- ----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event
Reported) August 30, 1996
FINANCIAL ASSET SECURITIES CORP., (as depositor under the
Pooling and Servicing Agreement, dated as of August 23, 1996,
which forms Cityscape Home Equity Loan Trust 1996-3, which
will issue the Home Equity Loan Asset-Backed Certificates,
Series 1996-3).
FINANCIAL ASSET SECURITIES CORP.
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 333-10273 06-1442101
- ---------------------------- -------------- -------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
600 Steamboat Road
Greenwich, Connecticut 06830
- ------------------------- ----------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (203) 625-2700
----- --------
- -----------------------------------------------------------------
Item 5. Other Events.
- ---- ------------
The financial statements of Financial Guaranty Insurance Company as of
December 31, 1995 and 1994 that are included in this Form 8-K have been
audited by KPMG Peat Marwick LLP. The consent of KPMG Peat Marwick LLP. to
the inclusion of their audit report on such financial statements in this Form
8-K and to being named as "experts" in the Prospectus Supplement for the
Cityscape Home Equity Loan Trust 1996-3 is attached hereto as Exhibit 23.1.
The financial statements of Financial Guaranty Insurance Company as of
December 31, 1995 and 1994 are attached hereto as Exhibit 99.1. The
unaudited financial statements of Financial Guaranty Insurance Company as of
June 30, 1996 are attached hereto as Exhibit 99.2.
In connection with the issuance of certain classes of the Certificates,
the Financial Guaranty Insurance Company has issued a policy. A form of such
policy is attached hereto as Exhibit 99.3.
Item 7. Financial Statements, Pro Forma Financial
- ---- -----------------------------------------
Information and Exhibits.
------------------------
(a) Not applicable.
(b) Not applicable.
(c) Exhibit:
23.1 Consent of KPMG Peat Marwick LLP.
99.1 Financial statements of Financial Guaranty Insurance Company as of
December 31, 1995 and 1994.
99.2 Unaudited financial statements of Financial Guaranty Insurance
Company as of June 30, 1996.
99.3 Form of Policy.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FINANCIAL ASSET SECURITIES CORP.
By: /s/ Charles A. Forbes, Jr.
---------------------------------
Charles A. Forbes, Jr.
Dated: August 30, 1996
Exhibit Index
-------------
Exhibit Page
- ------- ----
23.1 Consent of KPMG Peat Marwick LLP.
99.1 Financial statements of Financial Guaranty Insurance Company as of
December 31, 1995 and 1994.
99.2 Unaudited financial statements of Financial Guaranty Insurance
Company as of June 30, 1996.
99.3 Form of Policy.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Financial Guaranty Insurance Company:
We consent to the use of our report dated January 19, 1996 on the financial
statements of Financial Guaranty Insurance Company as of December 31, 1995
and 1994, and for each of the years in the three-year period ended
December 31, 1995 included in the Form 8-K of Financial Asset Securities
Corp., and to the reference to our firm under the heading "Experts" in the
Prospectus Supplement.
Our report refers to changes, in 1993, in accounting methods for multiple-
year retrospectively rated reinsurance contracts and for the adoption of the
provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities.
/s/KPMG PEAT MARWICK LLP
New York, New York
August 29, 1996
Exhibit 99.1
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
- -------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, DECEMBER 31,
1995 1994
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995 and $1,954,777 in 1994) $2,141,584 $1,889,910
Short-term investments, at cost, which approximates market 91,032 75,674
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated depreciation
($12,861 in 1995 and $10,512 in 1994) 6,314 7,912
Receivable for securities sold 26,572 -
Prepaid expenses and other assets 12,627 12,243
---------- ----------
Total assets $2,580,302 $2,298,210
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
---------- ----------
Total liabilities $1,032,421 $1,018,487
========== ==========
Stockholder's Equity:
Common stock, par value $1,500 per share; 10,000 shares
authorized, issued and outstanding $ 15,00 $ 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities 63,785 (41,773)
available-for-sale, net of tax
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
--------- ---------
Total stockholder's equity 1,547,881 1,279,723
--------- ---------
Total liabilities and stockholder's equity $2,580,302 $2,298,210
========== ==========
</TABLE>
See accompanying notes to financial statements.
($ in Thousands)
<TABLE>
<CAPTION> FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Gross premiums written $ 97,288 $161,940 $291,052
Ceded premiums (19,319) (46,477) (49,914)
-------- -------- --------
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned premiums 27,309 53,364 (74,902)
-------- ------- --------
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
-------- -------- --------
Total revenues $256,438 $284,553 $301,595
-------- -------- --------
EXPENSES:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy acquisition costs (3,940) 3,709 2,658
Other underwriting expenses (19,100) 21,182 21,878
-------- ------- -------
Total expenses 19,806 43,597 87,022
-------- ------- -------
Income before provision for Federal income taxes 236,632 240,956 214,573
-------- ------- -------
Federal income tax expenses (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
------- ------- --------
Total Federal income tax expense 48,754 51,225 52,221
------- ------- -------
Net income before cumulative effect of
change in accounting principle 187,878 189,731 162,352
------- ------- -------
Net cumulative effect of change in
accounting principle - - 3,008
-------- -------- --------
Net income $187,878 $189,731 $165,360
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
($ in Thousands)
<TABLE>
<CAPTION> NET UNREALIZED
GAINS (LOSSES)
ADDITIONAL FIXED MATURITY FOREIGN
COMMON PAID-IN SECURITIES AVAILA- CURRENCY RETAINED
STOCK CAPITAL FOR-SALE, NET OF TAX ADJUSTMENT EARNINGS
------ ---------- -------------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 2,500 $324,639 $7,267 $(1,597) $618,615
Net income - - - - 165,360
Capital contribution - 21,872 - - -
Adjustment to common stock par value 12,500 (12,500) - - -
Unrealized gains on fixed maturity securities - - (1,325) - -
previously held at market, net of tax of ($713)
Implementation of change in accounting for - - 84,766 - -
adoption of SFAS 115, net of tax of $45,643
Foreign currency translation adjustment - - - (668) -
------- ------- ------- -------- -------
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income - - - - 189,731
Unrealized losses on fixed maturity - - (132,481) - -
securities available-for-sale, net of tax
of ($71,336)
Foreign currency translation adjustment - - - 1,044 -
------- ------- -------- -------- -------
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income - - - - 187,878
Dividend paid - - - - (25,000)
Unrealized gains on fixed maturity securities - - 105,558 - -
available- for-sale, net of tax of $56,839
Foreign currency translation adjustment - - - (278) -
------- -------- ------- -------- ---------
Balance, December 31, 1995 $15,000 $334,011 $63,785 $(1,499) 1,136,584
======= ======== ======= ======== =========
</TABLE>
See accompanying notes to financial statements.
($ in Thousands)
<TABLE>
<CAPTION> FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $187,878 $189,731 $165,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle,
net of tax - - (3,008)
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment expenses reserves (20,938) 2,648 51,264
Depreciation of property and equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance premiums 2,581 (7,437) (15,527)
Change in foreign currency translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition costs 12,279 22,015 22,250
Change in accrued investment income and prepaid
expenses and other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity securities 1,922 5,112 8,976
Change in current income taxes payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
-------- ------- --------
Net cash provided by operating activities 94,546 184,489 277,448
-------- ------- -------
INVESTING ACTIVITIES:
Sales and maturities of fixed maturity securities 836,103 550,534 789,036
Purchases of fixed maturity securities (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of short-term
investments, net (15,358) (11,486) 4,164
Purchases of property and equipment, net (750) (1,290) (985)
--------- --------- ---------
Net cash used in investing activities (71,113) (184,150) (298,335)
---------- --------- ---------
FINANCING ACTIVITIES:
Dividends paid (25,000) - -
Capital contribution - - 21,872
---------- --------- --------
Net cash provided by financing activities (25,000) 21,872
---------- --------- --------
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
----------- ----------- ----------
Cash at end of year $ 199 $ 1,766 $ 1,427
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
(1) BUSINESS
--------
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides
financial guaranty insurance on newly issued municipal bonds and municipal
bonds trading in the secondary market, the latter including bonds held by
unit investment trusts and mutual funds. The Company also insures
structured debt issues outside the municipal market. Approximately 88% of
the business written since inception by the Company has been municipal
bond insurance.
The Company insures only those securities that, in its judgment, are
of investment grade quality. Municipal bond insurance written by the
Company insures the full and timely payment of principal and interest when
due on scheduled maturity, sinking fund or other mandatory redemption and
interest payment dates to the holders of municipal securities. The
Company's insurance policies do not provide for accelerated payment of the
principal of, or interest on, the bond insured in the case of a payment
default. If the issuer of a Company-insured bond defaults on its
obligation to pay debt service, the Company will make scheduled interest
and principal payments as due and is subrogated to the rights of
bondholders to the extent of payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The accompanying financial statements have been prepared on the basis
of generally accepted accounting principles ("GAAP") which differ in
certain respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 3). The prior years financial statements
have been reclassified to conform to the 1995 presentation. Significant
accounting policies are as follows:
INVESTMENTS
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Statement defines three
categories for classification of debt securities and the related
accounting treatment for each respective category. The Company has
determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's equity,
net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair
value. Bond discounts and premiums are amortized over the remaining terms
of the securities. Realized gains or losses on the sale of investments
are determined on the basis of specific identification.
PREMIUM REVENUE RECOGNITION
Premiums are earned over the period at risk in proportion to the
amount of coverage provided which, for financial guaranty insurance
policies, generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related
unearned premiums, net of premium credits allowed against the premiums
charged for insurance of refunding issues and applicable acquisition
costs, are earned immediately. Unearned premiums represent the portion of
premiums written related to coverage yet to be provided on policies in
force.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate
directly to premium production. Such costs include compensation of
employees involved in underwriting, marketing and policy issuance
functions, rating agency fees, state premium taxes and certain other
underwriting expenses, offset by ceding commission income on premiums
ceded to reinsurers (see Note 6). Net acquisition costs are deferred and
amortized over the period in which the related premiums are earned.
Anticipated loss and loss adjustment expenses are considered in
determining the recoverability of acquisition costs.
LOSS AND LOSS ADJUSTMENT EXPENSES
Provision for loss and loss adjustment expenses is made in an amount
equal to the present value of unpaid principal and interest and other
payments due under insured risks at the balance sheet date for which, in
management's judgment, the likelihood of default is probable. Such
reserves amounted to $77.8 million and $98.7 million at December 31, 1995
and 1994, respectively. As of December 31, 1995 and 1994, such reserves
included $28.8 million and $71.0 million, respectively, established based
on an evaluation of the insured portfolio in light of current economic
conditions and other relevant factors. Loss and loss adjustment expenses
include amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in
1994. The reserve for loss and loss adjustment expenses is necessarily
based upon estimates, however, in management s opinion the reserves for
loss and loss adjustment expenses is adequate. However, actual results
will likely differ from those estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred compensation.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from
taxable income, subject to certain limitations, amounts added to statutory
contingency reserves (see Note 3). The amounts deducted must be included
in taxable income upon their release from the reserves or upon earlier
release of such amounts from such reserves to cover excess losses as
permitted by insurance regulators. The amounts deducted are allowed as
deductions from taxable income only to the extent that U.S. government
non-interest bearing tax and loss bonds are purchased and held in an amount
equal to the tax benefit attributable to such deductions.
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to
income over their estimated service lives. Office furniture and equipment
are depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the lease,
whichever is shorter. Computer equipment and software are depreciated
over three years. Maintenance and repairs are charged to expense as
incurred.
FOREIGN CURRENCY TRANSLATION
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches
are local currencies. Accordingly, the assets and liabilities of these
foreign branches are translated into U.S. dollars at the rates of exchange
existing at December 31, 1995 and 1994 and revenues and expenses are
translated at average monthly exchange rates. The cumulative translation
loss at December 31, 1995 and 1994 was $1.5 million and $1.2 million,
respectively, net of tax, and is reported as a separate component of
stockholder's equity.
(3) STATUTORY ACCOUNTING PRACTICES
------------------------------
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory-basis accounting practices differ
from GAAP:
(a) premiums are earned in proportion to the reduction of the
related risk rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of whether
loss contingencies actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are
charged directly against surplus but are reflected as assets under GAAP,
if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the financial
reporting and the tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal income tax payments;
and
(g) all fixed income investments are carried at amortized cost
rather than at fair value for securities classified as available-for-sale
under GAAP.
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
-------- ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C>
GAAP basis amount $187,878 $1,547,881 $189,731 $1,279,723 $165,360 $1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve - (386,564) - (328,073) - (252,542)
Non-admitted assets - (5,731) - (7,566) - (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed
maturity securities held at fair
value, net of tax - (63,785) - 41,773 - (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for authorized reinsurance - - - (266) - -
Contingency reserve tax deduction
(see Note 2) - 78,196 - 55,496 - 45,402
Allocation of tax benefits due to
Parent's net operating loss to the
Company (Note 5) 637 19,290 (63) 9,653 - 9,716
-------- ---------- ---------- -------- -------- --------
Statutory-basis amount $166,906 $1,001,521 $179,348 $893,734 $185,145 $777,097
======== ========== ========= ======== ======== ========
</TABLE>
(4) INVESTMENTS
-----------
Investments in fixed maturity securities carried at fair value of
$3.2 million and $3.0 million as of December 31, 1995 and 1994,
respectively, were on deposit with various regulatory authorities as
required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale
are as follows (in thousands):
<TABLE>
<CAPTION> GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HANDLING
1995 COST GAINS LOSSES FAIR VALUE
- ---- --------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of U.S. $ 71,182 $ 1,696 - $ 72,878
government corporations and agencies
Obligations of states and political subdivisions 1,942,001 98,458 $ 1,625 2,038,834
Debt securities issued by foreign governments 30,270 152 550 29,872
--------- ------- ------- ----------
Investments available-for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 - - 91,032
--------- ------- ------- ----------
Total $2,134,485 $100,306 $2,175 $2,232,616
========= ======= ===== =========
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1995, by contractual maturity date, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1995 AMORTIZED FAIR
- ---- COST VALUE
---------- -------
<S> <C> <C>
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
--------- ---------
Total $2,134,485 $2,232,616
========= =========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HANDLING
1994 COST GAINS LOSSES FAIR VALUE
- ---- ---------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of U.S.
government corporations and agencies $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and political subdivisions 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by foreign governments 103,666 400 (4,765) 99,301
---------- -------- --------- ----------
Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 - - 75,674
--------- ------ ------- --------
Total $2,029,851 $ 26,217 $(90,484) $1,965,584
========= ======= ======== =========
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed
maturity securities available-for-sale carried at fair value were $836.1
million, $550.5 million, and $789.0 million, respectively. For 1995, 1994
and 1993 gross gains of $36.3 million, $18.2 million and $36.1 million
respectively, and gross losses of $5.5 million, $12.3 million and $1.0
million respectively, were realized on such sales.
Net investment income of the Company is derived from the following
sources (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income from fixed maturity securities $112,684 $108,519 $97,121
Income from short-term investments 8,450 2,479 3,914
------- ------- ------
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
------- ------- -------
Net investment income $120,398 $109,828 $99,920
======= ======= ======
</TABLE>
As of December 31, 1995, the Company did not have more than 10% of
its investment portfolio concentrated in a single issuer or industry.
(5) INCOME TAXES
------------
The Company files a federal tax return as part of the consolidated
return of General Electric Capital Corporation ("GE Capital"). Under a
tax sharing agreement with GE Capital, taxes are allocated to the Company
and the Parent based upon their respective contributions to consolidated
net income. The Company's effective federal corporate tax rate (20.6
percent in 1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less
than the corporate tax rate on ordinary income of 35 percent in 1995, 1994
and 1993.
Federal income tax expense (benefit) relating to operations of the
Company for 1995, 1994 and 1993 is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current tax expense $28,913 $43,484 $59,505
Deferred tax expense 19,841 7,741 (7,284)
------- ------- -------
Federal income tax expense $48,754 $51,225 $52,221
====== ====== ======
</TABLE>
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income taxes computed on income
before provision for federal income
taxes, at the statutory rate $82,821 $84,334 $75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305)
------- ------- -------
Provision for income taxes $48,754 $51,225 $52,221
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax liabilities at December 31,
1995 and 1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C>
Deferred tax assets:
Unrealized losses on fixed maturity securities,
available-for-sale - $22,493
Loss reserves $ 8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
------ ------
Total gross deferred tax assets
$18,434 $52,439
------ ------
Deferred tax liabilities:
Unrealized gains on fixed maturity securities,
available-for-sale 34,346 -
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and loss bonds 9,454 9,454
Other 7,810 9,126
------ ------
Total gross deferred tax liabilities 117,605 75,079
------- ------
Net deferred tax liability $99,171 $22,640
====== ======
</TABLE>
Based upon the level of historical taxable income, projections of
future taxable income over the periods in which the deferred tax assets
are deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it will
realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1995 and 1994. The
company anticipates that the related deferred tax asset will be realized.
Total federal income tax payments during 1995, 1994 and 1993 were
$59.8 million, $10.1 million, and $29.4 million, respectively.
(6) REINSURANCE
-----------
The Company reinsures portions of its risk with other insurance
companies through quota share reinsurance treaties and, where warranted,
on a facultative basis. This process serves to limit the Company's
exposure on risks underwritten. In the event that any or all of the
reinsuring companies were unable to meet their obligations, the Company
would be liable for such defaulted amounts. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The Company holds collateral under reinsurance agreements
in the form of letters of credit and trust agreements in various amounts
with various reinsurers totaling $33.7 million that can be drawn on in the
event of default.
Effective January 1, 1993, the Company adopted the Emerging Issues
Task Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent a
payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To
reflect the adoption of EITF 93-6 in the accompanying financial
statements, an initial adjustment of $4.6 million, before applicable
income taxes, has been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of
$21.9 million, $39.0 million and $34.4 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Loss and loss adjustment
expenses incurred are presented net of ceded losses of $1.1 million, $0.3
million and $9.1 million for the years ended December 31, 1995, 1994 and
1993, respectively.
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
---------------------------------
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at January 1, $98,746 $96,098 $44,834
Less reinsurance recoverable 14,472 14,168 5,128
------ ------ ------
Net Balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 -
Prior years (1,207) (437) (756)
Portfolio years (33,900) (11,050) 43,650
-------- -------- ------
Total Incurred (8,426) 3,646 42,894
------- ------ ------
Paid related to:
Current year (197) (382) -
Prior years (5,515) (920) (670)
------- ------ -----
Total Paid (5,712) (1,302) (670)
------- ------- -----
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
------ ------ ------
Balance at December 31, $77,808 $98,746 $96,098
====== ====== ======
</TABLE>
The changes in incurred portfolio reserves principally relate to
business written in prior years. The changes are based upon an evaluation
of the insured portfolio in light of current economic conditions and other
relevant factors.
(8) RELATED PARTY TRANSACTIONS
--------------------------
The Company has various agreements with subsidiaries of General
Electric Company ("GE") and GE Capital. These business transactions
include appraisal fees and due diligence costs associated with
underwriting structured finance mortgage-backed security business; payroll
and office expenses incurred by the Company's international branch offices
but processed by a GE subsidiary; investment fees pertaining to the
management of the Company's investment portfolio; and telecommunication
service charges. Approximately $3.2 million, $3.2 million and $1.0 million
in expenses were incurred in 1995, 1994 and 1993, respectively, related to
such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of
the underlying assets. For some of these issues, GE Capital also provides
first loss protection in the event of default. Gross premiums written on
these issues amounted to $1.3 million in 1995, $2.5 million in 1994, and
$3.3 million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written in 1995 and 1994 and 2 percent in 1993).
(9) COMPENSATION PLANS
------------------
Officers and other key employees of the Company participate in the
Parent's incentive compensation, deferred compensation and profit sharing
plans. Expenses incurred by the Company under compensation plans and
bonuses amounted to $7.5 million, $12.2 million and $16.7 million in 1995,
1994 and 1993, respectively, before deduction for related tax benefits.
(10) DIVIDENDS
---------
Under New York insurance law, the Company may pay a dividend only
from earned surplus subject to the following limitations: (a) statutory
surplus after such dividend may not be less than the minimum required
paid-in capital, which was $2.1 million in 1995 and 1994, and (b)
dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined by New York
insurance law, for the 12 month period ending on the preceding December
31, without the prior approval of the Superintendent of the New York State
Insurance Department. At December 31, 1995 and 1994, the amount of the
Company's surplus available for dividends was approximately $100.2 million
and $89.3 million, respectively.
During 1995, the company paid dividends of $25 million. No dividends
were paid during 1994 or 1993.
(11) FINANCIAL INSTRUMENTS
---------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities
are based on quoted market prices, if available. If a quoted market
price is not available, fair values is estimated using quoted market
prices for similar securities. Fair value disclosure for fixed
maturity securities is included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair values.
The estimated fair values of the Company s financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
FAIR CARRYING FAIR CARRYING
CARRYING AMOUNT VALUE AMOUNT VALUE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand $ 199 $ 199 $ 1,766 $ 1,766
accounts
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,141,584 2,141,584 1,889,910 1,889,910
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves.
Estimated fair values of these guaranties are based on amounts currently
charged to enter into similar agreements (net of applicable ceding
commissions), discounted cash flows considering contractual revenues to be
received adjusted for expected prepayments, the present value of future
obligations and estimated losses, and current interest rates. The
estimated fair values of such financial guaranties range between $412.8
million and $456.2 million compared to a carrying value of $540.6 million
as of December 31, 1995 and between $518.1 million and $565.9 million
compared to a carrying value of $585.1 million as of December 31, 1994.
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only
those securities that, in its judgment, are of investment grade quality.
The Company has established and maintains its own underwriting standards
that are based on those aspects of credit that the Company deems important
for the particular category of obligations considered for insurance.
Credit criteria include economic and social trends, debt management,
financial management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged for payment of securities under varying economic
scenarios and underlying levels of protection such as insurance or
overcollateralization.
In connection with underwriting new issues, the Company sometimes
requires, as a condition to insuring an issue, that collateral be pledged
or, in some instances, that a third-party guarantee be provided for a term
of the obligation insured by a party of acceptable credit quality
obligated to make payment prior to any payment by the Company. The types
and extent of collateral pledged varies, but may include residential and
commercial mortgages, corporate debt, government debt and consumer
receivables.
As of December 31, 1995, the Company's total insured principal
exposure to credit loss in the event of default by bond issuers was $98.7
billion, net of reinsurance of $20.7 billion. The Company's insured
portfolio as of December 31, 1995 was broadly diversified by geography and
bond market sector with no single debt issuer representing more than 1% of
the Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1995, the composition of principal exposure by
type of issue, net of reinsurance, was as follows (in millions):
<TABLE>
<CAPTION>
NET PRINCIPAL
OUTSTANDING
-------------
<S> <C>
Municipal:
General obligation $ 43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
---------
Total $98,660.3
========
</TABLE>
The Company is authorized to do business in 50 states, the District
of Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1995 by state, net of reinsurance, was as
follows (in millions):
<TABLE>
<CAPTION>
NET PRINCIPAL
OUTSTANDING
-------------
<S> <C>
California $10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
-------
Sub-total 59,518.2
other states and International 39,142.1
--------
Total $98,660.3
========
</TABLE>
(12) COMMITMENTS
-----------
Total rent expense was $2.2 million, $2.6 million and $2.4 million in
1995, 1994 and 1993, respectively. For each of the next five years and in
the aggregate as of December 31, 1995, the minimum future rental payments
under noncancellable operating leases having remaining terms in excess of
one year approximate (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------
<S> <C>
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
------
Total minimum future rental payments $16,844
======
</TABLE>
FINANCIAL GUARANTY INSURANCE COMPANY
=============================================================================
Audited Financial Statements
December 31, 1995
Report of Independent Auditors.......................1
Balance Sheets.......................................2
Statements of Income.................................3
Statements of Stockholder's Equity...................4
Statements of Cash Flows.............................5
Notes to Financial Statements........................6
Exhibit 99.2
FINANCIAL GUARANTY INSURANCE COMPANY
====================================
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1996
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Unaudited Interim Financial Statements . . . . . . . . . . . . . . 4
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Fixed maturity securities, available for sale, at fair value
(amortized cost of $2,066,231 in 1996 and $2,043,453 in 1995) $2,057,812 $2,141,584
Short-term investments, at cost, which approximates market 133,832 91,032
Cash 1,294 199
Accrued investment income 37,753 37,347
Reinsurance receivable 7,358 7,672
Deferred policy acquisition costs 93,100 94,868
Property, plant and equipment net of accumulated depreciation
of $14,094 in 1996 and $12,861 in 1955 5,573 6,314
Prepaid reinsurance premiums 156,055 162,088
Prepaid expenses and other assets 50,908 39,198
--------- ---------
Total assets $2,543,685 $2,580,302
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums 698,149 727,535
Losses and loss adjustment expenses 71,034 77,808
Ceded reinsurance payable 2,777 1,942
Accounts payable and accrued expenses 38,035 32,811
Due to parent 267 1,647
Current federal income taxes payable 67,077 51,296
Deferred federal income taxes payable 63,850 99,171
Payable for securities purchased 32,186 40,211
------- ---------
Total liabilities $973,375 $1,032,421
======= =========
Stockholder's Equity:
Common stock, par value $1,500 per share at June 30, 1996
and at December 31, 1995: 10,000 shares authorized, issued
and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized (losses) gains on fixed maturity securities
available for sale, net of tax (5,472) 63,785
Foreign currency translation adjustment (2,296) (1,499)
Retained earnings 1,229,067 1,136,584
--------- ---------
Total stockholder's equity 1,570,310 1,547,881
--------- ---------
Assets
Total liabilities and stockholder's equity $2,543,685 $2,580,302
========= =========
</TABLE>
See accompanying notes to interim financial statements
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
- ----------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
------ ------ (UNAUDITED)
<S> <C> <C>
REVENUES:
Gross Premiums written $ 45,481 $ 42,773
Ceded Premiums (6,643) (5,965)
------- -------
Net premiums written 38,838 36,808
Decrease in net unearned premiums 23,353 18,136
------ ------
Net premiums earned 62,191 54,944
Net investment income 61,513 59,327
Net realized gains 8,348 17,446
------ ------
Total revenues 132,052 131,717
------- -------
EXPENSES:
Losses and loss adjustment expenses (2,702) 815
Policy acquisition costs 9,637 5,308
Other underwriting expenses 7,561 8,662
------ ------
Total expenses 14,496 14,785
------- -------
Income before provision for federal income taxes 117,556 116,932
Provision for federal income taxes 25,071 25,066
------- -------
Net income $92,485 $91,866
====== ======
</TABLE>
See accompanying notes to interim financial statements
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOW
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 92,485 $ 91,866
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes 2,400 11,991
Amortization for fixed maturity securities 398 1,096
Policy acquisition costs deferred (8,565) (10,254)
Amortization of deferred policy acquisition costs 10,333 5,308
Depreciation of fixed assets 1,233 1,167
Change in reinsurance receivable 314 4,569
Change in prepaid reinsurance premiums 6,033 5,877
Foreign currency translation adjustment (1,226) 972
Change in accrued investment income, prepaid expenses
and other assets (12,116) (3,483)
Change in unearned premiums (29,386) (24,013)
Change in losses and loss adjustment expense reserves (6,774) (4,617)
Change in other liabilities 4,678 (11,076)
Change in current income taxes payable 15,781 (9,625)
Net realized gains on investments (8,348) (17,446)
------- --------
Net cash provided by operating activities 67,240 42,332
------ ------
Investing activities:
Sales or maturities of fixed maturity securities 406,676 478,328
Purchases of fixed maturity securities (429,529) (413,181)
Sales or maturities (purchases) of short-term investments, net (42,800) (102,414)
Purchases of property and equipment, net (492) (354)
------- --------
Net cash used for investing activities 66,145 (37,621)
------ --------
Increase (decrease) in cash 1,095 4,711
Cash at beginning of period 199 1,766
----- ------
Cash at end of period $ 1,294 $ 477
====== ======
</TABLE>
See accompanying notes to interim financial statements
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
June 30, 1996 and 1995
(Unaudited)
(1) BASIS OF PRESENTATION
---------------------
The interim financial statements of Financial Guaranty Insurance
Company (the Company) in this report reflect all adjustments necessary, in
the opinion of management, for a fair statement of (a) results of
operations for the six months ended June 30, 1996 and 1995, (b) the
financial position at June 30, 1996 and December 31, 1995, and (c) cash
flows for the six months ended June 30, 1996 and 1995.
These interim financial statements should be read in conjunction
with the financial statements and related notes included in the 1995
audited financial statements. The 1995 financial statements have been
reclassified to conform to the 1996 presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to
make estimates and assumptions that effect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(2) STATUTORY ACCOUNTING PRACTICES
------------------------------
The financial statements are prepared on the basis of GAAP,
which differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory basis accounting practices differ
from GAAP:
(a) premiums are earned in proportion to the reduction of the
related risk rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of whether
loss contingencies actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as assets under GAAP,
if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the financial
reporting and tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal income tax payments;
and
(g) all fixed income investments are carried at amortized cost,
rather than at fair value for securities classified as "Available for
Sale" under GAAP.
The following is a reconciliation of the net income and stockholder's equity
of Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
1996 1995
------------------ -------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
------ ---------- ------ ------------
<S> <C> <C> <C> <C>
GAAP basis amount $92,485 $1,570,310 $ 91,866 $1,441,820
Premium revenue recognition (4,061) (170,988) (9,905) (154,322)
Deferral of acquisition costs 1,768 (93,100) (4,946) (95,874)
Contingency reserve - (415,603) - (357,817)
Non-admitted assets - (4,837) - (6,579)
Case-basis losses incurred and salvage recoverable (3,394) (3,446) 6,631 2,531
Portfolio loss reserves - 24,000 (10,900) 35,200
Deferral of income tax 2,400 66,796 11,991 57,466
Unrealized gains on fixed maturity securities held at
fair value, net of taxes - 5,472 - (27,827)
Profit commission 1,273 (4,471) 4,909 (3,931)
Contingency reserve tax deduction - 85,176 - 78,196
Provision for unauthorized reinsurance - - - (266)
Allocation of tax benefits due to Parent's net operating
loss to the Company (4) 10,287 244 9,898
------ --------- ------ -------
Statutory basis amount $90,467 $1,069,596 $89,845 $978,495
====== ========= ====== =======
</TABLE>
June 30, 1996 and 1995
(Unaudited)
(3) DIVIDENDS
---------
Under New York Insurance Law, the Company may pay a dividend
only from earned surplus subject to the following limitations:
- Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $2,100,000 in 1996.
- Dividends may not exceed the lesser of 10 percent of its
surplus or 100 percent of adjusted net investment income, as defined
therein, for the twelve month period ending on the preceding December 31,
without the prior approval of the Superintendent of the New York State
Insurance Department.
The amount of the Company's surplus available for dividends
during 1996 is approximately $106.2 million.
(4) INCOME TAXES
------------
The Company's effective Federal corporate tax rate (21.3 percent
and 21.4 percent for the six months ended June 30, 1996 and 1995,
respectively) is less than the statutory corporate tax rate (35 percent in
1996 and 1995) on ordinary income due to permanent differences between
financial and taxable income, principally tax-exempt interest.
(5) REINSURANCE
-----------
In accordance with Statement of Financial Accounting Standards
No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-
Duration and Long-Duration Contracts", adopted in 1993, the Company
reports assets and liabilities relating to reinsured contracts gross of
the effects of reinsurance. Net premiums earned are shown net of premiums
ceded of $12.7 million and $11.6 million, respectively, for the six months
ended June 30, 1996 and 1995.
Exhibit 99.3
ISSUER: Cityscape Home POLICY NUMBER:
Equity Loan Trust , Series 1996-3
CONTROL NUMBER:
INSURED CERTIFICATES: DEPOSIT PREMIUM:
$___________ in principal amount
of Home Equity Loan Pass-Through
Certificates, Series 1996-3, Class A-1A,
Class A-1B, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6,
Class A-7, Class A-8 and Class A-IO
Certificates (the "Class A
Certificates")
TRUSTEE: Harris Trust and Savings Bank
Financial Guaranty Insurance Company ("Financial Guaranty"), a New York
stock insurance company, in consideration of its receipt of the Deposit
Premium and subject to the terms of this Certificate Insurance Policy (the
"Policy"), hereby unconditionally and irrevocably agrees to pay on each
Distribution Date, the Insured Payment to the Trustee named above or its
successor, as trustee under the Pooling and Servicing Agreement referred
to below (the "Trustee"), for the benefit of the holders of the Class A
Certificates.
Financial Guaranty will make such payment out of its own funds by 12:00
noon (New York City Time) in immediately available funds to the Trustee on
the later of (i) the second Business Day following the day on which
Financial Guaranty shall have received Notice that an Insured Payment is
due and (ii) the Distribution Date on which the Insured Payment is
distributable to Class A Certificateholders pursuant to the Pooling and
Servicing Agreement, for disbursement by the Trustee to the Class A
Certificateholders in the same manner as the payment of distributions with
respect to Class A Certificates. Upon such payment, Financial Guaranty
shall, subject to the terms and provisions of the Pooling and Servicing
Agreement, be fully subrogated to the rights of the Class A
Certificateholders, as appropriate, to receive the amount so paid as set
forth in Section 9.04 of the Pooling and Servicing Agreement. Financial
Guaranty's obligations hereunder, with respect to any Distribution Date,
shall be discharged to the extent funds equal to the Insured Distribution
Amount are received on or before any Distribution Date by the Trustee on
behalf of the Class A-Certificateholders for distribution on such
Distribution Date as provided in the Pooling and Servicing Agreement and
herein, whether or not such funds are properly applied by the Trustee.
If the payment of any portion or all of any Insured Distribution Amount or
Subordination Amount is voided (a "Preference Event") pursuant to a final,
non-appealable order under the U.S. Bankruptcy Code in an insolvency
proceeding, and, as a result of such a Preference Event, the Trustee or
any Class A Certificateholder is required to return such voided payment,
or any portion of such voided payment made in respect of the Class A
Certificates (an "Avoided Payment"), Financial Guaranty will pay on the
guarantee described in the first paragraph hereof, an amount equal to each
such Preference Amount, on the day specified below, following receipt by
Financial Guaranty of (x) a certified copy of a final order of a court
exercising jurisdiction in such insolvency proceeding to the effect that
the Trustee or Class A Certificateholder is required to return any such
payment or portion thereof prior to the termination of the Trust because
such payment was voided under applicable law, with respect to which order
the appeal period has expired without an appeal having been filed (the
"Final Order"), (y) an assignment, in form reasonably satisfactory to
Financial Guaranty, irrevocably assigning to Financial Guaranty all rights
and claims of such beneficiary relating to or arising under such Avoided
Payment and (z) a Notice in the form of Exhibit A hereto appropriately
completed and executed by the Trustee. Such payment shall be disbursed to
the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the Final Order and not to the beneficiary directly (unless a
Class A Certificateholder has previously paid such amount to such
receiver, conservator, debtor-in-possession or trustee in bankruptcy named
in such Final Order, in which case payment shall be disbursed to the
Trustee for distribution to such Class A Certificateholder upon proof of
such payment reasonably satisfactory to Financial Guaranty).
Notwithstanding the foregoing, in no event shall Financial Guaranty be
obligated to pay under this Policy more than one Insured Payment in
respect of any Avoided Payment.
Notwithstanding the foregoing, in no event shall Financial Guaranty be
obligated to make any payment in respect of any Avoided Payment, which
payment represents a payment of the principal amount of the Class A
Certificates, prior to the time Financial Guaranty would have been
required to make a payment in respect of such principal.
Financial Guaranty shall make payments due in respect of Avoided Payments
prior to 2:00 p.m. New York City time on the later of (a) the date when
due to be paid pursuant to the Final Order referred to above or (b) the
first to occur of (i) the fourth Business Day following Financial
Guaranty's receipt of the documents required under clauses (x) through (z)
of the second preceding paragraph, and (ii) the date of receipt of such
documents if, at least four Business Days prior to such date of receipt,
Financial Guaranty received notice from the Trustee that such documents
were to be delivered on such date and such date was specified in such
notice.
Any such documents or notices received by Financial Guaranty after 12:00
noon New York City time on any Business Day or on any day that is not a
Business Day shall be deemed to have been received by Financial Guaranty
prior to 2:00 p.m. on the next succeeding Business Day. All payments
made by Financial Guaranty hereunder in respect of Avoided Payments will
be made with Financial Guaranty's own funds.
This Policy is non-cancelable for any reason, including nonpayment of any
premium. The premium on this Policy is not refundable for any reason,
including the payment of the Class A Certificates prior to their maturity.
This Policy is subject to and shall be governed by the laws of the State
of New York. The proper venue for any action or proceeding on this Policy
shall be the County of New York, State of New York.
The insurance provided by this Policy is not covered by the New York
Property/Casualty Insurance Security Fund (New York Insurance Code Article
76).
All of the terms used but not defined herein, including, without
limitation, the terms "Business Day", "Insured Distribution Amount",
"Distribution Date," "Carry-Forward Amount," "Overcollateralization
Deficit," "Pass-Through Rate," "Class Certificate Principal Balance,"
"Class A-IO Notional Principal Amount" and "Distribution Account," shall
have the respective meanings set forth in the Pooling and Servicing
Agreement.
"Insured Payment" means the sum of (I) the amount by which (a) the sum of
(i) interest accrued on the Class A Certificates at the applicable
Pass-Through Rate on the related Class Certificate Principal Balance or
Class A-IO Notional Principal Amount, as applicable, (ii) the portion of
the Carry-Forward Amount representing interest,- and (iii) the
Overcollateralization Deficit exceeds (b) the amount on deposit in the
Distribution Account available to be distributed therefor on such
Distribution Date and (II) the Avoided Payment. "Notice" means written
notice in the form of Exhibit A hereto by registered or certified mail or
telephonic or telegraphic notice, subsequently confirmed by written notice
delivered via telegraph, telex or hand delivery from the Trustee to
Financial Guaranty specifying, for such Distribution Date, all amounts set
forth in such notice. "Class A Certificateholder" means, as to a
particular Class A Certificate, the person, other than the Trust Fund, the
Servicer or any subservicer or the Depositor (as such terms are defined in
the Pooling and Servicing Agreement), who, on the applicable Distribution
Date, is entitled under the terms of such Class A Certificate to payment
thereof. "Pooling and Servicing Agreement" means the Pooling and
Servicing Agreement by and among Financial Asset Securities Corp., as
Depositor, Cityscape Corp., as Servicer and Seller, and Harris Trust and
Savings Bank, as Trustee, dated as of August 23, 1996, authorizing the
issuance of the Class A Certificates.
In addition to the Deposit Premium set forth on the face of this Policy, a
monthly premium shall be due and payable on this Policy on each
Distribution Date, commencing with the Distribution Date occurring in
September 1996 in an amount equal to one-twelfth of the product of (i)
___% and (ii) the outstanding Class A Principal Balance on the Distribution
Date on which said monthly premium shall be due and payable.
In the event that payments under any Class A Certificate is accelerated,
nothing herein contained shall obligate Financial Guaranty to make any
payment of principal or interest on such Class A Certificates on an
accelerated basis, unless such acceleration of payment by Financial
Guaranty is at the sole option of Financial Guaranty.
IN WITNESS WHEREOF, Financial Guaranty has caused this Policy to be
affixed with its corporate seal and to be signed by its duly authorized
officer in facsimile to become effective and binding upon Financial
Guaranty by virtue of the countersignature of its duly authorized
representative.
Authorized Representative
Effective Date: August 30, 1996
EXHIBIT A
FORM OF NOTICE
Determination Date: ______________________
Distribution Date: ______________________
We refer to that certain Pooling and Servicing Agreement among Financial
Asset Securities Corp., as Depositor, Cityscape Corp., as Seller and
Servicer and Harris Trust and Savings Bank, as trustee, relating to
Cityscape Home Equity Loan Trust, Series 1996-3 (the "Agreement") and
dated as of August 23, 1996; all capitalized terms not otherwise defined
herein shall have the same respective meanings as set forth in the
Agreement.
Based upon the Servicer's report for the Distribution Date, the Trustee
has determined under the Agreement that in respect of the Distribution
Date;
(i) The Interest Distribution Amount due and owing is
$__________.
(ii) The Class A Principal Balance (after giving the effect to
distributions to the Class A Certificateholders on such Distribution Date)
is $ , the Pool Balance as of the end of the related Accrual Period is $
and the Subordination Deficit, if any, is $_________.
(iii) The amount of Avoided Payments, if any, is
$________.
(iv) The Available Funds on deposit in the Distribution Account
are $__________.
(Attached hereto is a copy of the court order in connection with an
Avoided Payment in the amount set forth therein, together with an
assignment of rights and appointment of agent.)
Accordingly, pursuant to Section 4.02 of the Agreement, this Notice
constitutes a claim for an Insured Payment in the amount of $__________
under the Policy.
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 ($5,000.00) and the
state value of the claim for each such violation.
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By: ____________________________
Name:___________________________
Title: _________________________
Telephone: _____________________
