not
participating in the distribution thereof, may be required to deliver this
Prospectus Supplement and the related Prospectus. This delivery requirement is
in addition to the obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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First Alliance Mortgage Loan Trust
1998-1A
$54,600,000 Adjustable Rate Mortgage Loan
Asset Backed Notes,
Series 1998-1A
Due April 20, 2028
[GRAPHIC OMITTED]
Seller and Servicer
Adjustable Rate Mortgage Loan
Asset Backed Notes, Series 1998-1A
---------------------
PROSPECTUS SUPPLEMENT
---------------------
PRUDENTIAL SECURITIES
INCORPORATED
March 10, 1998
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