As filed with the Securities and Exchange Commission on October 1, 1999
Registration Statement No. 333-86411
================================================================================
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------------------------
First Alliance Mortgage Company
(Exact name of Registrant as specified in its charter)
California 95-2944875
- ------------------------ ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
-----------------------------------------------------
17305 Von Karman Avenue
Irvine, California 92614-6203
(949) 224-8500
(Address and telephone number of principal executive offices)
-----------------------------------------------------
Joseph V. Gatti, Esq.
Arter & Hadden LLP
1801 K Street, N.W., Suite 400K
Washington, DC 20006
(202) 775-4442
Fax: (202) 857-0172
(Name, address and telephone number of agent for service)
-----------------------------------------------------
Please send copies of communications to:
Francisco Nebot
Executive Vice President and Chief Financial Officer
First Alliance Mortgage Company
17305 Von Karman Avenue
Irvine, California 92614-6203
(949) 224-8403
Fax: (949) 224-8366
-----------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC. From time to
time after the effective date of this Registration Statement as determined by
market conditions and pursuant to Rule 415.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus filed
as part of this Registration Statement may be used in connection with the
securities covered by Registration Statement No. 333-44585.
-----------------------------------------------------
CALCULATION OF REGISTRATION FEE
===========================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Offering Amount of
Being Registered Registered Per Unit* Price Registration Fee
===========================================================================================================
Mortgage Loan Asset Backed $850,000,000.00** 100% $850,000,000.00 $236,022.00***
Certificates and Notes
===========================================================================================================
* Estimated solely for purposes of calculating the registration fee.
** In addition to the amount being registered hereto, pursuant to Rule 429,
$92,105,000 is being carried forward from Registration Statement No.
333-44585, and the registration fee with respect thereto has previously
been paid.
*** $278.00 was previously paid by wire transfer on September 1, 1999.
-----------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
INTRODUCTORY NOTE
This registration statement registers up to $850,000,000 of mortgage
loan asset-backed certificates and notes collateralized by various types of
mortgage collateral described herein. The registration statement contains a form
of prospectus covering one-to-four ("single") family residential first and
junior lien, fixed and adjustable rate mortgage loans or interests therein
represented by agency or private label pass-through securities and notes
("Securities"). The prospectus is accompanied by two forms of prospectus
supplements describing the structures that are expected to be employed by the
Registrant for the issuance of certificates and notes. As described in the
Prospectus, each transaction may have classes of Securities with various
characteristics, mortgage assets with various characteristics, various forms and
terms of credit enhancement, an oversight agent and one or more subservicers,
various underwriting and servicing standards with respect to mortgage assets,
various tax consequences and various other characteristics, each of which will
be fully described in the actual form of prospectus supplement filed pursuant to
Rule 424(b)(2), (3) or (5).
2
CROSS REFERENCE SHEET
Items and Caption in Form S-3 Location in Prospectus
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus.............................................. Forepart of Registration Statement
and Outside Front Cover Page **
2. Inside Front and Outside Back Cover Pages
of Prospectus................................................... Inside Front Cover Page and
Outside Back Cover Page of
Prospectus **
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................................... Summary of Terms**; Risk
Factors**
4. Use of Proceeds.................................................... Use of Proceeds**
5. Determination of Offering Price.................................... *
6. Dilution........................................................... *
7. Selling Security Holders........................................... *
8. Plan of Distribution............................................... Methods of Distribution **
9. Description of Securities to be Registered......................... Outside Front Cover**; Summary
of Terms**; Description of the
Securities**; Certain Federal
Income Tax Consequences**; The
Pooling and Servicing
Agreement**; The Indenture**
10. Interests of Named Experts and Counsel............................. *
11. Material Changes................................................... *
12. Incorporation of Certain Information by Reference.................. Where You Can Find More
Information**
13. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities...................................... See Page II-5
- --------------------------
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
3
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
Securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
CERTIFICATES
Prospectus supplement dated ____ _, ____
(To prospectus dated September 2, 1999)
$-----------
FIRST ALLIANCE MORTGAGE LOAN TRUST ____-_
[GRAPHIC OMITTED]
Seller and Servicer
- --------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page S-8 of this
prospectus supplement and on page 6 of the prospectus.
The Class A Certificates represent interests in the trust only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the Class A
Certificates only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
The trust will issue two classes of Class A Certificates. The Class A
Certificates identified below are being offered by this prospectus supplement
and accompanying prospectus.
The Certificates
Initial Certificate
Class Principal Balance Interest Rate
----- ----------------- -------------
Class A-1 $_________ ____% annual pass-
through rate
Class A-2 $________ variable pass-through rate
equal to one-month LIBOR
plus ____%
o Distributions will be made monthly, commencing ______ __, ____.
o Each class of Class A Certificates represents an undivided
ownership interest in the related group of mortgage loans.
o The trust will make a REMIC election.
Credit Enhancement
o The certificate insurance policies, issued by
[_______________________], guarantee payment of interest and
principal on the Class A Certificates at the times and to the
extent described herein.
[LOGO]
o Excess interest received on the mortgage loans will be applied as a
payment of principal on the Class A Certificates to establish and
maintain required levels of overcollateralization. Excess interest
generated by one group of mortgage loans may be used to fund
shortfalls in available funds in the other mortgage loan group.
o The trust is also issuing one class of certificates that is
subordinated to the Class A Certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Class A Certificates or determined that this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The underwriters listed below will offer the Class A Certificates from time to
time in negotiated transactions or otherwise, at varying prices to be determined
at the time of sale. We expect to receive proceeds, including accrued interest,
of approximately ______% of the aggregate principal balance of the Class A
Certificates, before deducting our issuance expenses, estimated to be
approximately $_______. The Class A Certificates will not be listed on any
national securities exchange or any automated quotation system of any registered
securities association such as NASDAQ. See "Underwriting" in this prospectus
supplement.
We expect to deliver the Class A Certificates to the underwriters on or about
the closing date of ______ __, ____, in book entry form through The Depository
Trust Company, Cedelbank and the Euroclear System.
[Underwriters]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Class A Certificates in any state where the
offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the Class A Certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling Class A
Certificates will be required to deliver a prospectus supplement and prospectus
for ninety days following the date of this prospectus supplement.
TABLE OF CONTENTS
Prospectus Supplement
Summary of Terms............................................................S-1
Risk Factors................................................................S-8
The Portfolio of Mortgage Loans............................................S-13
Use of Proceeds............................................................S-15
The Mortgage Loan Pools....................................................S-15
Prepayment and Yield Considerations........................................S-26
Additional Information.....................................................S-30
Description of the Class A Certificates....................................S-31
The Seller.................................................................S-44
The Certificate Insurance Policies and the
Certificate Insurer..................................................S-45
The Pooling and Servicing Agreement........................................S-46
Certain Federal Income Tax Consequences....................................S-52
ERISA Considerations.......................................................S-52
Ratings....................................................................S-53
Legal Investment Considerations............................................S-54
Underwriting...............................................................S-54
Experts....................................................................S-55
Certain Legal Matters......................................................S-55
Global Clearance, Settlement and Tax
Documentation Procedures..............................................I-1
Index to Location of Principal Defined Terms................................A-1
Prospectus
Summary of Terms..............................................................1
Risk Factors..................................................................6
The Trusts...................................................................13
The Mortgage Pools...........................................................18
Mortgage Loan Program........................................................21
Description of the Securities................................................32
Subordination................................................................51
Description of Credit Enhancement............................................52
Hazard Insurance; Claims Thereunder..........................................59
The Seller...................................................................60
The Servicer.................................................................60
The Pooling and Servicing Agreement..........................................60
The Indenture................................................................66
Yield Considerations.........................................................68
Maturity and Prepayment Considerations.......................................71
Certain Legal Aspects of Mortgage Loans and
Related Matters........................................................73
Certain Federal Income Tax Consequences......................................80
ERISA Considerations.........................................................96
Legal Investment Matters....................................................102
Use of Proceeds.............................................................103
Methods of Distribution.....................................................103
Legal Matters...............................................................104
Financial Information.......................................................105
Rating......................................................................105
Index of Principal Definitions..............................................A-1
i
Important Notice about Information Presented in
this Prospectus Supplement and the Accompanying Prospectus
We provide information to you about the Class A Certificates in two
separate documents that progressively provide more detail:
o the accompanying prospectus, which provides general
information, some of which may not apply to the Class A
Certificates, and
o this prospectus supplement, which describes the specific
terms of your Class A Certificates.
If the description of any matter varies between this prospectus
supplement and the prospectus, you should rely on the information in this
prospectus supplement.
This prospectus supplement begins with a summary of terms to give you
an initial overview. The summary of terms does not contain all the information
that you need to consider in making your investment decision.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these documents where you can find
further related information. The following Table of Contents and the Table of
Contents included in the accompanying prospectus provide page references for the
captions.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement and the accompanying prospectus are first defined
under the caption "Index to Location of Principal Defined Terms" beginning on
page A-1 of this prospectus supplement and on page A-1 of the accompanying
prospectus.
All statistical data with respect to the mortgage loans are
approximate and are based on the scheduled principal balances of the mortgage
loans included in the trust as of the close of business on ______ __, ____,
except where otherwise noted.
This prospectus supplement includes some "forward looking" statements
that contain projections of various financial items. You should carefully review
"Risk Factors" and "Prepayment and Yield Considerations" in this prospectus
supplement. These sections discuss the risks that may cause actual yields and
distributions on the Class A Certificates to differ significantly from the
projections in the forward looking statements.
ii
SUMMARY OF TERMS
This summary provides an overview. It does not contain all of the information
that you need to consider in making your investment decision. To understand all
of the terms of the Class A Certificates and the characteristics of the mortgage
loans, read carefully the entire prospectus supplement and the accompanying
prospectus.
Securities Offered
On the closing date, the trust will issue two classes of Class A Certificates.
The Class A Certificates represent undivided ownership interests in the assets
of the trust and are not obligations of any other entity.
The mortgage loans in the trust are separated into two groups, each containing
mortgage loans secured by residential properties.
o The fixed rate group consists of fixed-rate first and second lien mortgage
loans.
o The variable rate group consists of variable-rate first lien mortgage
loans.
The Class A Certificates are also separated into two groups. In general, the
trust will distribute collections on the fixed rate mortgage loans to the Class
A-1 Certificates and collections on the variable rate mortgage loans to the
Class A-2 Certificates.
You will receive payments of interest and principal on your Class A Certificates
as provided in this prospectus supplement.
The Class A Certificates will be issued in book-entry form, in denominations of
$25,000 and integral multiples of $1,000 in excess thereof. You will not receive
a definitive certificate representing your Class A Certificates except in the
limited circumstances described in this prospectus supplement and the
accompanying prospectus.
See "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
attached to this prospectus supplement, "Description of the Class A Certificates
- -- Book Entry Registration of the Class A Certificates" in this prospectus
supplement and "Description of the Securities -- Form of the Securities" in the
accompanying prospectus for more detail.
The Seller, the Trust and the Trustee
o The seller, First Alliance Mortgage Company, maintains its corporate
headquarters at 17305 Von Karman Avenue, Irvine, California 92614-6203. You
can reach the seller by telephone at (949) 224-8500.
o The seller is forming First Alliance Mortgage Loan Trust ____-_ to own the
mortgage loans and certain other assets. The seller originated or acquired
the mortgage loans in accordance with its credit and underwriting
guidelines.
o The trustee is [_______________________] and its corporate trust office is
located in _______________________. You can reach the trustee by telephone
at (___) ___- ____.
See "The Seller" and "The Pooling and Servicing Agreement -- The Trustee" in
this prospectus supplement and "Mortgage Loan Program" in the accompanying
prospectus for more detail.
The Servicer and the Oversight Agent
First Alliance Mortgage Company will be the initial servicer for a term lasting
until ______ __, ____. Thereafter, First Alliance Mortgage Company may be
renewed as servicer for
S-1
consecutive terms of two months with the approval of the certificate insurer in
its sole discretion. The servicer will retain a monthly fee equal to ____% per
annum based on the outstanding principal balance of the mortgage loans. Each
month the servicer will advance to the trust out of its own funds an amount
equal to all delinquent payments of interest and scheduled principal on the
mortgage loans, but only to the extent it determines, in its reasonable business
judgment, that such advance will be recoverable from the related mortgage loan.
The servicer will also pay to the trust up to 30 days' compensating interest
(less the servicing fee rate) on mortgage loans that are paid-in-full each
month, but only up to the servicing fee for that month.
See "The Pooling and Servicing Agreement -- Delinquency Advances and
Compensating Interest" in this prospectus supplement and "Description of the
Securities -- Advances" in the accompanying prospectus for more detail.
[_______________________], will be the oversight agent. The oversight agent will
receive a monthly fee equal to ____% per annum based on the outstanding
principal balance of the mortgage loans. The oversight agent will supervise,
monitor and oversee the obligations of the servicer.
Property of the Trust
Payments on the Class A Certificates will be made only from the assets of the
trust. The trust's assets include:
o the mortgage loans;
o all payments of principal and interest on the mortgage loans other than
payments of principal and interest due on the mortgage loans on or before
______ __, ____, as further described in this prospectus supplement;
o one or more certificate insurance policies issued by [___________________];
and
o certain other property.
See "The Pooling and Servicing Agreement -- Formation of the Trust" in this
prospectus supplement for more detail.
Payment Dates
You will be entitled to receive payments of principal and interest on your Class
A Certificates on the 20th day of each calendar month or, if the 20th is not a
business day, the next business day, beginning ______ __, ____.
Interest Rates
The annual interest rate on the Class A-1 Certificates is ____% except that the
annual interest rate for the Class A-1 Certificates will increase to ____% after
the clean-up call date.
The annual interest rate on the Class A-2 Certificates is a variable rate. On
each payment date, the interest payable on the Class A-2 Certificates will equal
the lesser of the formula rate and the available funds cap described in this
prospectus supplement.
o The formula rate is equal to the lesser of (i) (A) LIBOR plus ____% on or
before the clean-up call date or (B) LIBOR plus ____% after the clean-up
call date and (ii) __%.
o If the formula rate on the Class A-2 Certificates is limited by the
available funds cap, the trustee will keep track of the amount of the
shortfall in interest. If funds are available on future payment dates, the
trustee will distribute all or part of such funds to the owners of the
Class A-2 Certificates to make up for such shortfalls.
See "Description of the Class A Certificates -- Payment Dates," "--Distributions
of Interest"
S-2
and "-- Calculation of LIBOR" in this prospectus supplement for more detail.
Interest Payments
On each payment date, you will be entitled to receive payments of interest on
your Class A Certificates equal to:
o interest accrued at the interest rate specified for your class of Class A
Certificates during the related accrual period on the outstanding principal
balance of your Class A Certificates; and
o any interest that was due on a prior payment date but was not paid (as well
as, to the extent permitted by applicable law, interest on such shortfall
at the interest rate for your Class A Certificates).
Interest on the Class A-1 Certificates will be calculated on the basis of a
360-day year consisting of twelve 30-day months. Interest on the Class A-2
Certificates will be calculated on the basis of the actual number of days and a
year of 360 days.
See "Description of the Class A Certificates -- Distributions" in this
prospectus supplement for more detail.
Principal Payments
On each payment date, you may be entitled to receive payments of principal on
the Class A Certificates. The amount that you will be entitled to receive is the
Class A principal distribution amount. Generally, the Class A principal
distribution amount for each class of the Class A Certificates consists of:
o unscheduled payments of principal received during the prior calendar
month, scheduled payments of principal received during the related due
period and delinquent payments of scheduled principal advanced by the
servicer; and
o certain amounts of excess interest on the mortgage loans.
The above amounts relating to the fixed rate mortgage loans are used to make
payments on the Class A-1 Certificates. The above amounts relating to the
variable rate mortgage loans are used to make payments on the Class A-2
Certificates.
See "Description of the Class A Certificates -- Distributions" in this
prospectus supplement for more detail.
Credit Enhancement
The Class A Certificates benefit from three forms of credit enhancement --
overcollateralization, crosscollateralization and the certificate insurance
policies.
Overcollateralization. Interest collected on each group of mortgage loans in
excess of the amount needed to pay interest on the related Class A Certificates
and certain expenses of the trust will be applied to accelerate the reduction of
the principal balance of the related Class A Certificates. This feature is known
as overcollateralization (i.e., the outstanding principal balance of the related
mortgage loans exceeds the outstanding principal balance of the related Class A
Certificates). Once overcollateralization reaches a target level, the
acceleration mechanism stops.
The target level of overcollateralization for a group of mortgage loans may
increase or decrease over time. If the target level increases, amortization of
the related Class A Certificates will accelerate until the actual
overcollateralization reaches the new target level. If the target level
decreases, amortization of the related Class A Certificates will decelerate
until overcollateralization reaches the new target level.
See "Prepayment and Yield Considerations," "Description of the Class A
Certificates -- Overcollateralization Provisions" in this
S-3
prospectus supplement and "Description of Credit Enhancement" in the
accompanying prospectus for more detail.
Crosscollateralization. Excess interest generated by one group of mortgage loans
may be used to fund shortfalls in available funds in the other mortgage loan
group or accelerate the amortization of the Class A Certificates related to the
other mortgage loan group.
See "Description of the Class A Certificates -- Crosscollateralization
Provisions" in this prospectus supplement for more detail.
Certificate Insurance Policies. Payments on your Class A Certificates will be
insured by [_______________________]. In return for an insurance premium, the
certificate insurer will issue one or more financial guaranty insurance policies
that unconditionally guarantee certain payments for the benefit of the owners of
the Class A Certificates.
Before each payment date, the trustee will determine whether funds available to
make the required payments of principal and interest on the Class A Certificates
are sufficient. If a deficiency exists that is covered by a certificate
insurance policy, then the trustee will make a claim under the related
certificate insurance policy.
See "The Certificate Insurance Policies and the Certificate Insurer" in this
prospectus supplement for more detail.
The effect of each certificate insurance policy is to guarantee the timely
payment of interest and the ultimate payment of principal on the Class A
Certificates. The certificate insurance policies cannot be canceled for any
reason. The certificate insurance policy for the Class A-2 Certificates does not
cover the available funds cap carry-forward amount.
Unless it defaults on its obligations under the certificate insurance policies
or becomes bankrupt or insolvent, the certificate insurer can exercise certain
rights of the owners of the Class A Certificates, without obtaining their
consent. In addition, owners of the Class A Certificates must generally obtain
the certificate insurer's written consent before exercising certain rights.
When the certificate insurer makes an insured payment on a Class A Certificate,
the trustee, as attorney-in-fact for the owners, will receive the insured
payment and disburse it to the owners. The certificate insurer will then become
entitled to receive reimbursement amounts to the extent of the insured payment.
See "The Certificate Insurance Policies and the Certificate Insurer" in this
prospectus supplement for more detail.
Other Securities
The trust is also issuing a class of residual certificates that represent the
most junior ownership interests in the trust.
The residual certificates are not being offered by this prospectus supplement
and the accompanying prospectus.
Final Payment Dates
The final scheduled payment date for each class of the Class A Certificates is
as follows:
o Class A-1 -- ______ __, ____
o Class A-2 -- ______ __, ____
The actual final payment date for each class of the Class A Certificates is
expected to occur much earlier for each class.
See "Prepayment and Yield Considerations -- Prepayments and Yield Scenarios for
Class A Certificates" in this prospectus supplement for more detail.
S-4
Information About the Initial Mortgage Loans
On ______ __, ____, there were ___ initial mortgage loans designated for
inclusion in the trust secured by mortgages on residential properties including
investment properties, which may be detached, attached, one-to-four family
dwellings, condominium units or units in a planned unit development. The
information provided below is as of ______ __, ____.
Initial Mortgage Loans in Fixed Rate Group
Number of Loans
Aggregate Loan Balance
Average Loan Balance
Range of Loan Balances
Range of Mortgage Rates
Weighted Average Mortgage Rate
Weighted Average Combined Original
Loan-to-Value Ratio
Weighted Average Remaining
Term to Stated Maturity
Range of Remaining Terms to
Stated Maturity
Percentage of:
First Lien Mortgage Loans
Second Lien Mortgage Loans
Properties
Single-family dwellings
Two- to Four- family
Condominiums
Initial Mortgage Loans in Variable Rate Group
Number of Loans
Aggregate Loan Balance
Average Loan Balance
Range of Loan Balances
Product Type:
Six Month LIBOR
Step Loan
Gross Margin Range:
Six Month LIBOR
Step Loan
Current Weighted Average Mortgage Rate
Range of Current Mortgage
Rates
Weighted Average Maximum Lifetime
Mortgage Rate
Range of Maximum Lifetime
Mortgage Rates
Weighted Average Lifetime Minimum
Mortgage Rate
Range of Minimum Lifetime
Mortgage Rates
Weighted Average Original
Loan-to-Value Ratio
Weighted Average Remaining
Term to Stated Maturity
Range of Remaining Terms to
Stated Maturity
Percentage of:
First Lien Mortgage Loans
Properties
Single-family dwellings
Two- to Four- family
Condominiums
Planned unit developments
Subsequent Mortgage Loans
On the closing date, we will deposit a cash amount of up to $__________ in a
pre-funding account. During the period from the closing date through ________
__, ____, the trust will use funds in this account to purchase additional
mortgage loans from the seller.
As new mortgage loans are purchased and added to the pool, the aggregate
principal balance of the mortgage loans will increase and the funds in the
pre-funding account will decrease by the same amount.
See "Description of the Class A Certificates -- Pre-Funding Account," "The
Mortgage Loan Pool -- Conveyance of Subsequent Mortgage Loans -- Fixed Rate
Group" and "-- Variable Rate Group" in this prospectus supplement for more
detail.
Capitalized Interest Account
On the closing date, we will deposit a cash amount in the capitalized interest
account to cover shortfalls in interest, if any, accruing on (i) the Class A-1
Certificates through ________ __, ____ and (ii) the Class A-2 Certificates
through ________ __, ____ as a result of the aggregate principal balance of the
Class A Certificates exceeding the aggregate principal balance of the initial
mortgage loans as of the closing date. On the ______ ____ and ______ ____
payment dates, the trustee will use the funds in the capitalized interest
account to pay you such shortfalls in interest.
S-5
See "Description of the Class A Certificates -- Capitalized Interest Account" in
this prospectus supplement for more detail.
Mandatory Prepayment of the Class A
Certificates
We expect to use nearly all the amounts that we will deposit in the pre-funding
account to purchase additional mortgage loans. Therefore, you will probably not
receive any significant prepayments of principal from the pre-funding account.
However, any amounts remaining in the pre-funding account on ________ __, ____
will be paid to you on the payment date in ______ ____ as a principal prepayment
on the related Class A Certificates.
See "Risk Factors -- Risks of Prepayments from Pre-Funding Account" and
"Description of the Class A Certificates -- Distributions" in this prospectus
supplement for more detail.
Optional Termination
The servicer (and the oversight agent, in the event the servicer does not
exercise such right) has the right to purchase all the mortgage loans and other
property in the trust on any payment date when the aggregate principal balance
of the mortgage loans has declined to less than $__________. Any such repurchase
will result in the early retirement of the Class A Certificates.
In the event the servicer or the oversight agent does not exercise its right to
purchase all of the mortgage loans and other property in the trust, the
certificate insurer will have such right.
See "The Pooling and Servicing Agreement -- Optional Termination" in this
prospectus supplement for more detail.
Ratings
The Class A Certificates will not be issued unless they are rated "Aaa" by
Moody's Investors Service, Inc. and "AAA" by Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies, Inc. A security rating is not a
recommendation to buy, sell or hold securities, and may be revised or withdrawn
at any time by the assigning rating agency.
See "Ratings" in this prospectus supplement and the accompanying prospectus for
more detail.
Tax Aspects
We will elect to treat certain portions of the trust as a "real estate mortgage
investment conduit" or REMIC. The Class A Certificates will be designated as
"regular interests" in a REMIC and will be treated as debt instruments of the
trust for federal income tax purposes. You should consult with your tax advisors
as to the consequences of owning the Class A Certificates.
See "Certain Federal Income Tax Consequences" in this prospectus supplement and
in the accompanying prospectus for more detail.
Legal Investment
You should consult with your legal advisor to see if you are permitted to buy
the Class A Certificates since the legal investment rules vary depending on what
kind of entity you are and who regulates you. The Class A Certificates will
[not] constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended.
See "Legal Investment Considerations" in this prospectus supplement and "Legal
Investment Matters" in the accompanying prospectus for more detail.
S-6
ERISA
Subject to important considerations discussed under "ERISA Considerations" in
this prospectus supplement and the accompanying prospectus, we believe that the
Class A Certificates will be eligible for purchase by employee benefit plans.
You should carefully review with your legal advisor whether the purchase or
holding of the Class A Certificates could give rise to a prohibited transaction.
See "ERISA Considerations" in this prospectus supplement and in the accompanying
prospectus for more detail.
S-7
RISK FACTORS
Before deciding whether to purchase the Class A Certificates, you should
consider the following risk factors (as well as the factors discussed under
"Risk Factors" in the prospectus). If any of the following risks are realized,
your investment could be materially and adversely affected.
Risk of Limitations
to Adjustments of
the Class A-2
Interest Rate
The calculation of the interest rate on the Class A-2 Certificates is based upon
the value of an index that is different from the index applicable to the
variable rate mortgage loans. Differences may also result from the use of a
different rate determination date or a different rate adjustment date. Since the
mortgage loan index may respond to different economic and market factors than
the Class A-2 index, there is not necessarily a correlation in movement between
them. For example, it is possible that the index on the variable rate mortgage
loans may decline while the Class A-2 index is stable or rising. It is also
possible that both the mortgage index and the Class A-2 index may decline or
increase during the same period, but not necessarily at the same rate.
This absence of a correlation between movement in the mortgage loan index and
the Class A-2 index may reduce the interest payable on the Class A-2
Certificates because the Class A-2 Certificates are subject to an available
funds cap. If the amount of interest that would accrue on the Class A-2
Certificates at the formula rate is greater than the available funds cap, then a
deficiency in interest paid to the owners of the Class A-2 Certificates will
occur. Although owners of the Class A-2 Certificates will be entitled to receive
that deficiency from excess available funds on future payment dates, there is no
assurance that excess funds will be available for this purpose. The ratings of
the Class A-2 Certificates do not address the likelihood of the payment of any
such deficiency, nor will the certificate insurer be liable for the payment of
any such deficiency.
Sensitivity
to Prepayments
The rate and timing of payments of principal of the mortgage loans (i.e., the
prepayment experience), among other factors, will affect the rate of principal
payments and the yield to maturity of the Class A Certificates. Because the
prepayment experience will depend on future events and a variety of factors, the
prepayment experience is uncertain and, in all likelihood, will not conform to
any projected rates of prepayment. Generally, in a declining interest rate
environment, mortgage loans are more likely to experience prepayments than if
prevailing interest rates remain constant or rise above the interest rates on
the mortgage loans. Conversely, in an increasing interest rate environment,
prepayments on mortgage loans are likely to decrease.
The borrowers can prepay the mortgage loans, in whole or in part, at any time.
However, approximately _____% and _____%, of the initial mortgage loans (by
aggregate principal balance) in the fixed rate group and the variable rate
group, respectively, as of ______ __, ____ require the borrower to pay a fee in
connection with certain prepayments. The requirement to pay this fee may result
in rates of prepayment that are lower than comparable pools of mortgage loans
that do not have this requirement. Also, many of the mortgage loans have
due-on-sale provisions which, if enforced by the servicer, will result in
prepayment of the mortgage loans.
See "Prepayment and Yield Considerations" in this prospectus supplement and
"Certain Legal Aspects of the Mortgage Loans and Related Matters --
Enforceability of Certain Provisions" in the accompanying prospectus for
more detail.
S-8
The mortgage loans in the variable rate group are variable rate mortgage loans.
Variable rate mortgage loans, like fixed rate mortgage loans, are more likely to
experience principal prepayments in a low interest rate environment. For
example, if prevailing interest rates were to fall, borrowers with variable rate
mortgage loans may be willing to refinance the mortgage loans with a fixed rate
loan to "lock in" a lower interest rate. Since the variable rate mortgage loans
also have periodic rate caps, and maximum and minimum interest rates, these caps
can also affect the likelihood of prepayments resulting from refinancings. In
addition, the delinquency and loss experience on variable rate mortgage loans
may differ from that on fixed rate mortgage loans because the amount of the
monthly payments on variable rate mortgage loans are subject to adjustment on
each payment change date.
Approximately _____% of the initial mortgage loans in the variable rate group by
aggregate principal balance as of ______ __, ____ are step loans that bear
interest at a fixed rate for [2, 3 or 5] years after origination and thereafter
have periodic adjustments in the same manner as the remaining initial mortgage
loans in the variable rate group. As with all mortgage loans, the rate of
prepayments on mortgage loans that are step loans and are in the initial fixed
rate period is sensitive to prevailing interest rates. The prepayment behavior
of the step loans may differ from that of the other mortgage loans. As a step
loan approaches its initial adjustment date, the borrower may become more likely
to refinance that loan to avoid an increase in the loan rate, even if fixed rate
loans are only available at rates that are slightly lower or higher than the
loan rate before adjustment.
The average life of the Class A Certificates, and, if purchased at other than
par, the yields realized by owners of the Class A Certificates will be sensitive
to levels of payment (including any principal prepayments) on the mortgage
loans. In general, the yield on the Class A Certificates if purchased at a
premium will be adversely affected by a higher than anticipated level of
prepayments and enhanced by a lower than anticipated level. Conversely, the
yield on Class A Certificates if purchased at a discount will be adversely
affected by a lower than anticipated level of prepayments.
See "Prepayment and Yield Considerations" in this prospectus supplement for more
detail.
The Following Characteristics
of the Mortgage Loans May
Increase Risk of Loss:
Non-
Conforming
Underwriting
Standards
The seller originated or purchased all the mortgage loans in accordance with its
mortgage loan program for non-conforming credits. A non-conforming credit means
a mortgage loan which may be ineligible for purchase by Fannie Mae or Freddie
Mac due to credit characteristics that may not meet Fannie Mae or Freddie Mac
guidelines.
Mortgage loans originated under the seller's mortgage loan program are likely to
experience rates of delinquency, bankruptcy and loss that are higher (perhaps
significantly) than mortgage loans originated under Fannie Mae or Freddie Mac
guidelines.
As of ______ __, ____, none of the initial mortgage loans were delinquent more
than 30 days.
S-9
Geographic
Concentration
As of ______ __, ____, mortgaged properties located in the state of California
secure approximately _____% and _____% of the initial mortgage loans in the
fixed rate group and the variable rate group (by aggregate principal balance),
respectively. This geographic concentration might magnify the effect on the
trust of adverse economic conditions in California and might increase the rate
of delinquencies, defaults and losses on the mortgage loans to a greater extent
than if the mortgaged properties were more geographically diversified.
Additionally, mortgaged properties in California may be particularly susceptible
to certain types of uninsurable hazards, such as earthquakes, floods, mudslides
and other natural disasters.
See "Risk Factors -- Geographic Concentration of the Mortgaged Properties" in
the accompanying prospectus for more detail.
Other Legal
Considerations
Federal and state laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and debt
collection practices, among other factors:
o regulate interest rates and other charges on mortgage loans
o require certain disclosures to borrowers
o require licensing of the seller and other originators
o regulate generally the origination, servicing and collection process for
the mortgage loans.
Depending on the specific facts and circumstances involved, violations may limit
the ability of the trust to collect on the mortgage loans, may entitle the
borrower to a refund of amounts previously paid and could result in liability
for damages and administrative enforcement. In addition, there may be
circumstances in which the trust, as owner of the mortgage loans, would be
subject to all of the claims and defenses that a borrower could assert against
the original lender. As a result, the trust may be subject to damages and
administrative penalties arising out of unlawful lending practices if it is
determined that a violation has occurred. The seller has represented that all
applicable federal and state laws were complied with in connection with the
origination of the mortgage loans. If there is a material and adverse breach of
such representation, the seller will be obligated to repurchase any affected
mortgage loan or to substitute a new mortgage loan.
See "Certain Legal Aspects of the Mortgage Loans and Related Matters" in the
accompanying prospectus for more detail.
Risk Associated with
the Certificate
Insurer
If the protection created by overcollateralization and crosscollateralization is
insufficient and the certificate insurer is unable to meet its obligations under
the certificate insurance policies, then you will experience a loss of some or
all of your investment. In addition, any reduction in a rating of the
claims-paying ability of the certificate insurer may result in a reduction of
the rating of the Class A Certificates.
Inability to
Repurchase or
Replace Defective
Loans
If the seller fails to cure a breach of its loan representations and warranties
with respect to any loan in a timely manner, then the seller is required to
repurchase or replace such defective loan. The seller may not be capable of
repurchasing or replacing any defective loans for financial or other reasons.
The seller's inability to repurchase or replace defective loans
S-10
would likely cause the loans to experience higher rates of delinquencies,
defaults and losses.
Risk of Prepayments
from Pre-Funding
Account
Any amounts on deposit in the pre-funding account that have not been used to
purchase additional mortgage loans by the end of the pre-funding period are
required to be paid to the owners of the related class of Class A Certificates
on the Payment Date in ______ ____. If this occurs, the owners of the Class A
Certificates will receive a prepayment of principal in an amount equal to the
amount remaining in the pre-funding account. Although we expect that
substantially all amounts in the pre-funding account will be used to purchase
additional mortgage loans and that there will be no material principal
prepayment, we cannot be certain that this will occur.
See "Prepayment and Yield Considerations," "The Mortgage Loan Pool -- Conveyance
of Subsequent Mortgage Loans -- Fixed Rate Group" and "-- Variable Rate Group"
in this prospectus supplement.
Litigation
From time to time, the seller may become involved in a number of lawsuits or
governmental investigations:
[Description of Litigation Matters to be provided]
An adverse determination in one or more of these matters may adversely affect
the seller and the servicer's financial condition and, in turn the seller's
ability to repurchase or replace any defective mortgage loans, and the
servicer's ability to service the mortgage loans. Revocation of one or more of
the seller's business licenses, particularly in the state of California, may
also adversely affect the mortgage lending operations of the seller.
Liquidity of the
Seller
The seller requires substantial capital to fund its operations. Currently, the
seller funds substantially all of its operations, including its loan production,
from borrowings under its lending arrangements with certain third parties
(including affiliates of the underwriters). As its existing lending arrangements
mature, the seller may not be able to access the financing necessary for its
operations. Recently, lenders have been less willing to extend credit on
mortgage loans. In addition, lenders who are willing to extend credit on
mortgage loans are doing so on terms that are less favorable than have recently
been available.
The seller's inability to arrange for new or alternative methods of financing on
favorable terms may curtail its loan production activities, which may adversely
affect its financial condition and, in turn, the seller's ability to repurchase
or replace any defective mortgage loan. In addition, such curtailment of
production may adversely affect the servicer's ability to service the mortgage
loans.
Risks Associated
with Year 2000
Compliance
The seller has been preparing for issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex; virtually every computer operation will be affected in
some way by the rollover of the two-digit year value to 00. The issue is whether
the computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
S-11
It is a condition of closing that the servicer and the oversight agent each
represent that either they are currently year 2000 ready or are implementing
modifications to their respective existing systems to the extent required to
cause them to be year 2000 ready prior to January 1, 2000. In the event that
computer problems arise out of a failure of such efforts to be completed on
time, or in the event that the computer systems of the oversight agent or the
servicer are not fully year 2000 ready, the resulting disruptions in the
collection or distribution of receipts on the loans could materially and
adversely affect your investment. To address the year 2000 issue, the seller has
completed implementation of its formal five-step plan, which is outlined herein.
Although the seller has determined that the baseline versions of its in-house
developed products currently are Year 2000 compliant, the seller will continue
to conduct further testing and implementation for year 2000 readiness. See "The
Seller" in this prospectus supplement for more detail.
Limited Resale
The underwriters intend to make a market for resales of the Class A Certificates
but have no obligation to do so. There is no assurance that such a market will
develop or, if it develops, that it will continue. Consequently, you may not be
able to sell your Class A Certificates readily or at prices that will enable you
to realize your desired yield. The market values of the Class A Certificates are
likely to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary markets for mortgage backed securities have experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have a
severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit, or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
Insolvency of Seller
Could Cause
Payment Delays
The seller believes that the transfer of the mortgage loans from the seller to
the trust constitutes a sale and, accordingly, that the mortgage loans will not
be a part of the assets of the seller in the event of the seller's insolvency
and will not be available to creditors of the seller. Nevertheless, in the event
of an insolvency, a bankruptcy trustee or a creditor may argue that the
transaction between the seller and the trust was a pledge of the mortgage loans
in connection with a borrowing rather than a true sale. Such an attempt, even if
unsuccessful, could result in delays in distributions on the Class A
Certificates.
The seller will deliver an opinion of its counsel, Arter & Hadden LLP, with
respect to the true sale of the mortgage loans from the seller to the trust, in
form and substance satisfactory to the rating agencies and the certificate
insurer.
Servicing Transfer
Could Cause Higher
Delinquencies
The mortgage loans are currently being serviced by the servicer. The certificate
insurer has the right, however, to refuse to extend the term of the servicer
beyond any two-month period. Servicing transfers can result in an increase in
delinquencies on the transferred loans.
S-12
THE PORTFOLIO OF MORTGAGE LOANS
General
The assets of the Trust initially will include two pools (each, a
"Mortgage Loan Group" or "Group") of closed-end mortgage loans (the "Initial
Mortgage Loans") secured by mortgages or deeds of trust (the "Mortgages")
primarily on one-to-four family residential properties (the "Mortgaged
Properties") to be conveyed to the Trust on the Closing Date. The Class A-1
Certificates will represent undivided ownership interests in a pool of
fixed-rate Mortgage Loans (the "Fixed Rate Group") secured by Mortgages which
may be either in a first or junior lien position. The Class A-2 Certificates
will represent undivided ownership interests in a pool of variable-rate Mortgage
Loans (the "Variable Rate Group") secured by Mortgages which are in a first lien
position.
The Mortgage Loan Pool includes newly-originated and seasoned fixed and
variable rate loans which were originated directly by the Seller or one or more
unrelated third party entities (the "Originators").
Substantially all of the Initial Mortgage Loans in the Variable Rate
Group 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 ____% per annum and a lifetime cap of ____% per annum above
the initial mortgage rate for the Initial Mortgage Loans in the Variable Rate
Group. 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 and Originations
The Seller originates and underwrites mortgage loans pursuant to the
Seller's Guidelines or acquires mortgage loans from Originators based on
Approved Guidelines or Bulk Guidelines as described in the Prospectus. See
"Mortgage Loan Program" in the Prospectus.
Fixed Rate Group. As of ______ __, ____, Initial Mortgage Loans
representing an aggregate principal balance of $__________ or ____% of the
Initial Mortgage Loans in the Fixed Rate Group by aggregate principal balance
were acquired from an Originator other than the Seller. The Seller has reviewed
100% of the acquisitions included in the Trust.
Variable Rate Group. As of ______ __, ____, Initial Mortgage Loans
representing an aggregate principal balance of $____________ or approximately
_____% of the Initial Mortgage Loans in the Variable Rate Group by aggregate
principal balance were acquired from an Originator other than the Seller. The
Seller has reviewed 100% of the acquisitions included in the Trust.
The Seller is constantly updating its underwriting guidelines, as
necessitated by changes in market conditions. Accordingly, the following
underwriting guidelines supplement the description of the Seller's underwriting
guidelines set forth in the Prospectus under the caption "MORTGAGE LOAN
PROGRAM." [Describe any changes to Underwriting Guidelines.]
As of ______ __, ____, ______% and _____% of the Initial Mortgage Loans
in the Fixed Rate Group and the Variable Rate Group, respectively, by aggregate
principal balance, were originated under the new underwriting guidelines
described above. The remaining Initial Mortgage Loans were originated under the
then existing guidelines, which are not materially different from the new
underwriting guidelines described in this Prospectus Supplement.
Furthermore, from time to time, exceptions are made to the underwriting
guidelines and it is possible that exceptions may have been made for a
substantial number of the Mortgage Loans based on compensating factors.
Management permits deviations from the specific criteria to reflect local
economic trends and real estate valuations, as well as other mitigating factors
specific to each applicant. Such
S-13
deviations are monitored and regularly reviewed by the Seller's credit
committee. The Seller strives to maintain the overall integrity of its credit
and underwriting policies and simultaneously provide its lending officers with
the flexibility to consider the specific circumstances of the mortgage loan
application.
As of ______ __, ____, Initial Mortgage Loans representing an aggregate
principal balance of $_________or _____% of the Initial Mortgage Loans in the
Fixed Rate Group by aggregate principal balance were refinanced under the
Seller's Streamline Refinance Program described in the Prospectus under the
caption "MORTGAGE LOAN PROGRAM."
Delinquencies
The following tables provide data on loan delinquency and REO for the
Servicer's United States servicing portfolio. The Servicer is not an approved
seller/servicer by Fannie Mae.
United States Servicing Portfolio
As of _________, As of December 31,
(Dollars in Thousands) (Dollars in Thousands)
----------------------------- -------------------------------------------------
1998 1997 1996
---- ---- ----
Total Servicing Portfolio........... $802,034 $769,733 $637,903
30-59 days delinquent........... 9,144 7,718 9,359
60-89 days delinquent........... 6,097 7,521 6,704
90 days or more 18,449 16,935 19,081
------ ------ ------
delinquent..........................
Total delinquencies(1).......... $33,690 $32,174 $35,144
======= ======= =======
Total Delinquency Percentage........ 4.2% 4.2% 5.5%
REO Properties(2)................... $2,063 $1,668 $3,951
- -----------------------
(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.
Losses
The following table provides data on net losses for the Servicer's United
States servicing portfolio.
For the Quarter Ended For the Years Ended
____________, December 31,
(Dollars in Thousands) (Dollars in Thousands)
----------------------------- ------------------------------------------------
1998 1997 1996
---- ---- ----
Average servicing portfolio (1)..... $799,979 $695,858 $614,982
Net losses (2)...................... $983 $1,705 $2,160
Percentage of average
servicing portfolio........ 0.12% 0.25% 0.35%
- -----------------------
(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.
S-14
USE OF PROCEEDS
The Seller will sell the Initial Mortgage Loans to the Trust
concurrently with the delivery of the Class A Certificates. Net proceeds from
the sale of the Class A Certificates will be applied by the Trust to purchase
the Initial Mortgage Loans from the Seller. Such net proceeds, less the
Pre-Funded Amount and the amount deposited in the Capitalized Interest Account,
will (together with the Class R Certificates retained by the Seller or its
affiliates) represent the purchase price to be paid by the Trust to the Seller
for the Initial Mortgage Loans.
THE MORTGAGE LOAN POOLS
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"). It is intended that additional Mortgage Loans (the
"Subsequent Mortgage Loans") satisfying the criteria set out in the Pooling and
Servicing Agreement will be purchased by the Trust from the Seller for inclusion
in the Fixed Rate Group and the Variable Rate Group from time to time on or
before ________ __, ____ from funds on deposit in the Pre-Funding Account. The
Subsequent Mortgage Loans, if available, will be sold by the Seller to the
Trust. The Initial Mortgage Loans and the Subsequent Mortgage Loans are
collectively referred to herein as the "Mortgage Loans".
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 CutOff Date, based on the outstanding principal balances of the Initial
Mortgage Loans in the Fixed Rate Group or the Initial Mortgage Loans in the
Variable Rate Group, in each case as of the Cut-Off Date, and giving effect to
all payments due on or prior to the Cut-Off Date whether or not received. The
Mortgage Loan Pool will initially consist of ___ fixed rate loans and adjustable
rate loans evidenced by promissory notes (the "Notes") secured by deeds of
trust, security deeds or mortgages on the Mortgaged Properties, which are
located in __ states and the District of Columbia. The Mortgaged Properties
securing 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 consist of _____% of loans secured by
first lien mortgages on the related Mortgaged Properties and ____% of loans
secured by second liens on the related Mortgaged Properties.
The Initial Mortgage Loans satisfied the following criteria as of the
Cut-Off Date: remaining terms to stated maturity of no greater than 360 months;
a Mortgage Rate as of the Cut-Off Date of at least ____% with respect to the
Fixed Rate Group and at least ____% with respect to the Variable Rate Group; and
a CLTV not in excess of _____% with respect to the Fixed Rate Group and a LTV
not in excess of _____% with respect to the Variable Rate Group.
The Combined Loan-to-Value Ratio ("CLTV") of a Mortgage Loan is equal
to the ratio (expressed as a percentage) of (x) the sum of the (i) original
principal balance of the Mortgage Loan and (ii) the outstanding principal
balances of any senior mortgage loans (computed at the date of origination of
the Mortgage Loan) and (y) the appraised value of the Mortgaged Property at the
time of origination. 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.
Each Mortgage Loan in the Trust will be assigned to one of the two
Mortgage Loan Groups comprised of Mortgage Loans which bear a fixed interest
rate only, in the case of the Fixed Rate Group,
S-15
and Mortgage Loans which bear an adjustable interest rate only, in the case of
the Variable Rate Group; provided, however, that the Step Loans included in the
Variable Rate Group bear interest at a fixed rate of interest for [2, 3 or 5]
years after origination and thereafter bear an adjustable interest rate. Each of
the Mortgage Loans contained in the Fixed Rate Group will be secured by a
Mortgage having either a first or junior lien position with respect to the
related Mortgaged Property. Each of the Mortgage Loans contained in the Variable
Rate Group will be secured by Mortgages which are in a first lien position.
_____% of the Initial Mortgage Loans were originated less than seven months
prior to the Cut-Off Date. The Class A-1 Certificates represent undivided
ownership interests in all Mortgage Loans contained in the Fixed Rate Group, and
the Class A-2 Certificates represent undivided ownership interests in all
Mortgage Loans contained in the Variable Rate Group.
Fixed Rate Group - Initial Mortgage Loans
[All] of the Initial Mortgage Loans in the Fixed Rate Group are
Actuarial Loans. [All] of the Initial Mortgage Loans in the Fixed Rate Group
require monthly payments of principal that will fully amortize such Initial
Mortgage Loan by its stated maturity date. No Initial Mortgage Loan in the Fixed
Rate Group had a stated maturity date later than ______ __, ____. As of the
Cut-Off Date, the aggregate principal balance of all Initial Mortgage Loans in
the Fixed Rate Group was _____% of the aggregate principal balance of such
Initial Mortgage Loans at the times of their origination.
The Initial Mortgage Loans in the Fixed Rate Group had the following
aggregate characteristics as of the Cut-Off Date:
Aggregate Number of Initial Mortgage Loans.............................
Principal Balance
Aggregate.....................................................
Average.......................................................
Range.........................................................
Mortgage Rates
Weighted Average..............................................
Range.........................................................
Original Term to Stated Maturity
Weighted Average..............................................
Range.........................................................
Remaining Term to Stated Maturity
Weighted Average..............................................
Range.........................................................
CLTV
Weighted Average..............................................
Range.........................................................
Weighted Average Junior Lien Ratio.....................................
Percentage of First Lien Mortgage Loans................................
Percentage of Second Lien Mortgage Loans...............................
Some of the aggregate percentages in the following tables may not total
100% due to rounding.
S-16
DISTRIBUTION OF CLTV'S
Fixed Rate Group
Number of
Initial Aggregate % of Aggregate
Mortgage Unpaid Unpaid
Range of CLTV's Loans Principal Balance Principal Balance
5.0 - 10.00%.....................................
10.0 - 15.00......................................
15.0 - 20.00......................................
20.0 - 25.00......................................
25.0 - 30.00......................................
30.0 - 35.00......................................
35.0 - 40.00......................................
40.0 - 45.00......................................
45.0 - 50.00......................................
50.0 - 55.00......................................
55.0 - 60.00......................................
60.0 - 65.00......................................
65.0 - 70.00......................................
70.0 - 75.00......................................
75.0 - 80.00......................................
80.0 - 85.00......................................
Total...........................................
The CLTV'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 such Appraised Values 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 Mortgage Loans, together with the outstanding balances of any senior
Mortgage Loans, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those heretofore experienced by the Servicer, as set forth above
under "The Portfolio of Mortgage Loans," and by the mortgage lending industry in
general.
DISTRIBUTION OF JUNIOR LIEN RATIOS
Fixed Rate Group
(Junior Lien Initial Mortgage Loans)
% of Aggregate
Unpaid Principal
Number of Aggregate Balance of
Range of Junior Lien Initial Unpaid Junior Lien Initial
Junior Lien Ratios Mortgage Loans Principal Balance Mortgage Loans
20.01 - 25.00%....................................
25.01 - 30.00.....................................
55.01 - 60.00.....................................
70.01 - 75.00.....................................
95.01 - 100.00....................................
Total....................................
The "Junior Lien Ratio" of a Mortgage Loan is equal to the ratio
(expressed as a percentage) of the original principal balance of such Mortgage
Loan to the sum of (i) the original principal balance of such Mortgage Loan and
(ii) the outstanding principal balances of any senior mortgage loans (computed
at the date of origination of the Mortgage Loan).
S-17
DISTRIBUTION OF MORTGAGE RATES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
7.5-1 - 8.000%.................................
8.0-1 - 8.500..................................
8.5-1 - 9.000..................................
9.0-1 - 9.500..................................
9.5-1 - 10.000..................................
10.0-1 - 10.500..................................
10.5-1 - 11.000..................................
11.0-1 - 11.500..................................
12.0-1 - 12.500..................................
12.5-1 - 13.000..................................
13.0-1 - 13.500..................................
13.5-1 - 14.000..................................
14.0-1 - 14.500..................................
Total..........................................
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
Arizona.........................................
California......................................
Colorado........................................
District of Columbia............................
Florida.........................................
Illinois........................................
Maryland........................................
Minnesota.......................................
New Jersey......................................
New York........................................
Ohio............................................
Oregon..........................................
Pennsylvania....................................
Utah............................................
Virginia........................................
Washington......................................
Total....................................
S-18
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Months Mortgage Loans Principal Balance Principal Balance
95 - 120 ....................................
121 - 180 ....................................
181 - 240 ....................................
241 - 300 ....................................
301 - 360 ....................................
Total
DISTRIBUTION OF PRINCIPAL BALANCES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
$15,000.01 - 25,000.00.......................
25,000.01 - 50,000.00.......................
50,000.01 - 75,000.00.......................
75,000.01 - 100,000.00.......................
100,000.01 - 125,000.00.......................
125,000.01 - 150,000.00.......................
150,000.01 - 175,000.00.......................
175,000.01 - 200,000.00.......................
200,000.01 - 225,000.00.......................
225,000.01 - 250,000.00.......................
250,000.01 - 275,000.00.......................
275,000.01 - 300,000.00.......................
325,000.01 - 350,000.00.......................
350,000.01 - 375,000.00.......................
Total...................................
DISTRIBUTION OF PROPERTY TYPES
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
Single Family...................................
Two-to-Four Family..............................
Condominium.....................................
Total..................................
S-19
DISTRIBUTION OF OCCUPANCY STATUS*
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
Owner Occupied..................................
Investor Property...............................
Second Home.....................................
Total...................................
- --------------------------
* Based on representations of the Mortgagors at origination of the Mortgage
Loans.
Conveyance of Subsequent Mortgage Loans - Fixed Rate Group
The Pooling and Servicing Agreement permits the Trust to acquire
$__________ in aggregate principal balance of Subsequent Mortgage Loans for
addition to the Fixed Rate Group. Accordingly, the statistical characteristics
of the Mortgage Loan Pool and the Fixed Rate Group will vary as of any
Subsequent Cut-Off Date upon the acquisition of Subsequent Mortgage Loans.
Pursuant to the Pooling and Servicing Agreement, however, the Seller has
covenanted to deliver Subsequent Mortgage Loans for inclusion in the Fixed Rate
Group that will not materially change the statistical characteristics of the
Mortgage Loan Pool and the Fixed Rate Group. Each Subsequent Mortgage Loan will
meet the requirements specified by the Certificate Insurer for Subsequent
Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans for
addition to the Fixed Rate Group on a Subsequent Transfer Date is subject to the
satisfaction of the requirements as set forth in the Pooling and Servicing
Agreement.
Variable Rate Group - Initial Mortgage Loans
[All] of the Initial Mortgage Loans in the Variable Rate Group are
Actuarial Loans and are secured by first mortgages. [All] of the Initial
Mortgage Loans in the Variable Rate Group require monthly payments of principal
that will fully amortize such Initial Mortgage Loans by their respective stated
maturity dates. [No] Initial Mortgage Loan in the Variable Rate Group had a
stated maturity date later than ________ __, ____. As of the Cut-Off Date, the
aggregate principal balance of the Initial Mortgage Loans in the Variable Rate
Group was _____% of the aggregate principal balance of such Initial Mortgage
Loans at the times of their origination. As of the Cut-Off Date, substantially
all of the Initial Mortgage Loans in the Variable Rate Group had interest rates
which were not fully indexed (i.e., the interest rate does not equal the sum of
the entire gross margin and the applicable index).
[All] of the Initial Mortgage Loans in the Variable Rate Group 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"). [All] of the
Six-Month LIBOR Loans have an initial periodic reset cap of ____% per annum and
a periodic reset cap of ____% per annum.
Approximately $________________ or _____% of the Initial Mortgage Loans
in the Variable Rate Group by aggregate principal balance as of the Cut-Off Date
bear interest at a fixed rate for [2, 3 or 5] years after origination and
thereafter have periodic adjustments at frequencies in the same manner as the
Six-Month LIBOR Loans (as described above) (the "Step Loans"). [All] of the Step
Loans have a first adjustment date that will occur in ________. As of the
Cut-Off Date, ____% and _____% of the Initial Mortgage Loans in the Variable
Rate Group by aggregate principal balance have initial periodic reset caps of
____% per annum and ____% per annum, respectively. After the first adjustment,
the Step Loans have a periodic reset cap of ____% per annum.
S-20
The Initial Mortgage Loans in the Variable Rate Group had the following
aggregate characteristics as of the Cut-Off Date:
Aggregate Number of Initial Mortgage Loans............................
Principal Balance
Aggregate....................................................
Average......................................................
Range........................................................
Current Mortgage Rate
Weighted Average.............................................
Range........................................................
Original Term to Stated Maturity
Weighted Average.............................................
Range........................................................
Remaining Term to Stated Maturity
Weighted Average.............................................
Range........................................................
LTV
Weighted Average ............................................
Range........................................................
Percentage of First Lien Mortgage Loans
Gross Margin
Weighted Average ............................................
Range........................................................
Semi-Annual Rate Adjustment Cap.......................................
Maximum Mortgage Rate
Weighted Average ............................................
Range........................................................
Minimum Mortgage Rate
Weighted Average ............................................
Range .......................................................
DISTRIBUTION OF LTV's
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Range of LTV's Mortgage Loans Principal Balance Principal Balance
15.01 - 20.00......................................
20.01 - 25.00......................................
25.01 - 30.00......................................
30.01 - 35.00......................................
40.01 - 45.00......................................
45.01 - 50.00......................................
50.01 - 55.00......................................
55.01 - 60.00......................................
60.01 - 65.00......................................
65.01 - 70.00......................................
70.01 - 75.00......................................
75.01 - 80.00......................................
80.01 - 85.00......................................
Total.....................................
S-21
The LTV's shown above were calculated based upon the Appraised Values
of the Mortgaged Properties. 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
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Months Mortgage Loans Principal Balance Principal Balance
120.............................................
121 - 180.......................................
181 - 240.......................................
301 - 360.......................................
Total.....................................
DISTRIBUTION OF PRINCIPAL BALANCES
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
$23,000.01 - 25,000.00 ..............
25,000.01 - 50,000.00 ..............
50,000.01 - 75,000.00 ..............
75,000.01 - 100,000.00 ..............
100,000.01 - 125,000.00 ..............
125,000.01 - 150,000.00 ..............
150,000.01 - 175,000.00 ..............
175,000.01 - 200,000.00 ..............
200,000.01 - 225,000.00 ..............
225,000.01 - 250,000.00 ..............
250,000.01 - 275,000.00 ..............
275,000.01 - 300,000.00 ..............
300,000.01 - 325,000.00 ..............
325,000.01 - 350,000.00 ..............
375,000.01 - 400,000.00 ..............
Total..........................
S-22
DISTRIBUTION OF PROPERTY TYPES
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
Single Family...................................
Two-to-Four Family .............................
Condominium.....................................
Planned Unit Development........................
Total....................................
DISTRIBUTION OF OCCUPANCY STATUS
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
Owner Occupied..................................
Investor Property...............................
Total..................................
DISTRIBUTION OF CURRENT MORTGAGE RATES
Variable Rate Group
Aggregate % of Aggregate
Range of Current Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
6.001 - 6.500%.............................
6.501 - 7.000..............................
7.001 - 7.500..............................
7.501 - 8.000..............................
8.001 - 8.500..............................
8.501 - 9.000..............................
9.001 - 9.500..............................
9.501 - 10.000..............................
10.001 - 10.500..............................
10.501 - 11.000..............................
11.001 - 11.500..............................
11.501 - 12.000..............................
12.001 - 12.500..............................
Total.................................
S-23
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
Variable Rate Group
Range of Aggregate % of Aggregate
Maximum Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
13.001 - 13.500%............................
13.501 - 14.000.............................
14.001 - 14.500.............................
14.501 - 15.000.............................
15.001 - 15.500.............................
15.501 - 16.000.............................
16.001 - 16.500.............................
16.501 - 17.000.............................
17.001 - 17.500.............................
17.501 - 18.000.............................
18.001 - 18.500.............................
18.501 - 19.000.............................
19.001 - 19.500.............................
Total................................
DISTRIBUTION OF MINIMUM MORTGAGE RATES
Variable Rate Group
Range of Aggregate % of Aggregate
Minimum Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
6.001 - 6.500%............................
6.501 - 7.000.............................
7.001 - 7.500.............................
7.501 - 8.000.............................
8.001 - 8.500.............................
8.501 - 9.000.............................
9.001 - 9.500.............................
9.501 - 10.000.............................
10.001 - 10.500.............................
10.501 - 11.000.............................
11.001 - 11.500.............................
11.501 - 12.000.............................
12.001 - 12.500.............................
Total................................
S-24
DISTRIBUTION OF MARGINS
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Margins Mortgage Loans Principal Balance Principal Balance
3.501 - 4.000%............................
4.001 - 4.500.............................
4.501 - 5.000.............................
5.001 - 5.500.............................
5.501 - 6.000.............................
6.001 - 6.500.............................
6.501 - 7.000.............................
7.001 - 7.500.............................
7.501 - 8.000.............................
8.001 - 8.500.............................
Total...............................
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
Arizona.........................................
California......................................
Colorado........................................
Connecticut.....................................
District of Columbia............................
Florida.........................................
Georgia.........................................
Illinois........................................
Maryland........................................
New Jersey......................................
New York........................................
Ohio............................................
Oregon..........................................
Pennsylvania....................................
Utah............................................
Virginia........................................
Washington......................................
Total..................................
Conveyance of Subsequent Mortgage Loans - Variable Rate Group
The Pooling and Servicing Agreement permits the Trust to acquire
$_________ in aggregate principal balance of Subsequent Mortgage Loans for
addition to the Variable Rate Group. Accordingly, the statistical
characteristics of the Mortgage Loan Pool and the Variable Rate Group will vary
as of any Subsequent Cut-Off Date upon the acquisition of Subsequent Mortgage
Loans. Pursuant to the Pooling and Servicing Agreement, however, the Seller has
covenanted to deliver Subsequent Mortgage Loans for inclusion in the Variable
Rate Group that will not materially change the statistical characteristics of
the Mortgage Loan Pool and the Variable Rate Group. Each Subsequent Mortgage
Loan will meet the requirements specified by the Certificate Insurer for
Subsequent Mortgage Loans.
S-25
The obligation of the Trust to purchase Subsequent Mortgage Loans for
addition to the Variable Rate Group on a Subsequent Transfer Date is subject to
the satisfaction of the requirements as set forth in the Pooling and Servicing
Agreement.
Interest Payments on the Mortgage Loans
Each Mortgage Loan provides for monthly payments by the obligor on the
related Note (the "Mortgagor") 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
(disregarding, for purposes of this discussion, the effects on the yield on the
Class A-1 Certificates resulting from the timing of the settlement date and
those considerations discussed below under "Payment Delay Feature of Class A-1
Certificates"), the yield to maturity on a Class A Certificate will be directly
related to the rate of payment of principal of the Mortgage Loans in the related
Mortgage Loan Group, including for this purpose voluntary payment in full of
Mortgage Loans in the related Mortgage Loan Group prior to stated maturity (a
"Prepayment"), liquidations due to defaults, casualties and condemnations, and
repurchases of Mortgage Loans in the related Mortgage Loan Group by the Seller
or by the Certificate Insurer. The Mortgage Loans may be prepaid by the related
Mortgagors, in whole or in part, at any time. However, as of the Cut-Off Date,
approximately _____% and _____% (by aggregate Loan Balance) of the Initial
Mortgage Loans in the Fixed Rate Group and the Variable Rate Group,
respectively, require the payment of a fee in connection with certain
prepayments of the Mortgage Loans. The actual rate of principal prepayments on
pools of mortgage loans is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
pools of mortgage loans at any time because of specific factors relating to the
mortgage loans in the particular pool, including, among other things, the age of
the mortgage loans, the geographic locations of the properties securing the
loans, the extent of the mortgagors' equity in such properties, and changes in
the mortgagors' housing needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Class A Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase any of the Class A Certificates. 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 Fixed Rate Group or the Variable Rate Group, then the
Owners of the Class A-1 Certificates and/or Class A-2 Certificates will receive
a partial prepayment on the Payment Date in ______ ____ equal to the related
amount remaining in the Pre-Funding Account.
S-26
Although no assurances can be given, the Seller expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust for inclusion in
the Fixed Rate Group and the Variable Rate Group 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 Class A-1
Certificates or the Class A-2 Certificates.
Prepayment and Yield Scenarios for Class A Certificates
If purchased at other than par, the yield to maturity on a Class A
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in a Mortgage Loan Group is slower than the rate
anticipated by an investor who purchases a Class A Certificate related to such
Mortgage Loan Group 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 in a Mortgage Loan Group is faster than the rate anticipated
by an investor who purchases a Class A Certificate related to such Mortgage Loan
Group at a premium, the actual yield to such investor will be lower than such
investor's anticipated yield.
All of the Mortgage Loans in the Fixed Rate Group are fixed rate
mortgage loans. The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on such mortgage loans. However, the monthly payment on a home equity or home
improvement loan is often smaller than the monthly payment on a purchase money
first mortgage loan. Because of the smaller loan balance often associated with a
home equity or home improvement loan, a decrease in the interest rate payable
results in a smaller reduction in the amount of the Mortgagor's monthly payment.
Conversely, if prevailing interest rates rise appreciably above the interest
rates on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans.
All of the Mortgage Loans in the Variable Rate Group are either
adjustable rate mortgage loans or Step 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 the Federal
National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac") is representative of the types of borrowers included
in the Seller's lending program and cannot assure that such prepayment
experience is relevant to the Mortgage Loans contained in either Mortgage Loan
Group.
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. In addition to such solicitations, the Seller may solicit or
otherwise agree to refinancings on the following basis: (i) general
solicitations, by mail, advertisement or otherwise of the general public or
persons on a targeted list, so long as the list was not generated from the
Schedules of Mortgage Loans, (ii) unsolicited refinancings by the Seller in
connection with a Mortgagor's request for refinancing and (iii) refinancings in
connection with the Seller's policy to solicit (x) Mortgagors who indicate to
the Seller their intent to refinance their Mortgage Loans, (y) with respect to
Mortgage Loans in the Variable Rate Group, Mortgagors with Mortgage Loans for
which the next interest rate adjustment is determined by the Seller to be higher
than the current market rate for a fixed rate mortgage loan with the same risk
qualifications or (z) in connection with the general solicitation described in
(i) above. If any Mortgage Loans are refinanced as a result, the prepayment
level of the related Mortgage Loan Group may be increased over the level which
such Mortgage Loan Group would experience in the absence of such solicitations.
Such refinancings will result in a prepayment on related Mortgage Loans.
S-27
The prepayment behavior of the Step Loans may differ from that of the
other Mortgage Loans in the Variable Rate Group. As a Step 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. In addition, the delinquency and loss experience on the Mortgage
Loans in the Variable Rate Group may differ from that on the Mortgage Loans in
the Fixed Rate Group because the amount of the monthly payments on the Mortgage
Loans in the Variable Rate Group are subject to adjustment on each adjustment
date.
The "Last Scheduled Payment Date" for the Class A-1 Certificates and
the Class A-2 Certificates is ______ __, ____ which is the Payment Date in the
month following the calendar month of the maturity of the latest maturing
Mortgage Loan, plus 12 months. The weighted average life of each Class of Class
A Certificates is likely to be shorter, and the actual final Payment Date with
respect to each Class of Class A Certificates could occur significantly earlier
than the Last Scheduled Payment Date because (i) Prepayments are likely to occur
which shall be applied to the payment of the Class A Principal Balances, (ii)
Net Monthly Excess Spread to the extent available will be applied as an
accelerated payment of principal on the Class A Certificates up to the Specified
Subordinated Amount for each Mortgage Loan Group and (iii) the Servicer or, in
limited circumstances, the Oversight Agent, may cause a termination of the Trust
when the aggregate outstanding principal balance of the Mortgage Loans has
declined to less than $_________, as described under "The Pooling and Servicing
Agreement -- Optional Termination" herein.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption" or "PPC") represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of the pool of mortgage
loans for the life of such mortgage loans. With respect to the Class A-1
Certificates, a 100% Prepayment Assumption (100% PPC) assumes a constant
prepayment rate ("CPR") of __% per annum of the outstanding principal balance of
such mortgage loans in the Fixed Rate Group in the first month of the life of
the mortgage loans and an additional amount of approximately ________%
(precisely __/__ percent per annum) in each month thereafter until the twelfth
month; beginning in the twelfth month and in each month thereafter during the
life of the mortgage loans, a constant prepayment rate of __% per annum each
month is assumed. With respect to the Class A-2 Certificates, the Prepayment
Assumption assumes a constant prepayment rate of the applicable per annum CPR
percentage of the outstanding principal balances of the mortgage loans in the
Variable Rate Group. As used in the tables below entitled "Prepayment
Assumptions" and "Weighted Average Lives", 0% Prepayment Assumption (0% PPC)
assumes a constant prepayment rate equal to 0% of the applicable Prepayment
Assumption, i.e., no prepayments. Correspondingly, 125% Prepayment Assumption
(125% PPC) assumes prepayment rates equal to 125% of the applicable Prepayment
Assumption, and so forth. The Prepayment Assumption does not purport to be an
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 Certificates 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 of the related Mortgage Loan Groups prepay at the
indicated constant percentages of the Prepayment Assumption; (ii) distributions
on the Class A Certificates are received, in cash, on the 20th day of each
month, commencing in ________ ____; (iii) no defaults or delinquencies in, or
modifications, waivers or amendments respecting, the payment by the Mortgagors
of principal and interest on the Mortgage Loans occur; (iv) scheduled payments
are assumed to be received on the first day of each month commencing in ________
____ 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 ________
____ and include 30 days' interest thereon; (v) the level of Six-Month LIBOR
remains constant at ____%; (vi) the Class A-2 Pass-Through Rate remains constant
at ____% per annum; (vii) the Oversight Agent Fee is ____% per annum; (viii) the
Class A Certificates are purchased on ______ __, ____ (the "Closing Date"); (ix)
the
S-28
Mortgage Rate for each Mortgage Loan in the Variable Rate Group 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); (x) on ______ __, ____, all
amounts on deposit in the Pre-Funding Account are used to acquire Subsequent
Mortgage Loans; and (xi) each Mortgage Loan Group consists of Mortgage Loans
having the following characteristics:
FIXED RATE GROUP
Initial and Subsequent Mortgage Loans
Remaining
Mortgage Term to
Principal Mortgage Rate Net of Stated Maturity Seasoning
Balance Rate Servicing Fee Rate (in months) (in months)
------- ---- ------------------ ----------- -----------
VARIABLE RATE GROUP
Initial and Subsequent Mortgage Loans
Current Remaining Number of
Mortgage Rate Term to Months to Initial
Current Net of Stated Next Mortgage Periodic Periodic
Principal Mortgage Servicing Fee Maturity Seasoning Gross Rate Change Adjustment Adjustment
Balance Rate Rate (in months) (in months) Margin (in months) Cap Cap
------- ---- ---- ----------- ----------- ------ ----------- --- ---
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate will be repaid to the investor. The weighted average life of
the Class A Certificates will be influenced by the rate at which principal
payments on the Mortgage Loans in the related Mortgage Loan Group are paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments, liquidations due to default
or early termination of a Mortgage Loan Group). The weighted average lives of
the Class A Certificates also will be influenced by the overcollateralization of
the Class A Certificates because collections otherwise payable to the Class R
Certificates are applied as principal prepayments to the Class A Certificates
until the outstanding aggregate principal balance of the Class A Certificates is
less than the aggregate outstanding principal balance of the Mortgage Loans in
each Mortgage Loan Group by the related Specified Subordinated Amount for such
Group. These payments of principal have the effect of accelerating the
amortization of the Class A Certificates, thereby shortening their respective
weighted average lives.
Based on the foregoing Modeling Assumptions, the tables below indicate
the weighted average life of each Class of the Class A Certificates, assuming
that the Mortgage Loans in the related Mortgage Loan Group prepay according to
the indicated percentages of the related Prepayment Assumption:
PREPAYMENT ASSUMPTIONS
Assumption I Assumption Assumption Assumption Assumption Assumption
------------ ---------- ---------- ---------- ---------- ----------
II III IV V VI
-- --- -- - --
Fixed Rate Group (PPC):
Variable Rate Group
(CPR):
S-29
WEIGHTED AVERAGE LIVES
Class
-----
Class A-1 Class A-2
------------------- -------------------
Weighted Weighted
Prepayment Average Life Average Life Earliest Retirement
Assumption (years)(1) (years)(1) Date(1)
- ---------- ---------- ---------- -------
I ..............................
II ..............................
III ..............................
IV ..............................
V ..............................
VI ..............................
(1) Assuming early termination of the Trust at the Clean-Up Call Date.
There is no assurance that prepayments will occur, or, if they do
occur, that they will occur at any constant percentage or in accordance with any
of the aforementioned Prepayment Assumptions.
Payment Delay Feature of Class A-1 Certificates
The effective yield to the Owners of the Class A-1 Certificates will be
lower than the yield otherwise produced by the Class A-1 Certificate
Pass-Through Rate and the purchase price of such Certificates because principal
and interest distributions will not be payable to such holders until at least
the twentieth day of the month following the month of accrual (without any
additional distributions of interest or earnings thereon in respect of such
delay).
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage pool, the
Fixed Rate Group, the Variable Rate Group 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 Class A Certificates, 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 Pooling 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 Class A Certificates.
A current report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Commission within fifteen days after the initial issuance of
the Class A Certificates and incorporated by reference to the Registration
Statement. 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 Class A-1 Certificates and the Class A-2 Certificates with the Commission
in a report on Form 8-K. Such tables and materials were prepared at the request
of certain prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such prospective investors. Such tables
and assumptions may be based on assumptions that differ from the Modeling
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
S-30
DESCRIPTION OF THE CLASS A CERTIFICATES
General
The Certificates will consist of the Class A-1 Certificates, the Class
A-2 Certificates and the Class R Certificates. The Certificates will be issued
by First Alliance Mortgage Loan Trust ____-_ (the "Trust") a trust to be
organized under the laws of the State of New York. Only the Class A Certificates
are offered hereby. The Class A Certificates together with the Class R
Certificates retained by the Seller (the "Class R Certificates") are herein
referred to as the "Certificates." The "Certificate Principal Balance" of any
Class of Class A Certificates is the original Certificate Principal Balance of
such Class as of the Closing Date as reduced by all amounts actually distributed
as principal to the Owners of such Class of Class A Certificates on all prior
Payment Dates.
Persons in whose name a Certificate is registered in the Register
maintained by the Trustee are the "Owners" of the Certificates. For so long as
the Class A Certificates are in book-entry form with DTC, the only "Owner" of
the Class A Certificates as the term "Owner" is used in the Pooling and
Servicing Agreement will be Cede. No beneficial owners will be entitled to
receive a definitive certificate representing such person's interest in the
Trust, except in the event that physical Certificates are issued under limited
circumstances set forth in the Pooling and Servicing Agreement. All references
herein to the Owners of Class A Certificates 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 Pooling and Servicing
Agreement.
As described in "The Portfolio of Mortgage Loans" herein, the Mortgage
Loan pool is divided into the Fixed Rate Group, which contains first and junior
lien Mortgage Loans having fixed rates of interest and the Variable Rate Group,
which contains first lien Mortgage Loans having variable rates of interest. For
each Mortgage Loan Group, the related Class of Class A Certificates will
evidence the right to receive on each Payment Date the Class A Distribution
Amount for such Class of Class A Certificates, in each case until the related
Certificate Principal Balance has been reduced to zero. The Owners of the Class
R Certificates will be entitled to receive distributions of residual Net Monthly
Excess Spread.
Collections and Remittances
The Pooling and Servicing Agreement will require that the Trustee
create and maintain an account, to be established as a trust account held by the
trust department of the Trustee (the "Certificate Account"). All funds in the
Certificate Account shall be invested and reinvested by the Trustee for the
benefit of the Trustee as determined by the Trustee in its sole discretion, but
only in Eligible Investments.
Five 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 Trustee, for deposit in the Certificate Account, the
Monthly Remittance Amount for the related Mortgage Loan Group. The Monthly
Remittance Amount for a Mortgage Loan Group is equal to (a) the sum of (i) the
balance on deposit in the Principal and Interest Account as of the close of
business on the related Determination Date, (ii) all Delinquency Advances and
Compensating Interest (collectively, the "Advances") and (iii) certain amounts
required to be deposited by the Servicer in the Certificate Account, including
Loan Purchase Prices and Substitution Amount, 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) the Servicing Fee for such Payment Date and 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. See "The Pooling and Servicing Agreement Servicing and Other Compensation
and Payment of Expenses; Originator's Retained Yield" in the Prospectus.
S-31
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 Prepayments on the Mortgage Loans received in
the corresponding Remittance Period. "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. Such shortfalls will result because the Mortgagor is required to pay
interest on Prepayments 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 Prepayments. The Servicer is not
obligated to cover any shortfalls in collections of interest for partial
prepayments. Such partial prepayments are applied to reduce the outstanding
principal balance of the related Mortgage Loan as of the Due Date in the month
following prepayment.
Distributions
Distributions on the Certificates will be made on the 20th day of each
calendar month, or if such 20th day is not a Business Day, on the next Business
Day, beginning on ______ __, ____ (each, a "Payment Date"). Distributions on the
Certificates will be made on each Payment Date to Owners of record of the
Certificates as of the immediately preceding Record Date in an amount equal to
the product of such Owner's Percentage Interest and the amount distributed in
respect of the Class of Certificates which includes such Owner's Certificates on
such Payment Date.
The "Record Date" is 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 "Percentage Interest" represented by any
Certificate will be equal to the percentage obtained by dividing the original
Certificate Principal Balance of such Certificate by the original Certificate
Principal Balance of all Certificates of the same Class.
Distributions of Interest
On each Payment Date, each Class of Class A Certificates will be
entitled to payments in respect of Class A Current Interest.
The Pass-Through Rate for each Class of the Class A Certificates is as
follows:
Class A-1 Certificates On each Payment Date that occurs on or prior
to the Clean-Up Call Date, ____% per annum
and for any Payment Date thereafter, ____%
per annum.
Class A-2 Certificates On each Payment Date, the Class A-2
Pass-Through Rate will be equal to the
lesser of (i) the Class A-2 Formula
Pass-Through Rate and (ii) the Available
Funds Cap.
The "Class A-2 Formula Pass-Through Rate" is
the lesser of (i) (A) LIBOR plus ____% per
annum for any Payment Date that occurs on or
prior to the Clean-Up Call Date or (B) LIBOR
plus ____% per annum for any Payment Date
that occurs after the Clean-Up Call Date,
and (ii) __% per annum.
The "Available Funds Cap" means the weighted
average of the Mortgage Rates on Mortgage
Loans in the Variable Rate Group, less the
sum of (a) the Servicing Fee Rate, (b) the
premiums due to the Certificate Insurer with
respect to the Certificate Insurance Policy
relating to the Class A-2 Certificates
(expressed as a per annum rate), (c) the fee
due to the Oversight Agent (expressed as a
per annum rate) relating to the Class A- 2
Certificates and (d) beginning on the
[thirteenth] Payment Date following the
Closing Date, ____%.
S-32
The Pooling and Servicing Agreement provides that if, on any Payment
Date, the Available Funds Cap is less than the Class A-2 Formula Pass-Through
Rate, the difference between the amount calculated at the Class A-2 Formula
Pass-Through Rate over the amount calculated at the Available Funds Cap will be
carried forward and be due and payable on future Payment Dates (to the extent
that there are funds available for such purpose) and shall accrue interest at
the applicable Class A-2 Formula Pass-Through Rate, until paid (such shortfall,
together with such accrued interest, the "Available Funds Cap CarryForward
Amount"). The Certificate Insurance Policy for the Class A-2 Certificates 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 Variable Rate
Group resulting from the Available Funds Cap being in excess of the Class A-2
Formula Pass-Through Rate on future Payment Dates after payment of any
Subordination Increase Amount for either Mortgage Loan Group, (ii) any Net
Monthly Excess Spread which would otherwise be paid to the Servicer or the
Trustee on account of certain reimbursable amounts, or to the Owners of the
Class R Certificates and (iii) any funds paid to effect the early retirement of
the Class A-2 Certificates on any Remittance Date after the Clean-Up Call Date.
"Class A Current Interest" means, with respect to a Class of Class A
Certificates and a Payment Date, the sum of (i) the aggregate amount of interest
accrued during the related Accrual Period at the Pass-Through Rate for such
Class of Class A Certificates on the outstanding Certificate Principal Balance
of such Class of Class A Certificates and (ii) any Interest Carry Forward Amount
for such Class of Class A Certificates.
The "Clean-Up Call Date" is the first Payment Date on which the
outstanding aggregate principal balance of the Mortgage Loans is less than
$_________.
"Accrual Period" means with respect to (x) the Class A-1 Certificates,
the calendar month immediately preceding the calendar month in which such
Payment Date occurs and (y) the Class A-2 Certificates, the period 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.
Calculations of interest on the Class A-1 Certificates will be made on the basis
of a 360-day year assumed to consist of twelve 30-day months. Calculations of
interest on the Class A-2 Certificates will be made on the basis of the actual
number of days elapsed in the related Accrual Period and a year of 360 days.
The "Interest Carry Forward Amount" for each Class of Class A
Certificates and any Payment Date is the sum of (x) the amount, if any, by which
(i) the Class A Current Interest for such Class of Class A Certificates as of
the immediately preceding Payment Date exceeded (ii) the amount of the actual
payments of interest for such Class of Class A Certificates made on such
immediately preceding Payment Date and (y) interest on such amount, calculated
at the Pass-Through Rate for such Class of Class A Certificates for the number
of days in the related Accrual Period.
Distributions of Principal
The Owners of each Class of Class A Certificates are entitled to
receive certain monthly distributions of principal on each Payment Date which
generally reflect collections of scheduled principal due on the Due Date
occurring during the related Due Period and unscheduled payments of principal
collected during the related Remittance Period.
The credit enhancement provisions of the Trust result in a limited
acceleration of the principal payments to the Owners of each Class of Class A
Certificates; such credit enhancement provisions are more fully described under
"Description of the Class A Certificates -- Overcollateralization Provisions"
and "-- Crosscollateralization Provisions" herein. Such credit enhancement
provisions also have the effect of accelerating and shortening the weighted
average lives of the Class A Certificates by increasing the rate at which
principal is distributed to the Owners. See "Prepayment and Yield
Considerations" herein.
On each Payment Date, distributions in reduction of the Certificate
Principal Balance of the Class A Certificates will be made in the amounts
described herein. The "Class A Principal Distribution Amount" for each Mortgage
Loan Group with respect to each Payment Date shall be the lesser of:
S-33
(a) the related Total Available Funds for the related Mortgage
Loan Group plus any related Insured Payment minus the related
Class A Current Interest and Fees and Expenses; and
(b)(i) the sum, without any duplication of:
(a) the Principal Carry-Forward Amount with respect to
the related Mortgage Loan Group;
(b) the principal portion of all scheduled monthly
payments on the Mortgage Loans in the related
Mortgage Loan Group due during the related Due
Period, to the extent actually received by the
Servicer 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
in the related Mortgage Loan Group that either was
repurchased by the Seller or an Originator or
purchased by the Servicer on 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 in
the related Mortgage Loan Group (to the extent such
Substitution Amounts relate to principal);
(e) all Net Liquidation Proceeds actually collected by
the Servicer with respect to the Mortgage Loans in
the related Mortgage Loan Group during the related
Remittance Period (to the extent such Net Liquidation
Proceeds relate to principal);
(f) the amount of any Subordination Deficit with respect
to such Mortgage Loan Group for such Payment Date;
(g) the proceeds received by the Trustee of any
termination of the related Mortgage Loan Group (to
the extent such proceeds relate to principal);
(h) any moneys released from the Pre-Funding Account as a
prepayment of the related Class of Class A
Certificates on the Payment Date which immediately
follows the end of the Funding Period; and
(i) the amount of any Subordination Increase Amount with
respect to such Mortgage Loan Group for such Payment
Date consisting of the amount of any Net Monthly
Excess Spread to be actually applied for the
accelerated payment of principal on the related Class
A Certificates;
minus
(ii) the amount of any Subordination Reduction Amount with respect
to such Mortgage Loan Group for such Payment Date consisting
of the amount of any Net Monthly Excess Spread to be actually
paid to the Owners of the Class R Certificates.
In no event will the Class A Principal Distribution Amount for any
Mortgage Loan Group and Payment Date (x) be less than zero or (y) be greater
than the then-outstanding Certificate Principal Balance of the related Class of
Class A Certificates.
S-34
The sum of the Class A Current Interest and the Class A Principal
Distribution Amount with respect to any Class of Class A Certificates and
Payment Date is the "Class A Distribution Amount" for such Class of Class A
Certificates and Payment Date.
The "Principal Carry-Forward Amount" with respect to a Class of Class A
Certificates for any Payment Date is the amount, if any, by which (i) the amount
described in clause (b) of the definition of Class A Principal Distribution
Amount for such Class as of the immediately preceding Payment Date exceeded (ii)
the amount of the actual distribution of principal made to the Owners of the
related Class of Class A Certificates on such immediately preceding Payment
Date.
A "Due Period" with respect to any Payment Date is the period
commencing on the second day of the month preceding the month of such Payment
Date and ending on the first day of the month of such Payment Date.
The "Fees and Expenses" for a Mortgage Loan Group and Payment Date are
the premium amount payable to the Certificate Insurer and the portion of the
Oversight Agent Fee allocable to such Mortgage Loan Group.
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).
Owners may not recover a loss on a Liquidated Mortgage Loan (i.e., a
Realized Loss) on the Payment Date which immediately follows the event of loss.
However, the Owners of the Class A Certificates are entitled to receive ultimate
recovery of any Realized Losses which occur in the related Mortgage Loan Group,
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 Spread in the related
Group or the other Group.
Insured Payments do not cover 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 or
when such unpaid Delinquency Advances are necessary to pay the required amount
of Class A Current Interest.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Spread with respect to a Mortgage Loan Group be applied on such Payment Date as
an accelerated payment of principal on the related Class of Class A
Certificates, 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" with respect to the related Mortgage
Loan Group), if any, of (x) the interest which is collected on the Mortgage
Loans in such Mortgage Loan Group with respect to the Due Date 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 plus any amounts transferred from
the Capitalized Interest Account over (y) the sum of (I) the related Class A
Current Interest and (II) the related Fees and Expenses, over (ii) any portion
of the Total Monthly Excess Spread that is used to cover any shortfalls in
Available Funds in the related Mortgage Loan Group on such Payment Date, or in
the other Mortgage Loan Group, or used to reimburse the Certificate Insurer.
The application of Net Monthly Excess Spread to principal has the
effect of accelerating the amortization of the related Class of Class A
Certificates relative to the amortization of the Mortgage Loans in the related
Mortgage Loan Group. To the extent that any Net Monthly Excess Spread is not so
S-35
used, the Pooling and Servicing Agreement provides that it will be used to
reimburse the Servicer or Trustee with respect to any amounts owing to each, and
then will be paid to the Owners of the Class R Certificates (subject to certain
prior applications as described below under "Crosscollateralization
Provisions").
Pursuant to the Pooling and Servicing Agreement, each Mortgage Loan
Group's Net Monthly Excess Spread is required to be applied as a payment of
principal on the related Class of Class A Certificates until the related
Subordinated Amount has increased to the level required with respect to the
related Mortgage Loan Group. "Subordinated Amount" means, with respect to a
Mortgage Loan Group and Payment Date, the positive difference, if any, between
(x) the sum of (i) the aggregate scheduled principal balances of the Mortgage
Loans in such Mortgage Loan Group as of the close of business on the last day of
the preceding Remittance Period after taking into account payments of scheduled
principal on such 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 earnings on the Pre-Funding Account related to such
Mortgage Loan Group at such time and (y) the Class A Principal Balance of the
related Class of Class A Certificates as of such Payment Date (and assuming all
distributions are made on such Payment Date). With respect to either Mortgage
Loan Group, 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 Mortgage Loan Group and Payment Date
is the "Specified Subordinated Amount" with respect to such Mortgage Loan Group
and Payment Date. The Pooling and Servicing Agreement generally provides that
the related Specified Subordinated Amount may, over time, decrease, or increase,
subject to certain floors, caps and triggers.
In the event that the required level of the Specified Subordinated
Amount with respect to a Mortgage Loan Group is permitted to decrease or "step
down" on a Payment Date in the future, the Pooling and Servicing Agreement
provides that a portion of the principal which would otherwise be distributed to
the Owners of the related Class of Class A Certificates on such Payment Date
shall be distributed to the Owners of the Class R Certificates on such Payment
Date (subject to certain prior applications as described below under
"Crosscollateralization Provisions"). This has the effect of decelerating the
amortization of the related Class of Class A Certificates relative to the
amortization of the Mortgage Loans in the related Mortgage Loan Group, and of
reducing the related Subordinated Amount.
"Excess Subordinated Amount" means, with respect to a Mortgage Loan
Group and a Payment Date, the positive difference, if any, between (x) the
Subordinated Amount that would apply to the related Mortgage Loan Group on such
Payment Date after taking into account all distributions to be made on such
Payment Date (before giving effect to any Subordination Reduction Amounts as
described in this paragraph) and (y) the related 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 related Specified Subordinated Amount), then any
amounts relating to principal which would otherwise be distributed to the Owners
of the related Class of Class A Certificates on such Payment Date shall instead
be distributed to the Owners of the Class R Certificates (subject to certain
prior applications as described below under "Crosscollateralization Provisions")
to the extent of the lesser of (x) the Excess Subordinated Amount and (y) the
amount available for distribution on account of principal with respect to the
related Class of Class A Certificates on such Payment Date; such amount being
the "Subordination Reduction Amount" with respect to a Mortgage Loan Group for
such Payment Date.
The Pooling and Servicing Agreement provides that, on any Payment Date
all amounts (subject to the discussion in the preceding paragraph) collected on
account of unscheduled principal with respect to a Mortgage Loan Group during
the prior Remittance Period together with principal due on the Due Date that
immediately follows the last day of such Remittance Period, to the extent
received or advanced (other than any such amount applied to the payment of a
Subordination Reduction Amount), will be distributed to the Owners of the
related Class of Class A Certificates 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 scheduled principal
S-36
balance of the related Mortgage Loan; the amount of any such insufficiency is a
"Realized Loss." In addition, the Pooling and Servicing Agreement provides that
the principal balance of any Mortgage Loan which becomes a Liquidated Mortgage
Loan shall thenceforth equal zero. The Pooling and Servicing Agreement does not
contain any rule which requires that the amount of any Realized Loss be
allocated to the Owners of the related Class of Class A Certificates on the
Payment Date which immediately follows the event of loss; i.e., the Pooling and
Servicing Agreement does not require the current payment to Owners in respect of
losses. However, the occurrence of a Realized Loss will reduce the Subordinated
Amount with respect to the related Mortgage Loan Group, which, to the extent
that such reduction causes the related Subordinated Amount to be less than the
related 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 related Specified
Subordinated Amount). The effect of the foregoing is to allocate losses to the
Owners of the Class R Certificates by reducing, or eliminating entirely,
payments of Net Monthly Excess Spread and of Subordination Reduction Amounts
which such Owners would otherwise receive.
Overcollateralization and the Certificate Insurance Policies. A
"Subordination Deficit" with respect to a Mortgage Loan Group and a Payment Date
is the amount, if any, by which (x) the Certificate Principal Balance of the
related Class of Class A Certificates, after taking into account the payment of
the related Class A Principal Distribution Amount (other than any portion
thereof representing payments under the related Certificate Insurance Policy) on
such Payment Date, exceeds (y) the sum of (i) the aggregate principal balances
of the Mortgage Loans in the related Mortgage Loan Group as of the close of
business on the last day of the preceding Remittance Period after taking into
account payments of scheduled principal on such Mortgage Loans due on the Due
Date in the calendar month in which such Payment Date occurs and (ii) the
amount, if any, relating to such Mortgage Loan Group on deposit in the
Pre-Funding Account less any earnings on the Pre-Funding Account relating to
such Mortgage Loan Group on the last day of the related Remittance Period. The
Pooling and Servicing Agreement requires the Trustee to make a claim for an
Insured Payment under the related Certificate Insurance Policy not later than
two business days prior to any Payment Date as to which the Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Payment as a payment of principal to the Owners of
the related Class of Class A Certificates on such Payment Date. The Certificate
Insurance Policies are thus similar to the subordination provisions described
above insofar as the Certificate Insurance Policies guarantee ultimate, rather
than current, payment of the amounts of any Realized Losses to the Owners of the
related Class of Class A Certificates. Investors in the Class A Certificates
should realize that, under extreme loss or delinquency scenarios applicable to
the related Mortgage Loan Pool, they may temporarily receive no distributions of
principal.
Crosscollateralization Provisions
To the extent that any Mortgage Loan Group's Net Monthly Excess Spread
is not required to be applied to the payment of a Subordination Increase Amount
on the related Class of Class A Certificates because the Subordinated Amount
related to such Class is equal to or greater than the then Specified
Subordinated Amount related to such Class, such Net Monthly Excess Spread
(together with the amount of any Subordination Reduction Amount) is permitted to
be applied to the payment of Subordination Increase Amounts on the other Class
of Class A Certificates to the extent necessary to increase the related
Subordinated Amount to the level of its Specified Subordinated Amount.
On each Payment Date, an amount equal to the sum of (x) the Total
Monthly Excess Spread with respect to each Mortgage Loan Group and Payment Date
plus (y) any Subordination Reduction Amount with respect to each such Mortgage
Loan Group and Payment Date (such amount being the "Total Monthly Excess
Cashflow" with respect to such Mortgage Loan Group and Payment Date) will be
required to be applied in the following order of priority:
(i) such amount shall be used to fund any shortfall on
such Payment Date with respect to the related Mortgage Loan Group and
equal to the difference, if any, between (x) the sum of (A) the related
Class A Current Interest and (B) the related Class A Principal
Distribution Amount (calculated only with respect to clause (b) of the
definition thereof and
S-37
without any Subordination Increase Amount) with respect to such
Mortgage Loan Group for such Payment Date and (y) the Available Funds
with respect to such Mortgage Loan Group for such Payment Date (the
amount of such difference being equal to an "Available Funds Shortfall"
with respect to the related Mortgage Loan Group);
(ii) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
application described in clause (i) above shall be used to fund any
Available Funds Shortfall with respect to the other Mortgage Loan
Group;
(iii) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
applications described in clauses (i) and (ii) above shall be paid to
the Certificate Insurer in respect of amounts owed on account of any
Insured Payments theretofore made and interest thereon with respect to
the related Mortgage Loan Group (any such amount so owed to the
Certificate Insurer and not theretofore paid, together with accrued
interest thereon, the "Insurer Reimbursable Amount" with respect to the
related Mortgage Loan Group); and
(iv) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
applications described in clauses (i), (ii) and (iii) above shall be
paid to the Certificate Insurer in respect of any Insurer Reimbursable
Amount with respect to the other Mortgage Loan Group.
The amount, if any, of the Total Monthly Excess Cashflow with respect
to a Mortgage Loan Group on a Payment Date remaining after such applications is
the "Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for
such Payment Date; such amount is required to be applied in the following order
of priority on such Payment Date:
(i) such amount shall be used to fund the payment of
any required Subordination Increase Amount with respect to the related
Mortgage Loan Group as a portion of the distribution of the Class A
Principal Distribution Amount on such Payment Date;
(ii) any portion of the Net Monthly Excess Cashflow
remaining after the application described in clause (i) above shall be
used first, to make any required Subordination Increase Amount with
respect to the other Mortgage Loan Group and second, to pay any
Available Funds Cap Carry-Forward Amount; and
(iii) any remaining Net Monthly Excess Cashflow shall be
used to reimburse the Servicer and to reimburse and indemnify the
Oversight Agent and the Trustee for certain expenses and other amounts
owing to each, and any remaining funds shall then be paid to the Owners
of the Class R Certificates.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the overcollateralization
provisions, the crosscollateralization provisions and by the Certificate
Insurance Policies 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 Certificate Insurance Policies to guarantee or insure that any particular
rate of prepayment is experienced by the Trust.
Class A Distributions and Insured Payments to the Owners of the Class A
Certificates
No later than two Business Days prior to each Payment Date the Trustee
will be required to determine the amounts to be on deposit in the Certificate
Account on such Payment Date with respect to each of the two Mortgage Loan
Groups and equal to the sum of (x) such amounts to be on deposit (excluding any
portion thereof that is Total Monthly Excess Cashflow), plus (y) any amounts of
Total Monthly Excess Cashflow (as described above under "Crosscollateralization
Provisions") to be applied on account of such Mortgage Loan Group on such
Payment Date plus, (z) any deposit to the Certificate
S-38
Account from the Pre-Funding Account and Capitalized Interest Account expected
to be made in accordance with the Pooling and Servicing Agreement. The amounts
described in clause (x) of the preceding sentence with respect to each Mortgage
Loan Group and Payment Date are the "Fixed Rate Group Available Funds" and the
"Variable Rate Group Available Funds", respectively or, generally, "Available
Funds"; the sum of the amounts described in clauses (x), (y) and (z) of the
preceding sentence with respect to each Mortgage Loan Group and Payment Date are
the "Fixed Rate Group Total Available Funds" and the "Variable Rate Group Total
Available Funds," respectively, or, generally, "Total Available Funds."
If the sum of the Class A Distribution Amounts with respect to the
Class A-1 Certificates, for any Payment Date exceeds the Fixed Rate Group Total
Available Funds for such Payment Date, the Trustee will be required to draw the
amount of such insufficiency from the Certificate Insurer under the Certificate
Insurance Policy applicable to the Class A-1 Certificates. Similarly, if on any
Payment Date the Class A Distribution Amount with respect to the Class A-2
Certificates exceeds the Variable Rate Group Total Available Funds for such
Payment Date, the Trustee will be required to draw the amount of such
insufficiency from the Certificate Insurer under the Certificate Insurance
Policy applicable to the Class A-2 Certificates. The Trustee will be required to
deposit to the Certificate Account the amount of any Insured Payment made by the
Certificate Insurer. The Pooling and Servicing Agreement provides that amounts
which cannot be distributed to the Owners of the Class A Certificates 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 Trustee of all
allocations, transfers and deposits heretofore described under this caption,
from amounts (including any related Insured Payment) then on deposit in the
Certificate Account with respect to the related Mortgage Loan Group, the Trustee
will be required to distribute (x) to the Owners of the Class A-1 Certificates,
the related Class A Distribution Amount for such Payment Date and (y) to the
Owners of the Class A-2 Certificates, the related Class A Distribution 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, an aggregate cash amount of $__________ (the
"Original Pre-Funded Amount") will be deposited in a trust account (the
"Pre-Funding Account"), which account shall be in the name of and maintained by
the Trustee and shall be part of the Trust. 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 period from the Closing Date to
________ __, ____ (the "Funding Period") by the amount thereof used to purchase
Subsequent Mortgage Loans for addition to the Fixed Rate Group or the Variable
Rate Group in accordance with the Pooling 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 Fixed Rate Group or the
Variable Rate Group on any date (each, a "Subsequent Transfer Date") must
satisfy the criteria for such Group set forth in the Pooling and Servicing
Agreement. Any Pre-Funded Amount remaining at the end of the Funding Period will
be distributed to the Owners of the Class A Certificates in accordance with the
terms of the Pooling and Servicing Agreement on the Payment Date that
immediately follows the end of the Funding Period in reduction of the
Certificate Principal Balance of such Owner's Certificates, thus resulting in a
principal prepayment of such Class of Certificates.
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. The
Pre-Funding Account will not be an asset of the REMIC.
S-39
Capitalized Interest Account
On the Closing Date, cash in an amount satisfactory to the Certificate
Insurer shall be deposited in a trust account (the "Capitalized Interest
Account"), which account shall be in the name of and maintained by the Trustee
and shall be part of the Trust. The amount on deposit in the Capitalized
Interest Account, including reinvestment income thereon and amounts deposited
thereto from the Pre-Funding Account, will be used by the Trustee, as provided
in the Pooling and Servicing Agreement, to fund any shortfalls in interest
accruing on (i) the Class A-1 Certificates through ________ __, ____ and (ii)
the Class A-2 Certificates through ________ __, ____, as a result of the
Certificate Principal Balance of the Class A Certificates exceeding the
aggregate Loan Balance of the Initial Mortgage Loans. On the ________ ____ and
_________ ____ Payment Dates, the Trustee will use the funds in the capitalized
interest account to pay you such shortfalls in interest.
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
Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments. The Capitalized Interest Account will not be an asset
of the REMIC.
Calculation of LIBOR
On the second business day preceding each Payment Date, or in the case
of the first Payment Date, on the second business day preceding the Closing Date
(each such date, an "Interest Determination Date"), the Trustee will determine
the London interbank offered rate for one-month U.S. dollar deposits ("LIBOR")
for the next Accrual Period for the Class A-2 Certificates on the basis of the
offered rate for one-month U.S. dollar deposits, as such rate appears 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 Bridge Telerate (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices). If such rate
does not appear on such page (or such other page as may replace that page on
that service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Trustee), the
rate will be the Reference Bank Rate. The "Reference Bank Rate" will be
determined on the basis of the rates at which deposits in U.S. Dollars are
offered by the reference banks (which shall be two major banks that are engaged
in transactions in the London interbank market, selected by the Trustee) as of
11:00 a.m. (London time), on the day that is two business days prior to the
immediately preceding Payment Date to prime banks in the London interbank market
for a period of one month in amounts approximately equal to the aggregate
Certificate Principal Balance of the Class A-2 Certificates. The Trustee will
request the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two such quotations are provided, as
requested, the rate arithmetic mean of the quotations. If on such date fewer
than two quotations are provided as requested, the rate will be the arithmetic
mean of the rates quoted by one or more major banks in New York City, selected
by the Trustee, as of 11:00 a.m. (New York City time), on such date for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of the Class
A-2 Certificates. If no such quotations can be obtained, the rate will be LIBOR
for the prior Payment Date.
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class A-2 Certificates for the related Accrual Period shall (in the absence of
manifest error) be final and binding.
S-40
Book Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
such Book-Entry Certificates ("Beneficial Owners") may elect to hold their
Book-Entry Certificates directly through The Depository Trust Company ("DTC") in
the United States, or Cedelbank ("Cedel") or The Euroclear System ("Euroclear")
(in Europe) if they are participants of such systems ("Participants"), or
indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
Certificates and will initially be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. Cedel and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in Cedel's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. ("Citibank") will act as
depositary for Cedel and The Chase Manhattan Bank ("Chase") will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $25,000 and in integral
multiples of $1,000 in excess thereof. Except as described below, no Beneficial
Owner will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until definitive
Certificates are issued, it is anticipated that the only "Owner" of such
Book-Entry Certificates will be Cede & Co., as nominee of DTC. Beneficial Owners
will not be Owners as that term is used in the Pooling and Servicing Agreement.
Beneficial Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
S-41
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- 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 Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedelbank 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.
S-42
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 Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
S-43
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. Cedel or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
None of the Seller, the Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Seller advises the Trustee and the Certificate 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
Certificates and the Seller or the 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 Class A
Certificates, advises the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify DTC (and request
that DTC notify all Beneficial Owners) and the Certificate Insurer of the
occurrence of such event and the availability through DTC of Definitive
Certificates. Upon surrender by DTC of the global certificate or certificates
representing the Book-Entry Certificates and instructions for re-registration,
the Trustee will issue Definitive Certificates, and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Owners under the
Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "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 and has been actively involved in the
mortgage lending business since its founding. The Seller is a consumer finance
company with headquarters in Irvine, California. The Seller originates,
purchases, sells and services non-conventional mortgage loans through __ retail
branch offices located in
S-44
the United States. In July 1996, the Seller became a wholly owned subsidiary of
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 were originated in the United States and are secured by Mortgaged
Properties located in the United States.
The Seller maintains its corporate headquarters at 17305 Von Karman
Avenue, Irvine, California 92614-6203. Its telephone number is (949) 224-8500.
The Seller has performed a review of its computer systems and hardware
to identify processes which may be affected by Year 2000 problems. The Seller
has implemented a formal five-step plan to address the Year 2000 issue: (1)
Awareness, (2) Inventory, (3) Assessment, (4) Renovation and (5) Testing and
Implementation. The plan addresses hardware and software purchased or leased
from outside vendors, in-house developed software, telecommunication equipment
and facilities. All five steps of the plan have been completed, and the Seller
has determined that the baseline versions of its in-house developed products are
Year 2000 compliant, however, the Seller will continue to conduct further
testing and implementation throughout 1999 to protect against unforeseen events.
Because the majority of the Seller's computer software and hardware has been
purchased or developed recently and was designed to be Year 2000 compliant, the
Seller does not expect its costs to be material in addressing the Year 2000
issue.
The Seller has received written assurances from each of its significant
outside vendors that each has properly addressed and converted its systems to be
Year 2000 compliant. While the Seller is not presently aware of any significant
exposure, the Seller cannot guarantee the Year 2000 readiness of its vendors. A
contingency plan for outside vendors has not yet been developed for dealing with
the most reasonably likely worst case scenario, and such scenario has not yet
been clearly identified.
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policies, thereby
unconditionally and irrevocably guarantees to any Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee, or its
successor, as trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policies with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in the Certificate Insurance Policies and no accelerated
Insured Payments shall be made regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust, the REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
[Description of Certificate Insurance Policy to be provided]
[Description of Certificate Insurer and its financial statements to be provided]
S-45
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus Supplement, there is set forth below a
summary of certain other provisions of the Pooling and Servicing Agreement.
Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant
to the Pooling and Servicing Agreement dated as of ______ __, ____ among the
Seller, the Servicer, the Oversight Agent and the Trustee (the "Pooling and
Servicing Agreement"). On such date, the Seller will sell, without recourse, the
Initial Mortgage Loans to the Trust and the Trust will issue the Class A
Certificates to the Owners thereof pursuant to the Pooling and Servicing
Agreement.
The property of the Trust shall include all money, instruments and
other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the Owners and the
Certificate Insurer, as their interests may appear, and all proceeds thereof,
including, without limitation, (i) the Mortgage Loans, (ii) such amounts,
including Eligible Investments, as from time to time may be held by the Trustee
in the Certificate Account, the Pre-Funding Account and the Capitalized Interest
Account and by the Servicer in the Principal and Interest Account (except as
otherwise provided in the Pooling and Servicing Agreement), each to be created
pursuant to the Pooling and Servicing Agreement, (iii) any Mortgaged Property,
the ownership of which has been effected on behalf of the Trust as a result of
foreclosure or acceptance by the Servicer of a deed in lieu of foreclosure and
that has not been withdrawn from the Trust, (iv) any insurance policies relating
to the Mortgage Loans and any rights of the Seller under any insurance policies,
(v) Net Liquidation Proceeds with respect to any Liquidated Loan, (vi) the
Certificate Insurance Policies and (vii) the proceeds of the foregoing
(collectively, the "Trust Estate").
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, any Originator, the
Seller, the Servicer, the Oversight Agent or the Trustee.
Sale of Mortgage Loans
On the Closing Date the Seller will sell without recourse to the Trust
all right, title and interest of the Seller in each Initial Mortgage Loan listed
on the related schedules of the Mortgage Loans delivered to the 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
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).
In connection with the sale 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 Trustee, at least five Business
Days prior to the Closing Date or Subsequent Transfer Date, as applicable, 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, (iv) the original assignment of
the Mortgage to the Trustee or in blank in recordable form, (v) 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, (vi)
evidence of title insurance with respect to the Mortgaged Property in the form
of a binder or commitment and (vii) at the Seller's expense, an opinion of
counsel with respect to the sale and perfection of all Subsequent Mortgage Loans
delivered to the Trustee in form and substance satisfactory to the Trustee and
the Certificate Insurer. The Trustee will agree, for the benefit of the Owners
and the Certificate Insurer, as their interests may appear, to review each such
file on or before the Closing Date or
S-46
the Subsequent Transfer Date, as applicable, and again within 90 days after the
Closing Date or the Subsequent Transfer Date, as applicable, to ascertain that
all required documents (or certified copies of documents) have been executed and
received.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Seller shall assign to the Trustee for the benefit of the holders of the
Certificates and the Certificate 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 Trustee of a breach of any representation, warranty or
covenant which materially and adversely affects the interests of the Owners in a
Mortgage Loan or of the Certificate Insurer, the Trustee will promptly notify
the Originator, the Seller and the Certificate Insurer. The Originators and the
Seller will have 60 days from its discovery or its receipt of such notice to
cure such breach or the Seller is obligated to 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 Pooling and
Servicing Agreement) assignments of the Mortgages from the Originators (other
than the Seller) to the Seller and then from the Seller to the Trustee, in the
appropriate jurisdictions in which such recordation is necessary to perfect the
lien of the Trust thereof as against creditors of or purchasers from the
Originators; provided, however, that if the Seller furnishes to the Trustee
executed recordable assignments of the Mortgages and to the Trustee and the
Certificate Insurer 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
any of the relevant jurisdictions, then such recording will not be required with
respect to such jurisdictions. However, the Certificate Insurer may require
recordation at a future date at its reasonable discretion.
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 Rate, 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 Class R Certificates.
In addition, the Servicer will also be required to deposit in the
Principal and Interest Account with respect to any 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 scheduled 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 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 Trustee a Delinquency
Advance or Compensating Interest to the extent required under the Pooling and
Servicing Agreement will constitute an event of default under the Pooling and
Servicing Agreement, in which case, upon the removal of the Servicer, the
Oversight Agent or the successor Servicer will be obligated to make such
advances in accordance with the terms of the Pooling and Servicing Agreement.
See "Description of the Securities -- Advances" in the Prospectus.
S-47
The "Servicing Fee" as of any Payment Date is equal to the product of
(x) one-twelfth of the Servicing Fee Rate and (y) the aggregate loan balances of
the Mortgage Loans.
The "Servicing Fee Rate" is equal to ____% per annum, payable monthly
at one-twelfth the annual rate of the then-outstanding principal amount of each
Mortgage Loan.
Removal and Resignation of the Servicer
The Pooling and Servicing Agreement provides that the Servicer shall be
hired for a term of no longer than two calendar months, and may be re-hired for
additional terms of no longer than two calendar months each, but only with the
consent of the Certificate Insurer, in its sole and absolute discretion. The
Servicer may not resign from its obligations and duties thereunder, or not agree
to be re-hired, 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 Oversight Agent (or an affiliate thereof) or a
successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. In addition, during any term, the Certificate
Insurer, the Trustee or the Owners with the consent of the Certificate Insurer,
will have the right, pursuant to the Pooling and Servicing Agreement, to remove
the Servicer upon the occurrence of any of:
o the continuing failure of the Servicer to deliver to the
Trustee any proceeds or required payment for a period of
five business days after written notice;
o 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;
o the continuing failure of the Servicer to perform any one or
more of its material obligations under the Pooling and
Servicing Agreement for a period specified in the Pooling
and Servicing Agreement; or
o 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 Owners or the Certificate Insurer for a
period of sixty (60) days after the Servicer's discovery or
receipt of notice thereof.
The Pooling and Servicing Agreement additionally provides that the
Certificate Insurer may remove the Servicer upon the occurrence of any of the
following events:
o with respect to any Payment Date, if the sum of the Fixed
Rate Group and Variable Rate Group Total Available Funds
will be less than the sum of the Class A Distribution
Amounts with respect to all of the Class A Certificates, in
respect of such Payment Date; provided, however, that the
Certificate 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 Certificate Insurer that such event was
due to circumstances beyond the control of the Servicer;
o the failure by the Servicer to make any required Servicing
Advance (as defined in the Pooling and Servicing Agreement);
o the failure of the Servicer to perform one or more of its
obligations under the Pooling 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
Certificate Insurer;
o the failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest by the
Remittance Date;
S-48
o if the delinquency or loss levels applicable to the Mortgage
Loans exceed certain "trigger" levels set forth in the
Pooling and Servicing Agreement; or
o certain other events described in the Pooling and Servicing
Agreement.
The Oversight Agent
[_______________________] ("_______"), as the oversight agent (the
"Oversight Agent"), will oversee and monitor the Servicer's performance of the
loan servicing functions under the Pooling and Servicing Agreement.
[Description of Oversight Agent to be provided]
Oversight Agent Duties
The Oversight Agent will be responsible for performing loan level
review and backup servicing functions for the Mortgage Loans pursuant to the
Pooling and Servicing Agreement. As compensation for performing its duties as
the Oversight Agent, including its oversight functions, the Oversight Agent will
be entitled to a monthly fee (the "Oversight Agent Fee") from which the
Oversight Agent will pay a fee to the Trustee. The Trust, and in certain cases
the Seller and the Servicer, will reimburse and indemnify the Oversight Agent
and the Trustee for certain liabilities, costs and expenses incurred by each of
them.
Under the Pooling and Servicing Agreement, the Oversight Agent will
perform the following loan review and backup servicing functions:
(1) The Oversight Agent will periodically review the servicing reports,
loan level information and other relevant information as may be reasonably
required by the Oversight Agent pursuant to the Pooling and Servicing Agreement;
(2) If the reports submitted by the Servicer are materially inaccurate
or incomplete, then the Oversight Agent will prepare and submit exception
reports to the Trustee, the Certificate Insurer and the Rating Agencies and
notify the Trustee, the Certificate Insurer and the Rating Agencies of any event
of default of which the Oversight Agent has actual knowledge, with respect to
the Servicer under the Pooling and Servicing Agreement; and
(3) If the Servicer is not rehired or is terminated as Servicer under
the Pooling and Servicing Agreement, then the Oversight Agent will accept
appointment as, or cause another entity (which may be an affiliate of the
Oversight Agent) reasonably acceptable to the Certificate Insurer to act as, the
successor servicer thereunder.
Under the Pooling and Servicing Agreement, the Servicer will facilitate
the review and backup servicing functions of the Oversight Agent as follows:
(1) the Servicer will comply with the terms of the various agreements
it is entering into in connection with the Mortgage Loans, including but not
limited to, the Pooling and Servicing Agreement;
(2) the Servicer will provide to the Oversight Agent certain
information regarding the Mortgage Loans and its servicing activities of such
Mortgage Loans; and
(3) the Servicer will permit the Oversight Agent to inspect the
Servicer's books and records.
In certain circumstances, the Oversight Agent may resign or be removed,
in which event another third-party oversight agent will be sought to become the
successor oversight agent. The Oversight Agent has the right to resign under the
Pooling and Servicing Agreement upon 30 days' notice or any time on or after one
year from the Closing Date. No removal or resignation of the Oversight Agent
will become effective until the Trustee, or a successor oversight agent,
reasonably acceptable to the Certificate Insurer,
S-49
has assumed the Oversight Agent's responsibilities and obligations under the
Pooling and Servicing Agreement.
The Trustee
[_______________________] will be appointed as Trustee (the "Trustee")
of the First Alliance Mortgage Loan Trust ____-_. In accordance with the Pooling
and Servicing Agreement, in the event of termination of both the Servicer and
the Oversight Agent, the Trustee (for this purpose, the term Trustee includes an
affiliate thereof) shall become the successor servicer and is empowered to
perform the duties of the Servicer. Pending the appointment of any other person
as successor servicer, the Trustee shall have the power and duty:
(i) to collect Mortgagor payments;
(ii) to foreclose on defaulted Mortgage Loans;
(iii) to enforce due-on-sale clauses and to enter into assumption
and substitution agreements as permitted by the Pooling and
Servicing Agreement;
(iv) to deliver instruments of satisfaction;
(v) to make Delinquency Advances and Servicing Advances and to
pay Compensating Interest; and
(vi) to enforce the Mortgage Loans.
During any period in which the Trustee is successor servicer, the
Trustee shall be entitled to all compensation due to the Servicer and the
Oversight Agent.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
from amounts other than those available under the Certificate Insurance Policies
of all amounts required to be paid such Owners upon the later to occur of (a)
the final payment or other liquidation (or any advance made with respect
thereto) of the last Mortgage Loan or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust or (ii) any time
when a Qualified Liquidation (as defined in the Pooling and Servicing Agreement)
of both Mortgage Loan Groups is effected.
Optional Termination
By the Servicer. At its option, the Servicer (and the Oversight Agent
in the event the Servicer does not exercise its option) acting directly or
through one or more affiliates may determine to purchase from the Trust all of
the Mortgage Loans and other property then held by the Trust, and thereby effect
early retirement of the Class A Certificates, on any Remittance Date after the
Clean-Up Call Date at a price equal to 100% of the aggregate principal balance
of the Mortgage Loans as of the day of purchase minus amounts remitted from the
Principal and Interest Account to the Certificate Account representing
collections of principal on the Mortgage Loans during the current Remittance
Period and the Due Date on the first day after such Remittance Period, plus one
month's interest on such amount computed at the weighted average Pass-Through
Rates of the Class A Certificates plus any Available Funds Cap-Carry Forward
Amount at such time plus the aggregate amount of any unreimbursed Delinquency
Advances
S-50
and Servicing Advances together with Reimbursement Amounts then owed to the
Certificate Insurer. Under certain circumstances described in the Pooling and
Servicing Agreement the Certificate Insurer may also exercise such purchase
rights if the Servicer and the Oversight Agent do not do so.
Upon Loss of REMIC Status. Following a final determination by the
Internal Revenue Service, or by a court of competent jurisdiction, in each case
from which no appeal is taken within the permitted time for such appeal, or if
any appeal is taken, following a final determination of such appeal from which
no further appeal can be taken to the effect that the REMIC does not and will no
longer qualify as a "REMIC" pursuant to Section 860D of the Internal Revenue
Code of 1986, as amended (the "Code") (the "Final Determination"), at any time
on or after the date which is 30 calendar days following such Final
Determination, (i) the Certificate Insurer or the Owners of a majority in
Percentage Interest represented by the Class of Class A Certificates then
outstanding with the consent of the Certificate Insurer (which consent may not
be unreasonably withheld) may direct the Trustee on behalf of the Trust to adopt
a plan of complete liquidation as contemplated by Section 860F(a)(4) of the Code
and (ii) the Certificate Insurer may notify the Trustee of the Certificate
Insurer's determination to purchase from the Trust all Mortgage Loans and other
property acquired by foreclosure, deed in lieu of foreclosure, or otherwise in
respect of any Mortgage Loan then remaining in the Trust, and thereby effect the
early retirement of the Certificates. The purchase price for any purchase of the
property of the Trust Estate shall be the Termination Price (as defined in the
Pooling and Servicing Agreement).
Upon receipt of such notice or direction from the Certificate Insurer,
the Trustee will be required to notify the Owners of the Class R Certificates of
such election to liquidate or such determination to purchase, as the case may be
(the "Termination Notice"). The Owners of a majority of the Percentage Interest
of the Class R Certificates then outstanding may, within sixty (60) days from
the date of receipt of the Termination Notice (the "Purchase Option Period"), at
their option, purchase from the Trust all (but not fewer than all) Mortgage
Loans and all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the
Trust Estate at a purchase price equal to the Termination Price. If, during the
Purchase Option Period, the Owners of the Class R Certificates have not
exercised the option described in the immediately preceding sentence, then upon
the expiration of the Purchase Option Period (i) in the event that the
Certificate Insurer or the Owners of the Class A Certificates with the consent
of the Certificate Insurer have given the Trustee the direction described in
clause (a)(i) above, the Trustee will be required to sell the Mortgage Loans and
distribute the proceeds of the liquidation of the Trust Estate, each in
accordance with the plan of complete liquidation, such that, if so directed, the
liquidation of the Trust Estate, the distribution of the proceeds of the
liquidation and the termination of the Pooling and Servicing Agreement occur no
later than the close of the sixtieth (60th) day, or such later day as the
Certificate Insurer or the Owners of the Class A Certificates with the consent
of the Certificate Insurer permit or direct in writing, after the expiration of
the Purchase Option Period and (ii) in the event that the Certificate Insurer
has given the Trustee notice of the Certificate Insurer's determination to
purchase the Trust Estate described in clause (a)(ii) preceding the Certificate
Insurer will be required to, within sixty (60) days, purchase all (but not fewer
than all) Mortgage Loans and all property theretofore acquired by foreclosure,
deed in lieu of foreclosure or otherwise in respect of any Mortgage Loan then
remaining in the Trust Estate. In connection with such purchase, the Servicer
will be required to remit to the Trustee all amounts then on deposit in the
Principal and Interest Account for deposit to the Certificate Account, which
deposit will be deemed to have occurred immediately preceding such purchase.
Following a Final Determination, the Owners of a majority of the
Percentage Interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Certificate Insurer of an opinion of counsel
experienced in federal income tax matters acceptable to the Certificate Insurer
selected by the Owners of the Class R Certificates which opinion shall be
reasonably satisfactory in form and substance to the Certificate Insurer, to the
effect that the effect of the Final Determination is to increase substantially
the probability that the gross income of the Trust will be subject to federal
taxation, purchase from the Trust all (but not fewer than all) Mortgage Loans
and all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the
Trust Estate at a purchase price equal to the Termination Price. In connection
with such purchase, the Servicer will be required to remit to the Trustee all
amounts then on deposit in the Principal and Interest Account for deposit to the
Certificate Account, which deposit shall be deemed to have occurred
S-51
immediately preceding such purchase. The foregoing opinion shall be deemed
satisfactory unless the Certificate Insurer gives the Owners of a majority of
the Percentage Interest of the Class R Certificates notice that such opinion is
not satisfactory within thirty days after receipt of such opinion.
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 Class A Certificates. Such section must be considered only in connection
with "Certain Federal Income Tax Consequences" in the Prospectus. The
discussions herein and in the Prospectus are based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussions below and in the Prospectus do 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 Class A Certificates.
REMIC Election
The Trustee will cause an election to be made to treat the Trust as a
real estate mortgage investment conduit (the "REMIC") (other than the
Pre-Funding Account and the Capitalized Interest Account) for federal income tax
purposes. Arter & Hadden LLP, special tax counsel, will advise that, in its
opinion, for federal income tax purposes, assuming (i) the REMIC election is
made and (ii) compliance with the Pooling and Servicing Agreement, the Trust
(other than the Pre-Funding Account and the Capitalized Interest Account) will
be treated as a REMIC, each Class of Class A Certificates will be treated as
"regular interests" in the REMIC and the Class R Certificates will be treated as
the sole class of "residual interests" in a REMIC.
The Class A Certificates may, depending on their issue price, be issued
with original issue discount ("OID") for federal income tax purposes. Owners of
such Certificates issued with OID will be required to include OID in income as
it accrues under a constant yield method, in advance of the receipt of cash
attributable to such income. The OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6) which applies to prepayable
securities such as the Class A Certificates. Until the Treasury issues guidance
to the contrary, the Trustee intends to base its OID computation on Code Section
1272(a)(6) and the OID Regulations as described in the Prospectus. However,
because no regulatory guidance currently exists under Code Section 1272(a)(6),
there can be no assurance that such methodology represents the correct manner of
calculating OID.
The yield used to calculate accruals of OID with respect to the Class A
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Mortgage Loans will prepay in
accordance with Assumption IV of the Prepayment Assumptions. No representation
is made as to the actual rate at which the Mortgage Loans will prepay.
The Class A Certificates will be treated as regular interests in a
REMIC under section 860G of the Code. Accordingly, the Class A Certificates will
be treated as (i) assets described in section 7701(a)(19)(C) of the Code, and
(ii) "real estate assets" within the meaning of section 856(c)(4) of the Code,
in each case to the extent described in the Prospectus. Interest on the Class A
Certificates 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 to the same
extent that the Class A Certificates are treated as real estate assets.
See "Certain Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements (and entities whose underlying assets include
plan assets by reason of such a plan's or arrangement's investment in such
S-52
entities) to which it applies (each, a "Plan") and on those persons who are
fiduciaries with respect to such Plans. Any Plan fiduciary which proposes to
cause a Plan to acquire any of the Class A Certificates should consult with
counsel with respect to the consequences under ERISA and the Code of the Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations --
Plan Asset Regulations," "-- Prohibited Transaction Class Exemption," "-- Tax
Exempt Investors" and "--Consultation with Counsel" in the Prospectus.
Section 406 of ERISA prohibits Plans from engaging in certain
transactions involving the assets of such Plans with Parties in Interest with
respect to such Plans, unless a statutory, regulatory or administrative
exemption is applicable to the transaction. Excise taxes under Section 4975 of
the Code, penalties under Section 502 of ERISA and other penalties may be
imposed on Plan fiduciaries and Parties in Interest (or "disqualified persons"
under the Code) that engage in "prohibited transactions" involving assets of a
Plan. Individual retirement arrangements and other plans that are not subject to
ERISA, but are subject to Section 4975 of the Code, and disqualified persons
with respect to such arrangements and plans, also may be subject to excise taxes
and other penalties if they engage in prohibited transactions. Furthermore,
based on the reasoning of the United States Supreme Court in John Hancock Life
Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993) an insurance company
that invests in the Class A Certificates may be subject to excise taxes and
other penalties if such insurance company's general account is deemed to include
assets of the Plans investing in the general account (e.g., through the purchase
of an annuity contract).
The Department of Labor (the "DOL") has issued a regulation (the "Plan
Asset Regulation") describing what constitutes the assets of a Plan when the
Plan acquires an equity interest in another entity. The Plan Asset Regulation
states that, unless an exception described in the regulation is applicable, the
underlying assets of an entity are considered, for purposes of ERISA, to be the
assets of the investing Plan. Pursuant to the Plan Asset Regulation, if the
assets of the Trust were deemed to be plan assets by reason of a Plan's
investment in any Class A Certificates, such plan assets would include an
undivided interest in each asset of the Trust, and the purchase, sale or holding
of any Certificate by a Plan subject to Section 406 of ERISA or Section 4975 of
the Code might result in prohibited transactions and the imposition of excise
taxes and civil penalties.
It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Class A Certificates and that all conditions for
exemptive relief (other than those within the control of the investors) will be
satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
as amended by PTE 97-34, and the potential consequences in their specific
circumstances, prior to making an investment in the Class A Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification an investment in
the Class A Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
RATINGS
It is a condition of the original issuance of the Class A Certificates
that they 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 Investors Service, Inc. ("Moody's"). [Other Rating Agencies, if
applicable.] The ratings issued by Standard & Poor's and Moody's on the payment
of principal and interest on the Class A-2 Certificates do not cover the payment
of the Available Funds Cap Carry-Forward Amount. The ratings assigned to the
Class A Certificates will be based on the claims-paying ability of the
Certificate 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
S-53
the Class A Certificates should be evaluated independently of similar security
ratings assigned to other kinds of securities.
Explanations of the significance of such ratings may be obtained from
Moody's Investors Service, Inc., 99 Church Street, New York, New York, 10007 and
Standard & Poor's, a division of The McGraw-Hill Companies, Inc., 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 Class A Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended. Accordingly, many institutions with legal authority to invest
in comparably rated securities may not be legally authorized to invest in the
Class A Certificates.
The Seller makes no representations as to the proper characterization
of the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. 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 Class A Certificates constitute a legal investment or are subject to
investment, capital or other restrictions.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Class A Certificates, dated _________
__, _____, the Seller has agreed to cause the Trust to sell to each of the
Underwriters named below (the "Underwriters"), and each of the Underwriters has
severally agreed to purchase the principal amount of the Class A Certificates
set forth opposite its name below:
Class A -1 Certificates
-----------------------
Underwriter Principal Amount
----------- ----------------
Class A -2 Certificates
-----------------------
Underwriter Principal Amount
----------- ----------------
The Underwriters have advised the Seller that they propose to offer the
Class A Certificates for sale from time to time in one or more negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling such Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters or purchasers of the Class A
Certificates for whom they may act as agent. Any dealers that participate with
the Underwriters in the distribution of the Class A Certificates purchased by
the Underwriters may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriters and any profit on the resale of
Class A Certificates by them or the Underwriters may be deemed to be
underwriting discounts or commissions under the Securities Act.
S-54
Proceeds to the Seller, including accrued interest, are expected to be
approximately _______% of the aggregate principal balance of the Class A
Certificates, before deducting expenses payable by the Seller in connection with
the Class A Certificates, estimated to be $_______. In connection with the
purchase and sale of the Class A Certificates, the Underwriters may be deemed to
have received compensation from the Seller in the form of underwriting
discounts.
The Seller has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
Immediately prior to the sale of the Mortgage Loans to the Trust, the
Mortgage Loans were subject to financing provided by affiliates of the
Underwriters. The Seller will apply a portion of the proceeds it receives from
the sale of the Certificates to repay such financing.
The Seller has been advised by the Underwriters that the Underwriters
presently intend to make a market in each Class of Class A Certificates, as
permitted by applicable laws and regulations. The Underwriters are not
obligated, however, to make a market in any Class of Class A Certificates and
such market-making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Class A Certificates.
EXPERTS
[To Be Provided]
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates 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 Certificates will be
passed upon for the Seller by Arter & Hadden LLP. Certain legal matters relating
to the validity of the Certificates will be passed upon for the Underwriters by
________________, ________________.
S-55
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered First
Alliance Mortgage Loan Trust ____-_ Mortgage Pass-Through Certificates, Class A
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC") in the United States, or Cedelbank ("Cedel") or
The Euroclear System ("Euroclear") (in Europe). 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 Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
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.
I-1
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 or a 360 day year of
twelve 30 day months, as applicable. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the Relevant Depositary to
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. 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 or a 360 day year comprised of twelve 30 day months. 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
I-2
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.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their 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.
I-3
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 state thereof (including the District of
Columbia) or (iii) an estate or the income of which is includible in gross
income for United States tax purposes, regardless of its source or a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. 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. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of Global
Securities or with the application of recently issued Treasury Regulations
relating to tax documentation requirements that are generally effective with
respect to payments made after December 31, 1999. Investors are advised to
consult their own tax advisors for specific tax advice concerning their holding
and disposing of Global Securities.
I-4
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Accrual Period.............................................................S-33
Actuarial Loans............................................................S-26
Advances...................................................................S-31
Appraised Values...........................................................S-17
Available Funds............................................................S-38
Available Funds Cap........................................................S-32
Available Funds Cap Carry-Forward Amount...................................S-33
Available Funds Shortfall..................................................S-37
Beneficial Owners..........................................................S-40
Book-Entry Certificates....................................................S-40
Capitalized Interest Account...............................................S-39
Cede ......................................................................S-40
Cedel .....................................................................S-40
Cedel Participants.........................................................S-42
Certificate Account........................................................S-31
Certificate Principal Balance..............................................S-31
Certificates...............................................................S-31
Chase......................................................................S-40
Class A Current Interest...................................................S-33
Class A Distribution Amount................................................S-34
Class A Principal Distribution Amount......................................S-33
Class A-2 Formula Pass-Through Rate........................................S-32
Class R Certificates.......................................................S-31
Clean-Up Call Date.........................................................S-33
Closing Date ..............................................................S-28
CLTV.......................................................................S-15
Code.......................................................................S-50
Compensating Interest......................................................S-47
Cooperative................................................................S-42
CPR........................................................................S-28
Cut-Off Date...............................................................S-15
Definitive Certificate.....................................................S-41
Delinquency Advances.......................................................S-47
DOL........................................................................S-52
DTC........................................................................S-40
DTC Participants...........................................................S-42
Due Period.................................................................S-35
Euroclear..................................................................S-40
Euroclear Operator.........................................................S-42
Euroclear Participants.....................................................S-42
European Depositaries......................................................S-40
Excess Subordinated Amount.................................................S-36
Fannie Mae.................................................................S-27
Fees and Expenses..........................................................S-35
Final Determination........................................................S-50
Financial Intermediary.....................................................S-41
Fixed Rate Group...........................................................S-13
Fixed Rate Group Available Funds...........................................S-38
Fixed Rate Group Total Available Funds.....................................S-38
Freddie Mac................................................................S-27
Funding Period.............................................................S-39
Group......................................................................S-13
Initial Mortgage Loans.....................................................S-13
Insurer Reimbursable Amount................................................S-38
Interest Carry Forward Amount..............................................S-33
Interest Determination Date................................................S-40
Junior Lien Ratio..........................................................S-17
Last Scheduled.............................................................S-28
LIBOR......................................................................S-40
Liquidated Mortgage Loan...................................................S-35
LTV........................................................................S-15
Modeling Assumptions.......................................................S-28
Moody's....................................................................S-53
Mortgage Loan Group........................................................S-13
Mortgaged Properties.......................................................S-13
Mortgages..................................................................S-13
Mortgagor..................................................................S-26
Net Monthly Excess Cashflow................................................S-38
Net Monthly Excess Spread..................................................S-35
Norwest....................................................................S-48
Notes......................................................................S-15
OID........................................................................S-52
Original Pre-Funded Amount.................................................S-39
Originators................................................................S-13
Oversight Agent............................................................S-48
Oversight Agent Fee........................................................S-48
Owners.....................................................................S-31
Participants...............................................................S-40
Payment Date...............................................................S-32
Percentage Interest........................................................S-32
Plan.......................................................................S-52
Plan Asset Regulation......................................................S-52
Pooling and Servicing Agreement............................................S-45
PPC........................................................................S-28
Pre-Funded Amount..........................................................S-39
Pre-Funding Account........................................................S-39
Prepayment.................................................................S-26
Prepayment Assumption......................................................S-28
Principal Carry-Forward Amount.............................................S-35
Realized Loss..............................................................S-36
Record Date................................................................S-32
Relevant Depositary........................................................S-40
REMIC......................................................................S-51
Remittance Date............................................................S-31
Remittance Period..........................................................S-32
Rules......................................................................S-41
Schedules of Mortgage Loans................................................S-46
Servicing Fee ............................................................S-47
Servicing Fee Rate.........................................................S-47
Six-Month LIBOR Loans......................................................S-20
Specified Subordinated Amount..............................................S-36
Standard & Poor's..........................................................S-53
Step Loans.................................................................S-20
Subordinated Amount........................................................S-36
Subordination Deficit......................................................S-37
Subordination Increase Amount..............................................S-36
Subordination Reduction Amount.............................................S-36
Subsequent Mortgage Loans..................................................S-15
Subsequent Transfer Date...................................................S-39
Telerate Page 3750.........................................................S-40
Terms and Conditions.......................................................S-43
Total Available Funds......................................................S-38
Total Monthly Excess Cashflow..............................................S-37
Total Monthly Excess Spread................................................S-35
Trust......................................................................S-31
Trustee....................................................................S-49
Underwriters...............................................................S-54
Variable Rate Group........................................................S-13
Variable Rate Group Available Funds........................................S-38
Variable Rate Group Total Available Funds..................................S-38
211016.2D
A-1
================================================================================
$----------
FIRST ALLIANCE MORTGAGE LOAN TRUST ____-_
Mortgage Loan
Asset Backed Certificates
Series ____-_
First Alliance Mortgage Company
as Seller and Servicer
------------------------------------------
PROSPECTUS SUPPLEMENT
-------- --, ----
------------------------------------------
[Underwriters]
---------------
================================================================================
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
Securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
NOTES
Prospectus supplement dated ____ _, ____
(To prospectus dated September 2, 1999)
$-----------
FIRST ALLIANCE MORTGAGE LOAN TRUST ____-_
$_____ Adjustable Rate Mortgage Loan, Asset Backed Notes, Series ____-__A
$_____ ___% Fixed Rate Mortgage Loan, Asset Backed Notes, Series ___-__F
[GRAPHIC OMITTED]
Seller and Servicer
- --------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page S-8 of this
prospectus supplement and on page 6 of the prospectus.
The Notes represent non-recourse obligations of the trust only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the Notes only if
accompanied by the prospectus.
- --------------------------------------------------------------------------------
The trust will issue two series of Notes. The Notes identified above are being
offered by this prospectus supplement and accompanying prospectus.
The Notes
o The Notes represent non-recourse obligations of the trust.
o Payments on each series of Notes will be secured principally by the
proceeds of the related group of mortgage loans.
o Interest will accrue on the outstanding principal balance of each
series of Notes at the rates specified herein.
o Payments will be made monthly, commencing _______ __, ____.
Credit Enhancement
o The note insurance policies, issued by
[_________________________________], guarantee payment of interest
and principal on the Notes at the times and to the extent described
herein.
[LOGO]
o Excess interest received on the mortgage loans will be applied as a
payment of principal on the Notes to establish and maintain required
levels of overcollateralization. Excess interest generated by one
group of mortgage loans may be used to fund shortfalls in available
funds in the other mortgage loan group.
o The trust is also issuing a residual interest that is subordinated
to the Notes. Subordination of the residual interest provides credit
enhancement for the Notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Notes or determined that this prospectus supplement
or the prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
The underwriters listed below will offer the Notes from time to time in
negotiated transactions or otherwise, at varying prices to be determined at the
time of sale. We expect to receive proceeds, including accrued interest, of
approximately ______% of the aggregate principal balance of the Notes, before
deducting our issuance expenses, estimated to be approximately $_______. The
Notes will not be listed on any national securities exchange or any automated
quotation system of any registered securities association such as NASDAQ. See
"Underwriting" in this prospectus supplement.
We expect to deliver the Notes to the underwriters on or about the closing date
of ______ __, ____, in book entry form through The Depository Trust Company,
Cedelbank and the Euroclear System.
[Underwriters]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Notes in any state where the offer is not
permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the Notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling Notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
TABLE OF CONTENTS
Prospectus Supplement
Summary of Terms............................................................S-1
Risk Factors................................................................S-8
The Portfolio of Mortgage Loans............................................S-13
The Trust..................................................................S-14
Use of Proceeds............................................................S-15
The Mortgage Loan Pool.....................................................S-15
Prepayment And Yield Considerations........................................S-25
Additional Information.....................................................S-29
Description of The Notes...................................................S-30
The Seller.................................................................S-42
The Note Insurance Policies And The Note Insurer...........................S-43
The Owner Trustee..........................................................S-43
The Indenture Trustee......................................................S-44
Administration.............................................................S-44
Certain Federal Income Tax Consequences....................................S-50
State Tax Consequences.....................................................S-51
ERISA Considerations.......................................................S-51
Ratings....................................................................S-52
Legal Investment Considerations............................................S-52
Underwriting...............................................................S-52
Experts....................................................................S-53
Certain Legal Matters......................................................S-53
Global Clearance, Settlement And Tax Documentation
Procedures............................................................I-1
Index to Location of Principal Defined Terms................................A-1
Prospectus
Summary of Terms..............................................................1
Risk Factors..................................................................6
The Trusts...................................................................13
The Mortgage Pools...........................................................18
Mortgage Loan Program........................................................21
Description of the Securities................................................32
Subordination................................................................51
Description of Credit Enhancement............................................52
Hazard Insurance; Claims Thereunder..........................................59
The Seller...................................................................60
The Servicer.................................................................60
The Pooling and Servicing Agreement..........................................60
The Indenture................................................................66
Yield Considerations.........................................................68
Maturity and Prepayment Considerations.......................................71
Certain Legal Aspects of Mortgage Loans and Related
Matters................................................................73
Certain Federal Income Tax Consequences......................................80
ERISA Considerations.........................................................96
Legal Investment Matters....................................................102
Use of Proceeds.............................................................103
Methods of Distribution.....................................................103
Legal Matters...............................................................104
Financial Information.......................................................105
Rating......................................................................105
Index of Principal Definitions..............................................A-1
i
Important Notice about Information Presented in
this Prospectus Supplement and the Accompanying Prospectus
We provide information to you about the Notes in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general
information, some of which may not apply to the Notes, and
o this prospectus supplement, which describes the specific
terms of your Notes.
If the description of any matter varies between this prospectus
supplement and the prospectus, you should rely on the information in this
prospectus supplement.
This prospectus supplement begins with a summary of terms to give you
an initial overview. The summary of terms does not contain all the information
that you need to consider in making your investment decision.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these documents where you can find
further related information. The following Table of Contents and the Table of
Contents included in the accompanying prospectus provide page references for the
captions.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement and the accompanying prospectus are first defined
under the caption "Index to Location of Principal Defined Terms" beginning on
page A-1 of this prospectus supplement and on page A-1 of the accompanying
prospectus.
All statistical data with respect to the mortgage loans are
approximate and are based on the scheduled principal balances of the mortgage
loans included in the trust as of the close of business on ______ __, ____,
except where otherwise noted.
This prospectus supplement includes some "forward looking" statements
that contain projections of various financial items. You should carefully review
"Risk Factors" and "Prepayment and Yield Considerations" in this prospectus
supplement. These sections discuss the risks that may cause actual yields and
distributions on the Notes to differ significantly from the projections in the
forward looking statements.
ii
SUMMARY OF TERMS
This summary provides an overview. It does not contain all of the information
that you need to consider in making your investment decision. To understand all
of the terms of the Notes and the characteristics of the mortgage loans, read
carefully the entire prospectus supplement and the accompanying prospectus.
Securities Offered
On the closing date, the trust will issue two series of Notes. Each series of
Notes will be secured principally by the related group of mortgage loans.
The Notes represent non-recourse obligations of the trust and are not
obligations of any other entity.
The mortgage loans in the trust are separated into two groups, each containing
mortgage loans secured by residential properties.
o The fixed rate group consists of fixed-rate first and second lien mortgage
loans.
o The variable rate group consists of variable-rate first lien mortgage
loans.
The Notes are also separated into two series. In general, the trust will
distribute collections on the fixed rate mortgage loans to the Series ______-__F
Notes and collections on the variable rate mortgage loans to the Series
______-__A Notes.
You will receive payments of interest and principal on your Notes as provided in
this prospectus supplement.
The Notes will be issued in book-entry form, in denominations of $25,000 and
integral multiples of $1,000 in excess thereof. You will not receive a
definitive certificate representing your Notes except in the limited
circumstances described in this prospectus supplement and the accompanying
prospectus.
See "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
attached to this prospectus supplement, "Description of the Notes -- Book Entry
Registration of the Notes" in this prospectus supplement and "Description of the
Securities -- Form of the Securities" in the accompanying prospectus for more
detail.
The Seller, the Trust and the Trustees
o The seller, First Alliance Mortgage Company, maintains its corporate
headquarters at 17305 Von Karman Avenue, Irvine, California 92614-6203. You
can reach the seller by telephone at (949) 224-8500.
o The seller is forming First Alliance Mortgage Loan Trust ____-_ to own the
mortgage loans and certain other assets. The seller originated or acquired
the mortgage loans in accordance with its credit and underwriting
guidelines.
o The owner trustee is [____________________] and its corporate trust office
is located in _______________________.
o The indenture trustee is [__________________] and its corporate trust
office is located in ___________________. You can reach the indenture
trustee by telephone at (___) ___- ____.
See "The Seller," "The Trust," "The Owner Trustee" and "The Indenture Trustee"
in this prospectus supplement and "Mortgage Loan
S-1
Program" in the accompanying prospectus for more detail.
The Servicer and the Oversight Agent
First Alliance Mortgage Company will be the initial servicer for a term lasting
until ______ __, ____. Thereafter, First Alliance Mortgage Company may be
renewed as servicer for consecutive terms of two months with the approval of the
Note Insurer in its sole discretion. The servicer will retain a monthly fee
equal to ____% per annum based on the outstanding principal balance of the
mortgage loans. Each month the servicer will advance to the trust out of its own
funds an amount equal to all delinquent payments of interest and scheduled
principal on the mortgage loans, but only to the extent it determines, in its
reasonable business judgment, that such advance will be recoverable from the
related mortgage loan. The servicer will also pay to the trust up to 30 days'
compensating interest (less the servicing fee rate) on mortgage loans that are
paid-in-full each month, but only up to the servicing fee for that month.
See "Description of the Notes -- Collections and Remittances" and
"Administration -- Delinquency Advances and Compensating Interest" in this
prospectus supplement and "Description of the Securities -- Advances" in the
accompanying prospectus for more detail.
[_______________________], will be the oversight agent. The oversight agent will
receive a monthly fee equal to ____% per annum based on the outstanding
principal balance of the mortgage loans. The oversight agent will supervise,
monitor and oversee the obligations of the servicer.
Property of the Trust
Payments on the Notes will be made only from the assets of the trust. The
trust's assets include:
o the mortgage loans;
o all payments of principal and interest on the mortgage loans other than
payments of principal and interest due on the mortgage loans on or before
______ __, ____, as further described in this prospectus supplement;
o one or more note insurance policies issued by [_______________________];
and
o certain other property.
See "Administration -- Formation of the Trust" in this prospectus supplement for
more detail.
Payment Dates
You will be entitled to receive payments of principal and interest on your Notes
on the 20th day of each calendar month or, if the 20th is not a business day,
the next business day, beginning ______ __, ____.
Interest Rates
The annual interest rate on the Series ____-__F Notes is ____% except that the
annual interest rate for the Series ____-__F Notes will increase to ____% after
the clean-up call date.
The annual interest rate on the Series ____-__A Notes is a variable rate. On
each payment date, the interest payable on the Series ____-__A Notes will equal
the lesser of the formula rate and the available funds cap described in this
prospectus supplement.
o The formula rate is equal to the lesser of (i) (A) LIBOR plus ____% on or
before the clean-up call date or (B) LIBOR plus ____% after the clean-up
call date and (ii) __%.
S-2
o If the formula rate on the Series ____-__A Notes is limited by the
available funds cap, the indenture trustee will keep track of the amount of
the shortfall in interest. If funds are available on future payment dates,
the indenture trustee will distribute all or part of such funds to the
owners of the Series ____-__A Notes to make up for such shortfalls.
See "Description of the Notes -- Payments," "-- Payments of Interest,"
"--Payments and Insured Payments to the Owners of the Notes" and "-- Calculation
of LIBOR" in this prospectus supplement for more detail.
Interest Payments
On each payment date, you will be entitled to receive payments of interest on
your Notes equal to:
o interest accrued at the interest rate specified for your series of Notes
during the related accrual period on the outstanding principal balance of
your Notes; and
o any interest that was due on a prior payment date but was not paid (as well
as, to the extent permitted by applicable law, interest on such shortfall
at the interest rate for your Notes).
Interest on the Series ____-__F Notes will be calculated on the basis of a
360-day year consisting of twelve 30-day months. Interest on the Series ____-__A
Notes will be calculated on the basis of the actual number of days and a year of
360 days.
See "Description of the Notes -- Payments," "--Payments of Interest," and "--
Payments and Insured Payments to the Owners of the Notes" in this prospectus
supplement for more detail.
Principal Payments
On each payment date, you may be entitled to receive payments of principal on
the Notes. The amount that you will be entitled to receive is the Note principal
payment amount. Generally, the Note principal payment amount for each series of
Notes consists of:
o unscheduled payments of principal received during the prior calendar
month, scheduled payments of principal received during the related due
period and delinquent payments of scheduled principal advanced by the
servicer; and
o certain amounts of excess interest on the mortgage loans.
The above amounts relating to the fixed rate mortgage loans are used to make
payments on the Series ____-__F Notes. The above amounts relating to the
variable rate mortgage loans are used to make payments on the Series ____-__A
Notes.
See "Description of the Notes -- Payments," "-- Payments of Principal" and "--
Payments and Insured Payments to the Owners of the Notes" in this prospectus
supplement for more detail.
Credit Enhancement
The Notes benefit from three forms of credit enhancement --
overcollateralization, crosscollateralization and the note insurance policies.
Overcollateralization. Interest collected on each group of mortgage loans in
excess of the amount needed to pay interest on the related series of Notes and
certain expenses of the trust will be applied to accelerate the reduction of the
principal balance of the related series of Notes. This feature is known as
S-3
overcollateralization (i.e., the outstanding principal balance of the related
mortgage loans exceeds the outstanding principal balance of the related series
of Notes). Once overcollateralization reaches a target level, the acceleration
mechanism stops.
The target level of overcollateralization for a group of mortgage loans may
increase or decrease over time. If the target level increases, amortization of
the related series of Notes will accelerate until the actual
overcollateralization reaches the new target level. If the target level
decreases, amortization of the related series of Notes will decelerate until
overcollateralization reaches the new target level.
See "Prepayment and Yield Considerations," "Description of the Notes
- -- Overcollateralization Provisions" in this prospectus supplement and
"Description of Credit Enhancement" in the accompanying prospectus for more
detail.
Crosscollateralization. Excess interest generated by one group of mortgage loans
may be used to fund shortfalls in available funds in the other mortgage loan
group or accelerate the amortization of the series of Notes related to the other
mortgage loan group.
See "Description of the Notes -- Crosscollateralization Provisions" in this
prospectus supplement for more detail.
Note Insurance Policies. Payments on your Notes will be insured by
[___________________]. In return for an insurance premium, the note insurer will
issue one or more financial guaranty insurance policies that unconditionally
guarantee certain payments for the benefit of the owners of the Notes.
Before each payment date, the indenture trustee will determine whether funds
available to make the required payments of principal and interest on the Notes
are sufficient. If a deficiency exists that is covered by a note insurance
policy, then the indenture trustee will make a claim under the related note
insurance policy.
See "Description of the Notes -- Payments and Insured Payments to the Owners of
the Notes" and "The Note Insurance Policies and the Note Insurer" in this
prospectus supplement for more detail.
The effect of each note insurance policy is to guarantee the timely payment of
interest and the ultimate payment of principal on the Notes. The note insurance
policies cannot be canceled for any reason. The note insurance policy for the
series ____-__A Notes does not cover the available funds cap carry-forward
amount.
Unless it defaults on its obligations under the note insurance policies or
becomes bankrupt or insolvent, the note insurer can exercise certain rights of
the owners of the Notes, without obtaining their consent. In addition, owners of
the Notes must generally obtain the note insurer's written consent before
exercising certain rights.
When the note insurer makes an insured payment on a Note, the indenture trustee,
as attorney-in-fact for the owners, will receive the insured payment and
disburse it to the owners. The note insurer will then become entitled to receive
reimbursement amounts to the extent of the insured payment.
See "Description of the Notes -- Payments and Insured Payments to the Owners of
the Notes" and "The Note Insurance Policies and the Note Insurer" in this
prospectus supplement for more detail.
S-4
Other Securities
The trust is also issuing an interest in the assets of the trust that is
subordinated to the Notes and represents the residual interest in the trust.
The residual interest is not being offered by this prospectus supplement and the
accompanying prospectus.
Last Scheduled Payment Dates
The last scheduled payment date for each series of the Notes is as follows:
o Series _____-__F -- ______ __, ____
o Series _____-__A -- ______ __, ____
The actual final payment date for each series of Notes is expected to occur much
earlier.
See "Prepayment and Yield Considerations -- Prepayments and Yield Scenarios for
Notes" in this prospectus supplement for more detail.
Information About the Initial Mortgage Loans
On ______ __, ____, there were ___ initial mortgage loans designated for
inclusion in the trust secured by mortgages on residential properties including
investment properties, which may be detached, attached, one-to-four family
dwellings, condominium units or units in a planned unit development. The
information provided below is as of ______ __, ____.
Initial Mortgage Loans in Fixed Rate Group
Number of Loans
Aggregate Loan Balance
Average Loan Balance
Range of Loan Balances
Range of Mortgage Rates
Weighted Average Mortgage Rate
Weighted Average Combined Original
Loan-to-Value Ratio
Weighted Average Remaining
Term to Stated Maturity
Range of Remaining Terms to
Stated Maturity
Percentage of:
First Lien Mortgage Loans
Second Lien Mortgage Loans
Properties
Single-family dwellings
Two- to Four- family
Condominiums
Initial Mortgage Loans in Variable Rate Group
Number of Loans
Aggregate Loan Balance
Average Loan Balance
Range of Loan Balances
Product Type:
Six Month LIBOR
Step Loan
Gross Margin Range:
Six Month LIBOR
Step Loan
Current Weighted Average Mortgage Rate
Range of Current Mortgage
Rates
Weighted Average Maximum Lifetime
Mortgage Rate
Range of Maximum Lifetime
Mortgage Rates
Weighted Average Lifetime Minimum
Mortgage Rate
Range of Minimum Lifetime
Mortgage Rates
Weighted Average Original
Loan-to-Value Ratio
Weighted Average Remaining
Term to Stated Maturity
Range of Remaining Terms to
Stated Maturity
Percentage of:
First Lien Mortgage Loans
Properties
Single-family dwellings
Two- to Four- family
Condominiums
Planned unit developments
Subsequent Mortgage Loans
On the closing date, we will deposit a cash amount of up to $__________ in a
pre-funding account. During the period from the closing
S-5
date through ________ __, ____, the trust will use funds in this account to
purchase additional mortgage loans from the seller.
As new mortgage loans are purchased and added to the pool, the aggregate
principal balance of the mortgage loans will increase and the funds in the
pre-funding account will decrease by the same amount.
See "Description of the Notes -- Pre-Funding Account," "The Mortgage Loan Pool
- -- Conveyance of Subsequent Mortgage Loans -- Fixed Rate Group" and "-- Variable
Rate Group" in this prospectus supplement for more detail.
Capitalized Interest Account
On the closing date, we will deposit a cash amount in the capitalized interest
account to cover shortfalls in interest, if any, accruing on (i) the Series
______-__F Notes through ________ __, ____ and (ii) the Series ______- __A Notes
through ________ __, ____ as a result of the aggregate principal balance of the
Notes exceeding the aggregate principal balance of the initial mortgage loans as
of the closing date. On the ______ ____ and ______ ____ payment dates, the
indenture trustee will use the funds in the capitalized interest account to pay
you such shortfalls in interest.
See "Description of the Notes -- Capitalized Interest Account" in this
prospectus supplement for more detail.
Mandatory Prepayment of the Notes
We expect to use nearly all the amounts that we will deposit in the pre-funding
account to purchase additional mortgage loans. Therefore, you will probably not
receive any significant prepayments of principal from the pre-funding account.
However, any amounts remaining in the pre-funding account on ________ __, ____
will be paid to you on the payment date in ______ ____ as a principal prepayment
on the related series of Notes.
See "Risk Factors -- Risks of Prepayments from Pre-Funding Account" and
"Description of the Notes -- Payments" in this prospectus supplement for more
detail.
Optional Redemption
The servicer (and the oversight agent, in the event the servicer does not
exercise such right) has the right to purchase all the mortgage loans and other
property in the trust on any payment date when the aggregate principal balance
of the mortgage loans has declined to less than $__________. Any such repurchase
will result in a redemption of the Notes.
In the event the servicer or the oversight agent does not exercise its right to
purchase all of the mortgage loans and other property in the trust, the Note
Insurer will have such right.
See "Administration -- Redemption of the Notes" and "-- Termination of the Trust
Estate" in this prospectus supplement for more detail.
Ratings
The Notes will not be issued unless they are rated "Aaa" by Moody's Investors
Service, Inc. and "AAA" by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. A security rating is not a recommendation to buy,
sell or hold securities, and may be revised or withdrawn at any time by the
assigning rating agency.
See "Ratings" in this prospectus supplement and the accompanying prospectus for
more detail.
S-6
Tax Aspects
Arter & Hadden LLP, special federal income tax counsel, is of the opinion that
under existing law, the Notes will be characterized as debt for federal income
tax purposes and not as representing an ownership interest in the assets of the
trust or an equity interest in the trust. By your acceptance of a Note, you will
be deemed to have agreed to treat the Note as indebtedness. In addition, special
federal income tax counsel is of the opinion that the trust will be treated as a
partnership in which the holders of the residual interest are partners and not
as an association (or publicly traded partnership) taxable as a corporation or a
taxable mortgage pool.
You should consult your tax advisors and review "Certain Federal Income Tax
Consequences" in this prospectus supplement and in the accompanying prospectus
for more detail.
Legal Investment
You should consult with your legal advisor to see if you are permitted to buy
the Notes since the legal investment rules vary depending on what kind of entity
you are and who regulates you. The Notes will [not] constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended.
See "Legal Investment Considerations" in this prospectus supplement and "Legal
Investment Matters" in the accompanying prospectus for more detail.
ERISA
Subject to important considerations discussed under "ERISA Considerations" in
this prospectus supplement and the accompanying prospectus, we believe that the
Notes will be eligible for purchase by employee benefit plans. You should
carefully review with your legal advisor whether the purchase or holding of the
Notes could give rise to a prohibited transaction.
See "ERISA Considerations" in this prospectus supplement and in the accompanying
prospectus for more detail.
S-7
RISK FACTORS
Before deciding whether to purchase the Notes, you should consider the following
risk factors (as well as the factors discussed under "Risk Factors" in the
prospectus). If any of the following risks are realized, your investment could
be materially and adversely affected.
Risk of Limitations
to Adjustments of
the Series _____-
___A Interest Rate
The calculation of the interest rate on the Series _____-___A Notes is based
upon the value of an index that is different from the index applicable to the
variable rate mortgage loans. Differences may also result from the use of a
different rate determination date or a different rate adjustment date. Since the
mortgage loan index may respond to different economic and market factors than
the Series _____-___A index, there is not necessarily a correlation in movement
between them. For example, it is possible that the index on the variable rate
mortgage loans may decline while the Series _____-___A index is stable or
rising. It is also possible that both the mortgage index and the Series
_____-__A index may decline or increase during the same period, but not
necessarily at the same rate.
This absence of a correlation between movement in the mortgage loan index and
the Series _____-__A index may reduce the interest payable on the Series
_____-__A Notes because the Series _____-__A Notes are subject to an available
funds cap. If the amount of interest that would accrue on the Series _____-__A
Notes at the formula rate is greater than the available funds cap, then a
deficiency in interest paid to the owners of the Series _____-__A Notes will
occur. Although owners of the Series _____-__A Notes will be entitled to receive
that deficiency from excess available funds on future payment dates, there is no
assurance that excess funds will be available for this purpose. The ratings of
the Series _____- __A Notes do not address the likelihood of the payment of any
such deficiency, nor will the note insurer be liable for the payment of any such
deficiency.
Sensitivity
to Prepayments
The rate and timing of payments of principal of the mortgage loans (i.e., the
prepayment experience), among other factors, will affect the rate of principal
payments and the yield to maturity of the Notes. Because the prepayment
experience will depend on future events and a variety of factors, the prepayment
experience is uncertain and, in all likelihood, will not conform to any
projected rates of prepayment. Generally, in a declining interest rate
environment, mortgage loans are more likely to experience prepayments than if
prevailing interest rates remain constant or rise above the interest rates on
the mortgage loans. Conversely, in an increasing interest rate environment,
prepayments on mortgage loans are likely to decrease.
The borrowers can prepay the mortgage loans, in whole or in part, at any time.
However, approximately _____% and _____%, of the initial mortgage loans (by
aggregate principal balance) in the fixed rate group and the variable rate
group, respectively, as of ______ __, ____ require the borrower to pay a fee in
connection with certain prepayments. The requirement to pay this fee may result
in rates of prepayment that are lower than comparable pools of mortgage loans
that do not have this requirement. Also, many of the mortgage loans have
due-on-sale provisions which, if enforced by the servicer, will result in
prepayment of the mortgage loans.
See "Prepayment and Yield Considerations" in this prospectus supplement and
"Certain Legal Aspects of the Mortgage Loans and Related Matters --
S-8
Enforceability of Certain Provisions" in the accompanying prospectus for more
detail.
The mortgage loans in the variable rate group are variable rate mortgage loans.
Variable rate mortgage loans, like fixed rate mortgage loans, are more likely to
experience principal prepayments in a low interest rate environment. For
example, if prevailing interest rates were to fall, borrowers with variable rate
mortgage loans may be willing to refinance the mortgage loans with a fixed rate
loan to "lock in" a lower interest rate. Since the variable rate mortgage loans
also have periodic rate caps, and maximum and minimum interest rates, these caps
can also affect the likelihood of prepayments resulting from refinancings. In
addition, the delinquency and loss experience on variable rate mortgage loans
may differ from that on fixed rate mortgage loans because the amount of the
monthly payments on variable rate mortgage loans are subject to adjustment on
each payment change date.
Approximately _____% of the initial mortgage loans in the variable rate group by
aggregate principal balance as of ______ __, ____ are step loans that bear
interest at a fixed rate for [2, 3 or 5] years after origination and thereafter
have periodic adjustments in the same manner as the remaining initial mortgage
loans in the variable rate group. As with all mortgage loans, the rate of
prepayments on mortgage loans that are step loans and are in the initial fixed
rate period is sensitive to prevailing interest rates. The prepayment behavior
of the step loans may differ from that of the other mortgage loans. As a step
loan approaches its initial adjustment date, the borrower may become more likely
to refinance that loan to avoid an increase in the loan rate, even if fixed rate
loans are only available at rates that are slightly lower or higher than the
loan rate before adjustment.
The average life of the Notes, and, if purchased at other than par, the yields
realized by owners of the Notes will be sensitive to levels of payment
(including any principal prepayments) on the mortgage loans. In general, the
yield on the Notes if purchased at a premium will be adversely affected by a
higher than anticipated level of prepayments and enhanced by a lower than
anticipated level. Conversely, the yield on Notes if purchased at a discount
will be adversely affected by a lower than anticipated level of prepayments.
See "Prepayment and Yield Considerations" in this prospectus supplement for more
detail.
The Following Characteristics
of the Mortgage Loans May
Increase Risk of Loss:
Non-
Conforming
Underwriting
Standards
The seller originated or purchased all the mortgage loans in accordance with its
mortgage loan program for non-conforming credits. A non-conforming credit means
a mortgage loan which may be ineligible for purchase by Fannie Mae or Freddie
Mac due to credit characteristics that may not meet Fannie Mae or Freddie Mac
guidelines.
Mortgage loans originated under the seller's mortgage loan program are likely to
experience rates of delinquency, bankruptcy and loss that are higher (perhaps
significantly) than mortgage loans originated under Fannie Mae or Freddie Mac
guidelines.
S-9
As of ______ __, ____, none of the initial mortgage loans were delinquent more
than 30 days.
Geographic
Concentration
As of ______ __, ____, mortgaged properties located in the state of California
secure approximately _____% and _____% of the initial mortgage loans in the
fixed rate group and the variable rate group (by aggregate principal balance),
respectively. This geographic concentration might magnify the effect on the
trust of adverse economic conditions in California and might increase the rate
of delinquencies, defaults and losses on the mortgage loans to a greater extent
than if the mortgaged properties were more geographically diversified.
Additionally, mortgaged properties in California may be particularly susceptible
to certain types of uninsurable hazards, such as earthquakes, floods, mudslides
and other natural disasters.
See "Risk Factors -- Geographic Concentration of the Mortgaged Properties" in
the accompanying prospectus for more detail.
Other Legal
Considerations
Federal and state laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and debt
collection practices, among other factors:
o regulate interest rates and other charges on mortgage loans
o require certain disclosures to borrowers
o require licensing of the seller and other originators
o regulate generally the origination, servicing and collection process for
the mortgage loans.
Depending on the specific facts and circumstances involved, violations may limit
the ability of the trust to collect on the mortgage loans, may entitle the
borrower to a refund of amounts previously paid and could result in liability
for damages and administrative enforcement. In addition, there may be
circumstances in which the trust, as owner of the mortgage loans, would be
subject to all of the claims and defenses that a borrower could assert against
the original lender. As a result, the trust may be subject to damages and
administrative penalties arising out of unlawful lending practices if it is
determined that a violation has occurred. The seller has represented that all
applicable federal and state laws were complied with in connection with the
origination of the mortgage loans. If there is a material and adverse breach of
such representation, the seller will be obligated to repurchase any affected
mortgage loan or to substitute a new mortgage loan.
See "Certain Legal Aspects of the Mortgage Loans and Related Matters" in the
accompanying prospectus for more detail.
Risk Associated
with
the Note Insurer
If the protection created by overcollateralization and crosscollateralization is
insufficient and the note insurer is unable to meet its obligations under the
note insurance policies, then you will experience a loss of some or all of your
investment. In addition, any reduction in a rating of the claims-paying ability
of the note insurer may result in a reduction of the rating of the Notes.
Inability to
Repurchase or
If the seller fails to cure a breach of its loan representations and warranties
with respect to any loan in a timely manner, then the seller is required to
S-10
Replace Defective
Loans
repurchase or replace such defective loan. The seller may not be capable of
repurchasing or replacing any defective loans for financial or other reasons.
The seller's inability to repurchase or replace defective loans would likely
cause the loans to experience higher rates of delinquencies, defaults and
losses.
Risk of
Prepayments from
Pre-Funding
Account
Any amounts on deposit in the pre-funding account that have not been used to
purchase additional mortgage loans by the end of the pre-funding period are
required to be paid to the owners of the related series of Notes on the Payment
Date in ______ ____. If this occurs, the owners of the Notes will receive a
prepayment of principal in an amount equal to the amount remaining in the
pre-funding account. Although we expect that substantially all amounts in the
pre-funding account will be used to purchase additional mortgage loans and that
there will be no material principal prepayment, we cannot be certain that this
will occur.
See "Prepayment and Yield Considerations," "The Mortgage Loan Pool -- Conveyance
of Subsequent Mortgage Loans -- Fixed Rate Group" and "-- Variable Rate Group"
in this prospectus supplement.
Litigation
From time to time, the seller may become involved in a number of lawsuits or
governmental investigations:
[Description of Litigation Matters to be provided]
An adverse determination in one or more of these matters may adversely affect
the seller and the servicer's financial condition and, in turn the seller's
ability to repurchase or replace any defective mortgage loans, and the
servicer's ability to service the mortgage loans. Revocation of one or more of
the seller's business licenses, particularly in the state of California, may
also adversely affect the mortgage lending operations of the seller.
Liquidity of the
Seller
The seller requires substantial capital to fund its operations. Currently, the
seller funds substantially all of its operations, including its loan production,
from borrowings under its lending arrangements with certain third parties
(including affiliates of the underwriters). As its existing lending arrangements
mature, the seller may not be able to access the financing necessary for its
operations. Recently, lenders have been less willing to extend credit on
mortgage loans. In addition, lenders who are willing to extend credit on
mortgage loans are doing so on terms that are less favorable than have recently
been available.
The seller's inability to arrange for new or alternative methods of financing on
favorable terms may curtail its loan production activities, which may adversely
affect its financial condition and, in turn, the seller's ability to repurchase
or replace any defective mortgage loan. In addition, such curtailment of
production may adversely affect the servicer's ability to service the mortgage
loans.
Risks Associated
with Year 2000
Compliance
The seller has been preparing for issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex; virtually every computer operation will be affected in
some way by the rollover of the two-digit year value to 00. The issue is whether
the computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
S-11
It is a condition of closing that the servicer and the oversight agent each
represent that either they are currently year 2000 ready or are implementing
modifications to their respective existing systems to the extent required to
cause them to be year 2000 ready prior to January 1, 2000. In the event that
computer problems arise out of a failure of such efforts to be completed on
time, or in the event that the computer systems of the oversight agent or the
servicer are not fully year 2000 ready, the resulting disruptions in the
collection or distribution of receipts on the loans could materially and
adversely affect your investment. To address the year 2000 issue, the seller has
completed implementation of its formal five-step plan, which is outlined herein.
Although the seller has determined that the baseline versions of its in-house
developed products currently are Year 2000 compliant, the seller will continue
to conduct further testing and implementation for year 2000 readiness. See "The
Seller" in this prospectus supplement for more detail.
Limited Resale
The underwriters intend to make a market for resales of the Notes but have no
obligation to do so. There is no assurance that such a market will develop or,
if it develops, that it will continue. Consequently, you may not be able to sell
your Notes readily or at prices that will enable you to realize your desired
yield. The market values of the Notes are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary markets for mortgage backed securities have experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have a
severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit, or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
Insolvency of Seller
Could Cause
Payment Delays
The seller believes that the transfer of the mortgage loans from the seller to
the trust constitutes a sale and, accordingly, that the mortgage loans will not
be a part of the assets of the seller in the event of the seller's insolvency
and will not be available to creditors of the seller. Nevertheless, in the event
of an insolvency, a bankruptcy trustee or a creditor may argue that the
transaction between the seller and the trust was a pledge of the mortgage loans
in connection with a borrowing rather than a true sale. Such an attempt, even if
unsuccessful, could result in delays in payments on the Notes.
The seller will deliver an opinion of its counsel, Arter & Hadden LLP, with
respect to the true sale of the mortgage loans from the seller to the trust, in
form and substance satisfactory to the rating agencies and the note insurer.
Servicing Transfer
Could Cause Higher
Delinquencies
The mortgage loans are currently being serviced by the servicer. The note
insurer has the right, however, to refuse to extend the term of the servicer
beyond any two-month period. Servicing transfers can result in an increase in
delinquencies on the transferred loans.
S-12
THE PORTFOLIO OF MORTGAGE LOANS
General
The assets of the Trust initially will include two pools (each, a "Mortgage
Loan Group" or "Group") of closed-end mortgage loans (the "Initial Mortgage
Loans") secured by mortgages or deeds of trust (the "Mortgages") primarily on
one-to-four family residential properties (the "Mortgaged Properties") to be
conveyed to the Trust on the Closing Date. The Series _____-__F Notes will be
secured primarily by a pool of fixed-rate Mortgage Loans (the "Fixed Rate
Group") secured by Mortgages which may be either in a first or junior lien
position. The Series _____-__A Notes will be secured primarily by a pool of
variable-rate Mortgage Loans (the "Variable Rate Group") secured by Mortgages
which are in a first lien position.
The Mortgage Loan pool includes newly-originated and seasoned fixed and
variable rate loans which were originated directly by the Seller or one or more
unrelated third party entities (the "Originators").
Substantially all of the Initial Mortgage Loans in the Variable Rate Group
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 ____% per annum and a lifetime cap of ____% per annum above
the initial mortgage rate for the Initial Mortgage Loans in the Variable Rate
Group. 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 and Originations
The Seller originates and underwrites mortgage loans pursuant to the
Seller's Guidelines or acquires mortgage loans from Originators based on
Approved Guidelines or Bulk Guidelines as described in the Prospectus. See
"Mortgage Loan Program" in the Prospectus.
Fixed Rate Group. As of ______ __, ____, Initial Mortgage Loans
representing an aggregate principal balance of $__________ or ____% of the
Initial Mortgage Loans in the Fixed Rate Group by aggregate principal balance
were acquired from an Originator other than the Seller. The Seller has reviewed
100% of the acquisitions included in the Trust.
Variable Rate Group. As of ______ __, ____, Initial Mortgage Loans
representing an aggregate principal balance of $____________ or approximately
_____% of the Initial Mortgage Loans in the Variable Rate Group by aggregate
principal balance were acquired from an Originator other than the Seller. The
Seller has reviewed 100% of the acquisitions included in the Trust.
The Seller is constantly updating its underwriting guidelines, as
necessitated by changes in market conditions. Accordingly, the following
underwriting guidelines supplement the description of the Seller's underwriting
guidelines set forth in the Prospectus under the caption "MORTGAGE LOAN
PROGRAM." [Describe any changes to Underwriting Guidelines.]
As of ______ __, ____, ______% and _____% of the Initial Mortgage Loans in
the Fixed Rate Group and the Variable Rate Group, respectively, by aggregate
principal balance, were originated under the new underwriting guidelines
described above. The remaining Initial Mortgage Loans were originated under the
then existing guidelines, which are not materially different from the new
underwriting guidelines described in this Prospectus Supplement.
Furthermore, from time to time, exceptions are made to the underwriting
guidelines and it is possible that exceptions may have been made for a
substantial number of the Mortgage Loans based on compensating factors.
Management permits deviations from the specific criteria to reflect local
economic trends and real estate valuations, as well as other mitigating factors
specific to each applicant. Such deviations are monitored and regularly reviewed
by the Seller's credit committee. The Seller strives to
S-13
maintain the overall integrity of its credit and underwriting policies and
simultaneously provide its lending officers with the flexibility to consider the
specific circumstances of the mortgage loan application.
As of ______ __, ____, Initial Mortgage Loans representing an aggregate
principal balance of $_________or _____% of the Initial Mortgage Loans in the
Fixed Rate Group by aggregate principal balance were refinanced under the
Seller's Streamline Refinance Program described in the Prospectus under the
caption "MORTGAGE LOAN PROGRAM."
Delinquencies
The following tables provide data on loan delinquency and REO for the
Servicer's United States servicing portfolio. The Servicer is not an approved
seller/servicer by Fannie Mae.
United States Servicing Portfolio
As of _________, As of December 31,
(Dollars in Thousands) (Dollars in Thousands)
----------------------------- -------------------------------------------------
1998 1997 1996
---- ---- ----
Total Servicing Portfolio........... $802,034 $769,733 $637,903
30-59 days delinquent........... 9,144 7,718 9,359
60-89 days delinquent........... 6,097 7,521 6,704
90 days or more 18,449 16,935 19,081
------ ------ ------
delinquent..........................
Total delinquencies(1).......... $33,690 $32,174 $35,144
======= ======= =======
Total Delinquency 4.2% 4.2% 5.5%
Percentage..........................
REO Properties(2)................... $2,063 $1,668 $3,951
- -----------------------
(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.
Losses
The following table provides data on net losses for the Servicer's United
States servicing portfolio.
For the Quarter Ended For the Years Ended
____________, December 31,
(Dollars in Thousands) (Dollars in Thousands)
----------------------------- ------------------------------------------------
1998 1997 1996
---- ---- ----
Average servicing portfolio (1)..... $799,979 $695,858 $614,982
Net losses (2)...................... $983 $1,705 $2,160
Percentage of average 0.12% 0.25% 0.35%
servicing portfolio........
- -----------------------
(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 TRUST
First Alliance Mortgage Loan Trust ____-_ (the "Trust") is a Delaware
business trust established by the Seller pursuant to the Trust Agreement, dated
as of _______ __, ___, (the "Trust Agreement"), between the Seller and
[______________], as owner trustee. After its formation, the Trust will not
engage
S-14
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 two series of Notes pursuant to the two Indentures each dated as of
______ __, ____, between the Trust and the Indenture Trustee (each, an
"Indenture") and one class of securities (the "Residual Interest") which
represents the residual interest in the Trust Estate, (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 net proceeds of the Notes and
the Residual Interest will be delivered by the Trust to the Seller as
consideration for the Mortgage Loans pursuant to the Sale and Servicing
Agreement. The Trust 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 Trust's principal offices are in ____________________, in care of
[______________________] as owner trustee.
USE OF PROCEEDS
The Seller will sell the Initial Mortgage Loans to the Trust
concurrently with the delivery of the Notes. Net proceeds from the sale of the
Notes will be applied by the Trust to purchase the Initial Mortgage Loans from
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 purchase price
to be paid by the Trust 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"). It is intended that additional Mortgage Loans (the
"Subsequent Mortgage Loans") satisfying the criteria set out in the Sale and
Servicing Agreement will be purchased by the Trust from the Seller for inclusion
in the Fixed Rate Group and the Variable Rate Group from time to time on or
before ________ __, ____ from funds on deposit in the Pre-Funding Account. The
Subsequent Mortgage Loans, if available, will be sold by the Seller to the
Trust. The Initial Mortgage Loans and the Subsequent Mortgage Loans are
collectively referred to herein as the "Mortgage Loans".
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 in the Fixed Rate Group or the Initial Mortgage Loans in the
Variable Rate Group, in each case as of the Cut-Off Date, and giving effect to
all payments due on or prior to the Cut-Off Date whether or not received. The
Mortgage Loan pool will initially consist of ___ fixed rate loans and 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 __ states and the District of Columbia. The Mortgaged Properties
securing 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 consist of _____% of loans secured by
first lien mortgages on the related Mortgaged Properties and ____% of loans
secured by second liens on the related Mortgaged Properties.
The Initial Mortgage Loans satisfied the following criteria as of the
Cut-Off Date: remaining terms to stated maturity of no greater than 360 months;
a Mortgage Rate as of the Cut-Off Date of at least ____% with respect to the
Fixed Rate Group and at least ____% with respect to the Variable Rate Group; and
a CLTV not in excess of _____% with respect to the Fixed Rate Group and a LTV
not in excess of _____% with respect to the Variable Rate Group.
S-15
The Combined Loan-to-Value Ratio ("CLTV") of a Mortgage Loan is equal
to the ratio (expressed as a percentage) of (x) the sum of the (i) original
principal balance of the Mortgage Loan and (ii) the outstanding principal
balances of any senior mortgage loans (computed at the date of origination of
the Mortgage Loan) and (y) the appraised value of the Mortgaged Property at the
time of origination. 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.
Each Mortgage Loan in the Trust will be assigned to one of the two
Mortgage Loan Groups comprised of Mortgage Loans which bear a fixed interest
rate only, in the case of the Fixed Rate Group, and Mortgage Loans which bear an
adjustable interest rate only, in the case of the Variable Rate Group; provided,
however, that the Step Loans included in the Variable Rate Group bear interest
at a fixed rate of interest for [2, 3 or 5] years after origination and
thereafter bear an adjustable interest rate. Each of the Mortgage Loans
contained in the Fixed Rate Group will be secured by a Mortgage having either a
first or junior lien position with respect to the related Mortgaged Property.
Each of the Mortgage Loans contained in the Variable Rate Group will be secured
by Mortgages which are in a first lien position. _____% of the Initial Mortgage
Loans were originated less than seven months prior to the Cut-Off Date.
Fixed Rate Group - Initial Mortgage Loans
[All] of the Initial Mortgage Loans in the Fixed Rate Group are
Actuarial Loans. [All] of the Initial Mortgage Loans in the Fixed Rate Group
require monthly payments of principal that will fully amortize such Initial
Mortgage Loan by its stated maturity date. No Initial Mortgage Loan in the Fixed
Rate Group had a stated maturity date later than ______ __, ____. As of the
Cut-Off Date, the aggregate principal balance of all Initial Mortgage Loans in
the Fixed Rate Group was _____% of the aggregate principal balance of such
Initial Mortgage Loans at the times of their origination.
The Initial Mortgage Loans in the Fixed Rate Group had the following
aggregate characteristics as of the Cut-Off Date:
Aggregate Number of Initial Mortgage Loans.............................
Principal Balance
Aggregate.....................................................
Average.......................................................
Range.........................................................
Mortgage Rates
Weighted Average..............................................
Range.........................................................
Original Term to Stated Maturity
Weighted Average..............................................
Range.........................................................
Remaining Term to Stated Maturity
Weighted Average..............................................
Range.........................................................
CLTV
Weighted Average..............................................
Range.........................................................
Weighted Average Junior Lien Ratio.....................................
Percentage of First Lien Mortgage Loans................................
Percentage of Second Lien Mortgage Loans...............................
Some of the aggregate percentages in the following tables may not total
100% due to rounding.
S-16
DISTRIBUTION OF CLTV'S
Fixed Rate Group
Number of
Initial Aggregate % of Aggregate
Mortgage Unpaid Unpaid
Range of CLTV's Loans Principal Balance Principal Balance
5.0 - 10.00%.....................................
10.0 - 15.00......................................
15.0 - 20.00......................................
20.0 - 25.00......................................
25.0 - 30.00......................................
30.0 - 35.00......................................
35.0 - 40.00......................................
40.0 - 45.00......................................
45.0 - 50.00......................................
50.0 - 55.00......................................
55.0 - 60.00......................................
60.0 - 65.00......................................
65.0 - 70.00......................................
70.0 - 75.00......................................
75.0 - 80.00......................................
80.0 - 85.00......................................
Total...........................................
The CLTV'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 such Appraised Values 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 Mortgage Loans, together with the outstanding balances of any senior
Mortgage Loans, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those heretofore experienced by the Servicer, as set forth above
under "The Portfolio of Mortgage Loans," and by the mortgage lending industry in
general.
DISTRIBUTION OF JUNIOR LIEN RATIOS
Fixed Rate Group
(Junior Lien Initial Mortgage Loans)
% of Aggregate
Unpaid Principal
Number of Aggregate Balance of
Range of Junior Lien Initial Unpaid Junior Lien Initial
Junior Lien Ratios Mortgage Loans Principal Balance Mortgage Loans
20.01 - 25.00%....................................
25.01 - 30.00.....................................
55.01 - 60.00.....................................
70.01 - 75.00.....................................
95.01 - 100.00....................................
Total....................................
The "Junior Lien Ratio" of a Mortgage Loan is equal to the ratio
(expressed as a percentage) of the original principal balance of such Mortgage
Loan to the sum of (i) the original principal balance of such Mortgage Loan and
(ii) the outstanding principal balances of any senior mortgage loans (computed
at the date of origination of the Mortgage Loan).
S-17
DISTRIBUTION OF MORTGAGE RATES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
7.5-1 - 8.000%.................................
8.0-1 - 8.500..................................
8.5-1 - 9.000..................................
9.0-1 - 9.500..................................
9.5-1 - 10.000..................................
10.0-1 - 10.500..................................
10.5-1 - 11.000..................................
11.0-1 - 11.500..................................
12.0-1 - 12.500..................................
12.5-1 - 13.000..................................
13.0-1 - 13.500..................................
13.5-1 - 14.000..................................
14.0-1 - 14.500..................................
Total..........................................
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
Arizona.........................................
California......................................
Colorado........................................
District of Columbia............................
Florida.........................................
Illinois........................................
Maryland........................................
Minnesota.......................................
New Jersey......................................
New York........................................
Ohio............................................
Oregon..........................................
Pennsylvania....................................
Utah............................................
Virginia........................................
Washington......................................
Total....................................
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Months Mortgage Loans Principal Balance Principal Balance
95 - 120 ..............................
121 - 180 ..............................
181 - 240 ..............................
241 - 300 ..............................
301 - 360 ..............................
Total ...............................
S-18
DISTRIBUTION OF PRINCIPAL BALANCES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
$15,000.01 - 25,000.00.......................
25,000.01 - 50,000.00.......................
50,000.01 - 75,000.00.......................
75,000.01 - 100,000.00.......................
100,000.01 - 125,000.00.......................
125,000.01 - 150,000.00.......................
150,000.01 - 175,000.00.......................
175,000.01 - 200,000.00.......................
200,000.01 - 225,000.00.......................
225,000.01 - 250,000.00.......................
250,000.01 - 275,000.00.......................
275,000.01 - 300,000.00.......................
325,000.01 - 350,000.00.......................
350,000.01 - 375,000.00.......................
Total...................................
DISTRIBUTION OF PROPERTY TYPES
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
Single Family...................................
Two-to-Four Family..............................
Condominium.....................................
Total..................................
DISTRIBUTION OF OCCUPANCY STATUS*
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
Owner Occupied..................................
Investor Property...............................
Second Home.....................................
Total...................................
- --------------------------
* Based on representations of the Mortgagors at origination of the Mortgage
Loans.
Conveyance of Subsequent Mortgage Loans - Fixed Rate Group
The Sale and Servicing Agreement permits the Trust to acquire
$__________ in aggregate principal balance of Subsequent Mortgage Loans for
addition to the Fixed Rate Group. Accordingly, the statistical characteristics
of the Mortgage Loan pool and the Fixed Rate Group 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 Fixed Rate Group that
will not materially change the statistical characteristics of the Mortgage Loan
pool and the Fixed Rate Group. Each Subsequent Mortgage Loan will meet the
requirements specified by the Note Insurer for Subsequent Mortgage Loans.
S-19
The obligation of the Trust to purchase Subsequent Mortgage Loans for
addition to the Fixed Rate Group on a Subsequent Transfer Date is subject to the
satisfaction of the requirements as set forth in the Sale and Servicing
Agreement.
Variable Rate Group - Initial Mortgage Loans
[All] of the Initial Mortgage Loans in the Variable Rate Group are
Actuarial Loans and are secured by first mortgages. [All] of the Initial
Mortgage Loans in the Variable Rate Group require monthly payments of principal
that will fully amortize such Initial Mortgage Loans by their respective stated
maturity dates. [No] Initial Mortgage Loan in the Variable Rate Group had a
stated maturity date later than ________ __, ____. As of the Cut-Off Date, the
aggregate principal balance of the Initial Mortgage Loans in the Variable Rate
Group was _____% of the aggregate principal balance of such Initial Mortgage
Loans at the times of their origination. As of the Cut-Off Date, substantially
all of the Initial Mortgage Loans in the Variable Rate Group had interest rates
which were not fully indexed (i.e., the interest rate does not equal the sum of
the entire gross margin and the applicable index).
[All] of the Initial Mortgage Loans in the Variable Rate Group 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"). [All] of the
Six-Month LIBOR Loans have an initial periodic reset cap of ____% per annum and
a periodic reset cap of ____% per annum.
Approximately $________________ or _____% of the Initial Mortgage Loans
in the Variable Rate Group by aggregate principal balance as of the Cut-Off Date
bear interest at a fixed rate for [2, 3 or 5] years after origination and
thereafter have periodic adjustments at frequencies in the same manner as the
Six-Month LIBOR Loans (as described above) (the "Step Loans"). [All] of the Step
Loans have a first adjustment date that will occur in ________. As of the
Cut-Off Date, ____% and _____% of the Initial Mortgage Loans in the Variable
Rate Group by aggregate principal balance have initial periodic reset caps of
____% per annum and ____% per annum, respectively. After the first adjustment,
the Step Loans have a periodic reset cap of ____% per annum.
S-20
The Initial Mortgage Loans in the Variable Rate Group had the following
aggregate characteristics as of the Cut-Off Date:
Aggregate Number of Initial Mortgage Loans............................
Principal Balance
Aggregate....................................................
Average......................................................
Range........................................................
Current Mortgage Rate
Weighted Average.............................................
Range........................................................
Original Term to Stated Maturity
Weighted Average.............................................
Range........................................................
Remaining Term to Stated Maturity
Weighted Average.............................................
Range........................................................
LTV
Weighted Average ............................................
Range........................................................
Percentage of First Lien Mortgage Loans
Gross Margin
Weighted Average ............................................
Range........................................................
Semi-Annual Rate Adjustment Cap.......................................
Maximum Mortgage Rate
Weighted Average ............................................
Range........................................................
Minimum Mortgage Rate
Weighted Average ............................................
Range .......................................................
DISTRIBUTION OF LTV's
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Range of LTV's Mortgage Loans Principal Balance Principal Balance
15.01 - 20.00......................................
20.01 - 25.00......................................
25.01 - 30.00......................................
30.01 - 35.00......................................
40.01 - 45.00......................................
45.01 - 50.00......................................
50.01 - 55.00......................................
55.01 - 60.00......................................
60.01 - 65.00......................................
65.01 - 70.00......................................
70.01 - 75.00......................................
75.01 - 80.00......................................
80.01 - 85.00......................................
Total.....................................
S-21
The LTV's shown above were calculated based upon the Appraised Values
of the Mortgaged Properties. 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
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Months Mortgage Loans Principal Balance Principal Balance
120.............................................
121 - 180.......................................
181 - 240.......................................
301 - 360.......................................
Total.....................................
DISTRIBUTION OF PRINCIPAL BALANCES
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
$23,000.01 - 25,000.00 ...............
25,000.01 - 50,000.00 ...............
50,000.01 - 75,000.00 ...............
75,000.01 - 100,000.00 ...............
100,000.01 - 125,000.00 ...............
125,000.01 - 150,000.00 ...............
150,000.01 - 175,000.00 ...............
175,000.01 - 200,000.00 ...............
200,000.01 - 225,000.00 ...............
225,000.01 - 250,000.00 ...............
250,000.01 - 275,000.00 ...............
275,000.01 - 300,000.00 ...............
300,000.01 - 325,000.00 ...............
325,000.01 - 350,000.00 ...............
375,000.01 - 400,000.00 ...............
Total...........................
DISTRIBUTION OF PROPERTY TYPES
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
Single Family...................................
Two-to-Four Family .............................
Condominium.....................................
Planned Unit Development........................
Total....................................
S-22
DISTRIBUTION OF OCCUPANCY STATUS
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
Owner Occupied..................................
Investor Property...............................
Total..................................
DISTRIBUTION OF CURRENT MORTGAGE RATES
Variable Rate Group
Aggregate % of Aggregate
Range of Current Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
6.001 - 6.500%.............................
6.501 - 7.000..............................
7.001 - 7.500..............................
7.501 - 8.000..............................
8.001 - 8.500..............................
8.501 - 9.000..............................
9.001 - 9.500..............................
9.501 - 10.000..............................
10.001 - 10.500..............................
10.501 - 11.000..............................
11.001 - 11.500..............................
11.501 - 12.000..............................
12.001 - 12.500..............................
Total................................
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
Variable Rate Group
Range of Aggregate % of Aggregate
Maximum Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
13.001 - 13.500%............................
13.501 - 14.000.............................
14.001 - 14.500.............................
14.501 - 15.000.............................
15.001 - 15.500.............................
15.501 - 16.000.............................
16.001 - 16.500.............................
16.501 - 17.000.............................
17.001 - 17.500.............................
17.501 - 18.000.............................
18.001 - 18.500.............................
18.501 - 19.000.............................
19.001 - 19.500.............................
Total................................
S-23
DISTRIBUTION OF MINIMUM MORTGAGE RATES
Variable Rate Group
Range of Aggregate % of Aggregate
Minimum Number of Initial Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
6.001 - 6.500%............................
6.501 - 7.000.............................
7.001 - 7.500.............................
7.501 - 8.000.............................
8.001 - 8.500.............................
8.501 - 9.000.............................
9.001 - 9.500.............................
9.501 - 10.000.............................
10.001 - 10.500.............................
10.501 - 11.000.............................
11.001 - 11.500.............................
11.501 - 12.000.............................
12.001 - 12.500.............................
Total................................
DISTRIBUTION OF MARGINS
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Initial Unpaid Unpaid
Margins Mortgage Loans Principal Balance Principal Balance
3.501 - 4.000%............................
4.001 - 4.500.............................
4.501 - 5.000.............................
5.001 - 5.500.............................
5.501 - 6.000.............................
6.001 - 6.500.............................
6.501 - 7.000.............................
7.001 - 7.500.............................
7.501 - 8.000.............................
8.001 - 8.500.............................
Total...............................
S-24
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
Arizona.........................................
California......................................
Colorado........................................
Connecticut.....................................
District of Columbia............................
Florida.........................................
Georgia.........................................
Illinois........................................
Maryland........................................
New Jersey......................................
New York........................................
Ohio............................................
Oregon..........................................
Pennsylvania....................................
Utah............................................
Virginia........................................
Washington......................................
Total..................................
Conveyance of Subsequent Mortgage Loans - Variable Rate Group
The Sale and Servicing Agreement permits the Trust to acquire
$_________ in aggregate principal balance of Subsequent Mortgage Loans for
addition to the Variable Rate Group. Accordingly, the statistical
characteristics of the Mortgage Loan pool and the Variable Rate Group 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 Variable
Rate Group that will not materially change the statistical characteristics of
the Mortgage Loan pool and the Variable Rate Group. Each Subsequent Mortgage
Loan will meet the requirements specified by the Note Insurer for Subsequent
Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans for
addition to the Variable Rate Group on a Subsequent Transfer Date is subject to
the satisfaction of the requirements as set forth in the Sale and Servicing
Agreement.
Interest Payments on the Mortgage Loans
Each Mortgage Loan provides for monthly payments by the obligor on the
related Mortgage Note (the "Mortgagor") at the interest rate specified in the
related Mortgage Note (the "Mortgage Rate") 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
(disregarding, for purposes of this discussion, the effects on the yield on the
Series _____-__F Notes resulting from the timing of the settlement date and
those considerations discussed below under "Payment Delay Feature of Series
_____-__F Notes"), the yield to maturity on a Note will be directly related to
the rate of payment of principal of the Mortgage Loans in the related Mortgage
Loan Group, including for this purpose
S-25
voluntary payment in full of Mortgage Loans in the related Mortgage Loan Group
prior to stated maturity (a "Prepayment"), liquidations due to defaults,
casualties and condemnations, and repurchases of Mortgage Loans in the related
Mortgage Loan Group by the Seller or by the Note Insurer. The Mortgage Loans may
be prepaid by the related Mortgagors, in whole or in part, at any time. However,
as of the Cut-Off Date, approximately _____% and _____% (by aggregate Loan
Balance) of the Initial Mortgage Loans in the Fixed Rate Group and the Variable
Rate Group, respectively, require the payment of a fee in connection with
certain prepayments of the Mortgage Loans. The actual rate of principal
prepayments on pools of mortgage loans is influenced by a variety of economic,
tax, geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments may
differ among pools of mortgage loans at any time because of specific factors
relating to the mortgage loans in the particular pool, including, among other
things, the age of the mortgage loans, the geographic locations of the
properties securing the loans, the extent of the mortgagors' equity in such
properties, and changes in the mortgagors' housing needs, job transfers and
unemployment.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the 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 Fixed Rate Group or the Variable Rate Group, then the
Owners of the related series of Notes will receive a partial prepayment on the
Payment Date in ______ ____ equal to the related amount remaining in the
Pre-Funding Account.
Although no assurances can be given, the Seller expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust for inclusion in
the Fixed Rate Group and the Variable Rate Group 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 either series of
the Notes.
Prepayment and Yield Scenarios 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 in the
related Mortgage Loan Group. If the actual rate of payments on the Mortgage
Loans in a Mortgage Loan Group is slower than the rate anticipated by an
investor who purchases a Note related to such Mortgage Loan Group 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 in a Mortgage Loan
Group is faster than the rate anticipated by an investor who purchases a Note
related to such Mortgage Loan Group at a premium, the actual yield to such
investor will be lower than such investor's anticipated yield.
All of the Mortgage Loans in the Fixed Rate Group are fixed rate
mortgage loans. The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on such mortgage loans. However, the monthly payment on a home equity or home
improvement loan is often smaller than the monthly payment on a purchase money
first mortgage loan. Because of the smaller loan balance often associated with a
home equity or home improvement loan, a decrease in the interest rate payable
results in a smaller reduction in the amount of the Mortgagor's monthly payment.
Conversely, if prevailing interest rates rise appreciably above the interest
rates on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans.
S-26
All of the Mortgage Loans in the Variable Rate Group are either
adjustable rate mortgage loans or Step 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 the Federal
National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac") is representative of the types of borrowers included
in the Seller's lending program and cannot assure that such prepayment
experience is relevant to the Mortgage Loans contained in either Mortgage Loan
Group.
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. In addition to such solicitations, the Seller may solicit or
otherwise agree to refinancings on the following basis: (i) general
solicitations, by mail, advertisement or otherwise of the general public or
persons on a targeted list, so long as the list was not generated from the
Schedules of Mortgage Loans, (ii) unsolicited refinancings by the Seller in
connection with a Mortgagor's request for refinancing and (iii) refinancings in
connection with the Seller's policy to solicit (x) Mortgagors who indicate to
the Seller their intent to refinance their Mortgage Loans, (y) with respect to
Mortgage Loans in the Variable Rate Group, Mortgagors with Mortgage Loans for
which the next interest rate adjustment is determined by the Seller to be higher
than the current market rate for a fixed rate mortgage loan with the same risk
qualifications or (z) in connection with the general solicitation described in
(i) above. If any Mortgage Loans are refinanced as a result, the prepayment
level of the related Mortgage Loan Group may be increased over the level which
such Mortgage Loan Group would experience in the absence of such solicitations.
Such refinancings will result in a prepayment on related Mortgage Loans.
The prepayment behavior of the Step Loans may differ from that of the
other Mortgage Loans in the Variable Rate Group. As a Step 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. In addition, the delinquency and loss experience on the Mortgage
Loans in the Variable Rate Group may differ from that on the Mortgage Loans in
the Fixed Rate Group because the amount of the monthly payments on the Mortgage
Loans in the Variable Rate Group are subject to adjustment on each adjustment
date.
The "Last Scheduled Payment Date" for the Series _____-__F Notes and
the Series _____-__A Notes is ______ __, ____ which is the Payment Date in the
month following the calendar month of the maturity of the latest maturing
Mortgage Loan, plus 12 months. The weighted average life of each series of Notes
is likely to be shorter, and the actual final Payment Date with respect to each
series of Notes could occur significantly earlier than the Last Scheduled
Payment Date because (i) Prepayments are likely to occur which shall be applied
to the payment of the Note Principal Balances, (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 for each Mortgage Loan Group
and (iii) the Servicer or, in limited circumstances, the Oversight Agent, may
cause a redemption of the Notes and a termination of the Trust Estate when the
aggregate outstanding principal balance of the Mortgage Loans has declined to
less than $_________, as described under "Administration -- Redemption of the
Notes" herein.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption" or "PPC") represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of the pool of mortgage
loans for the life of such mortgage loans. With respect to the Series ____-__F
Notes, a 100% Prepayment Assumption (100% PPC) assumes a constant prepayment
rate ("CPR") of __% per annum of the outstanding principal balance of such
mortgage loans in the Fixed Rate Group in the first month of the life of the
mortgage loans and an additional amount of approximately ________% (precisely
__/__ percent per annum) in each month thereafter until the twelfth month;
beginning in the twelfth month and in each month thereafter during the life of
the mortgage loans, a constant prepayment rate of __% per annum each month is
assumed. With respect to the Series ___-__A Notes, the
S-27
Prepayment Assumption assumes a constant prepayment rate of the applicable per
annum CPR percentage of the outstanding principal balances of the mortgage loans
in the Variable Rate Group. As used in the tables below entitled "Prepayment
Assumptions" and "Weighted Average Lives", 0% Prepayment Assumption (0% PPC)
assumes a constant prepayment rate equal to 0% of the applicable Prepayment
Assumption, i.e., no prepayments. Correspondingly, 125% Prepayment Assumption
(125% PPC) assumes prepayment rates equal to 125% of the applicable Prepayment
Assumption, and so forth. The Prepayment Assumption does not purport to be an
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 of the related Mortgage Loan Groups prepay at the
indicated constant percentages of the Prepayment Assumption; (ii) payments on
the Notes are received, in cash, on the 20th day of each month, commencing in
________ ____; (iii) no defaults or delinquencies in, or modifications, waivers
or amendments respecting, the payment by the Mortgagors of principal and
interest on the Mortgage Loans occur; (iv) scheduled payments are assumed to be
received on the first day of each month commencing in ________ ____ 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 ________
____ and include 30 days' interest thereon; (v) the level of Six-Month LIBOR
remains constant at ____%; (vi) the Series ____-__F Note Rate remains constant
at ____% per annum; (vii) the Oversight Agent Fee is ____% per annum; (viii) the
Notes are purchased on ______ __, ____ (the "Closing Date"); (ix) the Mortgage
Rate for each Mortgage Loan in the Variable Rate Group 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); (x) on ______ __, ____, all
amounts on deposit in the Pre-Funding Account are used to acquire Subsequent
Mortgage Loans; and (xi) each Mortgage Loan Group consists of Mortgage Loans
having the following characteristics:
FIXED RATE GROUP
Initial and Subsequent Mortgage Loans
Remaining
Mortgage Term to
Principal Mortgage Rate Net of Stated Maturity Seasoning
Balance Rate Servicing Fee Rate (in months) (in months)
------- ---- ------------------ ----------- -----------
VARIABLE RATE GROUP
Initial and Subsequent Mortgage Loans
Current Remaining Number of
Mortgage Rate Term to Months to Initial
Current Net of Stated Next Mortgage Periodic Periodic
Principal Mortgage Servicing Fee Maturity Seasoning Gross Rate Change Adjustment Adjustment
Balance Rate Rate (in months) (in months) Margin (in months) Cap Cap
------- ---- ---- ----------- ----------- ------ ----------- --- ---
"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
in the related Mortgage Loan Group are paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments, liquidations due to default or early termination of a
Mortgage Loan Group). The weighted average lives of the Notes also will be
influenced by the overcollateralization of the Notes because collections
otherwise payable to the
S-28
Residual Interest are applied as 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 in each Mortgage Loan Group
by the related Specified Subordinated Amount for such Group. These payments of
principal have the effect of accelerating the amortization of the Notes, thereby
shortening their respective weighted average lives.
Based on the foregoing Modeling Assumptions, the tables below indicate
the weighted average life of each series of Notes, assuming that the Mortgage
Loans in the related Mortgage Loan Group prepay according to the indicated
percentages of the related Prepayment Assumption:
PREPAYMENT ASSUMPTIONS
Assumption I Assumption Assumption Assumption Assumption Assumption
------------ ---------- ---------- ---------- ---------- ----------
II III IV V VI
-- --- -- - --
Fixed Rate Group (PPC):
Variable Rate Group
(CPR):
WEIGHTED AVERAGE LIVES
Series
------
Series - F Series - A
------------------- -------------------
Weighted Weighted
Prepayment Average Life Average Life Earliest Retirement
Assumption (years)(1) (years)(1) Date(1)
- ---------- ---------- ---------- -------
I ..............................
II ..............................
III ..............................
IV ..............................
V ..............................
VI ..............................
(1) Assuming early redemption of the Notes at the Clean-Up Call Date.
There is no assurance that prepayments will occur, or, if they do
occur, that they will occur at any constant percentage or in accordance with any
of the aforementioned Prepayment Assumptions.
Payment Delay Feature of Series ____-__F Notes
The effective yield to the Owners of the Series ____-__F Notes will be
lower than the yield otherwise produced by the Series ____-__F Note Rate and the
purchase price of such Notes because principal and interest distributions will
not be payable to such holders until at least the twentieth day of the month
following the month of accrual (without any additional payments of interest or
earnings thereon in respect of such delay).
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage pool, the
Fixed Rate Group, the Variable Rate Group 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 a series of Notes.
S-29
A current report on Form 8-K will be available to purchasers of the
Notes and will be filed, and incorporated by reference to the Registration
Statement, together with the Sale and Servicing Agreement, the Trust Agreement
and the Indentures, with the Commission within fifteen days after the initial
issuance of the Notes. 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 Trust will issue two series of Notes pursuant to the Indentures
(the "Series ____-__F Notes" and the "Series ____-__A Notes"). Pursuant to the
Trust Agreement, the Trust will also issue the Residual Interest which
represents the residual ownership interest in the Trust Estate. The "Note
Principal Balance" of any series of Notes is the original Note Principal Balance
of such series as of the Closing Date as reduced by all amounts actually
distributed as principal to t he Owners of such series of Notes on all prior
Payment Dates. The summaries of certain provisions of the Indentures, 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
Indentures. The Notes represent non-recourse obligations of the Trust 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 Underwriters, 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 "Owners" of the Notes as the term
"Owners" 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 Indentures. 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.
Collections and Remittances
The Sale and Servicing Agreement will require that the Indenture
Trustee create and maintain a Note Account for each series of Notes, each to be
established as a trust account held by the trust department of the Indenture
Trustee (each a "Note Account"). All funds in the Note Accounts shall be
invested and reinvested by the Indenture Trustee for the benefit of the
Indenture Trustee, as determined by the Indenture Trustee in its sole
discretion, but only in Eligible Investments.
Five 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 related Note
Account, the Monthly Remittance Amount for the related Mortgage Loan Group. The
"Monthly Remittance Amount" for a Mortgage Loan Group 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"), (iii) certain amounts
required to be deposited by the Servicer in the Note Accounts, 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
S-30
Account, (iii) the Servicing Fee for such Payment Date and 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. 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 Prepayments on the Mortgage Loans received in
the corresponding Remittance Period. "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. Such shortfalls will result because the Mortgagor is required to pay
interest on Prepayments 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 Prepayments. The Servicer is not
obligated to cover any shortfalls in collections of interest for partial
prepayments. Such partial prepayments are applied to reduce the outstanding
principal balance of the related Mortgage Loan as of the Due Date in the month
following prepayment.
Payments
Payments on the Notes will be made on the 20th day of each calendar
month, or if such 20th day is not a Business Day, on the next Business Day,
beginning on ______ __, ____ (each, a "Payment Date"). 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 paid in respect of the Notes which
includes such Owner's Notes on such Payment Date.
The "Record Date" is 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 "Percentage Interest" represented by any Note
will be equal to the percentage obtained by dividing the original Note Principal
Balance of such Note by the original Note Principal Balance of all Notes of the
same series.
Payments of Interest
On each Payment Date, each series of the Notes will be entitled to
payments in respect of Current Interest.
The "Note Rate" for each series of the Notes is as follows:
Series ____-__F Notes On each Payment Date that occurs on or prior
to the Clean-Up Call Date, ____% per annum
and for any Payment Date thereafter, ____%
per annum.
Series ____-__A Notes On each Payment Date, the Series ____-__A
Note Rate will be equal to the lesser of (i)
the Series ____-__A Formula Note Rate and
(ii) the Available Funds Cap.
The "Series ____-__A Formula Note Rate" is
the lesser of (i) (A) LIBOR plus ____% per
annum for any Payment Date that occurs on or
prior to the Clean-Up Call Date or (B) LIBOR
plus ____% per annum for any Payment Date
that occurs after the Clean-Up Call Date,
and (ii) __% per annum.
The "Available Funds Cap" means the weighted
average of the Mortgage Rates on Mortgage
Loans in the Variable Rate Group, less the
sum of (a) the Servicing Fee Rate, (b) the
premiums due to the Note Insurer with
respect to the Note Insurance Policy
relating to the Series ____-__A Notes
(expressed as a per annum rate), (c) the fee
due to the Oversight Agent (expressed as a
per annum rate) relating to the Series
____-__A
S-31
Notes and (d) beginning on the [thirteenth]
Payment Date following the Closing Date,
____%.
The Sale and Servicing Agreement provides that if, on any Payment Date,
the Available Funds Cap is less than the Series ____-__A Formula Note Rate, the
difference between the amount calculated at the Series ____-__A Formula Note
Rate over the amount calculated at the Available Funds Cap will be carried
forward and be due and payable on future Payment Dates (to the extent that there
are funds available for such purpose) and shall accrue interest at the
applicable Series ____-__A Formula Note Rate, until paid (such shortfall,
together with such accrued interest, the "Available Funds Cap Carry-Forward
Amount"). The Note Insurance Policy for the Series ____-__A Notes 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 Variable Rate Group resulting
from the Available Funds Cap being in excess of the Series ____-__A Formula Note
Rate on future Payment Dates after payment of any Subordination Increase Amount
for either Mortgage Loan Group, (ii) any Net Monthly Excess Spread which would
otherwise be paid to the Servicer or the Indenture Trustee on account of certain
reimbursable amounts, or to the Owners of the Residual Interest and (iii) any
funds paid to effect the redemption and early retirement of the Series ____- __A
Notes on any Remittance Date after the Clean-Up Call Date.
"Current Interest" means, with respect to a series of Notes and a
Payment Date, the sum of (i) the aggregate amount of interest accrued during the
related Accrual Period at the Note Rate for such series of Notes on the
outstanding Note Principal Balance of such series of Notes and (ii) any Interest
Carry Forward Amount for such series of Notes.
The "Clean-Up Call Date" is the first Payment Date on which the
outstanding aggregate principal balance of the Mortgage Loans is less than
$_________.
"Accrual Period" means with respect to (x) the Series ____-__F Notes,
the calendar month immediately preceding the calendar month in which such
Payment Date occurs and (y) the Series ____- __A Notes, the period 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.
Calculations of interest on the Series ____-__F Notes will be made on the basis
of a 360-day year assumed to consist of twelve 30-day months. Calculations of
interest on the Series ____-__A 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 each series of Notes and any
Payment Date is the sum of (x) the amount, if any, by which (i) the Current
Interest for such series of Notes as of the immediately preceding Payment Date
exceeded (ii) the amount of the actual payments of interest for such series of
Notes made on such immediately preceding Payment Date and (y) interest on such
amount, calculated at the Note Rate for such series of Notes for the number of
days in the related Accrual Period.
Payments of Principal
The Owners of each series of Notes are entitled to receive certain
monthly payments of principal on each Payment Date which generally reflect
collections of scheduled principal due on the Due Date occurring during the
related Due Period and unscheduled payments of principal collected during the
related Remittance Period.
The credit enhancement provisions of the Trust result in a limited
acceleration of the principal payments to the Owners of each series of Notes;
such credit enhancement provisions are more fully described under "Description
of the Notes -- Overcollateralization Provisions" and "-- Crosscollateralization
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.
On each Payment Date, distributions in reduction of the Note Principal
Balance of the Notes will be made in the amounts described herein. The
"Principal Payment Amount" for each Mortgage Loan Group with respect to each
Payment Date shall be the lesser of:
(a) the related Total Available Funds for the related Mortgage
Loan Group plus any related Insured Payment minus the related
Current Interest and Fees and Expenses; and
S-32
(b)(i) the sum, without any duplication of:
(a) the Principal Carry-Forward Amount with respect to
the related Mortgage Loan Group;
(b) the principal portion of all scheduled monthly
payments on the Mortgage Loans in the related
Mortgage Loan Group due during the related Due
Period, to the extent actually received by the
Servicer 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
in the related Mortgage Loan Group that either was
repurchased by the Seller or an Originator or
purchased by the Servicer on 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 in
the related Mortgage Loan Group (to the extent such
Substitution Amounts relate to principal);
(e) all Net Liquidation Proceeds actually collected by
the Servicer with respect to the Mortgage Loans in
the related Mortgage Loan Group during the related
Remittance Period (to the extent such Net Liquidation
Proceeds relate to principal);
(f) the amount of any Subordination Deficit with respect
to such Mortgage Loan Group for such Payment Date;
(g) the proceeds received by the Indenture Trustee of any
termination of the related Mortgage Loan Group (to
the extent such proceeds relate to principal);
(h) any moneys released from the Pre-Funding Account as a
prepayment of the related series of Notes on the
Payment Date which immediately follows the end of the
Funding Period; and
(i) the amount of any Subordination Increase Amount with
respect to such Mortgage Loan Group for such Payment
Date consisting of the amount of any Net Monthly
Excess Spread to be actually applied for the
accelerated payment of principal on the related
series of Notes;
minus
(ii) the amount of any Subordination Reduction Amount with respect
to such Mortgage Loan Group for such Payment Date consisting
of the amount of any Net Monthly Excess Spread to be actually
paid to the Owners of the Residual Interest.
In no event will the Principal Payment Amount for any Mortgage Loan
Group and Payment Date (x) be less than zero or (y) be greater than the
then-outstanding Note Principal Balance of the related series of Notes.
The sum of the Current Interest and the Principal Payment Amount with
respect to any series of Notes and Payment Date is the "Monthly Payment Amount"
for such series of Notes and Payment Date.
The "Principal Carry-Forward Amount" with respect to a series of Notes
for any Payment Date is the amount, if any, by which (i) the amount described in
clause (b) of the definition of Principal Payment Amount for such series of
Notes as of the immediately preceding Payment Date exceeded (ii) the amount of
the actual payment of principal made to the Owners of the related series of
Notes on such immediately preceding Payment Date.
S-33
A "Due Period" with respect to any Payment Date is the period
commencing on the second day of the month preceding the month of such Payment
Date and ending on the first day of the month of such Payment Date.
The "Fees and Expenses" for a Mortgage Loan Group and Payment Date are
the premium amount payable to the Note Insurer and the portion of the Oversight
Agent Fee allocable to such Mortgage Loan Group.
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).
Owners may not recover a loss on a Liquidated Mortgage Loan (i.e., a
Realized Loss) 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 occur in the related Mortgage Loan Group, 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 Spread in the related Group or
the other Group.
Insured Payments do not cover 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 or
when such unpaid Delinquency Advances are necessary to pay the required amount
of Current Interest.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Sale and
Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Spread with respect to a Mortgage Loan Group be applied on such Payment Date as
an accelerated payment of principal on the related series of Notes, but only to
the limited extent hereafter described.
"Net Monthly Excess Spread" equals (i) the excess (such excess being
the "Total Monthly Excess Spread" with respect to the related Mortgage Loan
Group), if any, of (x) the interest which is collected on the Mortgage Loans in
such Mortgage Loan Group with respect to the Due Date 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 plus any amounts transferred from
the Capitalized Interest Account over (y) the sum of (I) the related Current
Interest and (II) the related Fees and Expenses, over (ii) any portion of the
Total Monthly Excess Spread that is used to cover any shortfalls in Available
Funds in the related Mortgage Loan Group on such Payment Date, or in the other
Mortgage Loan Group, or used to reimburse the Note Insurer.
The application of Net Monthly Excess Spread to principal has the
effect of accelerating the amortization of the related series of Notes relative
to the amortization of the Mortgage Loans in the related Mortgage Loan Group. 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, and then will be
paid to the Owners of the Residual Interest (subject to certain prior
applications as described below under "Crosscollateralization Provisions").
Pursuant to the Sale and Servicing Agreement, each Mortgage Loan
Group's Net Monthly Excess Spread is required to be applied as a payment of
principal on the related series of Notes until the related Subordinated Amount
has increased to the level required with respect to the related Mortgage Loan
Group. "Subordinated Amount" means, with respect to a Mortgage Loan Group and
Payment Date, the positive difference, if any, between (x) the sum of (i) the
aggregate scheduled principal balances of the Mortgage Loans in such Mortgage
Loan Group as of the close of business on the last day of the preceding
Remittance Period after taking into account payments of scheduled principal on
such 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 earnings on the Pre-Funding Account related to such Mortgage
Loan Group at such time and (y) the Note Principal Balance of the related series
of Notes as of such Payment Date (and assuming all payments are made on such
Payment Date). With respect to either Mortgage Loan Group, any amount of Net
Monthly Excess Spread actually applied as a payment of
S-34
principal is a "Subordination Increase Amount". The required level of the
Subordinated Amount with respect to a Mortgage Loan Group and Payment Date is
the "Specified Subordinated Amount" with respect to such Mortgage Loan Group and
Payment Date. The Sale and Servicing Agreement generally provides that the
related Specified Subordinated Amount may, over time, decrease, or increase,
subject to certain floors, caps and triggers.
In the event that the required level of the Specified Subordinated
Amount with respect to a Mortgage Loan Group 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 paid to the Owners of
the related series of Notes on such Payment Date shall be distributed to the
Owners of the Residual Interest on such Payment Date (subject to certain prior
applications as described below under "Crosscollateralization Provisions"). This
has the effect of decelerating the amortization of the Notes relative to the
amortization of the Mortgage Loans in the related Mortgage Loan Group, and of
reducing the related Subordinated Amount.
"Excess Subordinated Amount" means, with respect to a Mortgage Loan
Group and a Payment Date, the positive difference, if any, between (x) the
Subordinated Amount that would apply to the related Mortgage Loan Group on such
Payment Date after taking into account all distributions to be made on such
Payment Date (before giving effect to any Subordination Reduction Amounts as
described in this paragraph) and (y) the related 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 related Specified Subordinated Amount), then any
amounts relating to principal which would otherwise be distributed to the Owners
of the related series of Notes on such Payment Date shall instead be distributed
to the Owners of the Residual Interest (subject to certain prior applications as
described below under "Crosscollateralization Provisions") to the extent of the
lesser of (x) the Excess Subordinated Amount and (y) the amount available for
distribution on account of principal with respect to the related series of Notes
on such Payment Date; such amount being the "Subordination Reduction Amount"
with respect to a Mortgage Loan Group for such Payment Date.
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 unscheduled principal with respect to a Mortgage Loan Group during
the prior Remittance Period together with principal due on the Due Date that
immediately follows the last day of such Remittance Period, to the extent
received or advanced (other than any such amount applied to the payment of a
Subordination Reduction Amount), will be distributed to the Owners of the
related series of 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 scheduled 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 allocated to the Owners of the related series of Notes on the
Payment Date which immediately follows the event of loss; i.e., the Sale and
Servicing Agreement does not require the current payment to Owners in respect of
losses. However, the occurrence of a Realized Loss will reduce the Subordinated
Amount with respect to the related Mortgage Loan Group, which, to the extent
that such reduction causes the related Subordinated Amount to be less than the
related 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 related 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 Net Monthly Excess Spread and of Subordination Reduction Amounts which such
Owners would otherwise receive.
Overcollateralization and the Note Insurance Policies. A "Subordination
Deficit" with respect to a Mortgage Loan Group and a Payment Date is the amount,
if any, by which (x) the Note Principal Balance of the related series of Notes,
after taking into account the payment of the related Principal Payment Amount
(other than any portion thereof representing payments under the related Note
Insurance Policy) on such Payment Date, exceeds (y) the sum of (i) the aggregate
principal balances of the Mortgage Loans in the related Mortgage Loan Group as
of the close of business on the last day of the preceding Remittance Period
after taking into account payments of scheduled principal on such Mortgage Loans
due on the Due Date in the calendar month in which such Payment Date occurs and
(ii) the amount, if any,
S-35
relating to such Mortgage Loan Group on deposit in the Pre-Funding Account less
any earnings on the Pre-Funding Account relating to such Mortgage Loan Group 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
related Note Insurance Policy not later than two business days 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 related
series of Notes on such Payment Date. The Note Insurance Policies are thus
similar to the subordination provisions described above insofar as the Note
Insurance Policies guarantee ultimate, rather than current, payment of the
amounts of any Realized Losses to the Owners of the related series of 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.
Crosscollateralization Provisions
To the extent that any Mortgage Loan Group's Net Monthly Excess Spread
is not required to be applied to the payment of a Subordination Increase Amount
on the related series of Notes because the Subordinated Amount related to such
series of Notes is equal to or greater than the then Specified Subordinated
Amount related to such series of Notes, such Net Monthly Excess Spread (together
with the amount of any Subordination Reduction Amount) is permitted to be
applied to the payment of Subordination Increase Amounts on the other series of
Notes to the extent necessary to increase the related Subordinated Amount to the
level of its Specified Subordinated Amount.
On each Payment Date, an amount equal to the sum of (x) the Total
Monthly Excess Spread with respect to each Mortgage Loan Group and Payment Date
plus (y) any Subordination Reduction Amount with respect to each such Mortgage
Loan Group and Payment Date (such amount being the "Total Monthly Excess
Cashflow" with respect to such Mortgage Loan Group and Payment Date) will be
required to be applied in the following order of priority:
(i) such amount shall be used to fund any shortfall on
such Payment Date with respect to the related Mortgage Loan Group and
equal to the difference, if any, between (x) the sum of (A) the related
Current Interest and (B) the related Principal Payment Amount
(calculated only with respect to clause (b) of the definition thereof
and without any Subordination Increase Amount) with respect to such
Mortgage Loan Group for such Payment Date and (y) the Available Funds
with respect to such Mortgage Loan Group for such Payment Date (the
amount of such difference being equal to an "Available Funds Shortfall"
with respect to the related Mortgage Loan Group);
(ii) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
application described in clause (i) above shall be used to fund any
Available Funds Shortfall with respect to the other Mortgage Loan
Group;
(iii) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
applications described in clauses (i) and (ii) above shall be paid to
the Note Insurer in respect of amounts owed on account of any Insured
Payments theretofore made and interest thereon with respect to the
related Mortgage Loan Group (any such amount so owed to the Note
Insurer and not theretofore paid, together with accrued interest
thereon, the "Insurer Reimbursable Amount" with respect to the related
Mortgage Loan Group); and
(iv) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
applications described in clauses (i), (ii) and (iii) above shall be
paid to the Note Insurer in respect of any Insurer Reimbursable Amount
with respect to the other Mortgage Loan Group.
The amount, if any, of the Total Monthly Excess Cashflow with respect
to a Mortgage Loan Group on a Payment Date remaining after such applications is
the "Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for
such Payment Date; such amount is required to be applied in the following order
of priority on such Payment Date:
S-36
(i) such amount shall be used to fund the payment of
any required Subordination Increase Amount with respect to the related
Mortgage Loan Group as a portion of the distribution of the Principal
Payment Amount on such Payment Date;
(ii) any portion of the Net Monthly Excess Cashflow
remaining after the application described in clause (i) above shall be
used first, to make any required Subordination Increase Amount with
respect to the other Mortgage Loan Group and second, to pay any
Available Funds Cap Carry-Forward Amount; and
(iii) any remaining Net Monthly Excess Cashflow shall be
used to reimburse the Servicer and to reimburse and indemnify the
Oversight Agent and the Indenture Trustee for certain expenses and
other amounts owing to each, and any remaining funds shall then be paid
to the Owners of the Residual Interest.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the overcollateralization
provisions, the crosscollateralization provisions and by the Note Insurance
Policies 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 Policies to guarantee or insure that any particular rate of
prepayment is experienced by the Trust.
Payments and Insured Payments to the Owners of the Notes
No later than two Business Days prior to each Payment Date the
Indenture Trustee will be required to determine the amounts to be on deposit in
the related Note Account on such Payment Date with respect to each of the two
Mortgage Loan Groups and equal to the sum of (x) such amounts to be on deposit
(excluding any portion thereof that is Total Monthly Excess Cashflow), plus (y)
any amounts of Total Monthly Excess Cashflow (as described above under
"Crosscollateralization Provisions") to be applied on account of such Mortgage
Loan Group on such Payment Date plus, (z) any deposit to the Note Accounts 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 with respect to each Mortgage Loan Group
and Payment Date are the "Fixed Rate Group Available Funds" and the "Variable
Rate Group Available Funds", respectively or, generally, "Available Funds"; the
sum of the amounts described in clauses (x), (y) and (z) of the preceding
sentence with respect to each Mortgage Loan Group and Payment Date are the
"Fixed Rate Group Total Available Funds" and the "Variable Rate Group Total
Available Funds," respectively, or, generally, "Total Available Funds."
If the sum of the Monthly Payment Amount with respect to the Series
___-__F Notes, for any Payment Date exceeds the Fixed Rate Group 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 applicable to the Series ___-__F Notes. Similarly, if on any Payment Date
the Monthly Payment Amount with respect to the Series ___-__A Notes exceeds the
Variable Rate Group 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 applicable to the Series ___-__A Notes.
The Indenture Trustee will be required to deposit to the related 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
a Note Account with respect to the related Mortgage Loan Group, the Indenture
Trustee will be required to distribute (x) to the Owners of the Series ___-__F
Notes, the Monthly Payment Amount with respect to the Series ___-__F Notes for
such Payment Date and (y) to the Owners of the Series ____-__A Notes, the
related Monthly Payment Amount with respect to the Series ___-__A Notes for such
Payment Date, together with any portion of any Available Funds Cap Carry-Forward
Amount to be funded on such Payment Date.
S-37
Pre-Funding Account
On the Closing Date, an aggregate cash amount of $__________ (the
"Original Pre-Funded Amount") will be deposited in a trust account (the
"Pre-Funding Account"), which account shall be in the name of and maintained by
the Indenture Trustee 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 period from the Closing
Date to ________ __, ____ (the "Funding Period") by the amount thereof used to
purchase Subsequent Mortgage Loans for addition to the Fixed Rate Group or the
Variable Rate Group 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 Fixed Rate
Group or the Variable Rate Group on any date (each, a "Subsequent Transfer
Date") must satisfy the criteria for such Group set forth in 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 related series of 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 such series of 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 in an amount satisfactory to the Note Insurer
shall be deposited in a trust account (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 Capitalized
Interest Account, including reinvestment income thereon and amounts deposited
thereto from the Pre-Funding Account, will be used by the Indenture Trustee, as
provided in the Sale and Servicing Agreement, to fund any shortfalls in interest
accruing on (i) the Series ___-__F Notes through ________ __, ____ and (ii) the
Series ___-__A Notes through ________ __, ____, as a result of the Note
Principal Balance of the Notes exceeding the aggregate Loan Balance of the
Initial Mortgage Loans. On the ________ ____ and _________ ____ Payment Dates,
the Indenture Trustee will use the funds in the capitalized interest account to
pay you such shortfalls in interest.
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. Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments.
Calculation of LIBOR
On the second business day preceding each Payment Date, or in the case
of the first Payment Date, on the second business day preceding the Closing 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 Series ___-__A Notes on the basis
of the offered rate for one-month U.S. dollar deposits, as such rate appears 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 Bridge Telerate (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices). If such rate
does not appear on such page (or such other page as may replace that page on
that service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Indenture
Trustee), the rate will be the Reference Bank Rate. The "Reference Bank Rate"
will be determined on the basis of the rates at which deposits in U.S. Dollars
are offered by the reference banks (which shall be two major banks that are
engaged in transactions in the London interbank market, selected by the
Indenture Trustee) as of 11:00 a.m. (London time), on the day that is two
business days prior to the immediately preceding Payment Date to prime banks in
the London interbank market for a period of one month in amounts approximately
equal to the aggregate Note Principal Balance of the Series ___-__A Notes. The
Indenture Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, as requested, the rate
S-38
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Indenture Trustee,
as of 11:00 a.m. (New York City time), on such date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the aggregate Note Principal Balance of the Series ___-__A Notes. If no such
quotations can be obtained, the rate will be LIBOR for the prior Payment Date.
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 Series ___-__A 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"). Persons
acquiring beneficial ownership interests in such Book-Entry Notes ("Beneficial
Owners") may elect to hold their Book-Entry Notes directly through The
Depository Trust Company ("DTC") in the United States, or Cedelbank ("Cedel") or
The Euroclear System ("Euroclear") (in Europe) if they are participants of such
systems ("Participants"), or indirectly through organizations which are
Participants. The Book-Entry Notes will be issued in one or more certificates
per series of Notes which in the aggregate equal the principal balance of such
series of Notes and will initially be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. Cedel and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in Cedel's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. ("Citibank") will act as
depositary for Cedel and The Chase Manhattan Bank ("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 $25,000 and in integral multiples of $1,000 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
S-39
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 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.
Cedelbank 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.
S-40
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 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 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
S-41
case may be, will take any action permitted to be taken by an Owner under the
Sale and Servicing Agreement on behalf of a Cedel Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such 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 Servicer 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 DTC (and
request that DTC 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 Sale and Servicing
Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of 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 Trust 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 Notes 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
First Alliance Mortgage Company (the "Seller") , was incorporated in
the State of California on May 13, 1975 and has been actively involved in the
mortgage lending business since its founding. The Seller is a consumer finance
company with headquarters in Irvine, California. The Seller originates,
purchases, sells and services non-conventional mortgage loans through __ retail
branch offices located in the United States. In July 1996, the Seller became a
wholly owned subsidiary of 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 were originated in the United States and
are secured by Mortgaged Properties located in the United States.
The Seller maintains its corporate headquarters at 17305 Von Karman
Avenue, Irvine, California 92614-6203. Its telephone number is (949) 224-8500.
The Seller has performed a review of its computer systems and hardware
to identify processes which may be affected by Year 2000 problems. The Seller
has implemented a formal five-step plan to
S-42
address the Year 2000 issue: (1) Awareness, (2) Inventory, (3) Assessment, (4)
Renovation and (5) Testing and Implementation. The plan addresses hardware and
software purchased or leased from outside vendors, in-house developed software,
telecommunication equipment and facilities. All five steps of the plan have been
completed, and the Seller has determined that the baseline versions of its
in-house developed products are Year 2000 compliant, however, the Seller will
continue to conduct further testing and implementation throughout 1999 to
protect against unforeseen events. Because the majority of the Seller's computer
software and hardware has been purchased or developed recently and was designed
to be Year 2000 compliant, the Seller does not expect its costs to be material
in addressing the Year 2000 issue.
The Seller has received written assurances from each of its significant
outside vendors that each has properly addressed and converted its systems to be
Year 2000 compliant. While the Seller is not presently aware of any significant
exposure, the Seller cannot guarantee the Year 2000 readiness of its vendors. A
contingency plan for outside vendors has not yet been developed for dealing with
the most reasonably likely worst case scenario, and such scenario has not yet
been clearly identified.
THE NOTE INSURANCE POLICIES AND THE NOTE INSURER
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Note Insurance Policies, thereby unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee, or its
successor, as indenture 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 Policies 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 Policies 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 Policies do
not cover shortfalls, if any, attributable to the liability of the Trust or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
[Description of Note Insurance Policy to be provided]
[Description of Note Insurer and its financial statements to be provided]
THE OWNER TRUSTEE
[_______________________] is the owner trustee (the "Owner Trustee")
under the Trust Agreement. The Owner Trustee is a ____________________________
and its principal offices are located in ____________________.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Trust 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.
S-43
THE INDENTURE TRUSTEE
[______________________], a ________________________, will act as
indenture trustee (the "Indenture Trustee") under each Indenture. Copies of the
Indentures will be provided by the Indenture Trustee without charge upon written
request. Requests should be addressed to the Indenture Trustee at
____________________________, Attention: First Alliance Mortgage Loan Trust
____-_.
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 Trust
On the Closing Date, the Trust 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 Trust pursuant to the Sale and Servicing
Agreement dated as of ______ __, ____ among the Seller, the Servicer, the
Oversight Agent and the Indenture Trustee (the "Sale and Servicing Agreement").
The Trust will issue each series of the Notes pursuant to the related Indenture.
The property of the Trust shall include all money, instruments and
other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the Owners and the
Note Insurer, as their interests may appear, and all proceeds thereof,
including, without limitation, (i) the Mortgage Loans, (ii) such amounts,
including Eligible Investments, as from time to time may be held by the
Indenture Trustee in the Note Account, the Pre-Funding Account and the
Capitalized Interest Account and by the Servicer in the Principal and Interest
Account (except as otherwise provided in the Sale and Servicing Agreement), each
to be created pursuant to the Sale and Servicing Agreement, (iii) any Mortgaged
Property, the ownership of which has been effected on behalf of the Trust as a
result of foreclosure or acceptance by the Servicer of a deed in lieu of
foreclosure and that has not been withdrawn from the Trust, (iv) any insurance
policies relating to the Mortgage Loans and any rights of the Seller under any
insurance policies, (v) Net Liquidation Proceeds with respect to any Liquidated
Loan, (vi) the Note Insurance Policies and (vii) the proceeds of the foregoing
(collectively, the "Trust Estate").
The Notes will not represent an interest in or an obligation of, nor
will the Mortgage Loans be guaranteed by, any Originator, the Seller, the
Servicer, the Oversight Agent, the Owner Trustee or the Indenture Trustee.
Sale of Mortgage Loans
On the Closing Date the Seller will sell without recourse to the Trust
all right, title and interest of the Seller in each Initial 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 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). The Trust 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 Indentures.
In connection with the sale 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 or Subsequent Transfer Date, as
applicable, 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, (iv) the original assignment
of the Mortgage to the Indenture Trustee or in blank in recordable form, (v)
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, (vi) evidence of title insurance with respect to the Mortgaged
Property in the form of a binder or commitment and (vii) at the Seller's
expense, an opinion of
S-44
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 or the Subsequent
Transfer Date, as applicable, and again within 90 days after the Closing Date or
the Subsequent Transfer Date, as applicable, 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
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 the Seller is obligated to 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 from the Seller to the Indenture Trustee, in the
appropriate jurisdictions in which such recordation is necessary to perfect the
lien of the Trust 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.
Delinquency Advances and Compensating Interest
First Alliance Mortgage Company, in its capacity as servicer (in such
capacity, 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 Rate, 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 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 scheduled 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 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
Oversight Agent 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.
S-45
The "Servicing Fee" as of any Payment Date is equal to the product of
(x) one-twelfth of the Servicing Fee Rate and (y) the aggregate loan balances of
the Mortgage Loans.
The "Servicing Fee Rate" is equal to ____% per annum, payable monthly
at one-twelfth the annual rate of the then-outstanding principal amount of each
Mortgage Loan.
Removal and Resignation of the Servicer
The Sale and Servicing Agreement provides that the Servicer shall be
hired for a term of no longer than two calendar months, and may be re-hired for
additional terms of no longer than two calendar months each, but only with the
consent of the Note Insurer, in its sole and absolute discretion. The Servicer
may not resign from its obligations and duties thereunder, or not agree to be
re-hired, 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 Oversight Agent (or an affiliate thereof) or a successor
Servicer has assumed the Servicer's obligations and duties under the Sale and
Servicing Agreement. In addition, during any term, 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:
o 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;
o 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;
o 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 specified in the Sale and
Servicing Agreement; or
o 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.
The Sale and Servicing Agreement additionally provides that the Note
Insurer may remove the Servicer upon the occurrence of any of the following
events:
o with respect to any Payment Date, if the sum of the Fixed
Rate Group and Variable Rate Group Total Available Funds
will be less than the sum of the Monthly Payment Amounts
with respect to all of the Notes, 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;
o the failure by the Servicer to make any required Servicing
Advance (as defined in the Sale and Servicing Agreement);
o 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;
o the failure by the Servicer to make any required
Delinquency Advance or to pay any Compensating Interest by
the Remittance Date;
o if the delinquency or loss levels applicable to the
Mortgage Loans exceed certain "trigger" levels set forth
in the Sale and Servicing Agreement; or
o certain other events described in the Sale and Servicing
Agreement.
S-46
[An Oversight Agent may be appointed pursuant to the Sale and Servicing
Agreement, and if so appointed, such Oversight Agent shall have the following
duties.]
The Oversight Agent
[_______________________] ("_______"), as the oversight agent (the
"Oversight Agent"), will oversee and monitor the Servicer's performance of the
loan servicing functions under the Sale and Servicing Agreement.
[Description of Oversight Agent to be provided]
Oversight Agent Duties
The Oversight Agent will be responsible for performing loan level
review and backup servicing functions for the Mortgage Loans pursuant to the
Sale and Servicing Agreement. As compensation for performing its duties as the
Oversight Agent, including its oversight functions, the Oversight Agent will be
entitled to a monthly fee (the "Oversight Agent Fee") from which the Oversight
Agent will pay a fee to the Indenture Trustee. The Trust, and in certain cases
the Seller and the Servicer, will reimburse and indemnify the Oversight Agent
and the Indenture Trustee for certain liabilities, costs and expenses incurred
by each of them.
Under the Sale and Servicing Agreement, the Oversight Agent will
perform the following loan review and backup servicing functions:
(1) The Oversight Agent will periodically review the servicing reports,
loan level information and other relevant information as may be reasonably
required by the Oversight Agent pursuant to the Sale and Servicing Agreement;
(2) If the reports submitted by the Servicer are materially inaccurate
or incomplete, then the Oversight Agent will prepare and submit exception
reports to the Indenture Trustee, the Note Insurer and the Rating Agencies and
notify the Indenture Trustee, the Note Insurer and the Rating Agencies of any
event of default of which the Oversight Agent has actual knowledge, with respect
to the Servicer under the Sale and Servicing Agreement; and
(3) If the Servicer is not rehired or is terminated as Servicer under
the Sale and Servicing Agreement, then the Oversight Agent will accept
appointment as, or cause another entity (which may be an affiliate of the
Oversight Agent) reasonably acceptable to the Note Insurer to act as, the
successor servicer thereunder.
Under the Sale and Servicing Agreement, the Servicer will facilitate
the review and backup servicing functions of the Oversight Agent as follows:
(1) the Servicer will comply with the terms of the various agreements
it is entering into in connection with the Mortgage Loans, including but not
limited to, the Sale and Servicing Agreement;
(2) the Servicer will provide to the Oversight Agent certain
information regarding the Mortgage Loans and its servicing activities of such
Mortgage Loans; and
(3) the Servicer will permit the Oversight Agent to inspect the
Servicer's books and records.
In certain circumstances, the Oversight Agent may resign or be removed,
in which event another third-party oversight agent will be sought to become the
successor oversight agent. The Oversight Agent has the right to resign under the
Sale and Servicing Agreement upon 30 days' notice or any time on or after one
year from the Closing Date. No removal or resignation of the Oversight Agent
will become effective until the Indenture Trustee, or a successor oversight
agent, reasonably acceptable to the Note Insurer, has assumed the Oversight
Agent's responsibilities and obligations under the Sale and Servicing Agreement.
S-47
Redemption of the Notes
At its option, on the Clean-Up Call Date or any Payment Date thereafter
the Servicer (and the Oversight Agent in the event the Servicer does not
exercise its option) may redeem all of the Notes at the Termination Price. Upon
such redemption, the Indentures 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:
o the then outstanding aggregate Note Principal Balance plus
all accrued and unpaid interest thereon (and with respect
to the Series ____-__A Notes, any Available Funds Cap
Carry-Forward Amount);
o any Fees and Expenses due and unpaid on such date;
o the payment of all amounts owed to the Note Insurer; and
o any unreimbursed Delinquency Advances and Servicing
Advances (as defined in the Sale and Servicing Agreement)
with respect to the Mortgage Loans.
The Termination Price 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 and 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). Any
amounts remaining will be distributed to the holders of the Residual Interest.
Under certain circumstances described in the Sale and Servicing Agreement, the
Oversight Agent or the Note Insurer may also exercise such redemption rights and
acquire all the Mortgage Loans from the Trust and thereby effect a redemption of
the Notes and terminate the Indentures, if the Servicer and the Oversight Agent
do not do so.
Provisions Relating to the Indenture Trustee
Each Indenture will provide that the Indenture Trustee may resign at
any time, upon notice to the Owner Trustee, the Note Insurer, the Servicer and
each Rating Agency, in which event the Owner Trustee, on behalf of the Trust
(with the consent of the Note Insurer) will be obligated to appoint a successor
Indenture Trustee. The Owner Trustee, on behalf of the Trust, 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. Each 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 each 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 such 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 each Indenture.
The Indentures
Pursuant to each 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
S-48
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 a series of Notes is defined in
the Indenture relating to such series as follows: (a) a default by the Trust 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,
with respect to the Series _____-__A Notes, 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
Trust in the Indenture, or any representation or warranty of the Trust 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 Trust by the Indenture Trustee, or to the Trust 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 Trust.
In case an Event of Default should occur and be continuing, the
Indenture Trustee shall, only at the direction of the Note Insurer or, if a Note
Insurer Default has occurred and is continuing, the Owners of the related series
of Notes representing not less than a majority of the Percentage Interest of
such series of 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 such series of Notes.
If, following an Event of Default, a series of Notes has been declared
to be due and payable, the Indenture Trustee may, only at the direction 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 such Notes in accordance with
their terms, notwithstanding the acceleration of the maturity of such Notes. In
addition, if following an Event of Default, a series of Notes has been declared
to be due and payable, the Indenture Trustee may, only at the direction of the
Note Insurer, 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:
o to the payment of the fees of the Indenture Trustee and
the Owner Trustee which have not been previously paid;
o to the Note Insurer, any premium amount then due and
unpaid;
o to the Servicer for the Servicing Fee then due and unpaid;
o to the Owners, the amount of interest then due and unpaid
on the Notes, pro rata;
o to the Owners, the amount of principal then due and unpaid
on the Notes, pro rata;
o to the payment of amounts due and owing to the Note
Insurer, to the extent not previously reimbursed;
o to the Owners of the Series _____-__A Notes, the Available
Funds Cap Carry-Forward Amount then unpaid; and
o to the Trust Paying Agent, the amounts to be distributed,
pro rata, to the owners of the Residual Interest.
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; (v) no direction
inconsistent with such written request has been given to the
S-49
Indenture Trustee during such 60-day period by the Owners of a majority of the
Percentage Interest of the Notes; and (vi) the Note Insurer consents to the
institution of such proceeding.
Voting
Unless otherwise specified in an Indenture, with respect to any
provisions of such 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 Trust 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.
Termination of the Trust Estate
Each Indenture will provide that the portion of the Trust Estate
relating thereto will terminate upon the payment to the Owners of all Notes of
such series from amounts other than those available under the related 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 in the related Mortgage Loan Group,
(b) the disposition of all property acquired in respect of any Mortgage Loan in
the related Mortgage Loan Group remaining in the Trust Estate or (c) the Last
Scheduled Payment Date relating to such series of Notes.
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 each series of 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 Trust or the Seller. In addition, for
federal income tax purposes, the Trust 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 CleanUp 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 Series
_____-__A Notes are issued with original issue discount and the rate of accrual
of original issue discount is a [CPR of 30%] and the prepayment assumption to be
used in determining whether the Series _____-__F Notes are issued with original
issue discount and the rate of accrual of original issue discount is a [HEP of
27%]. No representation is made as to the actual rate at which the Mortgage
Loans in either Mortgage Loan Group
S-50
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"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements (and entities whose underlying assets include
plan assets by reason of such a plan's or arrangement's investment in such
entities) to which it applies (each, a "Plan") and on those persons who are
fiduciaries with respect to such Plans. Any Plan fiduciary which proposes to
cause a Plan to acquire any of the Notes should consult with counsel with
respect to the consequences under ERISA and the Code of the Plan's acquisition
and ownership of such Notes. See "ERISA Considerations -- Plan Asset
Regulations," "-- Prohibited Transaction Class Exemption," "-- Tax Exempt
Investors" and "--Consultation with Counsel" in the Prospectus.
Section 406 of ERISA prohibits Plans from engaging in certain
transactions involving the assets of such Plans with Parties in Interest with
respect to such Plans, unless a statutory, regulatory or administrative
exemption is applicable to the transaction. Excise taxes under Section 4975 of
the Code, penalties under Section 502 of ERISA and other penalties may be
imposed on Plan fiduciaries and Parties in Interest (or "disqualified persons"
under the Code) that engage in "prohibited transactions" involving assets of a
Plan. Individual retirement arrangements and other plans that are not subject to
ERISA, but are subject to Section 4975 of the Code, and disqualified persons
with respect to such arrangements and plans, also may be subject to excise taxes
and other penalties if they engage in prohibited transactions. Furthermore,
based on the reasoning of the United States Supreme Court in John Hancock Life
Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86 (1993) an insurance company
that invests in the Notes may be subject to excise taxes and other penalties if
such insurance company's general account is deemed to include assets of the
Plans investing in the general account (e.g., through the purchase of an annuity
contract).
The Department of Labor (the "DOL") has issued a regulation (the "Plan
Asset Regulation") describing what constitutes the assets of a Plan when the
Plan acquires an equity interest in another entity. The Plan Asset Regulation
states that, unless an exception described in the regulation is applicable, the
underlying assets of an entity are considered, for purposes of ERISA, to be the
assets of the investing Plan. Pursuant to the Plan Asset Regulation, if the
assets of the Trust were deemed to be plan assets by reason of a Plan's
investment in any Notes, such plan assets would include an undivided interest in
each asset of the Trust, and the purchase, sale or holding of any Note by a Plan
subject to Section 406 of ERISA or Section 4975 of the Code might result in
prohibited transactions and the imposition of excise taxes and civil penalties.
It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Notes and that all conditions for exemptive relief
(other than those within the control of the investors) will be satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
as amended by PTE 97-34, and the potential
S-51
consequences in their specific circumstances, prior to making an investment in
the Notes. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the Notes is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
RATINGS
It is a condition of the original issuance of the Notes that they
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 Investors
Service, Inc. ("Moody's"). [Other Rating Agencies, if applicable.] The ratings
issued by Standard & Poor's and Moody's on the payment of principal and interest
on the Series ______-__A 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, 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, as amended.
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.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Notes, dated _________ __, _____, the
Seller has agreed to cause the Trust to sell to each of the Underwriters named
below (the "Underwriters"), and each of the Underwriters has severally agreed to
purchase the principal amount of the Notes set forth opposite its name below:
Series - A Notes
----------------
Underwriter Principal Amount
----------- ----------------
Series - F Notes
----------------
Underwriter Principal Amount
----------- ----------------
S-52
The Underwriters have advised the Seller that they propose 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 Underwriters 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 Underwriters or purchasers of the Notes for whom they may
act as agent. Any dealers that participate with the Underwriters in the
distribution of the Notes purchased by the Underwriters may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriters and any profit on the resale of Notes by them or the Underwriters
may be deemed to be underwriting discounts or commissions under the Securities
Act.
Proceeds to the Seller, including accrued interest, are expected to be
approximately _______% of the aggregate principal balance of the Notes, before
deducting expenses payable by the Seller in connection with the Notes, estimated
to be $_______. In connection with the purchase and sale of the Notes, the
Underwriters may be deemed to have received compensation from the Seller in the
form of underwriting discounts.
The Seller has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
Immediately prior to the sale of the Mortgage Loans to the Trust, the
Mortgage Loans were subject to financing provided by affiliates of the
Underwriters. The Seller will apply a portion of the proceeds it receives from
the sale of the Notes to repay such financing.
The Seller has been advised by the Underwriters that the Underwriters
presently intend to make a market in each series of Notes, as permitted by
applicable laws and regulations. The Underwriters are not obligated, however, to
make a market in any series of Notes and such market-making may be discontinued
at any time at the sole discretion of the Underwriters. Accordingly, no
assurance can be given as to the liquidity of, or trading markets for, the
Notes.
EXPERTS
[To Be Provided]
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 Underwriters by ________________,
________________.
S-53
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered First
Alliance Mortgage Loan Trust ____-_ Adjustable Rate Mortgage Loan, Asset Backed
Notes, Series ____-__A and _____% Fixed Rate Mortgage Loan, Asset Backed Notes,
Series ____-__F (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company ("DTC") in the United States, or Cedelbank
("Cedel") or The Euroclear System ("Euroclear") (in Europe). 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
I-1
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 or a 360 day year of twelve 30 day months, as applicable. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the Relevant Depositary to the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. 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 or a 360 day year comprised of twelve 30 day months. 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
I-2
would automatically fail on the sale side unless affirmative action is taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase side of
the trade is reflected in their Cedel or Euroclear accounts) in accordance with
the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no later
than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so that
the value date for the purchase from the DTC Participant is at least one day
prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
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 state thereof (including the District of
Columbia) or (iii) an estate or the income of which is includible in gross
income for United States tax purposes, regardless of its source or a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. 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.
I-3
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities. This summary
does not deal with all aspects of U.S. federal income tax withholding that may
be relevant to foreign holders of Global Securities or with the application of
recently issued Treasury Regulations relating to tax documentation requirements
that are generally effective with respect to payments made after December 31,
1999. Investors are advised to consult their own tax advisors for specific tax
advice concerning their holding and disposing of Global Securities.
I-4
[THIS PAGE INTENTIONALLY LEFT BLANK.]
================================================================================
$----------
FIRST ALLIANCE MORTGAGE LOAN TRUST ____-_
$_______ Adjustable Rate Mortgage Loan, Asset Backed Notes, Series _____-__
$_______ ____% Fixed Rate Mortgage Loan, Asset Backed Notes, Series ____-__
First Alliance Mortgage Company
as Seller and Servicer
------------------------------------------
PROSPECTUS SUPPLEMENT
-------- --, ----
------------------------------------------
[Underwriters]
---------------
================================================================================
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Accrual Period ............................................................S-32
Actuarial Loans............................................................S-25
Advances...... ............................................................S-30
Agreements.................................................................S-30
Appraised Values...........................................................S-17
Available Funds............................................................S-37
Available Funds Cap........................................................S-31
Available Funds Cap Carry-Forward Amount...................................S-32
Available Funds Shortfall..................................................S-36
Beneficial Owners..........................................................S-39
Book-Entry Notes...........................................................S-39
Capitalized Interest Account...............................................S-38
Cede.......................................................................S-39
Cedel......................................................................S-39
Cedel Participants.........................................................S-40
Chase......................................................................S-39
Clean-Up Call Date.........................................................S-32
Closing Date.. ............................................................S-28
CLTV.......................................................................S-16
Compensating Interest......................................................S-45
Cooperative................................................................S-41
CPR........................................................................S-27
Current Interest...........................................................S-32
Cut-Off Date...............................................................S-15
Definitive Note............................................................S-39
Delinquency Advances.......................................................S-45
Determination Date.........................................................S-31
DOL........................................................................S-51
DTC........................................................................S-39
DTC Participants...........................................................S-40
Due Date...................................................................S-31
Due Period.................................................................S-34
Euroclear..................................................................S-39
Euroclear Operator.........................................................S-41
Euroclear Participants.....................................................S-41
European Depositaries......................................................S-39
Event of Default...........................................................S-49
Excess Subordinated Amount.................................................S-35
Fannie Mae.................................................................S-27
Fees and Expenses..........................................................S-34
Financial Intermediary.....................................................S-39
Fixed Rate Group...........................................................S-13
Fixed Rate Group Available Funds...........................................S-37
Fixed Rate Group Total Available Funds.....................................S-37
Freddie Mac... ............................................................S-27
Funding Period ............................................................S-38
Group......................................................................S-13
Indenture..................................................................S-15
Indenture Trustee..........................................................S-44
Initial Mortgage Loans.....................................................S-13
Insurer Reimbursable Amount................................................S-36
Interest Carry Forward Amount..............................................S-32
Interest Determination Date................................................S-38
Junior Lien Ratio..........................................................S-17
Last Scheduled Payment Date................................................S-27
LIBOR......................................................................S-38
Liquidated Mortgage Loan...................................................S-34
LTV........................................................................S-16
Modeling Assumptions.......................................................S-28
Monthly Payment Amount.....................................................S-33
Monthly Remittance Amount..................................................S-30
Moody's....... ............................................................S-52
Mortgage Loan Group........................................................S-13
Mortgage Loans ............................................................S-15
Mortgage Notes ............................................................S-15
Mortgage Rate ............................................................S-25
Mortgaged Properties.......................................................S-13
Mortgages..................................................................S-13
Mortgagor..... ............................................................S-25
Net Monthly Excess Cashflow................................................S-36
Net Monthly Excess Spread..................................................S-34
Norwest....................................................................S-47
Note Account...............................................................S-30
Note Principal Balance.....................................................S-30
Note Rate..................................................................S-31
Original Pre-Funded Amount.................................................S-38
Originators ............................................................S-13
Oversight Agent............................................................S-47
Oversight Agent Fee........................................................S-47
Owner Trustee ............................................................S-43
Owners.....................................................................S-30
Participants...............................................................S-39
Payment Date.. ............................................................S-31
Percentage Interest........................................................S-31
Plan.......................................................................S-51
Plan Asset Regulation......................................................S-51
PPC........................................................................S-27
Pre-Funded Amount..........................................................S-38
Pre-Funding Account........................................................S-38
Prepayment.................................................................S-26
Prepayment Assumption......................................................S-27
Principal Carry-Forward Amount.............................................S-33
Principal Payment Amount...................................................S-32
Realized Loss. ............................................................S-35
Record Date................................................................S-31
Relevant Depositary........................................................S-39
Remittance Date............................................................S-30
Remittance Period..........................................................S-31
Residual Interest..........................................................S-15
Rules......................................................................S-39
Sale and Servicing Agreement...............................................S-44
Schedules of Mortgage Loans................................................S-44
Seller.....................................................................S-42
Series ____-__A Formula Note Rate..........................................S-31
Series ____-__A Notes......................................................S-30
Series ____-__F Notes......................................................S-30
Servicer...................................................................S-45
Servicing Fee..............................................................S-46
Servicing Fee Rate.........................................................S-46
Six-Month LIBOR Loans......................................................S-20
Specified Subordinated Amount..............................................S-35
Standard & Poor's..........................................................S-52
Step Loans.................................................................S-20
Subordinated Amount........................................................S-34
Subordination Deficit......................................................S-35
Subordination Increase Amount..............................................S-35
Subordination Reduction Amount.............................................S-35
Subsequent Mortgage Loans..................................................S-15
Subsequent Transfer Date...................................................S-38
Telerate Page 3750.........................................................S-38
Termination Price..........................................................S-48
Terms and Conditions.......................................................S-41
Total Available Funds......................................................S-37
Total Monthly Excess Cashflow..............................................S-36
Total Monthly Excess Spread................................................S-34
Trust......................................................................S-14
Trust Agreement............................................................S-14
Trust Estate...............................................................S-44
Underwriters...............................................................S-52
Variable Rate Group........................................................S-13
Variable Rate Group Available Funds........................................S-37
Variable Rate Group Total Available Funds..................................S-37
211767.2D
A-1
PROSPECTUS
First Alliance Mortgage Company
Seller
Mortgage Loan Asset Backed Securities
(Issuable in Series by Separate Trusts)
--------------------
We are offering securities, which may be in the form of asset-backed
certificates or asset-backed notes. We will form a trust for each issue of
securities, and each issue will have its own series designation and will
evidence either:
o ownership interests in certain assets of the trust, or
o debt obligations secured by certain assets of the trust
Each Trust --
- --------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page 6 of this
prospectus.
The securities represent obligations of the trust only and do not represent
interests in or obligations of any other entity.
This prospectus may be used to offer and sell any series of securities only if
accompanied by a prospectus supplement for that series.
- --------------------------------------------------------------------------------
o will issue a series of asset-backed securities which will consist
of one or more classes of securities,
o will own
o a pool or pools of fixed or adjustable interest rate mortgage
loans, each of which is secured by a first or junior lien on
one-to-four family residential properties,
o funds on deposit in one or more accounts,
o other assets described in this prospectus and the accompanying
prospectus supplement,
o may issue one or more other interests in the trust that will not
be offered under this prospectus, and
o may elect to have the assets of the trust characterized as a real
estate mortgage investment conduit or financial asset
securitization investment trust for tax purposes.
Each Pool of Mortgage Loans --
o will be sold to the related trust by the seller and will have been
originated or acquired by the seller, and
o will be serviced by the servicer.
Each Series of Securities --
o will include one or more classes of certificates or notes that may
be senior or subordinate to the rights of other classes in that
series,
o will represent the right to receive a specified portion of future
interest and principal payments on the assets in the related
trust,
o will have one or more of the types of credit enhancement described
in this prospectus, and
o will be paid only from the assets of the related trust.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Prospectus dated September 2, 1999
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN
THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate
documents that progressively provide more detail:
o this prospectus, which provides general information, some
of which may not apply to a particular series of
securities, including your securities, and
o the accompanying prospectus supplement relating to your
series of securities, which describes the specific terms
of your series of securities.
You are urged to read both this prospectus and the related prospectus
supplement in full. We cannot sell the securities of a series to you unless you
have received both this prospectus and the related prospectus supplement.
The prospectus supplement relating to a series of securities to be
offered under this prospectus will state:
o the aggregate principal amount, interest rate and
authorized denominations of each class of such series,
o certain information concerning the mortgage loans, the
originator(s), the servicer and any sub-servicers,
o information about the trustees and oversight agents,
o the order of payment on each class in a series of
securities, and the extent of subordination of any class
in the right to receive payments,
o the terms of any credit enhancement for each class of
such series,
o information concerning any other assets of the related
trust, including any reserve account or cash account,
o the payment dates for such series,
o the initial and final scheduled payment dates of each
class of such series, and any provisions for early
termination of the trust,
o the method to be used to calculate the amount of
principal and interest required to be paid in respect of
each class of such series on each payment date,
o additional information with respect to the method of
distribution of such series, and
o the federal income tax characterization of each class of
such series, including whether the trust will make any
REMIC or FASIT election.
If the description of any matter varies between this prospectus and
the accompanying prospectus supplement, you should rely on the information in
the accompanying prospectus supplement.
You should rely only on the information provided in this prospectus
and the accompanying prospectus supplement, including the information
incorporated by reference to other public filings made by First Alliance
Mortgage Company. We have not authorized anyone to provide you with any other
information. We are not offering the securities in any state where the offer is
not permitted. We do not
ii
claim that the information in this prospectus or the accompanying prospectus
supplement is accurate as of any date other than the dates stated on their
respective covers.
We include cross references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The Table of Contents on the following page and the Table
of Contents included in the accompanying prospectus supplement provide the pages
on which these captions are located.
REPORTS TO OWNERS OF THE SECURITIES
We will provide to the owners of the securities of each series certain
monthly and annual reports concerning the securities and the related trust. For
a more complete description of the reports please read the section entitled
"Description of the Securities - Reports to Owners." If the prospectus
supplement for a series of securities states that the securities will be issued
in book-entry form, then the securities will be registered in the name of DTC
and DTC, as the owner will receive the reports. The reports will then be
forwarded to you by DTC Participants. See "Description of the Securities - Form
of Securities".
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the Securities and
Exchange Commission (SEC), with respect to the securities. You can read and copy
the registration statement and the exhibits at the public reference facility
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, DC 20549. You can also read and copy such reports, registration
statements and other information at the following regional offices of the SEC:
- --------------------------------------------------------------------------------
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, IL 60661
- --------------------------------------------------------------------------------
Please call the SEC at 1-800-SEC-0330 for more information about the
public reference rooms or visit the SEC's web site at http://www.sec.gov to
access available filings.
The SEC allows us to "incorporate by reference" some of the
information we file with it, which means that we can disclose important
information to you by referring you to those documents. The information that we
incorporate by reference is considered to be part of this prospectus, and later
information that we file with the SEC will automatically update and supersede
this information.
All documents that each trust files pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, after the date
of this prospectus and prior to the termination of the offering of the
securities issued by that trust, will be incorporated by reference into this
prospectus.
We will provide you, upon your written or oral request, a copy of any
or all of the documents incorporated by reference in this prospectus (other than
certain exhibits to such documents and the documents incorporated by reference).
Please direct your requests for copies to First Alliance Mortgage Company, 17305
Von Karman Avenue, Irvine, California 92614-6203, Attention: Director of
Secondary Marketing, telephone number (949) 224-8500.
iii
TABLE OF CONTENTS
Caption Page
- ------- ----
SUMMARY OF TERMS...............................................................1
The Seller...............................................................1
Securities Offered.......................................................1
Payments.................................................................2
Other Securities.........................................................2
Subordinated Securities..................................................2
Credit Enhancement.......................................................2
Trustees.................................................................3
Mortgage Loans...........................................................3
Servicing................................................................3
Collections..............................................................3
Advances.................................................................4
Pre-Funding..............................................................4
Optional and Mandatory Termination.......................................4
Tax Status...............................................................4
Legal Investment.........................................................5
ERISA....................................................................5
Ratings..................................................................5
RISK FACTORS...................................................................6
THE TRUSTS....................................................................13
The Mortgage Loans--General.............................................13
Single Family Loans.....................................................18
THE MORTGAGE POOLS............................................................18
General.................................................................18
Description of the Mortgage Pools.......................................19
MORTGAGE LOAN PROGRAM.........................................................21
Underwriting Guidelines.................................................21
Streamline Refinance Program............................................25
Qualifications of Originators...........................................25
Sub-Servicers...........................................................27
Representations by Originators..........................................27
Sub-Servicing by Originators............................................30
Oversight Agent.........................................................31
DESCRIPTION OF THE SECURITIES.................................................32
General.................................................................32
General Payment Terms of Securities.....................................33
Form of Securities......................................................35
Assignment of Mortgage Loans............................................36
Forward Commitments; Pre-Funding........................................38
Payments on Mortgage Loans; Deposits to
Distribution Account.................................................39
Withdrawals from the Principal and Interest
Account..............................................................42
Distributions...........................................................43
Principal and Interest on the Securities................................44
Advances................................................................45
Reports to Owners.......................................................46
Collection and Other Servicing Procedures...............................48
Realization upon Defaulted Mortgage
Loans................................................................49
SUBORDINATION.................................................................51
DESCRIPTION OF CREDIT
ENHANCEMENT.............................................................52
Financial Guaranty Insurance Policies...................................53
Letter of Credit........................................................54
Mortgage Pool Insurance Policies........................................54
Special Hazard Insurance Policies.......................................55
Bankruptcy Bonds........................................................55
Reserve Funds...........................................................56
Other Insurance, Guarantees and Similar
Instruments or Agreements............................................56
Cross-Support...........................................................56
Overcollateralization...................................................57
Cross-Collateralization.................................................57
Maintenance of Credit Enhancement.......................................57
Caption Page
- ------- ----
Reduction or Substitution of Credit
Enhancement..........................................................58
HAZARD INSURANCE; CLAIMS
THEREUNDER..............................................................59
Hazard Insurance Policies...............................................59
THE SELLER....................................................................60
THE SERVICER..................................................................60
THE POOLING AND SERVICING
AGREEMENT...............................................................60
Servicing and Other Compensation and
Payment of Expenses; Originator's
Retained Yield.......................................................61
Evidence as to Compliance...............................................62
Removal and Resignation of the Servicer.................................62
Resignation of the Oversight Agent......................................63
Rights Upon Event of Default............................................63
Amendment...............................................................64
Termination; Retirement of Securities...................................65
The Trustee.............................................................66
THE INDENTURE.................................................................66
General.................................................................66
Note Events of Default..................................................66
Rights Upon Note Events of Default......................................67
The Sale and Servicing Agreement........................................68
Termination of the Trust Estate.........................................68
YIELD CONSIDERATIONS..........................................................68
MATURITY AND PREPAYMENT
CONSIDERATIONS..........................................................71
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS AND RELATED MATTERS...............................................73
Mortgages and Deeds of Trust............................................73
Foreclosure.............................................................74
Rights of Redemption....................................................75
Anti-Deficiency Legislation and Other
Limitations on Lenders...............................................75
Environmental Legislation...............................................76
Enforceability of Certain Provisions....................................77
Certain Provisions of California Deeds
of Trust.............................................................78
Applicability of Usury Laws.............................................78
Alternative Mortgage Instruments........................................79
Soldiers' and Sailors' Civil Relief Act
of 1940..............................................................79
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............................................................80
General.................................................................80
Grantor Trust Securities................................................80
REMIC Securities........................................................82
Sales of REMIC Securities...............................................87
Debt Securities.........................................................89
Discount and Premium....................................................90
Backup Withholding......................................................94
Foreign Investors.......................................................94
ERISA CONSIDERATIONS..........................................................96
Plan Asset Regulations..................................................96
Prohibited Transaction Exemptions.......................................97
Tax Exempt Investors...................................................101
Consultation With Counsel..............................................102
LEGAL INVESTMENT MATTERS.....................................................102
USE OF PROCEEDS..............................................................103
METHODS OF DISTRIBUTION......................................................103
LEGAL MATTERS................................................................104
FINANCIAL INFORMATION........................................................105
RATING.......................................................................105
INDEX OF PRINCIPAL DEFINITIONS...............................................A-1
iv
SUMMARY OF TERMS
This summary highlights selected information from this document and does not
contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
securities, you should carefully read the entire document and the accompanying
prospectus supplement.
The Seller
The seller, First Alliance Mortgage Company, will form each trust to own the
mortgage loans and certain other assets, and to issue each series of securities.
The seller originated or acquired all the mortgage loans that it will sell to
the trust in accordance with its credit and underwriting guidelines.
See "Mortgage Loan Program" for more detail.
Securities Offered
The trust will issue the securities of the related series on the terms specified
in the prospectus supplement.
The offered securities are mortgage loan asset backed securities, that are
either (i) certificates representing a beneficial ownership interest in the
related trust or (ii) notes representing debt obligations of a trust, secured by
assets of that trust.
The securities of each series are non-recourse obligations of the related trust,
payable solely from the proceeds of trust assets. The securities are not the
obligations of any other entity.
Each series of securities may be divided into one or more classes. If we so
specify in the prospectus supplement, a series of securities may include classes
that:
o are entitled to receive payments of principal only or interest only,
o are entitled to receive principal only before or after other classes have
received a specified amount of principal, or
o are entitled to receive principal only after the occurrence of specific
events or on a planned amortization schedule or a targeted amortization
schedule.
In the case of securities entitled to receive interest payments, each class of a
series will receive interest at a specified annual interest rate, which may be
fixed or variable, and which may differ from the interest rate on other classes
of the same series.
Each series of certificates will be issued under a pooling and servicing
agreement between the seller, the servicer and the trustee. The pooling and
servicing agreement creates the trust, identifies the particular assets of that
trust and describes the terms of the certificates.
Each series of notes will be issued under an indenture between the trust and the
indenture trustee. The seller will create the trust under a trust agreement
between the seller and an owner trustee. The terms of the notes will be governed
by the indenture.
The securities may be represented by global securities issued in book-entry
form, in the name of Cede & Co., as nominee of The Depository Trust Company. In
this case, you will not receive a definitive security representing your interest
except in the limited circumstances described in the related prospectus
supplement.
See "Description of the Securities -- Form of Securities" for more detail.
Unless otherwise specified in the related prospectus supplement, the securities
of a series will not be guaranteed by any governmental
1
agency or instrumentality or any other person or entity.
The seller and its affiliates may initially or permanently hold any class of
securities issued by any trust.
Payments
Each prospectus supplement will specify:
o when payments will be made on the securities,
o the amount of each payment allocable to principal and interest, and
o how the amounts distributed will be determined.
Other Securities
For each series of certificates, the pooling and servicing agreement may also
provide for the issuance of a residual interest, which represents the equity
interest in the trust and will be subordinated to the certificates.
For each series of notes, the ownership interest in the trust will be evidenced
by a residual interest issued under the trust agreement.
The residual interest in a trust will not be offered by this prospectus or any
prospectus supplement.
Subordinated Securities
We may subordinate one or more classes of any series of securities, as specified
in the prospectus supplement. The rights of owners of subordinated securities to
receive any portion of principal and interest payments on the mortgage loans
will be subordinated to the rights of owners of senior securities. Similarly,
losses on the mortgage loans will be allocated first to the owners of
subordinated securities and secondly, to the owners of the senior securities.
Payments and losses will be allocated among those classes in the manner we
specify in the prospectus supplement.
By subordinating a class of securities, we intend to:
o increase the likelihood of regular receipt by owners of senior securities
of the full amount of scheduled monthly payments of principal and
interest due, and
o protect owners of senior securities against losses on the mortgage loans
and other trust assets.
The residual interest in a trust provides another form of subordination for the
securities. The residual interest represents the right to receive the proceeds
of assets in the related trust after all required payments have been made to the
owners of the related senior and subordinate securities and following any
required deposits to any reserve account that may be established for the benefit
of the owners of the securities. Any losses experienced by a trust will first be
absorbed by the related residual interest.
See "Subordination" for more detail.
Credit Enhancement
A trust may include, with respect to a series of securities, certain assets
intended to provide credit enhancement for ultimate or timely payments to the
owners of such securities. These forms of credit enhancement may include
financial guaranty insurance policies, letters of credit, pool insurance
policies, hazard insurance policies, surety bonds, guarantees and reserve
accounts.
In addition, one or more classes of securities of a series may be entitled to
the benefits of other credit enhancement arrangements, including subordination,
overcollateralization or cross-collateralization.
2
We will describe any such forms of credit enhancement in the related prospectus
supplement.
See "Description of Credit Enhancement" and "Subordination" for more detail.
Trustees
The trustee (in the case of a trust issuing certificates) and the indenture
trustee and owner trustee (in the case of a trust issuing notes) will each be
identified in the related prospectus supplement.
Unless otherwise stated, references in this document to "trustee" or "Trustee"
will mean either the trustee with respect to a series of certificates or the
indenture trustee, with respect to a series of notes.
Mortgage Loans
The primary assets of each trust are conventional, one-to-four family
residential mortgage loans or certificates of interest or participation in such
mortgage loans. The seller will originate the mortgage loans itself or will
acquire the mortgage loans from affiliated or unaffiliated originators in
accordance with its credit and underwriting guidelines.
See "Mortgage Loan Program" and "The Mortgage Pools" for more detail.
The prospectus supplement for each series of securities will provide information
about the following:
o the aggregate principal balance of the mortgage loans comprising each
mortgage loan group,
o the weighted average and range of mortgage rates on the mortgage loans,
o the weighted average and range of terms to scheduled maturity of the
mortgage loans as of origination and as of a date specified in the
prospectus supplement,
o the average outstanding principal balance of the mortgage loans,
o the range of loan-to-value ratios, and
o the geographic location of and types of properties securing the mortgage
loans.
Servicing
First Alliance Mortgage Company, as servicer or another servicer specified in a
prospectus supplement, and any sub-servicers, will perform customary servicing
functions for the mortgage loans included in each trust.
In addition, an oversight agent may be appointed to supervise, monitor and
oversee the obligations of the servicer. The oversight agent, and any
sub-servicers, will be identified in the related prospectus supplement.
See "The Servicer" and "The Pooling and Servicing Agreement -- Certain Matters
Regarding the Servicer and the Seller" for more detail.
Collections
Payments on the assets in a trust will initially be remitted for deposit in a
collection account maintained by the servicer. Funds on deposit in the
collection account will then be transferred to a payment account to be
established with the trustee for the series of securities related to that trust.
Certain amounts may be subtracted from the amount deposited in the payment
account to cover servicing fees and other amounts specified in the related
prospectus supplement.
The remaining funds on deposit in the payment account will be paid by the
trustee to the owners of a series as described in the related prospectus
supplement subject to the following:
3
A portion of the principal collected on certain mortgage loans may be (i)
retained by the trustee and held temporarily in investments for a specified
period or (ii) applied by the trustee to the acquisition of additional mortgage
loans (instead of being paid as principal to the owners of the securities)
during a specified period. The effect of any such retention or application of
funds is to slow the amortization rate of the related securities relative to the
amortization rate of the related mortgage loans for the related period.
Advances
The servicer may be obligated to make certain cash advances to the trust,
representing all delinquent scheduled payments on the mortgage loans, but only
to the extent the servicer determines, in its reasonable business judgment, that
such advance will be recoverable from the related mortgage loan. The servicer
may also be required to pay to the trust up to 30 days' compensating interest
(less the servicing fee rate) on mortgage loans that are paid-in-full each
month, but only up to the servicing fee for that month.
See "Description of the Securities -- Advances" for more detail.
Pre-Funding
A trust may enter into a pre-funding arrangement with the seller for the
transfer of additional mortgage loans to the trust following the issuance of the
related securities. If a pre-funding arrangement is used, the trustee will be
required to deposit in a segregated pre-funding account up to 25% of the
proceeds of sale of the related securities. Thereafter, the trustee will acquire
additional mortgage loans in exchange for money in the segregated pre-funding
account.
The trustee will apply any proceeds remaining in the pre-funding account at the
end of a specified period, not to exceed 90 days, as a mandatory prepayment of
securities as specified in the related prospectus supplement.
See "Risk Factors" in this prospectus and in the related prospectus supplement
for more detail.
Optional and Mandatory Termination
If we so specify in the prospectus supplement, the servicer, the oversight
agent, the owners of the residual interest or the credit enhancer will have the
option to repurchase all the mortgage loans relating to a series of securities
outstanding at the time and under the conditions specified in the prospectus
supplement. Such a repurchase of the mortgage loans will result in an early
retirement of the related series of securities.
In addition, the securities may be subject to mandatory purchase. If specified
in the prospectus supplement, the trustee, the servicer or other parties may be
required to solicit bids for the purchase of the assets in the trust.
See "The Pooling and Servicing Agreement -- Termination; Retirement of
Securities" for more detail.
Tax Status
The federal income tax consequences to the owners will depend on, among other
factors, whether we elect to treat any portion of the trust assets represented
by a series of securities as a real estate mortgage investment conduit ("REMIC")
or a financial assets securitization investment trust (a "FASIT").
The prospectus supplement for each series of securities will specify whether the
related trust will make a REMIC or FASIT election.
If we do not make a REMIC or a FASIT election with respect to a series of
securities, the portion of trust assets represented by those securities may be
treated for federal income tax purposes as debt instruments of the trust, and by
accepting the securities, each owner will agree to treat the securities as
indebtedness.
4
You should consult your tax advisors and review "Certain Federal Income Tax
Consequences" in this prospectus and in the accompanying prospectus supplement
for more detail.
Legal Investment
We may offer some classes of securities that are secured by junior lien mortgage
loans, and therefore those securities would not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended. Securities that do not constitute "mortgage related
securities" may not be legal investments for certain types of institutional
investors. You should consult with your legal advisor to see if you are
permitted to buy the securities since the legal investment rules vary depending
on what kind of entity you are and who regulates you.
See "Legal Investment Matters" in this prospectus and "Legal Investment
Considerations" in the prospectus supplement for more detail.
ERISA
Fiduciaries of employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, as amended, or the Internal Revenue Code of 1986, as
amended, should carefully review with their legal advisor whether the purchase
or holding of the securities could result in a prohibited transaction. Certain
classes of securities may not be offered for sale or transfer to such plans.
See "ERISA Considerations" in this prospectus and in the prospectus supplement
for more detail.
Ratings
Each class of securities offered by this prospectus and the related prospectus
supplement will be rated in one of the four highest rating categories by one or
more nationally recognized statistical rating organizations.
o Ratings do not address the effect of prepayments on the yield you can
expect when you purchase your securities
o A security rating is not a recommendation to buy, sell or hold securities
and may be revised or withdrawn by the assigning rating agency
o We will specify the expected rating of each class of securities in the
related prospectus supplement.
5
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the securities. You should also carefully consider the information
under "Risk Factors" in the related prospectus supplement.
A secondary market for the securities may not develop, so that you
might not be able to sell your securities.
No market for the securities will exist before they are issued, and a
secondary market for the securities might not develop. Even if a resale market
does develop, it might not continue until the securities mature or it might not
be sufficiently liquid to allow you to resell any of your securities. The
underwriter(s) may establish a secondary market in the securities, although no
underwriter will be obligated to do so. Unless otherwise stated in the related
prospectus supplement, the securities will not be listed on any securities
exchange or quoted in the automated quotation system of any registered
securities association.
Trust assets will be the only source of payment on the securities;
therefore, if the revenues generated by trust assets are insufficient to cover
the required payments on your securities, you may experience losses on your
securities.
Proceeds of the related trust assets (including the mortgage loans and
any form of credit enhancement) will be the sole source of payments on a series
of securities. Therefore, you could experience losses or delays in payments if
these sources of payment are insufficient to make the required payments on your
securities.
Nevertheless, certain types of credit enhancement for a series of
securities, such as a financial guaranty insurance policy or a letter of credit,
may constitute a full recourse obligation of the provider of the credit
enhancement. 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 seller, the servicer,
the oversight agent, any sub-servicer or any of their affiliates.
The securities will not represent an interest in, or an obligation of
the seller the servicer, the oversight agent, any originator or any person other
than the related trust. You will have no recourse against the seller or any
other person if any required payment on the securities is not made. The only
obligations, if any, of the seller, the servicer, the oversight agent and the
related originator would result from:
o a breach of the representations and warranties that these persons
may make concerning the trust assets,
o a purchase obligations made by these persons with respect to the
mortgage loans,
o the servicer's servicing obligations, and
o the oversight agent's secondary servicing obligations under the
related servicing agreement.
Credit enhancement will be limited in amount and scope of coverage and
may not be sufficient to cover losses on the mortgage loans, which may cause
losses on your securities.
Credit enhancement is intended to reduce the effect of delinquent
payments or mortgage loan losses on those classes of securities that have the
benefit of credit enhancement. However, the amount of
6
credit enhancement (if any) and the scope of coverage for losses on the
underlying mortgage loans, are limited as described in the related prospectus
supplement.
Credit enhancement may be provided in the form of a financial guaranty
insurance policy, letter of credit, mortgage pool insurance policy, special
hazard insurance policy, surety bond, bankruptcy bond or reserve fund or any
other form referred to in the prospectus supplement. Credit enhancement may also
be provided in the form of:
o subordination of the residual interest or subordination of one or
more classes of securities in a series with respect to payments of
principal and interest and allocation of losses,
o cross-collateralization among separate portions of the trust
assets, and/or
o overcollateralization resulting from the use of excess cash flow
to amortize certain classes of securities faster than the
amortization of the related group of mortgage loans.
See "Description of Credit Enhancement" and "Subordination."
The following risks, relating to the mortgage loans, may cause losses
on your securities.
Mortgage Loans secured by junior liens may experience higher rates of
losses. Some of the mortgage loans may be secured by junior liens subordinate to
the rights of the related senior mortgage lender. As a result, the proceeds from
any liquidation, insurance or condemnation proceedings must first be used to
satisfy the claims of the related senior mortgagee (and the related foreclosure
expenses) before they are available to satisfy the junior lien loans. In
addition, a junior mortgage lender may only foreclose subject to the related
senior mortgage. Therefore, the junior mortgage lender must either pay the
related senior mortgage lender in full, at or before the foreclosure sale, or
agree to make the regular payments on the senior mortgage. In servicing junior
lien mortgage loans in its portfolio, the servicer's practice has been to pay
off the senior mortgage at or before the foreclosure sale only to the extent
that the servicer determines that the amounts paid will be recoverable from
future payments and collections on the junior lien loans or otherwise. A trust
will not have any source of funds to satisfy any such senior mortgages or
continue making payments on them.
See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Foreclosure."
Property values may decline, leading to higher losses on the mortgage
loans. The values of the properties securing the mortgage loans may be adversely
affected by a number of factors, including:
o an overall decline in residential real estate markets where the
properties are located,
o failure of borrowers to maintain their properties adequately
(e.g., due to adverse changes in the borrowers' financial
condition), and
o natural disasters that may not be covered by hazard insurance,
such as earthquakes or floods.
We cannot assure you that the values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
mortgage loans. If property values decline, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the nonconforming credit mortgage lending industry.
7
The mortgage loans are non-conforming loans and may have higher
delinquency and default rates than traditional loans. The seller's mortgage loan
program is a program for non-conforming credits. A "non-conforming credit" means
a mortgage loan that is ineligible for purchase by Fannie Mae or the Federal
Home Loan Mortgage Corporation ("Freddie Mac") due to credit characteristics
that do not meet Fannie Mae or Freddie Mac guidelines. These types of mortgage
loans are likely to experience rates of delinquency, bankruptcy and loss that
are higher than mortgage loans originated under Fannie Mae or Freddie Mac
guidelines.
See "Mortgage Loan Program."
Mortgage Loans with balloon and non-traditional payment methods may
create greater default risk. Some of the underlying mortgage loans may not be
fully amortizing over their terms to maturity and may require a substantial
principal payment (i.e., a "balloon payment") at their stated maturity. Loans of
this type involve a greater degree of risk than fully amortizing loans, since
the mortgagor generally must be able to refinance the loan or sell the property
prior to the loan's maturity date. The mortgagor's ability to refinance a
balloon mortgage loan will depend on factors such as:
o the level of available mortgage rates at the time,
o the value of the mortgaged property,
o the mortgagor's equity in the mortgaged property,
o the financial condition of the mortgagor, and
o the tax laws and general economic conditions at the time.
Other types of loans that may be included in the assets of a trust may
involve additional uncertainties not present in traditional types of loans. For
example, some of the mortgage loans may provide for escalating or variable
payments by the mortgagor, depending on the mortgagor's qualifications. Because
the mortgagors' income may not be sufficient to enable them to continue making
their loan payments as the payments increase, the likelihood of default on these
types of loans is greater than on traditional mortgage loans.
See "Mortgage Loan Program."
Bankruptcy of mortgagors could cause losses on the mortgage loans.
General economic conditions have an impact on the ability of borrowers to repay
their mortgage loans. If borrowers experience a loss of earnings, illness or
other similar event, the delinquencies and bankruptcy rates on the mortgage
loans will likely increase. Also, some of the mortgaged properties securing the
mortgage loans may not be owner occupied. 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.
The federal bankruptcy code and state debtor relief laws may adversely
affect the ability of the trust, as a secured lender, to realize upon its
security. For example, in a federal bankruptcy proceeding, a lender may not
foreclose on the mortgaged property without the bankruptcy court's permission.
Similarly, the bankruptcy court may suspend or reduce the payments or principal
balance on the mortgage loan. Any such actions could result in a delay or
permanent reduction in the amount received by the trust on such mortgage loan.
8
Foreclosure of mortgaged properties involves delays and expenses and
could cause losses on the mortgage loans. Even if the mortgaged properties
provide adequate security for the mortgage loans, the servicer may experience
substantial delays in liquidating the defaulted mortgage loans. An action to
foreclose on a mortgaged property is regulated by state statutes, rules and
judicial decisions and is subject to many of the delays and expenses of other
lawsuits, especially if defenses or counterclaims are raised. The process
sometimes requires 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 and others, may impede the ability of the servicer to foreclose on
or sell the mortgaged property or to obtain liquidation proceeds (net of
expenses) sufficient to repay all amounts due on the 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 and not yet repaid, including payments to prior
lienholder, 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, you could experience a loss on your 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 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."
Geographic concentration of mortgaged properties may result in higher
losses, if particular regions experience downturns. Historically, downturns in
regional or local economic conditions and housing markets have caused increased
delinquency, defaults and losses on mortgage loans in those areas. An economic
downturn in any region where a number of mortgaged properties are located might
cause higher delinquencies, defaults and losses on the mortgage loans. If
delinquencies, defaults or losses on the mortgage loans are higher than
expected, you could suffer a loss on your securities. Information about the
geographic concentration of mortgaged properties will be specified in the
related prospectus supplement or Current Report on Form 8-K filed with the
Securities and Exchange Commission.
9
Prepayments on the mortgage loans may adversely affect the yield to
maturity of your securities.
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o voluntary prepayments by the mortgagors on the mortgage loans in a
trust (including payments in connection with refinancings),
o liquidations on the mortgage loans due to defaults, foreclosures
and repurchases,
o mandatory prepayments from unused moneys held in pre-funding
accounts,
o sales of mortgaged properties subject to "due-on-sale" provisions,
o proceeds from physical damage, life and disability insurance
policies, and
o proceeds from mortgage loan repurchases and substitution
adjustments.
Prepayments will affect the average life and yield to maturity of each
class of securities. This is particularly true in the case of strip securities
or securities purchased at a premium to or a discount from par. In addition, the
yield to maturity on certain other types of classes of securities, including
accrual securities or other classes in a series may be relatively more sensitive
to the rate of prepayment on the related mortgage loans than other classes of
securities.
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. The mortgage loans may be prepaid in full or in part at any time;
however, mortgagors may be required to pay prepayment penalty. Such penalties
may not become the property of the related trust.
Unused pre-funding amounts may adversely affect the yield on your
investment.
The related prospectus supplement may provide that we will deposit a
specified amount in a pre-funding account on the date the securities are issued.
In this case, the deposited funds may be used only to acquire additional
mortgage loans for the trust during a specified period after the initial
issuance of the securities. The trustee will distribute any amounts remaining in
the account at the end of that period to the owners of related securities as a
prepayment. Any such principal prepayment may adversely affect the yield to
maturity of the securities. Since prevailing interest rates are subject to
fluctuation, we cannot assure you that you will be able to reinvest the
prepayment at yields equaling or exceeding the yields on the related securities.
The yield on any such reinvestments may be significantly lower than the yield on
the securities.
The additional loans to be purchased by the trust during the
pre-funding period must satisfy the eligibility criteria specified in the
related prospectus supplement. The eligibility criteria will be determined in
consultation with each rating agency and/or the provider of credit enhancement
prior to the issuance of the securities. The additional mortgage loans may be
originated or purchased by the seller 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 the additional mortgage
loans to the trust, the aggregate characteristics of the pool of mortgage loans
may vary from those of the initial mortgage loans.
10
The ability of the trust to purchase additional mortgage loans during
the pre-funding period will depend on the ability of the seller to originate or
purchase additional mortgage loans, which may be affected by a variety of social
and economic factors, including interest rates, unemployment levels, the rate of
inflation and consumer perception of economic conditions generally.
State and federal credit protection laws may limit collection of
principal and interest on the mortgage loans.
Applicable state laws generally regulate interest rates and other
charges and require specific disclosures. In addition, other state laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the mortgage loans.
The mortgage loans may also be subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z and the Real
Estate Settlement Procedures Act and Regulation X, which require
specific disclosures to the borrowers regarding the terms of the
mortgage loans,
o the Equal Credit Opportunity Act and Regulation B, 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,
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience, and
o 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 up-front fees and charges.
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. In addition, the borrower may
be entitled to a refund of amounts previously paid and damages and
administrative sanctions from the seller or servicer.
See "Certain Legal Aspects of Mortgage Loans and Related Matters."
Book-entry registration may cause delays in payment or reduce the
liquidity of the securities.
Securities issued in book-entry form may have only limited liquidity in
the resale market, since investors may be unwilling to purchase securities for
which they cannot obtain definitive physical instruments. You will be able to
effect transactions in book-entry securities only through The Depository Trust
Company ("DTC"), its participating organizations, its indirect participants and
certain banks. As a result, your ability to transfer or pledge securities issued
in book-entry form may be limited.
You may experience some delay in the receipt of distributions of
interest on and principal on book-entry securities since the distributions will
be forwarded by the trustee to DTC for credit
11
to the accounts of its participants. In turn, these participants will credit the
distribution to your account either directly or indirectly through indirect
participants.
See "Description of the Securities--Form of Securities."
Bankruptcy proceedings could delay or reduce payments on the
securities.
We intend that each transfer of mortgage loans to the trust will
constitute a sale, rather than a pledge of the mortgage loans to secure
indebtedness. However, if the seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in bankruptcy of the
seller may argue that the sale of the mortgage loans was a pledge of the
mortgage loans rather than a sale. This claim, if presented to or accepted by a
court, could result in a delay in payment in or a reduction of payments to the
owners of the securities.
The Civil Relief Act may limit the ability to collect on the mortgage
loans.
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended, 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 the mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. The Civil Relief Act could
therefore have an effect, for an indeterminate period of time, on the ability of
the servicer to collect full amounts of interest on some of the mortgage loans.
The Civil Relief Act also imposes limitations that could impair the
servicer's ability to foreclose on an affected mortgage loan during the
mortgagor's period of active duty status. If an affected mortgage loan goes into
default, the servicer may not be able to realize upon the mortgaged property in
a timely fashion, and you could experience losses or delays in payment on your
securities.
The rating of the securities may be reduced if the creditworthiness of
the credit enhancer or the performance of the mortgage loans deteriorates.
The rating of a series of securities may depend, to a large extent, on
the creditworthiness of a third party provider of credit enhancement. In this
case, any reduction in the rating assigned to the claims-paying ability of the
provider below the rating initially given to the related securities will likely
result in a reduction in the rating of the securities. The rating of securities
that are credit enhanced by subordination or reserve amounts may be reduced if
defaults and losses on the related mortgage loans exceed the levels originally
assumed.
See "Rating" in the related prospectus supplement.
12
THE TRUSTS
A trust (each a "Trust") issuing any series of securities (the
"Securities"), which may be either Certificates or Notes will include the
primary mortgage assets ("Mortgage Assets") consisting of (A) a pool of Mortgage
Loans (a "Mortgage Pool") comprised of (i) Single Family Loans or (ii) other
loans 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 (the "Trust Estate") and will not be entitled to payments in
respect of the assets of any other related Trust Estate established by the
Seller or any of its 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 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 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 or any other Territories of the United States.
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 certain Loan-To-Value Ratios
and/or certain principal balances may be covered wholly or partially by primary
mortgage insurance policies. The "Loan-To-Value Ratio" 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 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 Owners may be guaranteed by a
Financial Guaranty Insurer.
13
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:
o 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 or from a
fixed rate to an adjustable 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 if so provided in the related Mortgage Note. 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 borrower under
the Mortgage Loan (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.
o Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate
that is different from the 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.
o Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of
time ("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.
14
o 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.
o Other Mortgage Loans may be assumable by persons meeting the then
applicable Underwriting Guidelines of the Seller.
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):
o the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans,
o the largest principal balance and the smallest principal balance
of any of the Mortgage Loans,
o the types of Mortgaged Property securing the Mortgage Loans (e.g.,
one-to-four-family houses, vacation and second homes or other real
property),
o the original terms to stated maturity of the Mortgage Loans,
o the weighted average remaining term to maturity of the Mortgage
Loans and the range of the remaining terms to maturity,
o the earliest origination date and latest maturity date of any of
the Mortgage Loans,
o the weighted average Combined Loan-to-Value Ratio and the range of
Combined Loan-to-Value Ratios of the Mortgage Loans at
origination,
o 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,
o in the case of Mortgage Loans having adjustable rates, the
weighted average of the adjustable rates and indexes, if any,
o the aggregate outstanding principal balance, if any, of Buy-Down
Loans and Mortgage Loans having graduated payment provisions,
o the amount of any mortgage pool insurance policy, special hazard
insurance policy or bankruptcy bond to be maintained with respect
to such Mortgage Pool,
15
o the amount of any standard hazard insurance required to be
maintained with respect to each Mortgage Loan,
o 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
o 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 Servicing Agreement and the Trust Agreement and the Indenture,
in the case of a series of Notes, which will be filed with the Securities and
Exchange Commission and will be made available to Owners 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 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
16
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 Seller's practice to satisfy each
senior mortgage at or prior to a foreclosure sale only to the extent that it
determines any amounts 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 Owners of the related series.
The Seller 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 Owners of the Securities of the related series. A servicer, which
unless otherwise designated in the Prospectus Supplement, will be the Seller
(the "Servicer") will service the Mortgage Loans, either directly or through
Sub-Servicers, pursuant to the Servicing Agreement and will receive a fee for
such services. A master servicer or an oversight agent (the "Oversight Agent"),
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 Oversight Agent 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 Oversight Agent. 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 Servicing Agreement as if the Servicer
alone were servicing such Mortgage Loans.
The only obligations of the Seller, the Servicer and the Originators
with respect to a series of Securities will be related to servicing and/or
providing (or, where the Seller 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 Seller'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 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 the Servicer to make advances may be subject to limitations, to
the extent provided herein and in the related Prospectus Supplement. The
Oversight Agent's contractual obligations for servicing the Mortgage Loans and
making advances will
17
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 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. The Mortgaged Properties may be located in metropolitan, suburban or
rural districts. The Mortgage Loans will be secured by liens on fee simple or
leasehold interests (in those states in which long-term ground leases are used
as an alternative to fee interests) in the Mortgaged 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 Seller or any affiliate
of the Seller, 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 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. The
Mortgaged Properties may include manufactured housing and vacation, second and
non-owner occupied homes.
Each Mortgage Loan will be selected by the Seller for inclusion in a
Mortgage Pool from among mortgage loans originated by the Seller, one or more
institutions affiliated with the Seller, (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 Seller (such unaffiliated institutions, the "Unaffiliated Originators"
and, collectively with the Affiliated Originators and the Seller, 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 Seller for inclusion in such
Mortgage Pool.
18
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).
Description of 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 or any other Territories of the United States and (iii)
consist of one or more of the following types of mortgage loans (the "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) Fixed-rate mortgage loans bearing mortgage rates that may be
reduced one or more times over the loan term if the borrower
demonstrates a satisfactory on-time payment history over a specific
time period;
(c) Adjustable-rate loans ("ARM Loans") (which may include
mortgage loans converted from fixed-rate mortgage loans or otherwise
modified) 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;
19
(d) 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;
(e) 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 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");
(f) 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
(g) 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 Seller and/or certain Originators may make certain representations
and warranties regarding the Mortgage Loans, but the Seller'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 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
Oversight Agent'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 Servicing Agreement. See "Mortgage Loan Program--Oversight
Agent." In the event that the
20
Oversight Agent assumes the role of Servicer, the Oversight Agent 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 Servicing Agreement. See "Description of the Securities--Advances."
MORTGAGE LOAN PROGRAM
As a general matter, the Seller'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 Fannie Mae due to credit characteristics that do not meet Fannie Mae
guidelines. However, certain of the Mortgage Loans will relate to Fannie Mae
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 Seller's
Mortgage Loan Program. Under the Seller's Mortgage Loan Program, the Seller
purchases and originates Mortgage Loans pursuant to three types of underwriting
guidelines: (1) standard underwriting guidelines according to the Seller's
Originator Guide, as modified from time to time, used by Affiliated Originators
and Unaffiliated Originators ("Seller's Guidelines"), (2) underwriting
guidelines utilized by Participating Originators or Designated Originators and
approved by the Seller ("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 Seller as a bulk
acquisition ("Bulk Acquisition"). The respective underwriting guidelines are
described below.
Seller's Guidelines. The Seller's Guidelines are set forth in the
Seller's Guides. The Seller'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.
The information contained herein may be updated from time to time, as set forth
in the related Prospectus Supplement. Each loan is underwritten on a case by
case basis; therefore the Seller may deviate from these guidelines where it
deems it reasonable to do so.
Substantially all loans originated or purchased by the Seller are
subjected to the Seller'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 Seller 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 $20,000 to a maximum of
$350,000, unless a higher amount is approved by the Seller's loan committee. The
21
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 Seller to approve a loan is based upon a number of
factors, including the appraised value of the property, the applicant's
creditworthiness and the Seller'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 85% combined loan-to-value ratio;
however, the Seller will originate first mortgage loans with subordinate liens
with a combined loan-to-value ratio of up to 90%. Loans secured by second
mortgages are also limited to a maximum of 85% combined loan-to-value ratio.
With respect to creditworthiness, the Seller 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 Seller's four ratings ("A" through "D," with subratings within those
categories), depending upon the following five primary factors: (i) an
applicant's mortgage history within the preceding 12 months or if the mortgage
history is not available, an applicant's FICO score (a "FICO" score is a
predictive performance measure developed by Fair, Isaac and Co.), (ii) an
applicant's derogatory credit history within the preceding 24 months, including
collections and chargeoffs, (iii) an applicant's bankruptcy history, (iv)
combined loan-to-value ratios and (v) debt-to-income ratios. Terms of loans made
by the Seller 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 following factors to
be included in the particular ratings shown below:
"A" "B" "C" "D"
--- --- --- ---
Maximum Number of Mortgage 2X30 4X30, 1X120, 1X180,
Lates 1X60, 0X150 0X210
1X90
Minimum FICO Score 620 550 500 0
Maximum Medical Only OR Not Not Not
Collections/Chargeoffs None>$500 last 12 Considered Considered Considered
mos.
Maximum Bankruptcy Discharged Discharged Discharged Discharged
24 mos. at funding at funding at funding
Maximum of Loan-to-Value 85% 85% 70% 65%
Maximum of Debt-to-Income 50% 60% 60% 60%
Ratio
The thresholds shown above represent maximum and minimum scores for
each category, and therefore it is unlikely that an application with scores
identical to those shown above will be approved.
While the Seller primarily analyzes the factors noted above, the Seller
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
22
factors such as an unsubstantiated income proof, a non-owner occupied property,
the presence of a senior mortgage or zoning restrictions on the subject
property, the inability to collect pre-payment penalties or a loan amount in
excess of $350,000.
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 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 Seller 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 Seller 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 Seller employee. After evaluation
of a minimum of three neighborhood comparables, an appraiser employed by the
Seller will complete his appraisal with an inspection of the subject property
and a meeting with the prospective borrower. The Seller hires certified
appraisers in those states which require such designation. Appraisers at the
Seller'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 $250,000, (ii) all loans in excess of $150,000 gross loan
amount, (iii) all loans with a combined loan-to-value ratio of equal to or
greater than 68%, (iv) all loan applications prepared by a new retail branch
office for the first 90 days of its existence, (v) all income properties, and
(vi) all properties with a value less than $100,000 not otherwise reviewed.
In connection with prior securitizations of the Seller'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 Seller's appraisers have been within less than 4 % of the
aggregate appraisal values on securitized loans to date as calculated by the
independent appraisers. Historically, variances in values between the Seller's
appraisal and that of independent appraisals have ranged from negative 4% to
positive 2% (based on aggregate appraisal values). A negative variance indicates
that the Seller's appraisal is more conservative that the independent appraisal
and a positive variance indicates that the Seller's appraisal is less
conservative than the independent appraisal.
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 Seller discourages waiving the rescission period but may
permit such waivers with proper documentation.
The Seller'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 Seller originates or purchases. The Seller,
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.
23
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 Seller 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 Seller 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 Seller may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Seller'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 Seller from Originators who will represent that the Mortgage Loans
have been originated in accordance with underwriting guidelines agreed to by the
Seller; the Seller 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 Seller'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 Seller. 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 Seller, as in the case of 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
Seller'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 Seller's Guidelines or any Approved Guidelines. For
example, the Seller may purchase Mortgage Loans in bulk acquisitions with
Loan-to-Value Ratios in excess of 85%, 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 Seller. The Seller 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
24
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 Seller or by a third party acting at the direction of the
Seller.
Quality Control. The Seller maintains a quality control department. All
files originated by the Seller are reviewed for the accuracy of certain data
fields as well as for legal compliance of documentation prior to disbursement of
funds. The Seller performs a quality control review on all loans acquired from
other Originators, other than certain Affiliated Originators.
The Seller 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 Seller or a third party acting at the
direction of the Seller.
Streamline Refinance Program
In March, 1999, the Seller introduced the Streamline Refinance Program
in an attempt to retain certain performing mortgage loans in the Seller's
servicing portfolio, which the Seller believes are susceptible to being
refinanced by competitors. Where the Seller believes that borrowers having
existing loans with the Seller are likely to refinance such loans due to
interest rate changes or other reasons, the Seller actively attempts to retain
such borrowers through solicitations of such borrowers to refinance with the
Seller. Such refinancings generate fee and servicing income for the Seller.
Since the solicited borrowers may refinance their existing loans in any case,
the Seller believes that this practice will be unlikely to affect the prepayment
experience of the Mortgage Loans in a material respect.
Borrowers who qualify for the program must exhibit a satisfactory or
better payment history within the last 12 months. The Seller will not typically
perform any additional income or credit verification on the borrower. No new
appraisal on the mortgaged property is required unless the previous appraisal
was performed more than 18 months from the origination date of the loan. Loans
under the Streamline Refinance Program are structured as rate and term
refinancings with no cashout except to cover minimal third party expenses and
minimal origination fees associated with the loan. All loans originated under
the program will be fixed rate fully amortizing loans.
Qualifications of Originators
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Seller for participation in the Seller's mortgage loan program.
Unaffiliated Originators that enter into agreements to sell mortgage loans to
the Seller ("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
25
time of inclusion of mortgage loans sold by it in the Trust Estate for a series
of Securities, or thereafter.
The Seller 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 Seller 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 Seller 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 Seller'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
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 Seller 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 Seller nor any other entity has assumed the representations and
warranties or made representations and warranties, neither the Seller 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 Owners 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.
26
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 Seller nor any other entity has assumed
the representations and warranties and any related losses will be borne by the
Owners or by the credit enhancement, if any.
Sub-Servicers
Each Originator of a Mortgage Loan will act as sub-servicer for such
Mortgage Loan (each, a "Sub-Servicer") 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
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 Seller of
each Mortgage Loan:
o 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;
o 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;
o each Mortgaged Property is improved by a single (one-to-four) family
residential dwelling, which may include condominiums and townhouses;
o each Mortgage Loan had, at the time of origination, either an
attorney's certification of title or a title search or title policy;
o 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
27
Schedule of Mortgage Loans subject in all cases to exceptions to title set forth
in the title insurance policy, if any, with respect to the related Mortgage
Loan;
o each Originator held good and indefeasible title to, and was the sole
owner of, each Mortgage Loan conveyed by such Originator; and
o 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 Seller; 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 Seller, 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 Seller will assign to the Trustee for the benefit of the Owners 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 Owners in such Mortgage
Loan within a time period specified in the related Servicing Agreement, such
Originator and/or the Seller will be obligated to purchase from the related
Trust such Mortgage Loan at a price (the "Loan Purchase Price") set forth in the
related 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 Seller, 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 Seller to substitute in its
place another Mortgage Loan of like kind (a "Qualified Replacement Mortgage" as
such term is defined in the related 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 three 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)
28
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 Owners),
(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 Servicing Agreement as of the date of substitution. The related
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 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 Servicing Agreement
to enforce such purchase or substitution obligations for the benefit of the
Trustee and the Owners, 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 Seller's representations has occurred, the Originator's purchase
or substitution obligation will in no event become an obligation of the Seller
or the Servicer. In the case of a Designated Originator transaction where the
Originator fails to repurchase or substitute a Mortgage Loan and neither the
Seller, 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 Seller. The foregoing will constitute the sole
remedy available to Owners or the Trustee for a breach of representation by an
Originator in its capacity as a seller of Mortgage Loans to the Seller.
Unless otherwise described in the related Prospectus Supplement, the
Seller 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 Seller 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.
29
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 Seller. While such a Sub-Servicing Agreement will be a contract solely
between the Servicer and the Sub-Servicer, the Servicing Agreement pursuant to
which a series of Securities is issued will provide that, the Trustee, the
Servicer or any Oversight Agent 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
Seller'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 Servicing Agreement from the loan proceeds. Unless specified in the
related Prospectus Supplement 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
Sub-Servicer will be required to maintain a fidelity bond and an
30
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 Servicing Agreement for
each Trust Estate will provide that any such amendment or new agreement may not
be inconsistent with such Servicing Agreement to the extent that it would
materially and adversely affect the interests of the Owners.
Oversight Agent
An Oversight Agent 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 Oversight Agent. If the Oversight
Agent is not directly servicing the Mortgage Loans, then the Oversight Agent
will (i) administer and supervise the performance by the Servicer of its
servicing responsibilities under the Servicing Agreement with the Oversight
Agent, (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 Oversight Agent shall assume the obligations of the Servicer.
The Oversight Agent will be a party to the Servicing Agreement for any
Series for which Mortgage Loans comprise the Trust Estate. The Oversight Agent
generally will be required to be a Fannie Mae- or Freddie Mac-approved
seller/servicer and, in the case of FHA Loans, approved by
31
HUD as an FHA mortgagee. The Oversight Agent will be compensated for the
performance of its services and duties under each Servicing Agreement as
specified in the related Prospectus Supplement.
DESCRIPTION OF THE SECURITIES
General
Each Trust will be created pursuant to the terms of a Pooling and
Servicing Agreement or a trust agreement to be entered into by the Seller and
the owner trustee (the "Trust Agreement"). The provisions of each agreement will
vary depending upon the nature of the Securities to be issued thereunder and the
nature of the related Trust. Securities which represent beneficial interest in
the Trust (the "Certificates") will be issued pursuant to the Pooling and
Servicing Agreement. Securities which represent debt obligations of the Trust
(the "Notes") will be issued pursuant to an Indenture. The Mortgage Loans
relating to a Series of Securities will be conveyed to the related Trust and
serviced pursuant to a Pooling and Servicing Agreement, in the case of
Certificates or pursuant to a Sale and Servicing Agreement, in the case of Notes
(each, a "Servicing Agreement"). The following summaries and the summaries set
forth under "The Pooling and Servicing Agreement" and "The Indenture" describe
certain provisions relating to each Series of Securities. The Prospectus
Supplement for a Series of Securities will describe the specific provisions
relating to such Series.
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"). 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.
32
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
Owners 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 Seller. In addition, the Seller 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 or
Indenture, as applicable, and as described in the related Prospectus Supplement,
Owners 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 Owners 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 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 Owners on such Payment Date. As may be described
in the related Prospectus Supplement, the related 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
33
additional Mortgage Loans during a specified period (rather than used to
distribute payments of principal to Owners 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 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 Owners.
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 Owners 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
Seller, the Servicer, any Sub-Servicer, any Oversight Agent, any Originator or
any of their affiliates; provided, however, that certain distributions to Owners
may be guaranteed by a Financial Guaranty Insurer.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Securities of each series will evidence specified beneficial ownership
interest in a separate Trust Estate created pursuant to the related Servicing
Agreement. A Trust Estate will consist of, to the extent provided in the related
Servicing Agreement:
o 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 related 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 Seller or any of its affiliates with respect to each such
Mortgage Loan;
o 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;
o property acquired by foreclosure of the Mortgage Loans or deed in
lieu of foreclosure;
o hazard insurance policies and primary insurance policies, if any,
and certain proceeds thereof; and
o 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
34
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 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, Owners 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 Owners 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, Owners
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 Owners. Unless and until
Physical Securities are issued, it is anticipated that the only Owner will be
Cede, as nominee of DTC, and that the beneficial holders of Securities will not
be recognized by the Trustee as Owners under the Pooling and Servicing Agreement
or the Indenture, as applicable. The beneficial holders of such Securities will
only be permitted to exercise the rights of Owners under the Pooling and
Servicing Agreement or the Indenture, as applicable, 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 Owners 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 Owners. Accordingly, although Owners will
35
not possess Securities, the rules provide a mechanism by which Owners will
receive distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Owners 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 Owners.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of an Owner 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 an Owner under a Pooling and Servicing Agreement or an Indenture, as
applicable, 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 Owners 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 Owners or their
nominees ("Physical Securities"), rather than to DTC or its nominee only under
the events specified in the related Pooling and Servicing Agreement or
Indenture, as applicable, and described in the related Prospectus Supplement.
Upon the occurrence of any of the events specified in the related Pooling and
Servicing Agreement or the Indenture, as applicable, 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 Owners.
Thereafter, payments of principal of and interest on the Securities will be made
by the Trustee directly to Owners in accordance with the procedures set forth
herein and in the Pooling and Servicing Agreement, or Indenture, as applicable.
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 Owners.
Assignment of Mortgage Loans
At the time of issuance of a series of Securities, the Seller 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 Seller or any of its affiliates may retain the Originator's
Retained Yield, if any, for
36
itself or transfer the same to others. The Trustee will, concurrently with such
assignment, deliver a series of Securities to the Seller in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to the related 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 Seller, who in turn will
deliver to the Trustee, a file consisting of:
o the original Notes or certified copies thereof, endorsed by the
Originator thereof in blank or to the order of the holder,
o 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,
o 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,
o 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 Owners,
to review each such file within 90 days after the
execution and delivery of the applicable Servicing
Agreement to ascertain that all required documents
(or certified copies of documents) have been
executed and received.
The Seller is additionally required to cause to be prepared and
submitted for recording, within 75 business days of the execution and delivery
of the applicable Servicing Agreement (or, if original recording information is
unavailable, within such later period as is permitted by the Servicing
Agreement) assignments of the Mortgages from the Seller 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 Seller, to the
Trustee; provided, however, that if the Seller furnishes 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 Seller does not cure an omission or defect in a required
document within 60 days after notice is given to it, the Seller, 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
Seller, to the extent described above under "Mortgage Loan
Program--Representations by Originators." However, neither the Servicer nor the
Oversight Agent will be obligated to purchase or substitute for such Mortgage
Loan if the Seller defaults on
37
its obligation to do so, and there is no assurance that the Seller will carry
out any such obligation. Such purchase obligation constitutes the sole remedy
available to the Owners 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 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 (a "Forward
Purchase Agreement") with the Seller whereby the Seller 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 Agreement will be
originated by the Seller 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 Seller or have not formally completed the
origination process, in each case prior to the date on which the Securities are
delivered to the Owners (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 Seller
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 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 Seller'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
38
initial ratings were assigned to the Securities of the related series. The
Seller 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 Seller 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 Seller 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 Seller 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 Seller 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 Seller 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
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 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
39
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 Owners, 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 Seller, the Oversight Agent,
any Sub-Servicer or Originator or any other person pursuant to the
terms of the 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 Owners 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 maintained with a depository institution whose debt obligations at the
time of any deposit therein meet certain rating criteria, and be:
o an account or accounts the deposits in which are fully insured to
the limits established by the FDIC,
o an account maintained at a federal savings and loan or state
banking institution,
o an account maintained at a principal subsidiary of a bank holding
company,
o an account maintained at a national banking association, or
o 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:
o direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States that are fully
guaranteed,
o Federal Funds, certificates of deposit, time and demand deposits
of any bank meeting certain short term rating requirements described in
a Servicing Agreement,
o certain investment agreements approved by the Financial Guaranty
Insurer, and commercial paper and no load mutual funds meeting certain
rating requirements described in a 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
40
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
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 Owners 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
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.
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 Seller'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 depository
institution (including the Sub-Servicer itself) whose accounts are insured by
the FDIC, provided that any such depository institution must meet certain
minimum rating criteria set forth in the Seller'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.
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.
41
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 Seller's Guidelines from time to time, will support the scheduled level of
payments due under the Buydown Mortgage Loan. Neither the Servicer nor the
Seller 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 Owners 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 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 Servicing Agreement, which generally will include the following
except as otherwise provided therein:
42
o to effect the timely remittance to the Trustee for deposit to the
Distribution Account in the amounts and in the manner provided in the
Servicing Agreement and described in "--Payments on Mortgage Loans;
Deposits to Distribution Account" above;
o 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;
o to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
o to pay the Seller 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);
o to withdraw amounts that have been deposited in the Principal and
Interest Account in error; and
o to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the
related Pooling and Servicing Agreement or Indenture, as applicable, 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 Owners 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 an Owner at a bank or other entity having
appropriate facilities therefor, if such Owner has so notified the Trustee or
the Paying Agent, as the case may be, and the related Pooling and Servicing
Agreement or Indenture, as applicable, 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 Owners of such final distribution.
43
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 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
Owner 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 Owner
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 Owners
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
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 Owners 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 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 Owners.
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
44
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 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 Servicing Agreement) of the
month of distribution (the "Determination Date"), the Servicer will provide the
Trustee, (and the Oversight Agent and Credit Enhancer, if any) with a monthly
servicing report. Except as otherwise provided in the related 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 Owners 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 Owners, 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 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 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.
45
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 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 Owners
With each distribution to Owners of a particular class the Trustee will
forward or cause to be forwarded to each Owner 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 or Indenture, as applicable, 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 Seller pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Owners in computing their market discount;
46
(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 Owner 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 is in book-entry
form, DTC will supply such reports to the Owners 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
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 or Indenture, as applicable, shall
provide that the Owners will have the right to request an Owner list. Any Owner
in a Trust may apply in writing to the related Trustee, and such application
shall state that the Owner desires to communicate with other Owners with respect
to their rights under the related Servicing Agreement. Such written request
shall be accompanied by a copy of the communication which such Owner proposes to
transmit to other Owners. The Trustee shall furnish such Owner list to such
requesting Owner within ten business days after receipt of the application.
47
Collection and Other Servicing Procedures
Acting directly or through one or more Sub-Servicers as provided in the
related Servicing Agreement, the Servicer, is required to service and administer
the Mortgage Loans in accordance with the 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 Owners and the Trustee or any of them, any and all
instruments of satisfaction or cancellation, or of partial or full release or
discharge and all other comparable instruments, with respect to the Mortgage
Loans and with respect to the related Mortgaged Properties; (ii) may consent to
any modification of the terms of any Note not expressly prohibited by the
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 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 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:
o 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,
o 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
o 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 Servicing Agreement will
require the Servicer to take into account the existence of any
48
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 Owners 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 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, 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 for entering into an assumption or substitution of liability agreement
will be retained by the 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 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 Seller's Guidelines then applicable to such
Mortgage Loan; and (iii) the lien priority of the related Mortgage is not
affected.
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 Servicing Agreement (such Mortgage Loans, "REO
Property"). In connection with such foreclosure or other conversion, the
Servicer shall
49
exercise such of the rights and powers vested in it under the related 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 35 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
Owners 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 Owners, rent the same, or any part thereof, as the Servicer
deems to be in the best interest of the Owners 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 Owners 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."
50
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 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 Securities Owners to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securities Owners. 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 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
51
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 Owners 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 Owners 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
Owners of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Seller or the related
Originator) into which certain distributions otherwise allocable to the Owners
of the Subordinate Securities may be placed; such funds would thereafter be
available to cure shortfalls in distributions to Owners 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:
o 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");
o of a type generally covered by a special hazard insurance policy
(as defined below) (any such loss, a "Special Hazard Loss");
o 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
o 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
52
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 Owners 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, Owners 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 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.
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 Owners 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 Owners, for distribution by the Trustee
to each Owner. The "insured payment" will be defined in the related Prospectus
Supplement, and will generally equal the full amount of the distributions of
principal
53
and interest to which Owners of one or more classes are entitled under the
related 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 Servicing Agreement, the Financial
Guaranty Insurer may be subrogated to the rights of each Owner to receive
payments under the Securities to the extent of any payment by such Financial
Guaranty Insurer under the related Financial Guaranty Insurance Policy.
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 Seller'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 Seller (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 Seller or the Servicer 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 Owners. The Mortgage
Pool Insurance Policies, however, are not blanket policies against loss
(typically, such 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.
54
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Seller or the Servicer 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 Owners 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 Owner 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 Seller or the Servicer 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.
55
Reserve Funds
If so provided in the related Prospectus Supplement, the Seller 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 Owners 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 Owners, 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 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.
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.
56
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 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 Seller 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 Servicing Agreement
and Indenture, as applicable, 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 Seller's or the Servicer's obligation to maintain a
particular form of credit enhancement, the Seller 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
57
obtaining any substitute or alternate form of credit enhancement, the Seller 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 Owners, 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 Owners 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
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 Owners
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
58
related 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 Seller
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 Seller, 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 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 Servicing Agreement, the
Servicer will be
59
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 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 Servicing Agreement, the Servicer shall be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage under the 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 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 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 SELLER
First Alliance Mortgage Company (the "Seller") was incorporated in the
State of California on May 13, 1975. The Seller or its affiliates have 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 current corporation and all of
its predecessors have been located in Orange County, California.
The Seller maintains its principal office at 17305 Von Karman Avenue,
Irvine, California 92614. Its telephone number is (949) 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 Servicing Agreement. The
Prospectus Supplement for each series of Securities will specify the Servicer
for such series. An affiliate of First Alliance Mortgage Company may also act as
the Servicer.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Certificates will be issued pursuant to a pooling and servicing
agreement (the "Pooling and Servicing Agreement"), and each series of Notes will
be issued pursuant to an Indenture, as described in that section. The following
summaries describe certain additional provisions common to each Pooling and
Servicing Agreement.
60
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 Owners 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 Oversight Agent 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 Seller committed to
purchase the Mortgage Loan. See "Mortgage Loan Program--Sub-Servicing by
Originators." In addition, the 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.
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 Oversight Agent, 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 Owners 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 Owners of classes of Securities entitled
to payments of interest as provided in the Prospectus Supplement and the
applicable Pooling and Servicing Agreement.
61
Evidence as to Compliance
The Servicer will be required to deliver to the Trustee, the Oversight
Agent (if applicable), the Rating Agencies and the issuer of any external credit
enhancement device (a "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 Oversight Agent (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 Financial Guaranty Insurer and the
Trustee. No such resignation will become effective until the Trustee, the
Oversight Agent or a successor Servicer has assumed the Servicer's obligations
and duties under the Pooling and Servicing Agreement. The Trustee, the Financial
Guaranty Insurer or the Owners will have the right, pursuant to the related
Pooling and Servicing Agreement, to remove the Servicer upon the occurrence of
any of:
o 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;
o 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 Oversight
Agent or any Financial Guaranty Insurer of said failure;
o 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
Owners or any Financial Guaranty Insurer, if
62
applicable, for a period of sixty (60) days after the Servicer's
discovery or receipt of notice thereof; or
o 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 Oversight Agent pursuant to
clause (iii) below, upon the occurrence of any of certain events including:
o 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 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;
o the failure by the Servicer to make any required Servicing
Advance;
o the failure of the Servicer (or the Oversight Agent, 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
o the failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest.
Resignation of the Oversight Agent
Each applicable Pooling and Servicing Agreement provides that the
Oversight Agent 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
Oversight Agent assumes such duties and obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied, the Trustee, the
Oversight Agent 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 Owner)
covering such Trust Estate and in and to the Mortgage Loans and the proceeds
thereof, whereupon the Oversight Agent, 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
Oversight Agent 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 Fannie Mae-or Freddie Mac-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 Oversight Agent is obligated to act in such capacity.
63
Amendment
Each Pooling and Servicing Agreement may be amended by the Seller, the
Servicer, the Oversight Agent 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 Owners of Securities covered by such Pooling and Servicing
Agreement:
o to cure an ambiguity,
o to correct or supplement any provision therein which may be
inconsistent with any other provision therein,
o 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 Owner, 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,
o 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 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 Owner of Securities
covered by the Pooling and Servicing Agreement, or (b) to restrict the
transfer of the REMIC Residual Securities, provided that the Seller 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 Owner or (vi) to make any changes required by law.
The Pooling and Servicing Agreement may also be amended by the Seller,
the Servicer, the Oversight Agent and the Trustee with the consent of the Owners
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 Owners 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 Owner of such Security or (ii) reduce the aforesaid percentage of Securities
of any class the Owners of which are required to consent to any such amendment
64
without the consent of the Owners 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 Seller 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 Seller or the Oversight Agent 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 Owners 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 Owners without the consent of the Owner 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
Owners 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 Owners 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 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
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 Owner, 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 Owners are
permitted to terminate the trust under the applicable Pooling and Servicing
Agreement or Indenture, a penalty may be imposed upon the Owners 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 or Indenture will
be given to each Owner, 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 Owners
are permitted to terminate the trust under the applicable Pooling and Servicing
Agreement or Indenture, a penalty may be imposed upon the Owners 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 Seller or, if applicable, the holder of the REMIC Residual
Securities at the price specified in the related
65
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 Seller 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 Owners 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 Seller and/or its
affiliates.
The Trustee may resign at any time, in which event the Seller will be
obligated to appoint a successor Trustee. The Seller 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 Seller will be obligated to appoint a successor Trustee.
The Trustee may also be removed at any time by the Owners 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.
THE INDENTURE
General
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") to be entered into between the related Trust and the related
indenture trustee (the "Indenture Trustee"). Where provisions or terms used in a
particular Indenture differ from those provided herein, a description of such
provisions or terms will be included in the related Prospectus Supplement.
The following summaries describe certain provisions of the Indenture
not described elsewhere in this Prospectus. Where particular provisions or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Notes to describe the terms and provisions of the
particular Indenture relating to such Series of Notes.
Note Events of Default
Unless otherwise specified in the Prospectus Supplement relating to a
given Series of Notes, an "Event of Default" with respect to any Series of Notes
will be defined in the respective Indenture under which such Notes are issued
as:
66
o unless otherwise specified in the Prospectus Supplement for such
Series, a default in the payment of interest on any Note of such Series
when due and payable;
o unless otherwise specified in the Prospectus Supplement for such
Series, a default in the payment of principal on any Note of such
Series when due and payable;
o a default in the observance of any covenants or agreements of the
Trust made in the Indenture or any representations and warranties of
the Trust made in the Indenture, the Sale and Servicing Agreement or
certain other documents, and the continuation of any such default for a
specified period after notice to the related Trust by the Indenture
Trustee or to the related Trust and the Indenture Trustee by the Owners
of a majority in principal amount of the Notes of such Series then
outstanding; or
o certain events of bankruptcy, insolvency, receivership or
reorganization of the related Trust, whether voluntary or involuntary.
Rights Upon Note Events of Default
Unless otherwise specified in the Prospectus Supplement relating to a
given Series of Notes, in case a Note Event of Default should occur and be
continuing with respect to a Series of Notes, the Indenture Trustee may, and on
request of Owners of not less than a majority in principal amount of the Notes
of such Series then outstanding shall, declare the principal of such Series of
Notes to be due and payable. Such declaration may under certain circumstances be
rescinded by the Owners of a majority in principal amount of the Notes of such
Series then outstanding.
If, following an Event of Default, a series of Notes has been declared
to be due and payable, the Indenture Trustee may, only at the direction of the
Financial Guaranty Insurer (unless a Financial Guaranty 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
such Notes in accordance with their terms, notwithstanding the acceleration of
the maturity of such Notes. In addition, if following an Event of Default, a
series of Notes has been declared to be due and payable, the Indenture Trustee
may, only at the direction of the Financial Guaranty Insurer, 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:
o to the payment of the fees of the Indenture Trustee and the owner
trustee which have not been previously paid;
o to the Financial Guaranty Insurer, any premium amount then due and
unpaid;
o to the Servicer for the servicing fee then due and unpaid;
o to the Owners, the amount of interest then due and unpaid on the
Notes, pro rata;
o to the Owners, the amount of principal then due and unpaid on the
Notes, pro rata;
o to the payment of amounts due and owing to the Financial Guaranty
Insurer, to the extent not previously reimbursed;
o to the Owners of adjustable rate Notes, any unpaid available funds
cap carry-forward amount; and
67
o to the holders of the Equity Securities, any remaining amounts.
The Sale and Servicing Agreement
The conveyance and servicing of the Mortgage Loans related to the
issuance of a Series of Notes will be pursuant to a sale and servicing agreement
to be entered into between the Trust, the Seller, the Servicer and the Indenture
Trustee (the "Sale and Servicing Agreement"). Where provisions or terms used in
a particular Sale and Servicing Agreement differ from those provided herein, a
description of such provisions or terms will be included in the related
Prospectus Supplement. The provisions of the Sale and Servicing Agreement
relating to the assignment and servicing of the Mortgage Loans are substantially
similar to the corresponding provisions in the Pooling and Servicing Agreement,
as described under "Description of the Securities" and "The Pooling and
Servicing Agreement."
Servicing and Other Compensation: The terms of the Sale and Servicing
Agreement relating to the Servicer's compensation are substantially as set forth
in "The Pooling and Servicing Agreement -- Servicing and Other Compensation and
Payment of Expenses; Originator's Retained Yield."
Servicing Compliance: The terms of the Sale and Servicing Agreement
relating to the Servicer's compliance with the terms of such agreement are
substantially as set forth in "The Pooling and Servicing Agreement -- Evidence
as to Compliance."
Removal and Resignation of Servicer and Oversight Agent: Pursuant to
the Sale and Servicing Agreement, the Servicer and the Oversight Agent may be
removed and may resign under conditions substantially similar to the provisions
set forth in "The Pooling and Servicing Agreement -- Removal and Resignation of
the Servicer" and "-- Resignation of the Oversight Agent," respectively.
Termination of the Trust Estate
Each Indenture will provide that the portion of the Trust Estate
relating thereto will terminate upon the payment to the Owners of all Notes of
such series from amounts other than those available under the related Financial
Guaranty 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 in the related Mortgage
Loan group, (b) the disposition of all property acquired in respect of any
Mortgage Loan in the related Mortgage Loan group remaining in the Trust Estate
or (c) the last scheduled payment date relating to such series of Notes.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by
the Owner 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
68
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 Owners 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. Owners 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 Owner 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 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 Servicing Agreement
in the event of breaches of representations made in respect of such Mortgage
Loans by the Seller, 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
69
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 Owners 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 Owners
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
70
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 Owners thereof depending
upon the price at which such Securities were purchased. In addition, with
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 Owners
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 Owner 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 Seller'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 Seller, the Servicer, nor any of their affiliates will be obligated to
refinance or repurchase any Mortgage Loan or to sell the Mortgaged Property.
71
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 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 Seller 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 Seller that 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
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 Owners 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
72
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 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 Owners.
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 Owners and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Servicer, the Seller 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.
Mortgages and Deeds of Trust
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 and
other states, 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 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
73
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
74
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.
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
75
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.
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
76
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 Owners
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
77
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.
Certain Provisions of California Deeds of Trust
Most institutional lenders in California, including the Seller, 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.
78
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 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 Owners 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
79
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 Owners 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 Seller 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 Seller 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 Seller 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 an "Owner" 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 Seller will deliver its opinion to the Seller
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 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.
80
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 Seller will deliver its opinion
to the Seller 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.
81
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 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 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 Seller will
deliver its opinion to the Seller that (unless otherwise limited in the
applicable Prospectus Supplement), assuming (i) a REMIC election is made and
(ii) 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
82
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)(B) 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.
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.
83
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.
84
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
85
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 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.
86
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 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
87
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 the Trust
Agreement, as applicable, 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.
88
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 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 Seller will deliver its opinion to the Seller that
(unless otherwise limited in the applicable Prospectus Supplement) the
Securities will be classified as debt of the Trust 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 Seller 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
89
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 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
90
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 Seller anticipates that the Prepayment Assumption
for each Series of Securities will be consistent with this standard. The Seller
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 Owner must include in gross income the sum of the "daily portions"
of original issue discount on its Security for each day during its taxable year
on which it held such Security. For this purpose, in the case of an original
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 Owners, 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
91
one month, each beginning on a payment date (or, in the case of the first such
period, the Settlement Date) and ending on the day before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The present
value of the remaining distributions referred to in the preceding sentence will
be calculated based on (i) the yield to maturity of the Security, calculated as
of the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. 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
92
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 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.
93
Backup Withholding
Certain Holders may be subject to backup withholding at the rate of 31%
with respect to interest paid on the Securities if the Holders, upon issuance,
fail to supply the Trustee or their broker with their taxpayer identification
number, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other "reportable payments" (as defined in the Code)
properly, or, under certain circumstances, fail to provide the Trustee or their
broker with a certified statement, under penalty of perjury, that they are not
subject to backup withholding.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Holder of record, the amount of interest paid
(and OID accrued, if any) on the Securities (and the amount of interest withheld
for federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only Holder of record of the Securities is
Cede, as nominee for DTC, Holders and the IRS will receive tax and other
information including the amount of interest paid on such Securities owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, indirect participants and certain other persons to complete their
reports.) Each non-exempt Holder will be required to provide, under penalty of
perjury, a certificate on IRS Form W-9 containing his or her name, address,
correct federal taxpayer identification number and a statement that he or she is
not subject to backup withholding. Should a nonexempt Holder fail to provide the
required certification, the Participants or Indirect Participants will be
required to withhold 31% of the interest (and principal) otherwise payable to
the holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Such amounts will be deemed distributed to the affected Holder for all
purposes of the Securities, the servicing agreement and any financial guaranty
insurance policies.
Final regulations dealing with backup withholding and information
reporting on income paid to a foreign person and related matters (the "New
Withholding Regulations") were published in the Federal Register on October 14,
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. The discussion set forth
above does not take the New Withholding Regulations into account. Prospective
Holders are strongly urged to consult their own tax advisor with respect to the
New Withholding Regulations.
Foreign Investors
Grantor Trust Securities and Regular Securities
The following information describes the United States federal income
tax treatment of holders that are not United States persons ("Foreign
Investors"). The term "Foreign Investor" means any person other than (i) a
citizen or resident of the United States, (ii) a corporation or partnership
(including an entity treated as a corporation or partnership for United States
federal income tax purposes) organized in or under the laws of the United States
or any state thereof including the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (iii) an estate the income of which is includible
94
in gross income for United States federal income tax purposes, regardless of its
source or (iv) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of the trust.
Notwithstanding clause (iv), to the extent provided in the regulations, certain
trusts in existence on August 20, 1996 and treated as United States persons
prior to such date that elect to continue to be so treated also shall be
considered United States persons.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Securities will be
issued in registered form, therefore if the information required by the Code is
furnished (as described below) and no other exceptions to the withholding tax
exemption are applicable, no withholding tax will apply to the Securities.
For the Securities to constitute portfolio debt investments exempt from
the United States withholding tax, the withholding agent must receive from the
Holder an executed IRS Form W-8 or substantially similar form signed under
penalty of perjury by the Holder stating that the Holder is a Foreign Investor
and providing such Holder's name and address. The statement must be received by
the withholding agent in the calendar year in which the interest payment is
made, or in either the two preceding calendar years.
A Holder that is a nonresident alien or foreign corporation will not be
subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Class A Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the Holder
in the United States, (ii) in the case of an Holder that is an individual, such
Holder is not present in the United States for 183 days or more during the
taxable year in which such sale, exchange or redemption occurs and (iii) in the
case of gain representing accrued interest, the conditions described in the
immediately preceding paragraph are satisfied.
As described above, the New Withholding Regulations were published in
the Federal Register on October 14, 1997, and generally will be effective for
payments made after December 31, 2000, subject to certain transition rules. The
discussion set forth above does not take the New Withholding Regulations into
account. Prospective Foreign Investors are strongly urged to consult their own
tax advisor with respect to the New Withholding Regulations.
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 to any exemption from
95
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 or Section 4975 of the Code. Accordingly, assets of such plans may be
invested in Securities without regard to the ERISA considerations described
below or Section 4975 of the Code, 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) (collectively, "Parties in Interest") who
have certain specified relationships to the Plans, unless a statutory,
regulatory or administrative exemption is available. Unless such an exemption is
available, certain Parties in Interest 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. Whether an investing Plan's
assets are deemed to include an interest in the assets of a Trust Estate or are
deemed merely to include its interest in the Securities under the DOL
Regulations depends upon the facts and circumstances of an investment.
Therefore, Plans should not acquire or hold Securities in reliance upon the
availability of any exception under the DOL Regulations.
Under the prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Code, the Seller, the Servicer, any Sub-Servicer, the
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof, may be considered or become Parties in
96
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, regulatory 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 Seller, 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 not only
the acquisition or holding of Securities by a Plan, but also the operation of
the Trust Estate, may constitute or involve a prohibited transaction under ERISA
and the Code.
Prohibited Transaction Exemptions
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 Seller 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
97
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 Seller
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
owners 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 are
fiduciaries.
The Prospectus Supplement for a series will set forth whether the
Trustee in respect of that series is affiliated with the Seller. 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 Seller has been advised that the second general condition
referred to above will be satisfied. The Seller 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
98
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.
In addition, the DOL has issued to certain underwriters individual
prohibited transaction exemptions (collectively, the "Exemptions"), which may be
applicable to avoid certain of the prohibited transaction provisions of Section
406(a), Section 406(b)(1) and Section 406(b)(2) of ERISA and the excise taxes
imposed pursuant to Sections 4975(a) and (b) of the Code, with respect to the
initial purchase, the holding and the subsequent resale by Plans of certificates
in pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemptions.
Among the conditions that must be satisfied for the Exemptions to apply
are the following:
(1) the acquisition of the certificates by a Plan is on
terms (including the price for the certificates) that
are at least as favorable to the Plan as they would
be in an arm's-length transaction with an unrelated
party;
(2) the rights and interests evidenced by the
certificates acquired by the Plan are not
subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of
the three highest generic rating categories from
either Standard & Poor's, Moody's, Duff & Phelps or
Fitch IBCA, Inc. (formerly known as Fitch Investors
Service, L.P.) (each, a "Rating Agency");
(4) the Trustee is not an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of
the certificates represents not more than reasonable
compensation for underwriting the certificates; the
sum of all payments made to and retained by the
Seller pursuant to the assignment of the loans to the
Trust represents not more than the fair market value
of such loans; the sum of all payments made to and
retained by any Servicer represents not more than
reasonable compensation for such person's services
under the Servicing Agreement and reimbursement of
such person's reasonable expenses in connection
therewith; and
99
(6) the Plan investing in the certificates is an
"accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The Trust must also meet the following requirements:
(i) the corpus of the Trust must consist solely
of assets of the type that have been
included in other investment pools;
(ii) certificates in such other investment pools
must have been rated in one of the three
highest rating categories of a Rating Agency
for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such
other investment pools must have been
purchased by investors other than Plans for
at least one year prior to the Plan's
acquisition of certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which the fiduciary (or its affiliate) is an obligor on the
receivables held in the trust; provided that, among other requirements, (i) in
the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in which
Plans have invested is acquired by persons independent of the Restricted Group
and at least fifty percent of the aggregate interest in the trust is acquired by
persons independent of the Restricted Group; (ii) such fiduciary (or its
affiliate) is an obligor with respect to five percent or less of the fair market
value of the obligations contained in the trust; (iii) a Plan's investment in
certificates of any class does not exceed twenty-five percent of all of the
certificates of that class outstanding at the time of the acquisition; and (iv)
immediately after the acquisition, no more than twenty-five percent of the
assets of any Plan with respect to which such person is a fiduciary are invested
in certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemptions do not apply to Plans
sponsored by the Seller, the Certificate Insurer, the Underwriters, the Trustee,
any Servicer, any obligor with respect to Mortgage Loans included in the Trust
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust, or any affiliate of such parties (the
"Restricted Group").
On July 21, 1997, the DOL published in the Federal Register amendments
to the Exemption ("PTE 97-34"), which extend exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Securities, the amendments generally allow Mortgage Loans (the "Subsequent
Mortgage Loans") supporting payments to Owners, and having a value equal to no
more than 25% of the total principal amount of the Securities being offered by
the Trust, to be transferred to the Trust within a funding period no longer than
90 days or three months following the Closing Date (the "Funding Period")
instead of requiring that all Mortgage Loans be either identified or transferred
on or before the Closing Date. The relief will apply to the purchase, sale and
holding of the Securities, provided that the following general conditions are
met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Securities being offered ("Pre-Funding Limit")
does not exceed 25%;
100
(2) all Subsequent Mortgage Loans meet the same terms and conditions
for eligibility as the original Mortgage Loans used to create the Trust, which
terms and conditions have been approved by the Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the Trust during
the Funding Period does not result in the Securities to be covered by the
Exemption receiving a lower credit rating from a Rating Agency upon termination
of the Funding Period than the rating that was obtained at the time of the
initial issuance of the Securities by the Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of the
Mortgage Loans and Subsequent Mortgage Loans in the Trust at the end of the
Funding Period is not more than 100 basis points lower than the Average Interest
Rate for the Mortgage Loans which were transferred to the Trust on the Closing
Date;
(5) in order to ensure that characteristics of the Subsequent Mortgage
Loans are substantially similar to those of the original Mortgage Loans
transferred to the Trust: (i) the characteristics of the Subsequent Mortgage
Loans are monitored by an insurer or other credit support provider which is
independent of the Seller; or (ii) an independent accountant retained by the
Seller provides the Seller with a letter (with copies provided to the Rating
Agencies rating the Securities, the Underwriters and the Trustee) stating
whether or not the characteristics of the Subsequent Mortgage Loans conform to
the characteristics described in the Prospectus or Prospectus Supplement and/or
Servicing Agreement. In preparing such letter, the independent accountant must
use the same type of procedures as were applicable to the Mortgage Loans which
were transferred to the Trust as of the Closing Date;
(6) the Funding Period ends no later than three months or 90 days after
the Closing Date or earlier in certain circumstances if the Pre-Funding Account
falls below the minimum level specified in the Servicing Agreement or an event
of default occurs;
(7) amounts transferred to any Pre-Funding Account and/or capitalized
interest account used in connection with the pre-funding may be invested only in
certain permitted investments;
(8) the Prospectus or Prospectus Supplement describes: (i) any
Pre-Funding Account and/or capitalized interest account; (ii) the duration of
the Funding Period; (iii) the percentage and/or dollar amount of the Pre-Funding
Limit for the Funding Period that will be remitted to Owners as repayments of
principal; and (iv) that the amounts remaining in the Pre-Funding Account at the
end of the Funding Period will be remitted to Owners as repayments of principal;
and
(9) the servicing agreement describes the permitted investments for the
Pre-Funding Account and/or capitalized interest account and, if not disclosed in
the Prospectus or Prospectus Supplement, the terms and conditions for
eligibility of Subsequent Mortgage Loans.
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
101
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 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
102
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 Seller 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 Seller 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 Seller
for general corporate purposes. The Seller 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 Seller,
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 Seller from such sale.
The Seller 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
Seller);
2. By placements by the Seller with institutional investors through
dealers; and
103
3. By direct placements by the Seller 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 Seller whose identities and relationships to
the Seller 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.
In connection with the sale of the Securities, underwriters may receive
compensation from the Seller 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 Seller 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 Seller.
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 Seller will indemnify the several
underwriters and the underwriters will indemnify the Seller 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 Seller and purchasers
of Securities of such series.
The Seller anticipates that the Securities offered hereby will be sold
primarily to institutional investors or be placed with individuals by the Seller
or an affiliate of the Seller. 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. Owners 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 Seller by Arter &
Hadden LLP, Washington, D.C.
104
FINANCIAL INFORMATION
The Seller 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 Rating Agencies.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Owners 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, Owners might suffer a lower than
anticipated yield and, in addition, owners 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.
105
INDEX OF PRINCIPAL DEFINITIONS
Page
----
Accrual Securities............................................................32
Affiliated Originators........................................................18
Approved Guidelines...........................................................21
APR...........................................................................15
ARM Loans.....................................................................19
Average Interest Rate........................................................101
Balloon Amount................................................................20
Balloon Loans.................................................................20
Bankruptcy Bond...............................................................55
Bankruptcy Loss...............................................................52
Bankruptcy Loss Amount........................................................52
Book-Entry Securities.........................................................35
Bulk Acquisition..............................................................21
Bulk Guidelines...............................................................21
Buydown Account...............................................................14
Buydown Agreement.............................................................42
Buydown Funds.................................................................14
Buydown Mortgage Loans........................................................14
Buydown Period................................................................14
Certificates..................................................................32
Closing Date..................................................................38
Code..........................................................................80
Combined Loan-to-Value Ratio..................................................16
Compensating Interest.........................................................45
Contract Sub-Servicers........................................................27
Conventional Loans............................................................13
Credit Enhancer...............................................................62
Cut-Off Date..................................................................15
Debt Securities...............................................................80
Defaulted Mortgage Loss.......................................................52
Deficient Valuation...........................................................55
Deleted Mortgage Loan.........................................................28
Delinquency Advances..........................................................45
Designated Originator.........................................................25
Detailed Description..........................................................13
Determination Date............................................................45
Distribution Account..........................................................40
DOL...........................................................................96
DTC...........................................................................11
Due Date......................................................................39
Due Period....................................................................33
Eligible Account..............................................................40
Equity Securities.............................................................32
ERISA.........................................................................96
ERISA Plans...................................................................96
Event of Default..............................................................66
Exemptions....................................................................99
Extraordinary Losses..........................................................53
FACO..........................................................................60
FASIT..........................................................................4
FDIC..........................................................................26
FICO..........................................................................22
Page
----
Financial Guaranty Insurance Policy...........................................53
Financial Guaranty Insurer....................................................53
Fixed-Income Securities.......................................................32
Foreign Investors.............................................................85
Forward Purchase Agreement....................................................38
Fraud Loss....................................................................52
Fraud Loss Amount.............................................................52
Freddie Mac....................................................................8
Funding Period...............................................................100
Garn-St.-Germain Act..........................................................77
Grantor Trust Estate..........................................................80
Grantor Trust Fractional Interest Security....................................81
Grantor Trust Securities......................................................80
Grantor Trust Strip Security..................................................81
Indenture.....................................................................32
Indenture Trustee.............................................................66
Index.........................................................................19
Indirect Participant..........................................................35
Insurance Paying Agent........................................................53
Insurance Proceeds............................................................39
Insured Payment...............................................................54
Interest Rate.................................................................32
IRAs..........................................................................96
IRS...........................................................................82
Junior Lien Loans.............................................................16
Letter of Credit..............................................................54
Letter of Credit Bank.........................................................54
Liquidation Proceeds..........................................................39
Loan Purchase Price...........................................................28
Loan-To-Value Ratio...........................................................13
Master Commitments............................................................24
Modified Loans................................................................20
Mortgage Asset Schedule.......................................................13
Mortgage Assets...............................................................13
Mortgage Loan Program.........................................................17
Mortgage Loans................................................................19
Mortgage Notes................................................................18
Mortgage Pool.................................................................13
Mortgage Pool Insurance Policy................................................54
Mortgage Rate.................................................................14
Mortgaged Properties..........................................................13
Mortgagor.....................................................................14
Net Liquidation Proceeds......................................................40
Net Mortgage Rate.............................................................69
New Withholding Regulations...................................................94
Note Margin...................................................................19
Notes.........................................................................32
Originators...................................................................18
Originator's Retained Yield...................................................18
Oversight Agent...............................................................17
Participants..................................................................35
Participating Originators.....................................................25
A-1
Pass-Through Rate.............................................................44
Paying Agent..................................................................43
Payment Dates.................................................................33
Percentage Interest...........................................................43
Permitted Investments.........................................................40
Physical Certificates.........................................................35
Physical Securities...........................................................36
Policy Statement.............................................................102
Pool Factor...................................................................47
Pool Insurer..................................................................42
Pooling and Servicing Agreement...............................................60
Premium Security..............................................................93
Pre-Funding Limit............................................................100
Principal Prepayments.........................................................39
Qualified Replacement Mortgage................................................28
Qualified Retirement Plans....................................................96
Rating Agency.................................................................99
REMIC..........................................................................4
Realized Loss.................................................................51
Remittance Date...............................................................41
Record Date...................................................................43
Regular Security..............................................................82
Relief Act....................................................................79
REMIC Securities..............................................................80
REMIC Trust...................................................................82
REO Property..................................................................49
Remittance Period.............................................................33
Reserve Fund..................................................................56
Residual Security.............................................................82
Restricted Group.............................................................100
Sale and Servicing Agreement..................................................68
Securities....................................................................13
Security Registrar............................................................35
Seller........................................................................60
Seller's Guidelines...........................................................21
Senior Securities.............................................................33
Servicer......................................................................17
Servicing Advances............................................................50
Servicing Agreement...........................................................32
Settlement Date...............................................................83
Single Family Loans...........................................................18
SMMEA........................................................................102
Special Hazard Amount.........................................................51
Special Hazard Insurance Policy...............................................55
Special Hazard Insurer........................................................55
Special Hazard Loss...........................................................52
Statistic Calculation Date....................................................15
Strip Securities..............................................................32
Subordinate Amount............................................................52
Subordinate Securities........................................................33
Subsequent Mortgage Loans....................................................100
Sub-Servicer..................................................................27
Sub-Servicing Account.........................................................41
Sub-Servicing Agreement.......................................................27
Tax-Favored Plans.............................................................96
Title V.......................................................................78
Title VIII....................................................................79
Trust.........................................................................13
Trust Agreement...............................................................32
Trust Estate..................................................................13
Trustee........................................................................3
UCC...........................................................................35
Unaffiliated Originators......................................................18
212354.2d
A-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Certificates or Notes, other than
underwriting discounts and commissions.*
Filing Fee for Registration Statement................... $236,300.00
Legal Fees and Expenses*................................ 703,045.00
Accounting Fees and Expenses*........................... 192,500.00
Trustee's Fees and Expenses (including counsel fees)*... 70,000.00
Printing Fees*.......................................... 91,000.00
Rating Agency Fees*..................................... 510,000.00
Financial Guaranty Insurer's Fee*....................... 92,083.00
Miscellaneous*.......................................... 406,000.00
--------------
Total............................................. $2,300,928.00
- ---------------------
* Estimated in accordance with Item 511 of Regulation S-K.
Item 15. Indemnification of Directors and Officers.
Indemnification. Under the laws which govern the organization of the
registrant, the registrant has the power and in some instances may be required
to provide an agent, including an officer or director, who was or is a party or
is threatened to be made a party to certain proceedings, with indemnification
against certain expenses, judgments, fines, settlements and other amounts under
certain circumstances.
Article IX of the By-Laws of First Alliance Mortgage Company provides
that any director, officer or employee of the corporation, and every person who
serves at the written request of the corporation (or at its oral request
subsequently confirmed in writing), as a director, officer, or employee of
another business, whether or not incorporated, in which the corporation owns
capital stock or other proprietary interest, or of which the corporation is a
creditor, may in the discretion of the Board of Directors be indemnified and
held harmless by the corporation from and against any loss, cost, liability or
expense that may be imposed on or incurred by him in connection with or
resulting from any claim, action, suit, or proceeding, civil or criminal, in
which he may become a party or otherwise involved because of his being or having
been a director, officer, or employee of the corporation, or of the other
business in which the corporation may own capital stock or other proprietary
interest, or of which the corporation is a creditor, whether or not he has this
relationship when the loss, cost, liability, or expense was imposed or incurred.
The phrase "loss, cost, liability, or expense" shall include all expenses
incurred in defense of the claim, action, suit, or proceedings and the amounts
of judgments, fines, or penalties levied or rendered against the indemnified
person, provided that no person shall be entitled to indemnity under such
section unless the Board of Directors determines in good faith that such person
is acting in good faith and within what such person reasonably believed to be
the scope of his employment or authority and for the purpose that he reasonably
believed to be in the corporation's or shareholders' best interest. Payments
authorized under such section shall include amounts paid and expenses
II-1
incurred in settling the claim, action, suit or proceeding, and expenses
incurred in settling the claim, action, suit, or proceeding, and expenses
incurred in settling the claim, action, suit or proceeding, whether actually
begun or threatened. Expenses incurred with respect to a claim, action, suit or
proceeding indemnified against under such section may be advanced by the
corporation before final disposition of the matter on receipt of an undertaking
(satisfactory in form and amount to the Board of Directors) by or on behalf of
the recipient to repay this amount if it is ultimately determined that he is not
entitled to indemnification. This right of indemnification shall not affect any
other rights to which any person may otherwise be entitled by law or contract.
The form of the Underwriting Agreement filed as Exhibit 1.1 hereto,
provides that First Alliance Mortgage Company will indemnify and reimburse the
Underwriter(s) and each director, officer and controlling person of the
Underwriter(s) with respect to certain expenses and liabilities, including
liabilities under the 1933 Act or other federal or state regulations or under
the common law, which arise out of or are based on certain material
misstatements or omissions in the Registration Statement. In addition, the
Underwriting Agreement provides that the Underwriter(s) will similarly indemnify
and reimburse First Alliance Mortgage Company and each director, officer and
controlling person of First Alliance Mortgage Company with respect to certain
material misstatements or omissions in the Registration Statement which are
based on certain written information furnished by the Underwriter(s) for use in
connection with the preparation of the Registration Statement.
Insurance. As permitted under the laws which govern the organization of
the registrant, First Alliance Mortgage Company has adopted by-laws which permit
the board of directors to purchase and maintain insurance on behalf of the
registrant's agents, including its officers and directors, against any liability
asserted against them in such capacity or arising out of such agents' status as
such, whether or not such registrant would have the power to indemnify them
against such liability under applicable law. First Alliance Mortgage Company has
a general liability policy which insures its agents, including directors and
officers, for general liability exposures.
As permitted by the Employee Retirement Income Security Act of 1974,
First Alliance Mortgage Company has obtained insurance covering all employees
entrusted with fiduciary responsibilities under certain of its employee welfare
or benefit plans. The maximum coverage provided by this policy is an aggregate
of $10,000,000 per year, subject to a maximum $50,000 deductible amount with
respect to each claim.
II-2
Item 16. Exhibits.
1.1 * -- Form of Underwriting Agreement.
3.1 * -- Articles of Incorporation of First Alliance Mortgage Company.
3.2 * -- Bylaws of First Alliance Mortgage Company.
4.1 * -- Form of Pooling and Servicing Agreement.
4.2 * -- Form of Indenture.
5.1 * -- Opinion of Arter & Hadden LLP regarding the legality of the securities
(Asset Backed Certificates).
5.2 * -- Opinion of Arter & Hadden LLP regarding the legality of the securities
(Asset Backed Notes).
8.1 * -- Opinion of Arter & Hadden LLP regarding tax matters.
10.1 * -- Form of Sale and Servicing Agreement.
10.2 * -- Form of Trust Agreement.
23.1 * -- Consent of Arter & Hadden LLP (included as part of Exhibit 5.1, 5.2 and 8.1).
24.1 * -- Powers of Attorney (included on the signature page of this
Registration Statement).
25.1 ** -- Form T-1 Statement of Eligibility of the Indenture Trustee.
- -----------------
* Incorporated by reference from the filing of September 2, 1999 made by the
Registrant on Form S-3, Registration Statement No. 333-86411.
** To be filed by amendment.
II-3
Item 17. Undertakings
A. Undertaking pursuant to Rule 415.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which is
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
B. Undertaking pursuant to Securities Exchange Act of 1934.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
C. Undertaking for Equity Offerings.
II-4
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each
purchaser.
D. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed
by the final adjudication of such issue.
E. Undertaking pursuant to Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(l) or (4) or 497(h) under the Securities Act of 1933 shall
be deemed to be part of this Registration Statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
F. Undertaking pursuant to the Trust Indenture Act of 1939.
The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the Indenture Trustee to
act under subsection (a) of Section 310 of the Trust Indenture Act (the
"Act") in accordance with the rules and regulations prescribed by the
Securities and Exchange Commission under Section 305(b)(2) of the Act.
[Remainder of Page Intentionally Left Blank]
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on the 1st day of October, 1999.
FIRST ALLIANCE MORTGAGE COMPANY
By: /s/ Francisco Nebot
--------------------------------------
Name: Francisco Nebot
Title: Executive Vice President, Chief
Financial Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Brian Chisick President (Principal Executive Officer) and
- ----------------------------- Director October 1, 1999
Brian Chisick
/s/ Francisco Nebot Executive Vice President, Chief Financial October 1, 1999
- ----------------------------- Officer (Principal Financial Officer) and
Francisco Nebot Director
/s/ Jeffrey Smith Director October 1, 1999
- -----------------------------
Jeffrey Smith