Prospectus supplement dated December 10, 1999
(To prospectus dated October 1, 1999)
$103,075,000
FIRST ALLIANCE MORTGAGE LOAN TRUST 1999-4
MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 1999-4
First Alliance
MORTGAGE
COMPANY
SELLER AND SERVICER
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-6 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 $28,000,000 7.52% annual pass-
through rate
Class A-2 $75,075,000 variable pass-through rate
equal to one-month LIBOR
plus 0.38%
o Distributions will be made monthly, commencing January 20, 2000.
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 MBIA Insurance Corporation,
guarantee payment of interest and principal on the Class A Certificates at
the times and to the extent described herein.
MBIA
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 underwriter 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 99.686% of the aggregate principal balance of the Class A
Certificates, before deducting our issuance expenses, estimated to be
approximately $370,000. 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 underwriter on or about the
closing date of December 17, 1999, in book entry form through The Depository
Trust Company, Cedelbank and the Euroclear System.
LEHMAN BROTHERS
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-6
The Portfolio of Mortgage Loans.......................S-13
Use of Proceeds.......................................S-14
The Mortgage Loan Pools...............................S-15
Prepayment and Yield Considerations...................S-26
Prepayment Assumptions................................S-29
Additional Information................................S-30
Description of the Class A Certificates...............S-30
The Seller............................................S-43
The Certificate Insurance Policies and the
Certificate Insurer.................................S-43
The Pooling and Servicing Agreement...................S-47
Certain Federal Income Tax Consequences...............S-52
ERISA Considerations..................................S-53
Ratings...............................................S-55
Legal Investment Considerations.......................S-55
Underwriting..........................................S-55
Experts...............................................S-56
Certain Legal Matters.................................S-56
Global Clearance, Settlement and Tax
Documentation Procedures.............................I-1
Form of Certificate Guaranty Insurance Policy.........II-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...................................20
Description of the Securities...........................31
Subordination...........................................49
Description of Credit Enhancement.......................51
Hazard Insurance; Claims Thereunder.....................57
The Seller..............................................58
The Servicer............................................58
The Pooling and Servicing Agreement.....................58
The Indenture...........................................64
Yield Considerations....................................66
Maturity and Prepayment Considerations..................69
Certain Legal Aspects of Mortgage Loans and
Related Matters.......................................71
Certain Federal Income Tax Consequences.................77
ERISA Considerations....................................92
Legal Investment Matters................................98
Use of Proceeds........................................100
Methods of Distribution................................100
Legal Matters..........................................101
Financial Information..................................101
Rating.................................................101
Index of Principal Definitions.........................102
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 captions "Index to Location of Principal Defined Terms" beginning on
page A-1 of this prospectus supplement and "Index of Principal Definitions" on
page 102 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 December 1, 1999, 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 Securities" in the
accompanying prospectus for more detail.
The Seller, the Trust, the Trustee and the Custodian
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 1999-4 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 The Chase Manhattan Bank and its corporate trust office is
located in New York, New York. You can reach the Trustee by telephone at
(212) 946-8600.
o The Custodian is Norwest Bank Minnesota, National Association.
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 February 28, 2000. Thereafter, First Alliance Mortgage Company may be
renewed as Servicer for consecutive terms of two months with the approval of the
Certificate Insurer. The Servicer will retain a monthly fee equal to 0.50% per
annum of 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.
The Chase Manhattan Bank, will be the Oversight Agent. The Oversight Agent will
receive a monthly
S-1
fee equal to 0.03% 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
December 1, 1999, as further described in this prospectus supplement;
o two certificate insurance policies issued by MBIA Insurance Corporation;
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 January 20, 2000.
Interest Rates
The annual interest rate on the Class A-1 Certificates is the lesser of (i) (A)
7.52% on or before the clean-up call date or (B) 8.02% after the clean-up call
date and (ii) the available funds cap for the fixed rate group described in this
prospectus supplement.
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 for the variable rate
group described in this prospectus supplement.
o The formula rate is equal to the lesser of (i) (A) LIBOR plus 0.38% on or
before the clean-up call date or (B) LIBOR plus 0.76% after the clean-up
call date and (ii) 15%.
o If the formula rate on the Class A-2 Certificates is limited by the
available funds cap for the variable rate group, the Trustee will keep
track of the amount of the interest shortfall plus interest thereon. 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" 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
S-2
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.
On the closing date, the initial level of overcollateralization for the Class
A-2 Certificates will be $1,925,000. The Class A-1 Certificates will have no
initial overcollateralization.
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 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 MBIA Insurance Corporation (the "Certificate Insurer"). In return for
an insurance premium, the Certificate Insurer will issue two 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" herein and
"Form of Certificate Guaranty Insurance Policy" in Annex II attached to 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.
S-3
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 -- March 20, 2031
o Class A-2 -- March 20, 2031
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.
Information About the Initial Mortgage Loans
On December 1, 1999, there were 826 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 December 1, 1999.
Initial Mortgage Loans in Fixed Rate Group
Number of Loans 341
Aggregate Loan Balance $25,322,654.33
Average Loan Balance $74,259.98
Range of Loan Balances $1,611.41 - $342,536.54
Range of Mortgage Rates 7.85% - 16.25%
Weighted Average Mortgage Rate 10.21%
Weighted Average Combined Original
Loan-to-Value Ratio 58.19%
Weighted Average Remaining
Term to Stated Maturity 314 Months
Range of Remaining Terms to
Stated Maturity 29 - 360 Months
Percentage of:
First Lien Mortgage Loans 94.70%
Second Lien Mortgage Loans 5.30%
Prepayment Penalty Mortgage Loans 62.21%
Properties
Single-family dwellings 90.66%
Two-to-Four family 6.93%
Condominiums 2.11%
Planned Unit Development 0.29%
Initial Mortgage Loans in Variable Rate Group
Number of Loans 485
Aggregate Loan Balance $58,871,097.89
Average Loan Balance $121,383.71
Range of Loan Balances $18,291.07 - $380,770.00
Product Type:
Six Month LIBOR 7.88%
Two Year Fixed 79.24%
Three Year Fixed 12.88%
Gross Margin Range:
Six Month LIBOR 4.95% - 10.01%
Two Year Fixed 4.49% - 7.75%
Three Year Fixed 4.95% - 7.00%
Current Weighted Average Mortgage Rate 8.95%
Range of Current Mortgage Rates 6.69% - 15.75%
Weighted Average Lifetime
Maximum Mortgage Rate 15.91%
Range of Maximum Lifetime
Mortgage Rates 13.69% - 19.95%
Weighted Average Lifetime
Minimum Mortgage Rate 8.91%
Range of Minimum Lifetime
Mortgage Rates 6.69% - 12.95%
Weighted Average Original
Loan-to-Value Ratio 66.07%
Weighted Average Remaining
Term to Stated Maturity 349 Months
Range of Remaining Terms to
Stated Maturity 67 - 360 Months
Percentage of:
First Lien Mortgage Loans 100%
Prepayment Penalty Mortgage Loans 51.54%
Properties
Single-family dwellings 89.93%
Two-to-Four family 7.22%
Condominiums 2.19%
Planned unit developments 0.66%
Subsequent Mortgage Loans
On the closing date, we will deposit a cash amount of at least $20,805,000 in a
pre-funding account. During the period from the closing date through January 28,
2000, 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 January 31, 2000 and (ii) the Class A-2 Certificates
through February 20, 2000 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 January 2000 and February 2000
payment dates, the Trustee will use the funds in the
S-4
capitalized interest account to pay you such shortfalls in interest.
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 January 28, 2000
will be paid to you on the payment date in February 2000 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 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 $10,500,000. Any such repurchase will
result in the early retirement of the Class A Certificates.
In the event the Servicer 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.
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-5
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. In
addition, approximately 92.12% of the
mortgage loans in the variable rate
group bear interest at a fixed rate for
two or three years after origination and
thereafter adjust according to an index.
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 and the initial
fixed rate period for the two year fixed
and three year fixed loans 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 for
the variable rate group, 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 62.21% and
51.54%, of the initial mortgage loans
(by aggregate principal balance) in the
fixed rate group and the variable rate
group, respectively, as of December 1,
1999 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
S-6
have due-on-sale provisions which, if
enforced by the Servicer, will result in
prepayment of the mortgage loans.
In addition, the Seller may solicit
certain borrowers to refinance their
mortgage loans under the Seller's
Streamline Refinance Program. Such
refinancings will result in a prepayment
of the related mortgage loans. See "The
Portfolio of Mortgage Loans --Streamline
Refinance Program" in this prospectus
supplement for more detail.
See "Prepayment and Yield
Considerations" in this prospectus
supplement and "Certain Legal Aspects of
Mortgage Loans and Related Matters
--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 79.24% of the initial
mortgage loans in the variable rate
group by aggregate principal balance as
of December 1, 1999 bear interest at a
fixed rate for two years after
origination and thereafter have periodic
adjustments in the same manner as the
remaining initial mortgage loans in the
variable rate group; and approximately
12.88% of the initial mortgage loans in
the variable rate group by aggregate
principal balance as of December 1, 1999
bear interest at a fixed rate for three
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
two year fixed or three year fixed loans
and are in the initial fixed rate period
is sensitive to prevailing interest
rates. The prepayment behavior of the
two year fixed and the three year fixed
loans may differ from that of the other
mortgage loans. As a two year fixed or a
three year fixed 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.
S-7
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 December 1, 1999, none of the
initial mortgage loans was delinquent
more than 30 days.
Geographic Concentration As of December 1, 1999, mortgaged
properties located in the state of
California secure approximately 39.90%
and 45.86% 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" 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; and
o regulate generally the origination,
servicing and collection process for
the mortgage loans.
For example, as of December 1, 1999,
approximately 79.34% and 62.37% of the
initial mortgage loans in the fixed rate
group and the variable rate group (by
aggregate principal balance),
respectively, are subject to the Riegle
Community Development and Regulatory
Improvement Act of 1994. The Riegle Act
incorporates the Home Ownership and
Equity Protection Act of 1994 and
certain regulations of the
Truth-In-Lending Act. The Riegle Act
imposes additional disclosure and other
requirements on creditors with respect
to non-purchase money home equity loans
with high interest rates or high upfront
fees and charges.
Depending on the specific facts and
circumstances involved, violations of
laws such as the Riegle Act may limit
the ability of the trust to
S-8
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.
See "Certain Legal Aspects of Mortgage
Loans and Related Matters" in the
accompanying prospectus for more detail.
The Seller is currently involved in a
number of lawsuits which allege that the
Seller violated certain federal and
state laws in connection with the
origination of certain mortgage loans.
See "Risk Factors -- Litigation" in this
prospectus supplement for more detail.
However, 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.
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 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
February 2000. 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 The Seller has been named as a party in
a number of lawsuits or governmental
investigations including the following:
S-9
o The Seller is a wholly owned
subsidiary of First Alliance
Corporation ("FACO"). In June 1998,
Leon Rasachack and Philip A. Ettedgui
filed a class action suit in the
Superior Court of California in the
County of Orange, on behalf of all
purchasers of FACO's Class A common
stock between April 24, 1997 through
May 15, 1998. On May 26, 1999, an
action based on substantially similar
facts and allegations was filed in the
United States District Court for the
Central District of California by
Irving Selk. Both actions allege that
FACO and certain of its present and
former officers and directors
conspired against purchasers of the
stock during the class period by
failing to disclose known material
adverse conditions in making public
statements about FACO's growth
prospects for the future. The
plaintiffs in these class action suits
are seeking an unspecified amount of
damages. The Seller has filed a motion
to dismiss the federal action, based
on the plaintiff's alleged failure to
adequately plead a dispute under the
procedures mandated by applicable law.
Discovery is proceeding in the state
action.
o On December 3, 1998, the American
Association of Retired Persons
("AARP") filed a suit against the
Seller and against certain officers
and directors of the Seller in the
Superior Court of California in the
County of Santa Clara. The suit
alleges unfair, unlawful, fraudulent
and deceptive business practices and
conspiracy. AARP seeks injunctive
relief, revocation of business
licenses, restitution and attorneys'
fees and costs. The case is currently
in the discovery phase.
o In September 1998, the Seller was
informed by the United States
Department of Justice that it and the
Attorneys General of seven states
(Arizona, Florida, Illinois,
Massachusetts, Minnesota, New York and
Washington) had initiated a joint
investigation into the lending
practices of the Seller. Currently the
Department of Justice is investigating
whether the Seller has engaged in any
violations of the Fair Housing Act or
the Equal Credit Opportunity Act. The
Seller has provided the loan data
requested by the Department of Justice
for its review.
o Late in 1998, the Attorneys General of
Massachusetts and Illinois filed
actions against the Seller. The
Illinois action challenges the
Seller's lending practices as
unconscionable or unlawful. The
Massachusetts suit seeks to enjoin the
Seller from charging rates, points and
other terms which significantly
deviate from industry-wide standards
or which are otherwise unconscionable
or unlawful. The Attorneys General
seek injunctive relief and also seek
restitution for all consumers, civil
penalties, and the costs of
investigating and prosecuting the
action, including attorneys' fees.
Discovery has commenced in the
Massachusetts action. On May 18, 1999,
the Illinois court granted the
Seller's motion to dismiss three of
four causes of action alleged in the
complaint, so that the action under
the Illinois consumer fraud act is the
sole remaining action in the Illinois
suit.
o On March 4, 1999, the Seller advised
state officials of its intent to sue
the Washington State Department of
Financial Institutions (the
"Department") and several of its
employees for damages sustained as a
result of their publication of a
series of allegedly false and
S-10
defamatory statements about the
Seller. After its on-site examination
in February 1999, the Department
demanded that the Seller produce
thousands of additional pages of
documents, as well as records
concerning the Seller's business
activities outside the State of
Washington. The Seller refused and
attempted, unsuccessfully, to reach an
agreement with the Department on these
issues. Subsequently, on May 5, 1999,
the Department threatened the Seller
with license revocation. Although the
Seller believes that the matters
raised therein are without merit, the
Seller has provided the Department
with all of the requested documents.
o The Seller and FACO are also a party
to various legal proceedings arising
out of the ordinary course of
business, including a number of
lawsuits alleging misleading lending
practices, some of which have been
filed as a class action or under
private attorney general statutes.
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 an affiliate of the
underwriter). 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.
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
S-11
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 during the remainder of the
year. See "The Seller" in this
prospectus supplement for more detail.
Limited Resale The underwriter intends to make a market
for resales of the Class A Certificates
but has 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 second 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").
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
1.00% per annum and a weighted average lifetime cap of 7.00% 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 December 1, 1999, Initial Mortgage Loans
representing an aggregate principal balance of $1,408,773.35 or 5.56% 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 Fixed Rate Group.
Variable Rate Group. As of December 1, 1999, Initial Mortgage Loans
representing an aggregate principal balance of $9,760,640.25 or approximately
16.58% 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 Variable Rate
Group.
The Seller periodically updates its underwriting guidelines, as
necessitated by changes in market conditions. Accordingly, the credit scoring
method presented in the Prospectus may not necessarily reflect the credit
scoring method used at origination for all of the Mortgage Loans. As of December
1, 1999, 81.20% and 98.86% of the Initial Mortgage Loans in the Fixed Rate Group
and the Variable Rate Group, respectively, by aggregate principal balance, were
originated under the guidelines set forth in the Prospectus under the caption
"Mortgage Loan Program - Underwriting Guidelines." The remaining Initial
Mortgage Loans were originated under the then-existing guidelines, which are not
materially different from the underwriting guidelines described in the
Prospectus.
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 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 December 1, 1999, Initial Mortgage Loans representing an
aggregate principal balance of $384,700.73 or 1.52% of the Initial Mortgage
Loans in the Fixed Rate Group by aggregate principal balance were
S-13
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 September 30, As of December 31,
(Dollars in Thousands) (Dollars in Thousands)
---------------------- ----------------------
1999 1998 1997 1996
---- ---- ---- ----
Total Servicing Portfolio........ $864,948 $802,034 $769,733 $637,903
30-59 days delinquent........ 5,512 9,144 7,718 9,359
60-89 days delinquent........ 4,740 6,097 7,521 6,704
90 days or more delinquent... 19,612 18,449 16,935 19,081
------ ------ ------ ------
Total delinquencies(1).... $29,864 $33,690 $32,174 $35,144
======= ======= ======= =======
Total Delinquency Percentage..... 3.5% 4.2% 4.2% 5.5%
REO Properties(2)................ $965 $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
September 30, December 31,
(Dollars in Thousands) (Dollars in Thousands)
---------------------------- ----------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
Average servicing portfolio (1)... $838,452 $799,979 $695,858 $614,982
Net losses (2).................... $352 $983 $1,705 $2,160
Percentage of average 0.17%(3) 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.
(3) Annualized.
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.
S-14
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 December
1, 1999 (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 January 28, 2000 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 826 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 16 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 98.41% of loans secured by
first lien mortgages on the related Mortgaged Properties and 1.59% 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 7.85% with respect to the
Fixed Rate Group and at least 6.69% with respect to the Variable Rate Group; and
a CLTV not in excess of 84.99% with respect to the Fixed Rate Group and a LTV
not in excess of 85.00% 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, and Mortgage Loans which bear an
adjustable interest rate only, in the case of the Variable Rate Group; provided,
however, that the Two Year Fixed Loans and the Three Year Fixed Loans included
in the Variable Rate Group bear interest at a fixed rate of interest for two and
three years after origination, respectively, 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 second 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. 92.93% 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 February 1, 2030. As of the Cut-Off Date, the
aggregate principal balance of all Initial Mortgage Loans in the Fixed Rate
Group was 98.04% of the aggregate principal balance of such Initial Mortgage
Loans at the times of their origination.
S-15
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............................. 341
Principal Balance
Aggregate..................................................... $25,322,654.33
Average....................................................... $74,259.98
Range......................................................... $1,611.41 - $342,536.54
Mortgage Rates
Weighted Average.............................................. 10.21%
Range......................................................... 7.85% - 16.25%
Original Term to Stated Maturity
Weighted Average.............................................. 324 months
Range......................................................... 120 - 360 months
Remaining Term to Stated Maturity
Weighted Average.............................................. 314 months
Range......................................................... 29 - 360 months
CLTV
Weighted Average.............................................. 58.19%
Range......................................................... 5.49% - 84.99%
Weighted Average Junior Lien Ratio..................................... 43.63%
Percentage of First Lien Mortgage Loans................................ 94.70%
Percentage of Second Lien Mortgage Loans............................... 5.30%
Percentage of Mortgage Loans with Prepayment Penalties................. 62.21%
Some of the aggregate percentages in the following tables may not total
100% due to rounding.
DISTRIBUTION OF CLTV'S
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
Range of CLTV's Mortgage Loans Principal Balance Principal Balance
5.01 - 10.00%....................... 1 $ 25,384.00 0.10%
10.01 - 15.00........................ 3 81,664.35 0.32
15.01 - 20.00........................ 14 496,404.12 1.96
20.01 - 25.00........................ 13 517,347.13 2.04
25.01 - 30.00........................ 11 482,260.45 1.90
30.01 - 35.00........................ 14 675,854.62 2.67
35.01 - 40.00........................ 30 1,749,117.53 6.91
40.01 - 45.00........................ 26 1,391,373.36 5.49
45.01 - 50.00........................ 22 1,641,594.65 6.48
50.01 - 55.00........................ 30 2,220,318.53 8.77
55.01 - 60.00........................ 38 3,067,788.10 12.11
60.01 - 65.00........................ 41 3,099,116.85 12.24
65.01 - 70.00........................ 38 3,686,576.97 14.56
70.01 - 75.00........................ 33 3,230,839.15 12.76
75.01 - 80.00........................ 22 2,460,143.81 9.72
80.01 - 85.00........................ 5 496,870.71 1.96
- ---------- ----
Total.......................... 341 $25,322,654.33 100.00%
=== ============== =======
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
S-16
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
5.001 - 10.000% ........................... 1 $ 20,429.00 1.52%
15.001 - 20.000 ........................... 9 225,871.52 16.84
20.001 - 25.000 ........................... 1 17,757.13 1.32
25.001 - 30.000 ........................... 2 150,722.23 11.23
30.001 - 35.000 ........................... 6 226,144.71 16.86
35.001 - 40.000 ........................... 3 125,585.89 9.36
40.001 - 45.000 ........................... 2 44,619.95 3.33
45.001 - 50.000 ........................... 2 60,477.56 4.51
50.001 - 55.000 ........................... 1 18,465.47 1.38
55.001 - 60.000 ........................... 3 122,678.79 9.14
60.001 - 65.000 ........................... 2 95,489.05 7.12
65.001 - 70.000 ........................... 1 1,611.41 0.12
70.001 - 75.000 ........................... 1 6,507.66 0.49
75.001 - 80.000 ........................... 1 104,559.60 7.79
85.001 - 90.000 ........................... 1 46,987.32 3.50
90.001 - 95.000 ........................... 1 73,693.55 5.49
- --------- ----
Total........................... 37 $1,341,600.84 100.00%
== ============= =======
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
7.501 - 8.000%.......................... 4 $ 318,828.10 1.26%
8.001 - 8.500........................... 3 543,606.22 2.15
8.501 - 9.000........................... 30 2,443,662.58 9.65
9.001 - 9.500........................... 31 3,075,644.91 12.15
9.501 - 10.000........................... 107 8,414,228.02 33.23
10.001 - 10.500........................... 39 2,885,522.17 11.40
10.501 - 11.000........................... 54 4,408,691.05 17.41
11.001 - 11.500........................... 9 672,298.30 2.65
11.501 - 12.000........................... 12 690,870.54 2.73
12.001 - 12.500........................... 4 317,423.26 1.25
12.501 - 13.000........................... 11 392,294.76 1.55
13.001 - 13.500........................... 6 205,907.45 0.81
13.501 - 14.000........................... 11 425,837.65 1.68
14.001 - 14.500........................... 6 109,336.88 0.43
14.501 - 15.000........................... 6 192,059.75 0.76
15.001 - 15.500........................... 4 147,653.02 0.58
16.001 - 16.500........................... 4 78,789.67 0.31
- --------- ----
Total........................ 341 $25,322,654.33 100.00%
=== ============== =======
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Fixed Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
Arizona........................................ 6 $ 467,020.51 1.84%
California..................................... 149 10,104,151.01 39.90
Colorado....................................... 21 1,575,120.84 6.22
Connecticut.................................... 2 207,384.65 0.82
District of Columbia........................... 5 498,383.77 1.97
Florida........................................ 7 628,634.24 2.48
Illinois....................................... 18 1,323,781.23 5.23
Maryland....................................... 8 705,535.49 2.79
Minnesota...................................... 5 476,216.82 1.88
New Jersey..................................... 19 1,343,655.38 5.31
New York....................................... 52 4,436,036.16 17.52
Ohio........................................... 11 775,479.79 3.06
Oregon......................................... 9 597,357.67 2.36
Pennsylvania................................... 11 695,441.51 2.75
Utah........................................... 5 458,222.07 1.81
Washington..................................... 12 989,363.75 3.91
Wisconsin...................................... 1 40,869.44 0.16
- --------- ----
Total........................ 341 $25,322,654.33 100.00%
=== ============== =======
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
29 - 120............................... 11 $ 314,323.83 1.24%
121 - 180............................... 73 4,051,853.21 16.00
181 - 240............................... 9 834,487.70 3.30
241 - 300............................... 1 55,006.00 0.22
301 - 360............................... 247 20,066,983.59 79.25
Total........................ 341 $25,322,654.33 100.00%
=== ============== =======
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
$ 1,000.01 - 25,000.00..................... 28 $ 510,164.25 2.01%
25,000.01 - 50,000.00..................... 78 2,987,071.56 11.80
50,000.01 - 75,000.00..................... 76 4,794,529.11 18.93
75,000.01 - 100,000.00..................... 89 7,657,790.82 30.24
100,000.01 - 125,000.00..................... 35 3,869,688.17 15.28
125,000.01 - 150,000.00..................... 19 2,596,690.09 10.25
150,000.01 - 175,000.00..................... 11 1,765,703.17 6.97
175,000.01 - 200,000.00..................... 3 559,290.62 2.21
225,000.01 - 250,000.00..................... 1 239,190.00 0.94
325,000.01 - 350,000.00..................... 1 342,536.54 1.35
- ---------- ----
Total.......................... 341 $25,322,654.33 100.00%
=== ============== =======
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.................................. 310 $22,958,766.68 90.66%
Two-to-Four Family............................. 23 1,756,108.58 6.93
Condominium.................................... 7 534,479.07 2.11
Planned Unit Development....................... 1 73,300.00 0.29
- --------- ----
Total............................... 341 $25,322,654.33 100.00%
=== ============== =======
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................................... 327 $24,643,709.67 97.32%
Investor Property................................ 14 678,944.66 2.68
-- ---------- ----
Total............................... 341 $25,322,654.33 100.00%
=== ============== =======
______________
* Based on representations of the Mortgagors at origination of the Mortgage
Loans.
S-19
Conveyance of Subsequent Mortgage Loans - Fixed Rate Group
The Pooling and Servicing Agreement permits the Trust to acquire at
least $2,677,000 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 February 1, 2030. As of the Cut-Off Date, the aggregate
principal balance of the Initial Mortgage Loans in the Variable Rate Group was
99.85% of the aggregate principal balance of such Initial Mortgage Loans at the
times of their origination. As of the Cut-Off Date, 99.75% 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).
Except as described in the following paragraph, 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 1.00% per annum and a periodic reset cap of 1.00% per
annum.
Approximately $46,649,022.21 or 79.24% 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 two years after origination and thereafter
have periodic adjustments at frequencies in the same manner as the Six-Month
LIBOR Loans (as described above) (the "Two Year Fixed Loans"); and approximately
$7,584,631.61 or 12.88% 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 three years after origination and thereafter have periodic adjustments
at frequencies in the same manner as the Six-Month LIBOR Loans (as described
above (the "Three Year Fixed Loans"). All of the Two Year Fixed Loans have a
first adjustment date that will occur in September, October, November or
December of 2001 or January or February of 2002. All of the Three Year Fixed
Loans have a first adjustment date that will occur in October, November or
December of 2002 or January or February of 2003. As of the Cut-Off Date, 7.88%,
75.97% and 16.15% of the Initial Mortgage Loans in the Variable Rate Group by
aggregate principal balance have initial periodic reset caps of 1.00%, 1.50% and
3.00% per annum, respectively. After the first adjustment, the Two Year Fixed
Loans and the Three Year Fixed Loans have a periodic reset cap of 1.00% per
annum.
The Initial Mortgage Loans in the Variable Rate Group had the following
aggregate characteristics as of the Cut-Off Date:
S-20
Aggregate Number of Initial Mortgage Loans.......................... 485
Principal Balance
Aggregate.................................................. $58,871,097.89
Average.................................................... $121,383.71
Range...................................................... $18,291.07 - $380,770.00
Current Mortgage Rate
Weighted Average........................................... 8.95%
Range...................................................... 6.69% - 15.75%
Original Term to Stated Maturity
Weighted Average........................................... 350 months
Range...................................................... 120 - 360 months
Remaining Term to Stated Maturity
Weighted Average........................................... 349 months
Range...................................................... 67 - 360 months
LTV
Weighted Average .......................................... 66.07%
Range...................................................... 11.98% - 85.00%
Percentage of First Lien Mortgage Loans............................. 100%
Percentage of Mortgage Loans with Prepayment Penalties.............. 51.54%
Gross Margin
Weighted Average .......................................... 5.49%
Range...................................................... 4.49% - 10.10%
Initial Weighted Average Rate Adjustment Cap........................ 1.70%
Subsequent Semi-Annual Rate Adjustment Cap.......................... 1.00%
Maximum Mortgage Rate
Weighted Average .......................................... 15.91%
Range...................................................... 13.69% - 19.95%
Minimum Mortgage Rate
Weighted Average .......................................... 8.91%
Range ..................................................... 6.69% - 12.95%
Some of the aggregate percentages in the following tables may not total
100% due to rounding.
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
10.01 - 15.00%................................... 2 $ 87,553.50 0.15%
15.01 - 20.00.................................... 4 147,754.00 0.25
20.01 - 25.00.................................... 5 390,560.23 0.66
25.01 - 30.00.................................... 12 712,830.00 1.21
30.01 - 35.00.................................... 12 667,521.13 1.13
35.01 - 40.00.................................... 16 1,354,198.55 2.30
40.01 - 45.00.................................... 22 1,697,076.85 2.88
45.01 - 50.00.................................... 29 3,119,045.08 5.30
50.01 - 55.00.................................... 32 3,319,465.15 5.64
55.01 - 60.00.................................... 48 5,785,722.96 9.83
60.01 - 65.00.................................... 74 8,573,894.76 14.56
65.01 - 70.00.................................... 58 8,697,108.45 14.77
70.01 - 75.00.................................... 71 10,284,118.79 17.47
75.01 - 80.00.................................... 66 8,892,968.61 15.11
80.01 - 85.00.................................... 34 5,141,279.83 8.73
-- ------------ ----
Total................................ 485 $58,871,097.89 100.00%
=== ============== =======
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
67 - 120........................................ 2 $ 56,581.41 0.10%
121 - 180........................................ 30 2,695,554.21 4.58
181 - 240........................................ 7 862,067.58 1.46
301 - 360........................................ 446 55,256,894.69 93.86
--- ------------- -----
Total............................... 485 $58,871,097.89 100.00%
=== ============== =======
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
$15,000.01 - 25,000.00 .................. 2 $ 36,763.07 0.06%
25,000.01 - 50,000.00 .................. 45 1,854,310.27 3.15
50,000.01 - 75,000.00 .................. 64 4,027,930.93 6.84
75,000.01 - 100,000.00 .................. 102 8,986,014.41 15.26
100,000.01 - 125,000.00 .................. 100 11,122,654.54 18.89
125,000.01 - 150,000.00 .................. 53 7,190,422.68 12.21
150,000.01 - 175,000.00 .................. 39 6,313,049.84 10.72
175,000.01 - 200,000.00 .................. 14 2,632,637.51 4.47
200,000.01 - 225,000.00 .................. 26 5,464,945.75 9.28
225,000.01 - 250,000.00 .................. 9 2,143,130.57 3.64
250,000.01 - 275,000.00 .................. 12 3,182,080.32 5.41
275,000.01 - 300,000.00 .................. 8 2,281,173.00 3.87
300,000.01 - 325,000.00 .................. 5 1,566,008.00 2.66
325,000.01 - 350,000.00 .................. 5 1,689,207.00 2.87
375,000.01 - 400,000.00 .................. 1 380,770.00 0.65
- ---------- ----
Total............................... 485 $58,871,097.89 100.00%
=== ============== =======
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.................................... 435 $52,943,318.65 89.93%
Two-to-Four Family............................... 32 4,250,891.83 7.22
Condominium...................................... 14 1,290,521.89 2.19
Planned Unit Development......................... 4 386,365.52 0.66
- ---------- ----
Total............................... 485 $58,871,097.89 100.00%
=== ============== =======
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................................... 468 $57,122,879.25 97.03%
Investor Property................................ 17 1,748,218.64 2.97
-- ------------ ----
Total............................... 485 $58,871,097.89 100.00%
=== ============== =======
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
6.501 - 7.000%............................ 7 $ 1,022,929.23 1.74%
7.001 - 7.500............................. 13 1,437,080.73 2.44
7.501 - 8.000............................. 64 7,951,323.33 13.51
8.001 - 8.500............................. 84 10,183,299.51 17.30
8.501 - 9.000............................. 123 15,526,391.73 26.37
9.001 - 9.500............................. 77 8,555,562.39 14.53
9.501 - 10.000............................. 64 8,905,281.05 15.13
10.001 - 10.500............................. 16 1,914,408.36 3.25
10.501 - 11.000............................. 15 1,465,014.91 2.49
11.001 - 11.500............................. 6 457,764.18 0.78
11.501 - 12.000............................. 6 721,269.75 1.23
12.001 - 12.500............................. 1 137,976.00 0.23
12.501 - 13.000............................. 3 271,048.32 0.46
13.501 - 14.000............................. 1 18,291.07 0.03
14.001 - 14.500............................. 1 31,730.61 0.05
14.501 - 15.000............................. 2 198,963.16 0.34
15.001 - 15.500............................. 1 29,398.50 0.05
15.501 - 16.500............................. 1 43,365.06 0.07
- --------- ----
Total............................... 485 $58,871,097.89 100.00%
=== ============== =======
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
13.501 - 14.000%.............................. 7 $ 1,022,929.23 1.74%
14.001 - 14.500............................... 13 1,437,080.73 2.44
14.501 - 15.000............................... 65 7,969,614.40 13.54
15.001 - 15.500............................... 87 10,403,258.16 17.67
15.501 - 16.000............................... 123 15,526,391.73 26.37
16.001 - 16.500............................... 80 8,706,670.86 14.79
16.501 - 17.000............................... 65 8,934,679.55 15.18
17.001 - 17.500............................... 17 1,965,301.65 3.34
17.501 - 18.000............................... 14 1,488,413.86 2.53
18.001 - 18.500............................... 7 536,504.97 0.91
18.501 - 19.000............................... 5 643,286.75 1.09
19.001 - 19.500............................... 1 137,976.00 0.23
19.501 - 20.000............................... 1 98,990.00 0.17
- --------- ----
Total............................... 485 $58,871,097.89 100.00%
=== ============== =======
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
6.501 - 7.000%............................. 7 $ 1,022,929.23 1.74%
7.001 - 7.500.............................. 13 1,437,080.73 2.44
7.501 - 8.000.............................. 65 7,969,614.40 13.54
8.001 - 8.500.............................. 86 10,335,252.49 17.56
8.501 - 9.000.............................. 123 15,526,391.73 26.37
9.001 - 9.500.............................. 81 8,774,676.53 14.90
9.501 - 10.000.............................. 65 8,934,679.55 15.18
10.001 - 10.500.............................. 17 1,965,301.65 3.34
10.501 - 11.000.............................. 14 1,488,413.86 2.53
11.001 - 11.500.............................. 7 536,504.97 0.91
11.501 - 12.000.............................. 5 643,286.75 1.09
12.001 - 12.500.............................. 1 137,976.00 0.23
12.501 - 13.000.............................. 1 98,990.00 0.17
- --------- ----
Total................................ 485 $58,871,097.89 100.00%
=== ============== =======
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
4.001 - 4.500%............................... 5 $ 628,327.71 1.07%
4.501 - 5.000................................ 98 11,295,630.50 19.19
5.001 - 5.500................................ 253 30,236,812.70 51.36
5.501 - 6.000................................ 70 10,675,171.50 18.13
6.001 - 6.500................................ 18 1,978,970.93 3.36
6.501 - 7.000................................ 24 2,449,270.57 4.16
7.001 - 7.500................................ 5 414,202.58 0.70
7.501 - 8.000................................ 6 870,963.00 1.48
8.001 - 8.500................................ 1 18,291.07 0.03
8.501 - 9.000................................ 1 78,740.79 0.13
9.001 - 9.500................................ 2 151,952.98 0.26
9.501 -10.000................................ 1 29,398.50 0.05
10.001 -10.500................................ 1 43,365.06 0.07
- --------- ----
Total ............................... 485 $58,871,097.89 100.00%
=== ============== =======
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Variable Rate Group
Aggregate % of Aggregate
Number of Initial Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
Arizona........................................... 13 $ 1,328,464.48 2.26%
California........................................ 191 26,996,644.93 45.86
Colorado.......................................... 19 1,949,344.38 3.31
Connecticut....................................... 6 838,034.52 1.42
District of Columbia.............................. 3 426,586.82 0.72
Florida........................................... 4 463,350.15 0.79
Illinois.......................................... 47 4,836,210.98 8.21
Maryland.......................................... 19 1,593,150.48 2.71
New Jersey........................................ 55 6,921,862.03 11.76
New York.......................................... 45 5,715,550.79 9.71
Ohio.............................................. 9 717,711.71 1.22
Oregon............................................ 15 1,453,443.28 2.47
Pennsylvania...................................... 18 1,318,769.24 2.24
Utah.............................................. 12 1,104,773.82 1.88
Washington........................................ 29 3,207,200.28 5.45
-- ------------ ----
Total................................. 485 $58,871,097.89 100.00%
=== ============== =======
Conveyance of Subsequent Mortgage Loans - Variable Rate Group
The Pooling and Servicing Agreement permits the Trust to acquire at
least $18,128,000 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 62.21% and 51.54% (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. Substantially all of the prepayment fees
relate to prepayments made during the first one-, three- or five-year period
after the origination of the related Mortgage Loan and consist of either (i) 2 -
6 months' interest on 80% - 100% of the unpaid principal balance of the Mortgage
Loan or (ii) 1% of the original principal balance of the Mortgage Loan. 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 February 2000 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 the Class A-1
Certificates or the Class A-2 Certificates.
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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 adjustable
rate mortgage loans, Two Year Fixed Loans or Three Year Fixed 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 Two Year Fixed Loans and the Three Year
Fixed Loans may differ from that of the other Mortgage Loans in the Variable
Rate Group. As a Two Year Fixed Loan or a Three Year Fixed 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.
S-27
The "Last Scheduled Payment Date" for the Class A-1 Certificates and
the Class A-2 Certificates is March 20, 2031 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 $10,500,000, 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 4% 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 1.4545% (precisely
16/11 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 20% 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 January 2000; (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 January
2000 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 December
1999 and include 30 days' interest thereon; (v) the level of Six-Month LIBOR
remains constant at 6.09%; (vi) the Class A-2 Pass-Through Rate remains constant
at 6.8475% per annum; (vii) the Oversight Agent Fee is 0.03% per annum; (viii)
the Class A Certificates are purchased on December 17, 1999 (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 the
Closing Date, 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:
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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)
------- ---- ------------------ ----------- -----------
$ 316,662.71 11.493% 10.993% 99 21
4,511,147.03 10.721 10.221 166 14
922,717.47 10.630 10.130 230 10
22,249,472.79 10.072 9.572 350 10
VARIABLE RATE GROUP
Initial and Subsequent Mortgage Loans
Current Remaining
Mortgage Rate Term to Number of
Current Net of Stated Months to Next Periodic Initial
Principal Mortgage Servicing Fee Maturity Gross Mortgage Rate Adjustment Periodic
Balance Rate Rate (in months) Margin Change Cap Adjustment Cap
------- ---- ---- ----------- ------ ------ --- --------------
$15,088,927.39 9.063% 8.563% 352 5.473% 26 1.000% 1.702%
3,726,540.83 9.267 8.767 360 5.622 27 1.000 1.500
4,871,295.36 9.180 8.680 329 5.382 38 1.000 1.500
4,562,420.71 9.603 9.103 343 6.215 6 1.000 1.000
5,042,252.99 8.426 7.926 345 5.430 18 1.000 1.900
9,191,301.19 8.666 8.166 358 5.429 24 1.000 2.002
29,468,296.26 8.943 8.443 351 5.454 25 1.000 1.779
5,048,965.26 8.704 8.204 333 5.246 37 1.000 1.500
"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 II Assumption III Assumption IV Assumption V Assumption VI
------------ ------------- -------------- ------------- ------------ -------------
Fixed Rate Group (PPC): 0% 75% 100% 125% 175% 200%
Variable Rate Group (CPR): 0% 15% 20% 30% 35% 40%
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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 ............................. 18.01 20.47 March 20, 2028
II ............................. 4.93 4.97 December 20, 2012
III ............................. 3.74 3.71 October 20, 2009
IV ............................. 2.85 2.42 August 20, 2006
V ............................. 2.03 1.99 March 20, 2005
VI ............................. 1.73 1.69 June 20, 2004
(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.
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 1999-4 (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
S-30
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 & Co., as nominee of DTC. 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 10th 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.
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 January 20, 2000 (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
S-31
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, the Class A-1
Pass-Through Rate will be equal to the
lesser of (i) (A) 7.52% per annum on each
Payment Date that occurs on or prior to the
Clean-Up Call Date, or (B) 8.02% per annum
for any Payment Date that occurs after the
Clean-Up Call Date, and (ii) the Available
Funds Cap for the Fixed Rate Group.
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 for the Variable Rate Group.
The "Class A-2 Formula Pass-Through Rate" is
the lesser of (i) (A) LIBOR plus 0.38% per
annum for any Payment Date that occurs on or
prior to the Clean-Up Call Date or (B) LIBOR
plus 0.76% per annum for any Payment Date
that occurs after the Clean-Up Call Date,
and (ii) 15% per annum.
The "Available Funds Cap" means:
o with respect to the Fixed Rate Group,
the weighted average of the Mortgage
Rates on Mortgage Loans in the Fixed
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-1
Certificates (expressed as a per annum
rate) and (c) the fee due to the
Oversight Agent (expressed as a per
annum rate) relating to the Class A-1
Certificates.
o with respect to the Variable Rate
Group, 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, 0.50%.
The Pooling and Servicing Agreement provides that if, on any Payment
Date, the Available Funds Cap with respect to the Variable Rate Group 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 with respect to the Variable Rate Group 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 Carry-Forward
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 with respect to the Variable Rate
Group 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
S-32
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
$10,500,000.
"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:
(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;
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(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.
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,
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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
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). On the Closing Date, the initial
Subordinated Amount will be $0 for the Class A-1 Certificates and $1,925,000 for
the Class A-2 Certificates.
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),
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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 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.
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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 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
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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 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 at least $20,805,000
(the "Original Pre-Funded Amount"), consisting of at least $2,677,000 to be used
by the Trust to acquire Subsequent Mortgage Loans for addition to the Fixed Rate
Group and at least $18,128,000 to be used by the Trust to acquire Subsequent
Mortgage Loans for addition to the Variable Rate Group. 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 January 28, 2000 (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.
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
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Certificates through January 31, 2000 and (ii) the Class A-2 Certificates
through February 20, 2000, 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 January 2000 and February 2000 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 Capital Markets Report (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 three 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, or in the case of the initial Payment Date, 6.4675%.
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.
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
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Book-Entry Certificates will be Cede. 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.
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.
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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, the Luxembourg Monetary
Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear Securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is a branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry 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.
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Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. Cedel or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such 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
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otherwise reacquire its securities. See "Description of the Securities --
Reports To Owners" 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 its retail
branch offices located throughout 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 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. Thus far,
the Seller has been required to replace or renovate only a small amount of its
older computer equipment to comply with 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.
The Seller has completed its contingency plan for business continuity. The plan
establishes the Seller's general approach for business continuity due to
unexpected systems failure related to the Year 2000 problem and due to disaster
recovery. The Seller has entered into an agreement with a professional disaster
planning firm which allows the Seller use of the firm's remote facilities,
computer hardware and software and operating equipment as necessary for business
continuity.
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement. The Certificate Insurer does not
accept any responsibility for the accuracy or completeness of this Prospectus
Supplement or any information or disclosure contained herein, or omitted
herefrom, other than with respect to the accuracy of the information regarding
the Certificate Insurance Policies and Certificate Insurer set forth under the
heading "The Certificate Insurance Policies and the Certificate Insurer."
Additionally, the Certificate Insurer makes no representation regarding the
Class A Certificates or the advisability of investing in the Class A
Certificates.
The Policies
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 of a Class A Certificate
that an amount equal to each full and complete Insured Payment (as described
below) 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 Insurance Policies will be issued by the Certificate
Insurer in substantially the form of policy set forth in Annex II hereto. See
"Form of Certificate Guaranty Insurance Policy" in Annex II hereto.
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The Certificate Insurer's obligations under the Certificate Insurance
Policies with respect to a particular Insured Payment will 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 will be made only at the time set forth in the Certificate Insurance
Policies and no accelerated Insured Payments will 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, any REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any liability for withholding taxes).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount (as described below) on the business day following receipt on
a business day by the Certificate Insurer's fiscal agent of the following:
o a certified copy of the order requiring the return of a
preference payment,
o an opinion of counsel satisfactory to the Certificate Insurer
that such order is final and not subject to appeal,
o an assignment in such form as is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate
Insurer all rights and claims of the owner relating to or
arising under the Class A Certificates against the debtor
which made such preference payment or otherwise with respect
to such preference payment, and
o appropriate instruments to effect the appointment of the
Certificate Insurer as agent for the owner in any legal
proceeding related to such preference payment, which
instruments are in a form satisfactory to the Certificate
Insurer,
provided that if these documents are received after 12:00 noon New York City
time on that business day, they will be deemed to be received on the following
business day. Payments by the Certificate Insurer will be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the owner and not to any owner directly
unless the owner has returned principal or interest paid on the Class A
Certificates to any receiver or trustee in bankruptcy, in which case that
payment will be disbursed to the owner.
The Certificate Insurer will pay any other amount payable under a
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of the related Payment Date or the business day following receipt in New
York, New York on a business day by State Street Bank and Trust Company, N.A.,
as fiscal agent for the Certificate Insurer or any successor fiscal agent
appointed by the Certificate Insurer of a notice from the Trustee, substantially
in the form of notice set forth in Exhibit A to Annex II hereto, specifying the
Insured Payment which is due and owing on the applicable Payment Date; provided
that if the Notice is received after 12:00 noon New York City time on that
business day, it will be deemed to be received on the following business day. If
any such notice received by the Certificate Insurer's fiscal agent is not in
proper form or is otherwise insufficient for the purpose of making a claim under
the related Certificate Insurance Policy, it will be deemed not to have been
received by the Certificate Insurer's fiscal agent for the purposes of this
paragraph, and the Certificate Insurer or the fiscal agent, as the case may be,
will promptly so advise the Trustee and the Trustee may submit an amended
notice.
Insured Payments due under a Certificate Insurance Policy, unless
otherwise stated therein will be disbursed by the Certificate Insurer's fiscal
agent to the Trustee on behalf of owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for the
payment of such Insured Payment and legally available therefor.
The fiscal agent is the agent of the Certificate Insurer only and the
fiscal agent will in no event be liable to owners for any acts of the fiscal
agent or any failure of the Certificate Insurer to deposit or cause to be
deposited sufficient funds to make payments due under the related Certificate
Insurance Policy.
As used in each Certificate Insurance Policy, the following terms shall
have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as
of December 1, 1999 among First Alliance Mortgage Company, as Seller
and Servicer and The Chase Manhattan Bank, as Trustee and Oversight
Agent, without regard to any amendment or supplement thereto unless the
Certificate Insurer has consented in writing thereto.
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"Class A Distribution Amount" has the same meaning ascribed to
such term in the Agreement as of the date of execution of such
Certificate Insurance Policy, without giving effect to any subsequent
amendment or modification to the Agreement.
"Insured Payment," with respect to the related Mortgage Loan
Group and as to any Payment Date, will equal the sum of (i) the excess,
if any, of (a) the related Class A Current Interest over (b) the
related Total Available Funds (after any deduction for the related Fees
and Expenses), (ii) the related Subordination Deficit, if any (after
applying the crosscollateralization provisions of the Agreement) and
(iii) the related Preference Amount. Insured Payments do not include
the payment of any Available Funds Cap Carry-Forward Amounts.
"Preference Amount" means any amount previously distributed to
an owner on the Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended
from time to time, in accordance with a final nonappealable order of a
court having competent jurisdiction.
Capitalized terms used in a Certificate Insurance Policy and not
otherwise defined therein shall have the respective meanings set forth in the
Agreement as of the date of execution of such Certificate Insurance Policy,
without giving effect to any subsequent amendment or modification to the
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
The Certificate Insurance Policies are not cancelable for any reason.
The premiums on the Certificate Insurance Policies are not refundable for any
reason including payment, or provision being made for payment, prior to the
maturity of the Class A Certificates.
The Certificate Insurance Policies are being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE CERTIFICATE INSURANCE POLICIES IS NOT
COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76
OF THE NEW YORK INSURANCE LAW.
The Certificate Insurer
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in,
and is subject to regulation under the laws of, all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Certificate Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is required
to maintain contingency reserves on its liabilities in specified amounts and for
specified periods of time.
Financial Information About the Certificate Insurer
The consolidated financial statements of the Certificate Insurer, a
wholly-owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1998 and December 31, 1997 and for each of the three years in the period ended
December 31, 1998, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the year
ended December 31, 1998 and the consolidated financial statements of the
Certificate Insurer and its subsidiaries as of September 30, 1999 and for the
nine-month periods ended September 30, 1999 and September 30, 1998 included in
the Quarterly Report on Form 10-Q of MBIA Inc. for the period ended September
30, 1999, are hereby incorporated by reference into this Prospectus Supplement
and shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
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All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by MBIA Inc. pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities and generally
accepted accounting principles:
Statutory Accounting
Practices
-----------------------------
December 31, September 30,
1998 1999
(Audited) (Unaudited)
(In millions)
Admitted Assets............................... $6,521 $6,930
Liabilities................................... 4,231 4,571
Capital and Surplus........................... 2,290 2,359
Generally Accepted
Accounting Principals
------------------------------
December 31, September 30,
1998 1999
(Audited) (Unaudited)
(In millions)
Assets........................................ $7,488 $7,422
Liabilities................................... 3,211 3,234
Shareholder's Equity.......................... 4,277 4,188
Where You Can Obtain Additional Information about the Certificate Insurer
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1998
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
Year 2000 Readiness Disclosure
MBIA Inc. is actively managing a high-priority Year 2000 (Y2K) program
addressing the issue of whether its computer system can correctly distinguish
between the years 1900 and 2000. MBIA Inc. has established an independent Y2K
testing lab in its Armonk office, with a committee of business unit managers
overseeing the project. MBIA Inc. has a budget of $1.13 million for its
1998-2000 Y2K efforts. As of September 30, 1999, MBIA Inc. has spent $949,000 on
the project. A recent review of efforts at certain subsidiaries has indicated
the need to spend an additional $1.03 million this year on remediation. As of
September 30, 1999, MBIA Inc. has spent $568,000 of this additional amount.
However, this increase will not have a material effect on MBIA Inc.'s financial
results.
MBIA Inc. has initiated a comprehensive Y2K plan which includes the
following phases: assessment - completed in the second quarter of 1998;
remediation - completed in the fourth quarter of 1998; testing - completed in
the second quarter of 1999; and contingency planning - completed in the third
quarter of 1999, subject to final approval by senior management and any need for
revision that might arise in the future. This plan covers "mission-critical"
internally developed systems, vendor software, hardware and certain third-party
entities through which MBIA Inc. conducts its business. Testing to date
indicates that functions critical to the financial guarantee business, both
domestic and international, were Y2K-ready as of December 31, 1998. Additional
testing will continue throughout 1999.
Financial Strength Ratings of the Certificate Insurer
Moody's rates the financial strength of the Certificate
Insurer "Aaa."
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Standard & Poor's rates the financial strength of the
Certificate Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors
Service, L.P.) rates the financial strength of the Certificate
Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the Class
A Certificates. The Certificate Insurer does not guaranty the market price of
the Class A Certificates, nor does it guaranty that the ratings on the Class A
Certificates will not be revised or withdrawn.
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 December 1, 1999 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 Custodian, on
behalf of 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 Custodian, on behalf of 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)
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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 cause the Custodian 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 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 or the Custodian 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 or the Custodian, on behalf of 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
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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.
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 0.50% 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;
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.
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The Oversight Agent
The Chase Manhattan Bank, in its capacity 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.
The Oversight Agent is a New York banking corporation with executive
offices located at 450 West 33rd Street, 15th Floor, New York, New York 10001,
and will perform its oversight agent functions through Chase Home Financing
Servicing, which is located at 1400 E. Newport Center Drive, Deerfield Beach,
Florida 33442.
The Oversight Agent has provided the foregoing information, and none of
the Seller , the Servicer or the Underwriter makes any representation or
warranty as to the accuracy and completeness of such information.
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, has assumed the Oversight
Agent's responsibilities and obligations under the Pooling and Servicing
Agreement.
The Trustee
The Chase Manhattan Bank will be appointed as Trustee (the "Trustee")
of the First Alliance Mortgage Loan Trust 1999-4. In accordance with the Pooling
and Servicing Agreement, in the event of termination of both the Servicer and
the Oversight Agent, the Trustee, or an affiliate thereof (unless the Oversight
Agent and the Trustee are the same person) 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;
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(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.
The Trustee will mail monthly reports concerning the Class A
Certificates to all registered Owners, pursuant to the Pooling and Servicing
Agreement.
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 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 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 does 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
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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 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 the REMIC.
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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 those 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, as regular interests in a REMIC, 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)(5)(B) 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
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 Exemptions," "-- 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.
The DOL has issued to Lehman Brothers Inc. an individual prohibited
transaction exemption, Prohibited Transaction Exemption 91-14 (the "Exemption"),
which generally exempts from the application 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
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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 Exemption. The loans covered by the Exemption include
mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption 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 Underwriter 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 Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses in
connection therewith; and
(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 Exemption provides 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; 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 Exemption
does not apply to Plans sponsored by the Seller, the Certificate Insurer, the
Underwriter, 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").
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.
S-54
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"). 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 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., 55 Water
Street, New York, New York 10041. 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 December
10, 1999, the Seller has agreed to cause the Trust to sell to Lehman Brothers
Inc. (the "Underwriter") and the Underwriter has agreed to purchase the Class A
Certificates.
The Underwriter has advised the Seller that it proposes 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 Underwriter
may effect such transactions by selling such Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter or purchasers of the Class A
Certificates for whom they may act as agent. Any dealers that participate with
the Underwriter in the distribution of the Class A Certificates purchased by the
Underwriter may be deemed to be underwriters, and any discounts or commissions
received by them or the Underwriter and any profit on the resale of Class A
Certificates by them or the Underwriter may be deemed to be underwriting
discounts or commissions under the Securities Act.
S-55
Proceeds to the Seller, including accrued interest, are expected to be
approximately 99.686% 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 $370,000 In connection with the
purchase and sale of the Class A Certificates, the Underwriter may be deemed to
have received compensation from the Seller in the form of underwriting
discounts.
The Seller has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
Immediately prior to the sale of the Mortgage Loans to the Trust, the
Mortgage Loans were subject to financing provided by an affiliate of the
Underwriter. 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 Underwriter that the Underwriter
presently intends to make a market in each Class of Class A Certificates, as
permitted by applicable laws and regulations. The Underwriter is 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
Underwriter. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Class A Certificates.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
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
Brown & Wood LLP, New York, New York. Certain legal matters relating to the
Certificate Insurer and the Certificate Insurance Policies will be passed upon
for the Certificate Insurer by Kutak Rock LLP, Omaha, Nebraska.
S-56
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered First
Alliance Mortgage Loan Trust 1999-4 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.
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,
I-1
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 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.
I-2
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:
(1) 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;
(2) 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
(3) 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.
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
I-3
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
ANNEX II
FORM OF CERTIFICATE GUARANTY INSURANCE POLICY
OBLIGATIONS: $[ ] POLICY NUMBER: [ ]
First Alliance Mortgage Loan Trust 1999-4
[Class A-1 or Class A-2] [Fixed or
Variable] Rate Group Certificates
Mortgage Loan Asset Backed Certificates
Series 1999-4
MBIA Insurance Corporation (the "Insurer"), in consideration of the
payment of the premium and subject to the terms of this Certificate Guaranty
Insurance Policy (this "Policy"), hereby unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete [Group I
or Group II] Insured Payment will be received from the Insurer by The Chase
Manhattan Bank, or its successor, as trustee for the Owners (the "Trustee"), on
behalf of the Owners from the Insurer, for distribution by the Trustee to each
Owner of each Owner's proportionate share of the [Group I or Group II] Insured
Payment. The Insurer's obligation hereunder with respect to a particular [Group
I or Group II] Insured Payment shall be discharged to the extent funds equal to
the applicable [Group I or Group II] Insured Payment are received by the
Trustee, whether or not such funds are properly applied by the Trustee. [Group I
or Group II] Insured Payments shall be made only at the time set forth in this
Policy, and no accelerated [Group I or Group II] Insured Payments shall be made
regardless of any acceleration of the Obligations, unless such acceleration is
at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, this Policy does not cover
shortfalls, if any, attributable to the liability of the Trust, any REMIC or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Insurer will pay any [Group I or Group II] Insured Payment that is
a [Group I or Group II] Preference Amount on the Business Day following receipt
on a Business Day by the Fiscal Agent (as described below) of (a) a certified
copy of the order requiring the return of a preference payment, (b) an opinion
of counsel satisfactory to the Insurer that such order is final and not subject
to appeal, (c) an assignment in such form as is reasonably required by the
Insurer, irrevocably assigning to the Insurer all rights and claims of the Owner
relating to or arising under the Obligations against the debtor which made such
preference payment or otherwise with respect to such preference payment and (d)
appropriate instruments to effect the appointment of the Insurer as agent for
such Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Insurer, provided that, if such
documents are received after 12:00 noon, New York City time, on such Business
Day, they will be deemed to be received on the following Business Day. Such
payments shall be disbursed to the receiver or trustee in bankruptcy named in
the final order of the court exercising jurisdiction on behalf of the Owner and
not to any Owner directly unless such Owner has returned principal or interest
paid on the Obligations to such receiver or trustee in bankruptcy, in which case
such payment shall be disbursed to such Owner.
The Insurer will pay any other amount payable hereunder no later than
12:00 noon, New York City time, on the later of the Payment Date on which the
[Group I or Group II] Distribution Amount is due or the Business Day following
receipt in New York, New York on a Business Day by State Street Bank and Trust
Company, N.A., as Fiscal Agent for the Insurer, or any successor fiscal agent
appointed by the Insurer (the "Fiscal Agent") of a Notice (as described below);
provided that, if such Notice is received after 12:00 noon, New York City time,
on such Business Day, it will be deemed to be received on the following Business
Day. If any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making claim hereunder, it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Trustee and the Trustee may submit an amended Notice.
[Group I or Group II] Insured Payments due hereunder, unless otherwise
stated herein, will be disbursed by the Fiscal Agent to the Trustee on behalf of
the Owners by wire transfer of immediately available funds in the amount of the
[Group I or Group II] Insured Payment less, in respect of [Group I or Group II]
Insured Payments related to [Group I or Group II] Preference Amounts, any amount
held by the Trustee for the payment of such [Group I or Group II] Insured
Payment and legally available therefor.
II-1
The Fiscal Agent is the agent of the Insurer only and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under this Policy.
As used herein, the following terms shall have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of
December 1, 1999 among First Alliance Mortgage Company, as Seller and as
Servicer and The Chase Manhattan Bank, as Trustee and Oversight Agent, without
regard to any amendment or supplement thereto unless the Insurer shall have
consented in writing thereto.
"Business Day" means any day other than (a) a Saturday or a Sunday (b)
a day on which the Insurer is closed or (c) a day on which banking institutions
in New York City or in the city in which the corporate trust office of the
Trustee under the Agreement is located are authorized or obligated by law or
executive order to close.
"[Group I or Group II] Distribution Amount" means the [Class A-1 or
Class A-2] Distribution Amount.
"[Group I or Group II] Insured Payment" with respect to the [Class A-1
or Class A-2] Certificates and as to any Payment Date, will equal the sum of (i)
the excess, if any, of (a) the [Class A-1 or Class A-2] Current Interest over
(b) the [Group I or Group II] Total Available Funds (after any deduction for the
Fees and Expenses allocable to [Group I or Group II]), (ii) the [Group I or
Group II] Subordination Deficit, if any (after applying the cross
collateralization provisions of Section 7.5(d)(ii)(A) and (B) of the Agreement)
and (iii) the [Group I or Group II] Preference Amount. [Group II Insured
Payments do not include the payment on the Class A-2 Certificates of any Group
II Available Funds Cap Carry-Forward Amounts.]
"[Group I or Group II] Preference Amount" means any amount previously
distributed to an Owner on the [Class A-1 or Class A-2] Certificates that is
recoverable and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended
from time to time, in accordance with a final nonappealable order of a court
having competent jurisdiction.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy substantially in the form of Exhibit A attached hereto,
the original of which is subsequently delivered by registered or certified mail,
from the Trustee specifying the [Group I or Group II] Insured Payment which
shall be due and owing on the applicable Payment Date.
"Owner" means each Owner of a [Class A-1 or Class A-2] Certificate (as
defined in the Agreement) who, on the applicable Payment Date, is entitled under
the terms of the applicable [Class A-1 or Class A-2] Certificate to payment
thereunder.
Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Agreement as of the date of
execution of this Policy, without giving effect to any subsequent amendment to
or modification of the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal Agent may be
made at the address listed below for the Fiscal Agent or such other address as
the Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006 Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
THIS POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND SHALL BE
CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF.
The insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
This Policy is not cancelable for any reason. The premium on this
Policy is not refundable for any reason, including payment, or provision being
made for payment, prior to maturity of the Obligations.
II-2
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed
and attested this 17th day of December 1999.
MBIA INSURANCE CORPORATION
By
---------------------------------
Title
------------------------------
Attest:
By
-------------------------------
Secretary
II-3
EXHIBIT A
TO CERTIFICATE GUARANTY INSURANCE POLICY
NUMBER: [ ]
NOTICE UNDER CERTIFICATE GUARANTY
INSURANCE POLICY NUMBER: [ ]
State Street Bank and Trust Company, N.A., as Fiscal Agent
for MBIA Insurance Corporation
15th Floor
61 Broadway
New York, NY 10006
Attention: Municipal Registrar
and Paying Agency
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorized officer of ______________________,
as trustee (the "Trustee"), hereby certifies to State Street Bank and Trust
Company, N.A. (the "Fiscal Agent") and MBIA Insurance Corporation (the
"Insurer"), with reference to Certificate Guaranty Insurance Policy Number: [ ]
(the "Policy") issued by the Insurer in respect of the $[ ] First Alliance
Mortgage Loan Trust 1999-4, [Class A-1 or Class A-2] [Fixed or Variable] Rate
Group Certificates, Mortgage Loan Asset Backed Certificates Series 1999-4 (the
"Obligations"), that:
(i) the Trustee is the trustee under the Pooling and Servicing
Agreement dated as of December 1, 1999 (the "Agreement") among First
Alliance Mortgage Company, as Seller and as Servicer, the Oversight
Agent and the Trustee, as trustee for the Owners;
(ii) the excess, if any, of (a) the [Class A-1 or Class A-2]
Current Interest for the Payment Date over (b) the [Group I or Group
II] Total Available Funds (after any deduction for the Fees and
Expenses allocable to [Group I or Group II]) occurring on
________________ (the "Applicable Payment Date") is $___________;
(iii) the [Group I or Group II] Subordination Deficit (after
applying the cross collateralization provisions of Section
7.5(d)(ii)(A) and (B) of the Agreement) for the Applicable Payment Date
is $________;
(iv) the [Group I or Group II] Preference Amount is
$___________________;
(v) the sum of the amounts set forth in (ii), (iii) and (iv)
above is $________________ (the "[Group I or Group II] Insured
Payment");
(vi) the Trustee is making a claim under and pursuant to the
terms of the Policy for the [Group I or Group II] Insured Payment to be
applied to the payment of the sum of (ii), (iii) and (iv) above for the
Applicable Payment Date in accordance with the Agreement; and
(vii) the Trustee directs that payment of the [Group I or
Group II] Insured Payment be made to the following account by bank wire
transfer of federal or other immediately available funds in accordance
with the terms of the Policy: [Certificate Account].
II-A-1
Any Person Who Knowingly And With Intent To Defraud Any Insurance
Company Or Other Person Files An Application For Insurance Or Statement
Of Claim Containing Any Materially False Information, Or Conceals For
The Purpose Of Misleading, Information Concerning Any Fact Material
Thereto, Commits A Fraudulent Insurance Act, Which Is A Crime, And
Shall Also Be Subject To A Civil Penalty Not To Exceed Five Thousand
Dollars And The Stated Value Of The Claim For Each Such Violation.
Any capitalized term used in this Notice and not otherwise defined
herein shall have the meaning assigned thereto in the Policy.
IN WITNESS WHEREOF, the Trustee has executed and
delivered this Notice under the Policy as of the ____ day of
_________________ , .
[TRUSTEE]
By
---------------------------------
Title
------------------------------
II-A-2
[THIS PAGE INTENTIONALLY LEFT BLANK.]
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
AARP.............................................S-10
Accrual Period...................................S-33
Actuarial Loans..................................S-26
Advances.........................................S-31
Agreement........................................S-44
Appraised Values.................................S-16
Available Funds..................................S-38
Available Funds Cap..............................S-32
Available Funds Cap Carry-Forward Amount.........S-32
Available Funds Shortfall........................S-37
Beneficial Owners................................S-39
Book-Entry Certificates..........................S-39
Capitalized Interest Account.....................S-38
Cede.............................................S-39
Cedel............................................S-39
Cedel Participants...............................S-41
Certificate Account..............................S-31
Certificate Insurer...............................S-3
Certificate Principal Balance....................S-30
Certificates.....................................S-30
Chase............................................S-39
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-30
Clean-Up Call Date...............................S-33
Closing Date.....................................S-28
CLTV.............................................S-15
Code.............................................S-51
Compensating Interest............................S-48
Cooperative......................................S-41
CPR..............................................S-28
Cut-Off Date.....................................S-15
Definitive Certificate...........................S-39
Delinquency Advances.............................S-48
Department.......................................S-10
DOL..............................................S-53
DTC..............................................S-39
DTC Participants.................................S-41
Due Period.......................................S-34
Euroclear........................................S-39
Euroclear Operator...............................S-41
Euroclear Participants...........................S-41
European Depositaries............................S-39
Excess Subordinated Amount.......................S-35
Exemption........................................S-53
FACO.............................................S-10
Fannie Mae.......................................S-27
Fees and Expenses................................S-34
Final Determination..............................S-51
Financial Intermediary...........................S-40
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-38
Group............................................S-13
Initial Mortgage Loans...........................S-13
Insured Payment:.................................S-45
Insurer Reimbursable Amount......................S-37
Interest Carry Forward Amount....................S-33
Interest Determination Date......................S-39
Junior Lien Ratio................................S-17
Last Scheduled Payment Date......................S-28
LIBOR............................................S-39
Liquidated Mortgage Loan.........................S-34
LTV..............................................S-15
Modeling Assumptions.............................S-28
Moody's..........................................S-55
Mortgage Loan Group..............................S-13
Mortgaged Properties.............................S-13
Mortgages........................................S-13
Mortgagor........................................S-26
Net Monthly Excess Cashflow......................S-37
Net Monthly Excess Spread........................S-35
Notes............................................S-15
OID..............................................S-53
Original Pre-Funded Amount.......................S-38
Originators......................................S-13
Oversight Agent..................................S-50
Oversight Agent Fee..............................S-50
Owners...........................................S-31
Participants.....................................S-39
Payment Date.....................................S-31
Percentage Interest..............................S-32
Plan.............................................S-53
Plan Asset Regulation............................S-53
Pooling and Servicing Agreement..................S-47
PPC..............................................S-28
Preference Amount:...............................S-45
Pre-Funded Amount................................S-38
Pre-Funding Account..............................S-38
Prepayment.......................................S-26
Prepayment Assumption............................S-28
Principal Carry-Forward Amount...................S-34
Rating Agency....................................S-54
Realized Loss....................................S-36
Record Date......................................S-32
Relevant Depositary..............................S-39
REMIC............................................S-52
Remittance Date..................................S-31
A-1
Remittance Period................................S-31
Restricted Group.................................S-54
Rules............................................S-40
Schedules of Mortgage Loans......................S-47
Servicing Fee....................................S-49
Servicing Fee Rate...............................S-49
Six-Month LIBOR Loans............................S-20
Specified Subordinated Amount....................S-35
Standard & Poor's................................S-55
Subordinated Amount..............................S-35
Subordination Deficit............................S-36
Subordination Increase Amount....................S-35
Subordination Reduction Amount...................S-36
Subsequent Mortgage Loans........................S-15
Subsequent Transfer Date.........................S-38
Telerate Page 3750...............................S-39
Terms and Conditions.............................S-41
Three Year Fixed Loans...........................S-20
Total Available Funds............................S-38
Total Monthly Excess Cashflow....................S-37
Total Monthly Excess Spread......................S-35
Trust............................................S-30
Trustee..........................................S-50
Two Year Fixed Loans.............................S-20
Underwriter......................................S-55
Variable Rate Group..............................S-13
Variable Rate Group Available Funds..............S-38
Variable Rate Group Total Available Funds........S-38
A-2
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
- --------------------------------------------------------------------------------
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 series of securities only if
accompanied by a prospectus supplement for that series.
- --------------------------------------------------------------------------------
Each Trust --
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 October 1, 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
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.
i
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.
ii
TABLE OF CONTENTS
Caption Page
- ------- ----
SUMMARY OF TERMS....................................1
RISK FACTORS........................................6
THE TRUSTS.........................................13
The Mortgage Loans--General....................13
Single Family Loans............................17
THE MORTGAGE POOLS.................................18
General........................................18
Description of the Mortgage Pools..............19
MORTGAGE LOAN PROGRAM..............................20
Underwriting Guidelines........................21
Streamline Refinance Program...................24
Qualifications of Originators..................25
Sub-Servicers..................................26
Representations by Originators.................27
Sub-Servicing by Originators...................29
Oversight Agent................................30
DESCRIPTION OF THE SECURITIES......................31
General........................................31
General Payment Terms of Securities............32
Form of Securities.............................34
Assignment of Mortgage Loans...................35
Forward Commitments; Pre-Funding...............37
Payments on Mortgage Loans; Deposits
to Distribution Account........................38
Withdrawals from the Principal and
Interest Account...............................41
Distributions..................................42
Principal and Interest on the Securities.......43
Advances.......................................44
Reports to Owners..............................45
Collection and Other Servicing Procedures......46
Realization upon Defaulted Mortgage Loans......48
SUBORDINATION......................................49
DESCRIPTION OF CREDIT ENHANCEMENT..................51
Financial Guaranty Insurance Policies..........52
Letter of Credit...............................52
Mortgage Pool Insurance Policies...............53
Special Hazard Insurance Policies..............53
Bankruptcy Bonds...............................53
Reserve Funds..................................54
Other Insurance, Guarantees and Similar
Instruments or Agreements......................54
Cross-Support..................................54
Overcollateralization..........................55
Cross-Collateralization........................55
Maintenance of Credit Enhancement..............55
Reduction or Substitution of Credit
Enhancement....................................56
HAZARD INSURANCE; CLAIMS
THEREUNDER.........................................57
Hazard Insurance Policies......................57
THE SELLER.........................................58
THE SERVICER.......................................58
Caption Page
- ------- ----
THE POOLING AND SERVICING
AGREEMENT..........................................58
Servicing and Other Compensation and Payment
of Expenses; Originator's Retained Yield.......58
Evidence as to Compliance......................59
Removal and Resignation of the Servicer........60
Resignation of the Oversight Agent.............61
Rights Upon Event of Default...................61
Amendment......................................61
Termination; Retirement of Securities..........63
The Trustee....................................63
THE INDENTURE......................................64
General........................................64
Note Events of Default.........................64
Rights Upon Note Events of Default.............65
The Sale and Servicing Agreement...............65
Termination of the Trust Estate................66
YIELD CONSIDERATIONS...............................66
MATURITY AND PREPAYMENT CONSIDERATIONS.............69
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
RELATED MATTERS....................................71
Mortgages and Deeds of Trust...................71
Foreclosure....................................71
Rights of Redemption...........................72
Anti-Deficiency Legislation and Other
Limitations on Lenders.........................72
Environmental Legislation......................74
Enforceability of Certain Provisions...........74
Certain Provisions of California Deeds of
Trust..........................................75
Applicability of Usury Laws....................76
Alternative Mortgage Instruments...............76
Soldiers'and Sailors'Civil Relief
Act of 1940....................................77
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............77
General........................................77
Grantor Trust Securities.......................78
REMIC Securities...............................79
Sales of REMIC Securities......................84
Debt Securities................................86
Discount and Premium...........................87
Backup Withholding.............................90
Foreign Investors..............................91
ERISA CONSIDERATIONS...............................92
Plan Asset Regulations.........................93
Prohibited Transaction Exemptions..............94
Tax Exempt Investors...........................98
Consultation With Counsel......................98
LEGAL INVESTMENT MATTERS...........................98
USE OF PROCEEDS...................................100
METHODS OF DISTRIBUTION...........................100
LEGAL MATTERS.....................................101
FINANCIAL INFORMATION.............................101
RATING............................................101
INDEX OF PRINCIPAL DEFINITIONS....................102
iii
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
1
will not be guaranteed by any governmental 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:
A portion of the principal collected on certain mortgage loans may be (i)
retained by the trustee
3
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.
6
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 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
7
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.
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,
8
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.
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."
9
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.
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.
10
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.
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
11
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 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.
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:
13
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.
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
14
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 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
16
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 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
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("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.
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).
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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;
(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
19
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 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.
20
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
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
21
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 Lates 2X30 4X30, 1X120, 1X180,
1X60, 0X150 0X210
1X90
Minimum FICO Score 620 550 500 0
Maximum Collections/Chargeoffs Medical Only OR Not Not Not
None>$500 last 12 Considered Considered Considered
mos.
Maximum Bankruptcy Discharged Discharged at Discharged Discharged
24 mos. funding at funding at funding
Maximum of Loan-to-Value 85% 85% 70% 65%
Maximum of Debt-to-Income Ratio 50% 60% 60% 60%
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 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.
22
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.
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.
23
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 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
24
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 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
25
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.
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
26
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 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
27
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) 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.
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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.
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.
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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 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
30
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 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
31
events, in accordance with a schedule or formula, or on the basis of collections
from designated portions of the related Mortgage Pool, which series may include
one or more classes of Fixed-Income Securities ("Accrual Securities"), as to
which certain accrued interest will not be distributed but rather will be added
to the principal balance (or nominal principal balance in the case of Accrual
Securities which are also Strip Securities) thereof on each Payment Date, as
hereinafter defined and in the manner described in the related Prospectus
Supplement.
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more classes of Fixed-Income Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Fixed-Income Securities (collectively, the "Subordinate Securities") in
respect of certain distributions of principal and interest and allocations of
losses on Mortgage Loans. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of Senior (or
Subordinate) Securities in respect of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to the
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
32
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 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
33
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 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
34
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Owners. Accordingly, although Owners
will 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
35
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 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
36
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 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
37
to ensure that such additional Mortgage Loans will not cause the aggregate
characteristics of the related Mortgage Pool to vary materially from those of
the initial Mortgage Pool, or that any such variation is within parameters that
were taken into account at the time the initial ratings were assigned to the
Securities of the related series. The 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
38
applied to the restoration of the related property or released to the
Mortgagor in accordance with the Servicer's normal servicing procedures
(such amounts, net of related unreimbursed expenses and advances of the
Servicer, "Net Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to 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
39
and Interest Account may contain funds relating to more than one series of
Securities as well as payments received on other mortgage loans serviced or
master serviced by the Servicer that have been deposited into the Principal and
Interest Account. The Servicer will be entitled to any interest or other income
or gain realized with respect to the funds on deposit in the Principal and
Interest Accounts.
Unless otherwise specified in the related Prospectus Supplement and
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.
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
40
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:
41
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.
42
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 principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
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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.
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
44
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;
(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
45
(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.
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
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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 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
47
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 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
48
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."
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
49
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 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.
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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 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
51
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 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.
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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.
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
53
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.
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
54
which support other classes of Securities. The Prospectus Supplement for a
series that includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
Overcollateralization
If specified in the Prospectus Supplement, subordination provisions of
a Trust may be used to accelerate to a limited extent the amortization of one or
more classes of Securities relative to the amortization of the related Mortgage
Loans. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more classes of
Securities. This acceleration feature creates, with respect to the Mortgage
Loans or groups thereof, overcollateralization which results from the excess of
the aggregate principal balance of the related Mortgage Loans, or a group
thereof, over the principal balance of the related class of Securities. Such
acceleration may continue 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."
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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
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 alternative 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
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enhancement will be subject to periodic reduction in accordance with a schedule
or formula on a nondiscretionary basis pursuant to the terms of the related
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 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.
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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.
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
58
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.
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
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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
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
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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.
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,
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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
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
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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 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.
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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:
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.
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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
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."
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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 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.
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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 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
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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 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."
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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.
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.
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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 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."
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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 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.
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Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for new
purchaser to purchase the subject property at the sale. Rather, it is common for
the lender to purchase the property from the trustee or referee for a credit bid
less than or equal to the unpaid principal amount of the mortgage or deed of
trust, accrued and unpaid interest and the expense of foreclosure. Generally,
state law controls the amount of foreclosure costs and expenses, including
attorneys' fees, which may be recovered by a lender. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property and, in some states, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors or other parties are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states,
there is no right to redeem property after a Trustee's sale under a deed of
trust.
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
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cases to the difference between the amount due to the lender and the net amount
realized upon the public sale of the real property. In the case of a Mortgage
Loan secured by a property owned by a trust where the Mortgage Note is executed
on behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of these states the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Certain state courts have imposed general equitable principles upon
judicial foreclosure. These equitable principles are generally designed to
relieve the borrower from the legal effect of the borrower's default under the
related loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes for the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disabilities. In other cases, such courts have limited the right of the lender
to foreclose if the default under the loan is not monetary, such
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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 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
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a transfer of the property may have occurred. These include intra-family
transfers, certain transfers by operation of law, leases of fewer than three
years and the creation of a junior encumbrance. Regulations promulgated under
the Garn-St. Germain Act also prohibit the imposition of a prepayment penalty
upon the acceleration of a loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, that may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
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
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commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the property or the rights of the beneficiary
under the deed of trust. Upon a failure of the trustor to perform any of these
obligations, the beneficiary is given the right under the deed of trust to
perform the obligation itself, at its election, with the trustor agreeing to
reimburse the beneficiary for any sums expended by the beneficiary on behalf of
the trustor. All sums so expended by the beneficiary become part of the
indebtedness secured by the deed of trust.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges.
As indicated above under "Mortgage Loan Program--Representations by
Originators," each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
Alternative Mortgage Instruments
Alternative mortgage instruments, including ARM Loans and early
ownership mortgage loans, originated by non-federally chartered lenders have
historically been subjected to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining whether a
particular alternative mortgage instrument originated by a state-chartered
lender was in compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act ("Title VIII"). Title VIII provides that: notwithstanding any state law to
the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative 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.
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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 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
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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.
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
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Security may differ from the amount of interest distributable thereon. See
"Discount and Premium," below. Individuals holding a Grantor Trust Fractional
Interest Security directly or through certain pass-through entities will be
allowed a deduction for such reasonable servicing fees and expenses only to the
extent that the aggregate of such Holder's miscellaneous itemized deductions
exceeds two percent of such Holder's adjusted gross income. Further, Holders
(other than corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining alternative minimum taxable
income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the 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.
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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 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
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for each day during a calendar quarter that the Holder owned such Residual
Security. For this purpose, the daily portion shall be determined by allocating
to each day in the calendar quarter its ratable portion of the taxable income or
net loss of the REMIC Trust for such quarter and by allocating the amount so
allocated among the Residual Holders (on such day) in accordance with their
percentage interests on such day. Any amount included in the gross income or
allowed as a loss of any Residual Holder by virtue of this paragraph will be
treated as ordinary income or loss.
The requirement that each Holder of a Residual Security report its
daily portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any Class outstanding, even though the Holder
of the Residual Security may have received full payment of the stated interest
and principal on its Residual Security.
The Trustee will provide to Holders of Residual Securities of each
Series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such Series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the Regular Securities
(but not the Residual Securities), even though Regular Securities are for
non-tax purposes evidences of beneficial ownership rather than indebtedness of a
REMIC Trust. Second, market discount or premium equal to the difference between
the total stated principal balances of the qualified mortgages and the basis to
the REMIC Trust therein generally will be included in income (in the case of
discount) or deductible (in the case of premium) by the REMIC Trust as it
accrues under a constant yield method, taking into account the Prepayment
Assumption. The basis to a REMIC Trust in the qualified mortgages is the
aggregate of the issue prices of all the Regular and Residual Securities in the
REMIC Trust on the Settlement Date. If, however, a substantial amount of a Class
of Regular or Residual Securities has not been sold to the public, then the fair
market value of all the Regular or Residual Securities in that Class as of the
date of the Prospectus Supplement should be substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC Trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the Regular and Residual Securities are not treated as expenses of the REMIC
Trust for which a deduction is allowed. If the deductions allowed to a REMIC
Trust exceed its gross income for a calendar quarter, such excess will be a net
loss for the REMIC Trust for that calendar quarter. The REMIC Regulations also
provide that any gain or loss to a REMIC Trust from the disposition of any
asset, including a qualified mortgage or "permitted investment" (as defined in
section 86OG(a)(5) of the Code) will be treated as ordinary gain or loss.
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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.
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
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indicate that if a Holder of a Residual Security is a member of an affiliated
group filing a consolidated income tax return, the taxable income of the
affiliated group cannot be less than the sum of the excess inclusions
attributable to all residual interests in REMICs held by members of the
affiliated group. For a discussion of the effect of excess inclusions on certain
foreign investors that own Residual Securities, see "Foreign Investors" below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC Trust as excess inclusions if the
Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for "significant value" that is contained in the REMIC
Regulations would be applicable. If no such rule is applicable, excess
inclusions should be calculated as discussed above.
In the case of any Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such Residual
Securities reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of section 857(b)(2) of the Code, excluding
any net capital gain) will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
Residual Security as if held directly by such shareholder. Similar rules will
apply in the case of regulated investment companies, common trust funds and
certain cooperatives that hold a Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of
a Residual Security who is an individual will be required to include in income a
share of any servicing and guaranty fees. A deduction for such fees will be
allowed to such Holder only to the extent that such fees, along with certain of
such Holder's other miscellaneous itemized deductions exceed 2 percent of such
Holder's adjusted gross income. In addition, a Holder of a Residual Security may
not be able to deduct any portion of such fees in computing such Holder's
alternative minimum tax liability. A Holder's share of such fees will generally
be determined by (i) allocating the amount of such expenses for 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"
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(which includes property acquired by deed in lieu of foreclosure) and "net
income from foreclosure property" are defined by reference to the rules
applicable to real estate investment trusts. Generally, foreclosure property
would be treated as such for a period of three years, with possible extensions.
Net income from foreclosure property generally means gain from the sale of
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or Residual Security is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Security. The adjusted
basis of a Regular Security generally will equal the cost of such Security to
the seller, increased by any original issue discount or market discount included
in the seller's gross income with respect to such Security and reduced by
distributions on such Security previously received by the seller of amounts
included in the stated redemption price at maturity and by any premium that has
reduced the seller's interest income with respect to such Security. See
"Discount and Premium." The adjusted basis of a Residual Security is determined
as described above under "Taxation of Holders of Residual Securities-Basis Rules
and Distributions." Except as provided in the following paragraph or under
section 582(c) of the Code, any such gain or loss will be capital gain or loss,
provided such Security is held as a "capital asset" (generally, property held
for investment) within the meaning of section 1221 of the Code.
Gain from the sale of a Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a Regular Security had income accrued
at a rate equal to 110 percent of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a Regular Security who purchased a
such Security at a market discount would also be taxable as ordinary income in
an amount not exceeding the portion of such discount that accrued during the
period such Security was held by such Holder, reduced by any market discount
includible in income under the rules described below under "Discount and
Premium."
If a Holder of a Residual Security sells its Residual Security at a
loss, the loss will not be recognized if, within six months before or after the
sale of the Residual Security, such Holder purchases another residual interest
in any REMIC or any interest in a taxable mortgage pool (as defined in section
7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
no such regulations have yet been published.
Transfers of Residual Securities. Section 860E(e) of the Code imposes a
substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a Residual Security to a disqualified organization
and upon a pass-through entity (including regulated investment companies, real
estate investment trusts, common trust funds, partnerships, trusts, estates,
certain cooperatives, and nominees) that owns a Residual Security if such
pass-through entity has a disqualified organization 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.
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The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a Residual Security and certain
other provisions that are intended to meet this requirement are described in the
Pooling and Servicing Agreement and 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
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organizations discussed above. Transferors of a Residual Security should consult
with their own tax advisors for further information regarding such transfers.
Reporting and Other Administrative Matters
For purposes of the administrative provisions of the Code, each REMIC
Trust will be treated as a partnership and the Holders of Residual Securities
will be treated as partners. The Trustee will prepare, sign and file federal
income tax returns for each REMIC Trust, which returns are subject to audit by
the IRS. Moreover, within a reasonable time after the end of each calendar year,
the Trustee will furnish to each Holder that received a distribution during such
year a statement setting forth the portions of any such distributions that
constitute interest distributions, original issue discount, and such other
information as is required by Treasury regulations and, with respect to Holders
of Residual Securities in a REMIC Trust, information necessary to compute the
daily portions of the taxable income (or net loss) of such REMIC Trust for each
day during such year. The Trustee will also act as the tax matters partner for
each REMIC Trust, either in its capacity as a Holder of a Residual Security or
in a fiduciary capacity. Each Holder of a 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 tax purposes, Holders will be required to report income
received with respect to
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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 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
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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 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
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distribution made on such Security during the accrual period of amounts included
in the stated redemption price at maturity, over (ii) the adjusted issue price
of such Security at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated based on (i) the yield to maturity of the Security, calculated as of
the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Holders of such
Securities should consult their own tax advisors concerning the treatment of
such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also be required to defer the deduction of all or a portion of the interest
on such indebtedness until the corresponding amount of market discount is
included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
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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.
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.
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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 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
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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 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").
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Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA) and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein or to 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,
regulatory 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 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.
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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 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
94
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 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, 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
95
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
(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; provided
that, among other
96
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%;
(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
97
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 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, the Exemptions 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
98
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 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.
99
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
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.
100
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.
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.
101
INDEX OF PRINCIPAL DEFINITIONS
Page
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Accrual Securities...................................32
Affiliated Originators...............................18
Approved Guidelines..................................21
APR..................................................15
ARM Loans............................................19
Average Interest Rate................................97
Balloon Amount.......................................20
Balloon Loans........................................19
Bankruptcy Bond......................................54
Bankruptcy Loss......................................51
Bankruptcy Loss Amount...............................50
Bulk Acquisition.....................................21
Bulk Guidelines......................................21
Buydown Account......................................14
Buydown Agreement....................................41
Buydown Funds........................................14
Buydown Mortgage Loans...............................14
Buydown Period.......................................14
Certificates.........................................31
Closing Date.........................................37
Code.................................................77
Combined Loan-to-Value Ratio.........................16
Compensating Interest................................44
Contract Sub-Servicers...............................26
Conventional Loans...................................13
Credit Enhancer......................................59
Cut-Off Date.........................................15
Debt Securities......................................77
Defaulted Mortgage Loss..............................51
Deficient Valuation..................................53
Deleted Mortgage Loan................................28
Delinquency Advances.................................44
Designated Originator................................25
Detailed Description.................................13
Determination Date...................................44
Distribution Account.................................39
DOL..................................................93
DTC..................................................12
Due Date.............................................38
Due Period...........................................32
Eligible Account.....................................39
Equity Securities....................................31
ERISA................................................92
ERISA Plans..........................................92
Event of Default.....................................64
Exemptions...........................................95
Extraordinary Losses.................................51
FACO.................................................58
FASIT.................................................4
FDIC.................................................25
FICO.................................................22
Financial Guaranty Insurance Policy..................52
Financial Guaranty Insurer...........................52
Fixed-Income Securities..............................31
Foreign Investors....................................83
Forward Purchase Agreement...........................37
Fraud Loss...........................................51
Fraud Loss Amount....................................50
Freddie Mac...........................................8
Funding Period.......................................97
Garn-St.-Germain Act.................................74
Grantor Trust Estate.................................77
Grantor Trust Fractional Interest Security...........78
Grantor Trust Securities.............................77
Grantor Trust Strip Security.........................78
Indenture............................................31
Indenture Trustee....................................64
Index................................................19
Indirect Participant.................................34
Insurance Paying Agent...............................52
Insurance Proceeds...................................38
Insured Payment......................................52
Interest Rate........................................31
IRAs.................................................92
IRS..................................................79
Junior Lien Loans....................................16
Letter of Credit.....................................52
Letter of Credit Bank................................52
Liquidation Proceeds.................................38
Loan Purchase Price..................................28
Loan-To-Value Ratio..................................13
Master Commitments...................................23
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.......................53
Mortgage Rate........................................14
Mortgaged Properties.................................13
Mortgagor............................................14
Net Liquidation Proceeds.............................39
Net Mortgage Rate....................................67
New Withholding Regulations..........................91
Note Margin..........................................19
Notes................................................31
Originator's Retained Yield..........................18
Originators..........................................18
Oversight Agent......................................17
Participants.........................................34
Participating Originators............................25
Pass-Through Rate....................................43
Paying Agent.........................................42
Payment Dates........................................32
Percentage Interest..................................42
Permitted Investments................................39
Physical Certificates................................34
Physical Securities..................................35
Policy Statement.....................................99
Pool Factor..........................................45
Pool Insurer.........................................41
Pooling and Servicing Agreement......................58
Pre-Funding Limit....................................97
Premium Security.....................................90
Principal Prepayments................................38
Qualified Replacement Mortgage.......................28
102
Page
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Qualified Retirement Plans...........................92
Rating Agency........................................96
Realized Loss........................................50
Record Date..........................................42
Regular Security.....................................80
Relief Act...........................................77
REMIC.................................................4
REMIC Securities.....................................77
REMIC Trust..........................................80
Remittance Date......................................40
Remittance Period....................................32
REO Property.........................................48
Reserve Fund.........................................54
Residual Security....................................80
Restricted Group.....................................97
Sale and Servicing Agreement.........................65
Securities...........................................13
Security Registrar...................................34
Seller...............................................58
Seller's Guidelines..................................21
Senior Securities....................................32
Servicer.............................................17
Servicing Advances...................................48
Servicing Agreement..................................31
Settlement Date......................................80
Single Family Loans..................................18
SMMEA................................................98
Special Hazard Amount................................50
Special Hazard Insurance Policy......................53
Special Hazard Insurer...............................53
Special Hazard Loss..................................51
Statistic Calculation Date...........................15
Strip Securities.....................................31
Subordinate Amount...................................50
Subordinate Securities...............................32
Subsequent Mortgage Loans............................97
Sub-Servicer.........................................26
Sub-Servicing Account................................40
Sub-Servicing Agreement..............................26
Tax-Favored Plans....................................92
Title V..............................................76
Title VIII...........................................76
Trust................................................13
Trust Agreement......................................31
Trust Estate.........................................13
Trustee...............................................3
UCC..................................................34
Unaffiliated Originators.............................18
103
$103,075,000
FIRST ALLIANCE MORTGAGE LOAN TRUST 1999-4
MORTGAGE LOAN
ASSET BACKED CERTIFICATES
SERIES 1999-4
FIRST ALLIANCE MORTGAGE COMPANY
AS SELLER AND SERVICER
------------------------------------------
PROSPECTUS SUPPLEMENT
DECEMBER 10, 1999
------------------------------------------
LEHMAN BROTHERS