PROSPECTUS SUPPLEMENT
(To Prospectus dated December 11, 1996)
(MEGO LOGO)
$66,721,383
MEGO MORTGAGE HOME LOAN TRUST 1996-3
HOME LOAN ASSET-BACKED CERTIFICATES, SERIES 1996-3
$19,630,000 CLASS IA-1, 6.50% PASS-THROUGH RATE
$10,790,000 CLASS IA-2, 6.84% PASS-THROUGH RATE
$9,101,458 CLASS IA-3, 7.23% PASS-THROUGH RATE
$27,199,925 CLASS IIA, 6.98% PASS-THROUGH RATE
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN DECEMBER
1996
FINANCIAL ASSET SECURITIES CORP.,
As Depositor
MEGO MORTGAGE CORPORATION,
As Seller and Servicer
__________________
The Home Loan Asset-Backed Certificates, Series 1996-3 (the
"Certificates") will consist of the Class IA-1 Certificates, Class IA-2
Certificates, Class IA-3 Certificates, Class IIA Certificates (the "Class A
Certificates"), Class IS Certificates, Class IIS Certificates (the "Class S
Certificates" and together with the Class A Certificates, the "Senior
Certificates") and the Class R Certificates. Only the Class A Certificates
(the "Offered Certificates") are being offered hereby.
Financial Asset Securities Corp. (the "Depositor") has caused MBIA
Insurance Corporation (the "Certificate Insurer") to issue two unconditional
certificate guaranty insurance policies (the "Policies") for the benefit of
holders of the Senior Certificates pursuant to which the Certificate Insurer
will guarantee certain payments to the Trustee on behalf of the holders of
the Senior Certificates as described herein.
(MBIA logo)
The Group I Certificates (as defined herein) will evidence in the
aggregate the entire beneficial interest in the Group I Loans (as defined
herein) and the Group II Certificates (as defined herein) will evidence in
the aggregate the entire beneficial interest in the Group II Loans (as
defined herein). The Group I Loans and the Group II Loans will be held by
the Mego Mortgage Home Loan Trust 1996-3 (the "Trust") to be formed pursuant
to a pooling and servicing agreement dated as of November 1, 1996 (the
"Agreement"), among Financial Asset Securities Corp., as depositor (the
"Depositor"), Mego Mortgage Corporation ("Mego"), as seller, servicer and
claims administrator (in such capacities, the "Seller", "Servicer" and
"Claims Administrator", respectively), Norwest Bank Minnesota, N.A., as
master servicer (the "Master Servicer"), and First
continued on page 2
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED CERTIFICATES, SEE THE INFORMATION UNDER "RISK FACTORS" BEGINNING ON
PAGE S-15 HEREIN AND IN THE PROSPECTUS ON PAGE 12.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR , THE SELLER, THE MASTER
SERVICER, THE TRUSTEE, THE SERVICER, THE CERTIFICATE INSURER, THE CLAIMS
ADMINISTRATOR, THE CONTRACT OF INSURANCE HOLDER OR ANY AFFILIATE THEREOF,
EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE CERTIFICATES NOR THE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, OTHER THAN TO THE
EXTENT OF THE FHA INSURANCE DESCRIBED HEREIN. THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Offered Certificates are being offered by the Underwriter from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor are expected to be
approximately $66,702,441.49, plus accrued interest, before deducting
issuance expenses payable by the Depositor, estimated to be $175,000 in the
aggregate.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel. It is expected that
delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company (the "Depository") on
or about December 17, 1996.
GREENWICH CAPITAL
M A R K E T S, I N C.
- -
December 11, 1996
Trust of New York, National Association, as trustee and contract of insurance
holder (in such capacities, the "Trustee" and "Contract of Insurance Holder",
respectively). The Class IA-1 Certificates, Class IA-2 Certificates, Class
IA-3 Certificates (the "Group IA Certificates"), Class IS Certificates and
Class R Certificates (collectively, the "Group I Certificates") will
represent undivided ownership interests in a Loan Group consisting of fixed-
rate residential home improvement loans and retail installment sale contracts
and home equity loans, secured by first- and junior-lien mortgages on
Mortgaged Properties (the "Group I Loans"). The Class IIA Certificates (the
"Group IIA Certificates") and the Class IIS Certificates (collectively, the
"Group II Certificates") will represent undivided ownership interests in a
Loan Group consisting of fixed-rate residential home improvement loans and
retail installment sale contracts and home equity loans, 89% (by Cut-Off Date
Group II Loan Balance, as defined herein) of which are secured by first- and
junior-lien mortgages on Mortgaged Properties and the remainder of which are
unsecured obligations of the related borrowers (the "Group II Loans", and
together with the Group I Loans, the "Loans"). The assets of the Trust will
include the Loans, the Policies and certain other property. See "Property of
the Trust" herein. Approximately 84% (by Cut-Off Date Group I Loan Balance)
of the Group I Loans and approximately 11% (by Cut-Off Date Group II Loan
Balance, as defined herein) of the Group II Loans will be partially insured
by the Federal Housing Administration (the "FHA") of the United States
Department of Housing and Urban Development ("HUD") under Title I of the
National Housing Act of 1934, as amended. See "The Title I Loan Program and
the Contract of Insurance---The Contract of Insurance" herein.
All of the Loans will be acquired by the Depositor from the Seller
pursuant to a purchase agreement dated as of November 1, 1996 (the "Purchase
Agreement"), between the Depositor and the Seller. The aggregate undivided
interest in the Group I Loans represented by the Group IA Certificates
initially will equal $39,521,458, which is approximately 98.65% of the Cut-
Off Date Group I Loan Balance. The aggregate undivided interest in the Group
II Loans represented by the Group IIA Certificates initially will equal
$27,199,925, which is approximately 100% of the Cut-Off Date Group II Loan
Balance.
-----------------------
THE YIELDS TO MATURITY ON THE CLASS A CERTIFICATES MAY VARY FROM
ANTICIPATED YIELDS TO THE EXTENT THAT ANY SUCH CERTIFICATES ARE PURCHASED AT
A DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS
THEREON ARE SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE LOANS IN THE RELATED LOAN GROUP. CERTIFICATEHOLDERS
SHOULD CONSIDER, IN THE CASE OF ANY CLASS A CERTIFICATES PURCHASED AT A
DISCOUNT, THE RISK THAT A LOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS
ON THE LOANS IN THE RELATED LOAN GROUP COULD RESULT IN AN ACTUAL YIELD THAT
IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY CLASS A
CERTIFICATES PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED
RATE OF PRINCIPAL PAYMENTS ON THE LOANS IN THE RELATED LOAN GROUP COULD
RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD.
----------------------
The interests of the owners of the Class A Certificates will be
represented by book-entries on the records of the Depository and
participating members thereof. No person acquiring a beneficial interest in
a Class A Certificate will be entitled to receive a physical certificate
representing such certificate, except in the limited circumstances described
herein. See "Description of the Certificates--Book-Entry Certificates"
herein.
Except for certain representations and warranties relating to the Loans,
Mego's obligations with respect to the Offered Certificates are limited to
its contractual servicing and claim administration obligations. The Offered
Certificates evidence interests in the Trust only and are payable solely from
amounts received with respect thereto. The Offered Certificates do not
constitute an obligation of or an interest in the Depositor, the Seller, the
Servicer, the Master Servicer, the Claims Administrator, the Trustee or the
Certificate Insurer or any of their respective affiliates, and will not be
insured or guaranteed by any governmental agency.
An election will be made to treat the Group I Loans as a "real estate
mortgage investment" conduit (the "REMIC") for federal income tax purposes.
As described more fully herein, the Group IA Certificates and the Class IS
Certificates will be designated as "regular interests" in the REMIC. See
"Certain Federal Income Tax Consequences--Group I Certificates" herein and
"Certain Material Federal Income Tax Consequences" in the Prospectus. The
portion of the Trust consisting of the Group II Loans will be classified as a
grantor trust for federal income tax purposes. Holders of Group IIA
Certificates will be treated for federal income tax purposes as owners of a
pro rata undivided interest in the Group II Loans. See "Certain Federal
Income Tax Consequences--Group II Certificates" herein and "Certain Material
Federal Income Tax Consequences--Tax Status as a Grantor Trust" in the
Prospectus.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Offered Certificates but has no obligation to do so.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that such a market will develop or, if it does develop,
that it will continue.
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is contained
in the Prospectus dated December 11, 1996 (the "Prospectus") which
accompanies this Prospectus Supplement and purchasers are urged to read both
this Prospectus Supplement and the Prospectus in full. Sales of the Offered
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus Supplement and the Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed on behalf
of the Trust with the Commission pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, on or subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Offered Certificates made by this Prospectus Supplement. The
Depositor will provide without charge to each person to whom this Prospectus
Supplement and Prospectus are delivered, on request of such person, a copy of
any or all of the documents incorporated herein by reference other than the
exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be made to
Kari A. Skilbred, Vice President of Financial Asset Securities Corp. in
writing at 600 Steamboat Road, Greenwich, Connecticut 06830.
AVAILABLE INFORMATION
In addition to the locations specified under "Available Information" in
the accompanying Prospectus, the Securities and Exchange Commission (the
"Commission") maintains a Web site at http://www.sec.gov containing reports,
proxy and information statements and other information regarding registrants,
including the Depositor, that file electronically with the Commission.
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary
of Terms are defined elsewhere in this Prospectus Supplement or in the
Prospectus.
Trust Mego Mortgage Home Loan Trust 1996-3 (the "Trust") will be
formed pursuant to a pooling and servicing agreement to be
dated as of November 1, 1996 (the "Agreement") among Financial
Asset Securities Corp., as depositor (the "Depositor"), Mego
Mortgage Corporation ("Mego"), as seller, servicer and claims
administrator (in such capacities, the "Seller", "Servicer"
and "Claims Administrator", respectively), Norwest Bank
Minnesota, N.A., as master servicer (the "Master Servicer"),
and First Trust of New York, National Association, as trustee
and contract of insurance holder (in such capacities, the
"Trustee" and "Contract of Insurance Holder," respectively).
The property of the Trust will consist primarily of the Loans
(as defined below).
Securities Issued The Home Loan Asset-Backed Certificates, Series
1996-3 (the "Certificates") will consist of the
Class IA-1 Certificates, Class IA-2 Certificates,
Class IA-3 Certificates, Class IIA Certificates (the
"Class A Certificates"), Class IS Certificates,
Class IIS Certificates (the "Class S Certificates"
and together with the Class A Certificates, the
"Senior Certificates") and the Class R Certificates.
Only the Class A Certificates (the "Offered
Certificates") are being offered hereby. Each Class
A Certificate represents the right to receive
payments of interest at the per annum rate set forth
on the cover hereof (the "Pass-Through Rate"),
subject to certain limitations described herein,
payable monthly, and payments of principal to the
extent provided below. The Class IA-1 Certificates,
Class IA-2 Certificates, Class IA-3 Certificates
(collectively, the "Group IA Certificates"), Class
IS Certificates and Class R Certificates
(collectively, the "Group I Certificates") will
represent undivided ownership interests in the Group
I Loans. The Class IIA Certificates and the Class
IIS Certificates (collectively, the "Group II
Certificates") will represent undivided ownership
interests in the Group II Loans. Each of the Group I
Certificates and the Group II Certificates are
sometimes referred to herein as a "Certificate
Group" and each of the Group I Loans and the Group
II Loans are sometimes referred to herein as a "Loan
Group." The aggregate undivided interest in the
Group I Loans represented by the Group IA
Certificates initially will equal $39,521,458 of
principal, which represents 98.65% of the Cut-Off
Date Group I Loan Balance (as defined below). The
aggregate undivided interest in the Group II
Loans represented by the Group IIA Certificates initially will
equal $27,199,925 of principal, which represents 100% of the Cut-
Off Date Group II Loan Balance. The principal amount of each class
of Class A Certificates (each a "Class Principal Balance") on any
date is equal to the applicable Class Principal Balance set forth
on the cover hereof as of the Closing Date (as defined below) minus
the aggregate of amounts actually distributed as principal to the
holders of such class and, with respect to the Group IIA
Certificates, in the event any Insurer Default has occurred and is
continuing, certain losses allocated in reduction of the related
Class Principal Balance of the Group IIA Certificates. On any
date, the "Aggregate Class A Principal Balance" for a Certificate
Group is the aggregate of the Class Principal Balances of all Class
A Certificates in such Certificate Group on such date.
The Class IS Certificates represent the right to receive interest
at a Pass-Through Rate of 0.45% per annum, payable monthly, on a
notional amount (the "Class IS Notional Amount") equal with respect
to any Distribution Date to the Group I Loan Balance as of the
beginning of the calendar month preceding the month of such
Distribution Date (or, in the case of the first Distribution Date,
the Cut-Off Date Group I Loan Balance). The Class IIS Certificates
represent the right to receive interest at a Pass-Through Rate of
0.50% per annum, payable monthly, on a notional amount (the "Class
IIS Notional Amount" and together with the Class IS Notional
Amount, the "Class S Notional Amounts") equal with respect to any
Distribution Date to the Group II Loan Balance as of the beginning
of the calendar month preceding the month of such Distribution Date
(or, in the case of the first Distribution Date, the Cut-Off Date
Group II Loan Balance). The Class S Certificates have no class
principal balances. The Class R Certificates have no class
principal balance and will bear no interest. See "Description of
the Certificates" herein.
The Loans The Loans will be conveyed to the Trust by the Depositor on or
about December 17, 1996 (the "Closing Date"). The aggregate
principal balances of the Group I Loans and the Group II Loans
as of the opening of business on November 1, 1996 or, with
respect to any Loan originated on or after November 1, 1996,
as of the origination date of such Loan (as to each Loan, the
"Cut-Off Date") are $40,062,299.05 (the "Cut-Off Date Group I
Loan Balance") and $27,199,925.48 (the "Cut-Off Date Group II
Loan Balance"), respectively. Interest on each Loan is
payable monthly on the outstanding Loan Balance thereof at a
fixed rate per annum (the "Loan Rate"). See "Description
of the Loans" herein.
The Loans will not be insured by primary mortgage insurance
policies or any pool insurance policy. In addition, with respect to
the Group I FHA Loans, the Master Servicer will not require hazard
insurance to be maintained on the related Mortgaged Properties.
Moreover, the Loans will not be guaranteed by the Seller, the
Depositor or any of their respective affiliates.
Group I Loans. The "Group I Loans" consist of closed-end
fixed-rate home improvement loans and retail installment sale
contracts and home equity loans secured by first- and junior-lien
mortgages, deeds of trust and security deeds on residential
properties (which are primarily condominiums, townhouses and one-
to four-family residences), including investment properties.
Approximately 84% of the Group I Loans (by Cut-Off Date Group I
Loan Balance) will be partially insured by the Federal Housing
Administration ("FHA") of the United States Department of Housing
and Urban Development ("HUD") under Title I of the National Housing
Act of 1934, as amended (the "Group I FHA Loans"). See "The Title
I Loan Program and the Contract of Insurance" herein. The
Agreement requires the Master Servicer to service the FHA Loans (as
defined below) in accordance with the standards and procedures
required by the FHA under the Title I Program. The FHA Title I
insurance claims administration will be performed by Mego, in its
capacity as the Claims Administrator. See "The Title I Loan Program
and The Contract of Insurance" herein. The Group I Loans other
than the Group I FHA Loans (the "Group I Conventional Loans") were
originated by Mego pursuant to its conventional loan underwriting
guidelines and are not insured under the Title I Program. See
"Mego Mortgage Corporation--Conventional Loans" herein.
Group II Loans. The "Group II Loans" consist of closed-end
fixed-rate home improvement loans and retail installment sale
contracts which are partially insured by the FHA under the Title I
Program but which are unsecured general obligations of the related
borrowers (the "Group II Unsecured FHA Loans"), and closed-end
fixed-rate home improvement loans and home equity loans (the "Group
II Conventional Loans") secured by first- and junior-lien
mortgages, deeds of trust and security deeds on residential
properties (collectively with the properties securing the Group I
Loans, the "Mortgaged Properties"). The Group I
Loans and the Group II Loans are referred to herein collectively as
the "Loans."
The Group II Unsecured FHA Loans represent approximately 11% of the
Group II Loans (by Cut-Off Date Group II Loan Balance). The Group
II Unsecured FHA Loans and the Group I FHA Loans are referred to
collectively herein as the "FHA Loans." See "The Title I Loan
Program and the Contract of Insurance" herein. The Group II
Conventional Loans together with the Group I Conventional Loans
(the "Conventional Loans") were originated by Mego pursuant to its
conventional loan underwriting guidelines and are not insured under
the Title I Program. See "Mego Mortgage Corporation--Conventional
Loans" and "Description of the Loans" herein.
Denominations The Class A Certificates are offered for purchase in
minimum denominations of $1,000 and integral multiples
thereof.
Registration of
Class A
Certificates The Class A Certificates will initially be issued in
book-entry form. Persons acquiring beneficial ownership
interests in the Class A Certificates ("beneficial
owners") will hold their interests through The Depository
Trust Company (the "Depository"). Transfers within the
Depository will be made in accordance with the usual
rules and operating procedures of the Depository. So
long as the Class A Certificates are Book-Entry
Certificates (as defined herein), such Certificates will
be evidenced by one or more certificates registered in
the name of Cede & Co. ("Cede"), as the nominee of the
Depository. No beneficial owners of Book-Entry
Certificates will be entitled to receive a definitive
certificate representing such owner's interest, except in
the event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described herein. All references in this Prospectus
Supplement to the rights of holders of the Class A
Certificates reflect the rights of such beneficial owners
only as such rights may be exercised through the
Depository and its participating organizations for so
long as such Class A Certificates are held by the
Depository. See "Description of the Certificates--
Book-Entry Certificates" herein.
Depositor Financial Asset Securities Corp. (the "Depositor"), a Delaware
corporation. The Depositor is an indirect limited purpose
finance subsidiary of National Westminster Bank Plc and an
affiliate of Greenwich Capital Markets, Inc. (the
"Underwriter"). See "The Depositor" in the Prospectus and
"Method of Distribution" herein. None of the Depositor,
National Westminster Bank Plc or any of their affiliates or
any other person or entity (other than the Certificate Insurer
to the extent set forth herein) will insure or guarantee or
otherwise be obligated with respect to the Certificates.
The Seller Mego Mortgage Corporation, a Delaware corporation.
Master Servicer Norwest Bank Minnesota, N.A. (the "Master
Servicer"), a national banking association with its
executive offices at Sixth and Marquette,
Minneapolis, Minnesota 55479 and its master
servicing offices located at 11000 Broken Land
Parkway, Columbia, Maryland 21044.
The Servicer and Claims
Administrator Mego Mortgage Corporation. Pursuant to a servicing
agreement (the "Servicing Agreement") dated as of
November 1, 1996 among Mego, the Master Servicer, the
Trustee and the Trust, Mego will service the Loans on
behalf of the Master Servicer. Mego will also administer
claims filed under the contract of insurance as Claims
Administrator under the Agreement.
Pass-Through Rate The "Pass-Through Rate" applicable to the Class A
Certificates on any Distribution Date is the rate
per annum set forth on the cover hereof, subject to
certain limitations set forth herein under
"Description Of The Certificates--Pass-Through
Rate". The "Pass-Through Rate" with respect to the
Class IS Certificates and the Class IIS Certificates
on any Distribution Date is 0.45% per annum and
0.50% per annum, respectively. Interest on the
Senior Certificates in respect of any Distribution
Date will accrue from the first day of the month
preceding such Distribution Date through the last
day of the month preceding such Distribution Date
calculated on the basis of a 360-day year consisting
of twelve 30-day months.
Distributions On the 25th day of each month, or if such a day is not a
Business Day, then the next succeeding Business Day,
commencing in December 1996 (each such day, a
"Distribution Date"), the Trustee will be required to
distribute the amounts described below from funds
available therefor in respect of a Loan Group to the
holders of the Senior Certificates of the related
Certificate Group of record as of the last day of the
calendar month immediately preceding the calendar month
in which such Distribution Date occurs (the "Record
Date"), except that the final distribution on the Offered
Certificates of any class will be made only upon
presentation and surrender of the Certificates of such
class at the office or agency of the Trustee in New York,
New York.
Distributions relating to each Loan Group will be applied to the
payment of principal on the Class A Certificates of the related
Certificate Group and to the payment of interest on the Senior
Certificates of the related Certificate Group in accordance with
the priorities described below.
1. Interest On each Distribution Date, to the extent of
funds available therefor in respect of a Loan
Group, and in accordance with the priorities
described herein, interest will be distributed
with respect to each class of Senior
Certificates of the related Certificate Group
in an amount (each a "Class Interest
Distribution") equal to the sum of (a) one
month's interest at the applicable Pass-Through
Rate on the related Class Principal Balance or
Class S Notional Amount, as applicable, for
such Distribution Date (the "Class Monthly
Interest Amount") and (b) any related Class
Interest Shortfall (as defined below) for such
Distribution Date. As to any Distribution Date
and class of Senior Certificates, "Class
Interest Shortfall" is the sum of (a) the
excess of the related Class Monthly Interest
Amount for the preceding Distribution Date and
any outstanding Class Interest Shortfall with
respect to such class on such preceding
Distribution Date, over the amount in respect
of interest that is actually distributed to the
holders of such class on such preceding
Distribution Date and (b) one month's interest
on such excess, to the extent permitted by law,
at the related Pass-Through Rate.
Notwithstanding the foregoing, the Class
Monthly Interest Amount for any Distribution
Date and class will be reduced by such class's
pro rata share (based on the interest such
class would otherwise be entitled to receive
absent the shortfalls specified below) of (x)
Prepayment Interest Shortfalls (as defined
herein) in respect of the related Loan Group,
to the extent not covered by the Servicing Fee
and (y) any Civil Relief Act Interest
Shortfalls (as defined herein) in respect of
the related Loan Group for such Distribution
Date. Neither Prepayment Interest Shortfalls
nor Civil Relief Act Interest Shortfalls will
be covered by payments under the Policies.
See "Risk Factors--Civil Relief Act
Shortfalls" herein.
Distributions of the related Class Interest
Distribution to the Class S Certificates of a
Certificate Group will be made prior to the
distribution of the related Class Interest
Distribution to the Class A Certificates of
such Certificate Group. See "Description of the
Certificates--Distributions" herein.
2. Principal On each Distribution Date, to the extent of
funds available therefor and in accordance with
the priorities described herein, principal will
be distributed to the holders of the Class A
Certificates of each Certificate Group then
entitled to distributions of principal, in an
amount equal to the lesser of (A) the related
Aggregate Class A Principal Balance and (B) the
Class A Principal Distribution for such
Certificate Group on such Distribution Date.
The "Class A Principal Distribution" means,
with respect to any Distribution Date and
Certificate Group, the sum of the Class A
Monthly Principal Amount for such Distribution
Date and Certificate Group and with respect to
the Group IA Certificates, any outstanding
Class A Principal Shortfall as of the close of
business on the preceding Distribution Date,
provided that on the Distribution Date in
November 2022, the "Class A Principal
Distribution" will equal the Aggregate
Class A Principal Balance for each of
the Group IA Certificates and the Group IIA
Certificates, respectively.
"Class A Monthly Principal Amount" means, with
respect to any Distribution Date and
Certificate Group, the sum of the following
amounts (without duplication) with respect to
the immediately preceding Due Period (as
defined below): (i) that portion of all
payments received on Loans in the related Loan
Group (other than Defaulted Loans (as defined
herein)) allocable to principal, including all
full and partial principal
prepayments, (ii) the Loan Balance of each Loan
in the related Loan Group that became a
Defaulted Loan for the first time during such
Due Period, (iii) the portion of the Purchase
Price (as defined herein) allocable to
principal of all Defective Loans in the related
Loan Group (as defined herein) with respect to
such Due Period and the portion of the purchase
amount paid in connection with the termination
of the Trust allocable to principal with
respect to the Loans in the related Loan Group,
(iv) any Substitution Adjustments (as defined
herein) for the related Loan Group received on
or prior to the related Determination Date (as
defined herein) and not yet distributed, and
(v) only with respect to the Group I
Certificates, the Distributable Excess Spread
(as defined herein), if any, in respect of such
Distribution Date. See "Description of the
Certificates--Principal" herein.
"Class A Principal Shortfall" means, with
respect to any Distribution Date and the Group
IA Certificates, the excess of the sum of the
Class A Monthly Principal Amount for such
Certificate Group for the preceding
Distribution Date and any outstanding Class A
Principal Shortfall for such Certificate Group
on such preceding Distribution Date over the
amount in respect of principal that is actually
distributed to the holders of the Group IA
Certificates on such preceding Distribution
Date.
Distributions to the holders of the Group IA
Certificates of Distributable Excess Spread
will result in acceleration of principal
payments to the holders of the Group IA
Certificates and reduce the weighted average
lives of the classes of Group IA Certificates.
See "Description of Certificates --
Overcollateralization Provisions" and
"Description of the Certificates-Weighted
Average Lives" herein.
Credit
Enhancement The credit enhancement provided for the benefit of the
Certificateholders consists of (x) FHA Insurance to the
extent described herein, (y) in the case of the Group IA
Certificates, the overcollateralization in effect on the
Closing Date and any further overcollateralization
created by the application of the internal cash flows of
the Group I Loans, as described herein, and (z) the
Policies.
FHA Insurance Program and Contract of Insurance: The aggregate
amount of insurance provided by the FHA pursuant to the Title I
Program that is expected to be available to the Claims
Administrator in respect of the FHA Loans is $3,674,309.75 (the
"Trust Designated Insurance Amount"). Such amount represents 10%
of the Loan Balances of the FHA Loans as of the Cut-Off Date.
First Trust of New York, National Association holds the Contract of
Insurance for the benefit of the Trust and other Related Series
Trusts (defined herein). As of the Closing Date the aggregate
amount of insurance transferred or to be transferred by the FHA
pursuant to the Title I Program to the Contract of Insurance Holder
is $16,971,823.75 (the "Combined FHA Insurance Amount") and for any
date of determination thereafter, the Combined FHA Insurance Amount
will equal such amount plus all amounts subsequently transferred by
the Secretary of HUD to the Contract of Insurance Holder's FHA
Reserve Account (defined below) less the amount of FHA Insurance
proceeds received since the Closing Date under the Contract of
Insurance with respect to the FHA Loans and loans in other Related
Series Trusts. The Combined FHA Insurance Amount will be reflected
in an insurance coverage reserve account maintained by the FHA in
the name of the Contract of Insurance Holder (the "FHA Reserve
Account").
The Secretary of HUD will not earmark the insurance coverage in the
FHA Reserve Account for the benefit of the Trust or any other
Related Series Trust; however, each of the Contract of Insurance
Holder and the Claims Administrator has agreed in the Agreement to
earmark the Trust Designated Insurance Amount exclusively for the
benefit of the Trust. The Trust Designated Insurance Amount and
any trust designated insurance amount for any Related Series Trust
may be increased up to the Combined FHA Insurance Amount with the
consent of the Certificate Insurer. In the event that any portion
of the Combined FHA Insurance Amount is applied to loans in a
Related Series Trust other than the Trust in excess of the trust
designated insurance
amount for such Related Series Trust, the portion of the Combined
FHA Insurance Amount available to cover defaults on the FHA Loans
may be reduced below the remaining Trust Designated Insurance
Amount for the Trust. See "Risk Factors--Limitations on FHA
Insurance," "The Title I Loan Program and the Contract of
Insurance--FHA Insurance Coverage" and "--The Contract Of
Insurance" herein.
Subject to the then remaining Combined FHA Insurance Amount, each
FHA Loan will be insured by the FHA in an amount equal to 90% of
the sum of the following: (a) the unpaid loan obligation (equal to
the net unpaid principal and the uncollected interest earned to the
date of default) with adjustments thereto if the holder of the loan
has proceeded against property securing such loan, (b) the interest
on the unpaid amount of the loan obligation from the date of
default to the date of the claim's initial submission for payment
plus 15 calendar days (not to exceed nine months from the date of
default), calculated at the rate of 7% per annum, (c) the
uncollected court costs, (d) the attorneys' fees (not to exceed
$500), and (e) the expenses for recording the assignment of the
security to the United States of America. See "The Title I Loan
Program and the Contract of Insurance--The Title I Program" herein.
Since the remaining Combined FHA Insurance Amount is dependent upon
future events, including reductions for the payment of claims, no
assurance can be given that the Combined FHA Insurance Amount will
be adequate to cover 90% of the losses on such FHA Loans. Further,
it is possible that a FHA Loan would not be submitted to the FHA
for insurance coverage due to the limitations on the Trust
Designated Insurance Amount described above (even though the
Combined FHA Insurance Amount might be sufficient to provided
insurance proceeds in respect of such FHA Loan).
Overcollateralization. The credit enhancement provisions available
to the Group IA Certificates include (i) overcollateralization in
effect as of the Closing Date (i.e., the excess of the Group I Loan
Balance over the Aggregate Class A Principal Balance for the Group
IA Certificates) and (ii) a feature providing for limited
acceleration of principal distributions on the Group IA
Certificates in the early months of the transaction that is
intended to create additional overcollateralization. This
acceleration of principal distributions on the Group IA
Certificates is achieved by application of Distributable Excess
Spread (as defined herein) as principal of the Group IA
Certificates. Once the level of overcollateralization specified in
the Agreement is reached and subject to the provisions described
herein under "Description of the Certificates--
Overcollateralization Provisions", the acceleration feature will
cease, unless necessary to maintain the required level of
overcollateralization.
The Agreement provides that, subject to certain trigger tests, the
required level of overcollateralization may increase or decrease
over time. An increase would result in a temporary period of
accelerated amortization of the Group IA Certificates to increase
the actual level of overcollateralization to its required level; a
decrease would result in a temporary period of decelerated
amortization to reduce the actual level of overcollateralization to
its required level. See "Description of the Certificates--
Principal" herein.
The Policies. The Certificate Insurer will issue two certificate
guaranty insurance policies (the "Policies"), one with respect to
the Group I Certificates and the other with respect to the Group II
Certificates. The Policies are being issued as a means of
providing credit enhancement to the Senior Certificates. The
Policies will unconditionally and irrevocably guarantee that with
respect to each Distribution Date and Certificate Group, an amount
equal to the related Insured Payment (as defined herein) will be
paid to the Trustee on behalf of the holders of the Senior
Certificates of each Certificate Group, as further described
herein. In the event of a default under the Policy relating to a
Certificate Group, holders of the Certificates in such Certificate
Group will directly bear the credit and other risks associated with
their undivided interest in the Trust. See "The Certificate
Guaranty Insurance Policies" herein.
The Certificate
Insurer MBIA Insurance Corporation (the "Certificate Insurer"), a
stock insurance company organized under the laws of the State
of New York. See "The Certificate Insurer" herein.
Servicing The Master Servicer is responsible for servicing, managing and
making collections on the Loans. All collections in respect of
the Loans in a Loan Group will be deposited into the related
Collection Account as described herein. Not later than the
fifth Business Day prior to each Distribution Date (the
"Determination Date"), the Trustee will calculate the amounts
to be paid, as described herein, to the Certificateholders on
such Distribution Date. See "Description of the Certificates--
Distributions." With respect to each Due Period and Loan
Group, the Master Servicer will receive from payments in
respect of interest on the related Loans, a portion of such
payments as a monthly master servicing
fee (each a "Master Servicing Fee") in the amount of 0.08% per
annum (the "Master Servicing Fee Rate") on the related Loan Group
Balance as of the first day of each such Due Period as to which
such a payment was made.
The Servicer will service the Loans on behalf of the Master
Servicer pursuant to the terms of the Servicing Agreement. The
Servicer will also receive from payments in respect of interest on
the Loans in each Loan Group a monthly servicing fee (the
"Servicing Fee") in an amount equal to 1.00% per annum (the
"Servicing Fee Rate") on the related Loan Group Balance subject to
certain reductions due to Prepayment Interest Shortfalls and any
Additional Trustee Fee owed to the Trustee. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses." In
certain limited circumstances, the Master Servicer may resign or be
removed, in which event either the Trustee or a third-party
servicer will be appointed as a successor Master Servicer. See
"Description of the Certificates--Certain Matters Regarding the
Master Servicer and Servicer."
Trustee First Trust of New York, National Association. Notices and
correspondence for the Trustee should be directed to First
Bank National Association, First Trust Center, 180 East Fifth
Street, St. Paul, MN 55101, attention: Structured Finance.
Interest
Advances The Master Servicer is required to remit to the Trustee
no later than the close of business on the Determination
Date for each Distribution Date, for deposit in the
Distribution Account (as defined herein) relating to each
Certificate Group, an amount equal to the scheduled
installment of interest due on each Loan in the related
Loan Group (other than a Defaulted Loan) but not received
during the related Due Period, net of the related
Servicing Fee (each, an "Interest Advance"). The Master
Servicer is not required to make any Interest Advance
that it determines would be nonrecoverable. Interest
Advances are reimbursable to the Master Servicer subject
to certain conditions and restrictions, and are intended
to provide sufficient funds for the required
distributions of interest on the Senior Certificates. See
"Description of the Certificates--Interest Advances"
herein.
Payments to Cover
Prepayment Interest
Shortfalls The Servicer will be required to fund in respect of each
Distribution Date and Loan Group, without any right of
reimbursement, an amount equal to the lesser of (a) the
aggregate, for each Loan in such Loan Group, the excess,
if any,
of (x) a full month's interest on the amount of each principal
prepayment in full at a per annum rate equal to the related Loan
Rate (or such lower rate as may be in effect for a Loan because of
application of the Civil Relief Act) minus the related Servicing
Fee Rate over (y) the amount of interest actually paid by the
Obligor in connection with such principal prepayment during the
related Due Period (a "Prepayment Interest Shortfall") and (b) the
aggregate of the related Servicing Fee to be received by the
Servicer in the related Due Period. See "Description of the
Certificates--Adjustment to Servicing Fee in Connection with
Certain Prepaid Loans". Any Prepayment Interest Shortfall not
covered by such Servicing Fee will not be covered by the
application of any Excess Spread or by the Policies.
Optional Termination by the
Master Servicer or
Mego The Master Servicer or Mego, each with the consent of the
Certificate Insurer if such purchase would result in a claim
under the Policies, may purchase from the Trust all (but not
fewer than all) remaining Loans and other property of the
Trust, thereby effecting early retirement of the Certificates,
on any Distribution Date as of which each of the Group I Loan
Balance and the Group II Loan Balance is less than 10% of the
Cut-Off Date Group I Loan Balance and Cut-Off Date Group II
Loan Balance, respectively. See "Description of the
Certificates--Termination; Retirement of the Certificates."
Certain Federal Income Tax
Considerations An election will be made to treat the Group I Loans
as a "real estate mortgage investment conduit" (the
"REMIC") for federal income tax purposes. In the
opinion of Brown & Wood LLP, counsel to Mego, the
Depositor and the Underwriter, the Group IA
Certificates and Class IS Certificates will
constitute "regular interests" in the REMIC and the
Class R Certificates will constitute the sole class
of "residual interests" in the REMIC and the portion
of the Trust containing the Group II Loans will be
classified as a grantor trust for federal income tax
purposes. Certificateholders of Group IIA
Certificates will be treated for federal income tax
purposes as owners of a pro rata undivided interest
in the Group II Loans. See "Certain Federal Income
Tax Consequences--Group II Certificates" herein and
"Certain Material Federal Income Tax Consequences--
Tax Status as a Grantor Trust" in the Prospectus.
The Group IA Certificates may be issued with
original issue discount for federal income tax
purposes. For purposes of determining the amount and
rate of accrual of original issue discount and
market discount, the Depositor intends to assume
that principal prepayments on the
Loans will occur at a constant prepayment rate ("CPR") equal to 15%
per annum. No representation is made as to whether the Loans will
prepay at that rate or any other rate. See "Certain Material
Federal Income Tax Consequences" in the Prospectus.
ERISA
Considerations The acquisition of an Offered Certificate by an
employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or a plan or arrangement subject to
Section 4975 of the Code (each of the foregoing, a
"Plan") could, in some instances, result in a
"prohibited transaction" or other violation of the
fiduciary responsibility provisions of ERISA and
Code Section 4975.
Any Plan fiduciary considering whether to purchase any Offered
Certificates on behalf of a Plan should consult with its counsel
regarding the applicability of the provisions of ERISA and the
Code. The Group IIA Certificates may not be purchased by a Plan
except upon satisfaction of certain conditions. See "ERISA
Considerations" herein and in the Prospectus.
Legal
Investment The Offered Certificates will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") because
some of the Loans are secured by junior liens or are
unsecured. Accordingly, many institutions with legal
authority to invest in comparably rated securities based
on first mortgage loans may not be legally authorized to
invest in the Offered Certificates. See "Legal
Investment" in the Prospectus.
Ratings It is a condition of the issuance of the Offered Certificates
that they be rated AAA by Standard & Poor's Rating Services
("S&P"), and Aaa by Moody's Investors Service, Inc. ("Moody's"
and, together with S&P, the "Rating Agencies"). The security
ratings of the Offered Certificates should be evaluated
independently from similar ratings on other types of
securities. A security rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or
withdrawal at any time by the Rating Agencies. See "Ratings"
herein.
RISK FACTORS
Investors are urged to carefully consider, among other things, the
following factors in connection with a purchase of the Offered Certificates.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
YIELD GENERALLY. The yields to maturity of the Class A Certificates in
a Certificate Group may vary from the anticipated yields to the extent such
Certificates are purchased at a discount or premium and to the extent the
rate and timing of payments thereon are sensitive to the rate and timing of
principal payments (including prepayments) of the Loans in the related Loan
Group. Certificateholders should consider, in the case of any Class A
Certificates purchased at a discount, the risk that a lower than anticipated
rate of principal payments could result in an actual yield that is lower than
the anticipated yield and, in the case of any Class A Certificates purchased
at a premium, the risk that a faster than anticipated rate of principal
payments could result in an actual yield that is lower than the anticipated
yield. In addition, the timing of changes in the rate of Principal
Prepayments (as defined herein) on the Loans may significantly affect an
investor's actual yield to maturity, even if the average rate of Principal
Prepayments is consistent with such investor's expectation. In general, the
earlier a Principal Prepayment on a Loan occurs, the greater the effect of
such Principal Prepayment on an investor's yield to maturity. 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 Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of Principal Prepayments.
PREPAYMENT CONSIDERATIONS AND RISKS. The rates of principal payment on
the Class A Certificates in a Certificate Group and the aggregate amount of
distributions and yields to maturity of the Class A Certificates in such
Certificate Group will be related to, among other things, the rate and timing
of payments of principal on the Loans in the related Loan Group. The rate of
principal payments on the Loans will in turn be affected by the amortization
of the Loans and by the rate of Principal Prepayments thereon (including for
this purpose, prepayments resulting from (i) refinancing, (ii) liquidations
of the Loans due to defaults, casualties and condemnations and (iii)
repurchases by the Seller as required pursuant to the Agreement). Generally,
if prevailing interest rates on similar loans fall significantly below the
interest rates on the Loans, the Loans may be subject to higher prepayment
rates than if prevailing rates remain at or above the interest rates on the
Loans. Conversely, if prevailing interest rates rise significantly above the
interest rates on the Loans, the rate of prepayments may decrease. The Loans
may be prepaid by the obligors thereunder (the "Obligors") at any time. The
Mortgage Loans are subject to the "due-on-sale" provisions included therein.
Prepayments, liquidations and purchases of the Loans in a Loan Group
(including any purchase by the Master Servicer or Mego of the remaining Loans
and Mortgaged Properties (title to which has been acquired by the Trust) in
connection with the optional termination of the Trust) will, subject to
certain conditions, result in distributions to holders of the Class A
Certificates of the related Certificate Group then entitled to receive
principal distributions of principal that would otherwise be distributed over
the remaining terms of such Loans. In addition, the overcollateralization
provisions applicable to the Group IA Certificates will result in a limited
acceleration of principal payments to the holders of the Group IA
Certificates. See "Description of the Certificates" herein. Since the rate
of payment of principal on the Loans will depend on future events and a
variety of factors, no assurance can be given as to such rate or the rate of
Principal Prepayments.
The weighted average life of a pool of loans is the average amount of
time that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because
it is expected that there will be prepayments and defaults on the Loans, the
actual weighted average life or lives of the Certificates of a Certificate
Group may be expected to vary substantially from the weighted average
remaining term to stated maturity of the Loans in the related Loan Group as
set forth under "Description of the Loans."
DEFAULTS AND DELINQUENT PAYMENTS. The yields to maturity of the Offered
Certificates of a Certificate Group will be sensitive to defaults and
delinquent payments on the Loans in the related Loan Group. Neither the
Master Servicer nor the Servicer will be required to advance amounts in
respect of delinquent payments of principal of the Loans. If a purchaser of
an Offered Certificate calculates its anticipated yield based on an assumed
rate of default and amount of losses that is lower than the default rate and
amount of losses actually incurred and such actual losses are not covered by
the Policies, its actual yield to maturity will be lower than that so
calculated and could, in the event of substantial losses, be negative. The
timing of losses that are not covered by the Policies will also affect an
investor's actual yield to maturity even if the rate of defaults and severity
of such losses are consistent with an investor's expectations. In general,
the earlier a loss occurs, the greater is the effect on an investor's yield
to maturity. There can be no assurance as to the delinquency, foreclosure or
loss experience with respect to the Loans.
PAYMENT DELAY. Under the Agreement, payments of principal and interest
on the Loans in a Loan Group in respect of any Due Period generally will not
be passed through to the holders of the Offered Certificates of the related
Certificate Group until the Distribution Date in the following calendar
month. As a result, the monthly distributions to the holders of the Offered
Certificates generally will reflect Obligor payments during the prior
calendar month. Each Distribution Date will be on the 25th day of each month
(or the next succeeding business day), and the first Distribution Date will
not occur until December 26, 1996. Thus, the effective yields to the holders
of the Offered Certificates will be lower than those otherwise produced by
the related Pass-Through Rates because distributions on the Offered
Certificates in respect of any given month will not be made until on or about
the 25th day of the following month and will not bear interest during such
delay.
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY.
Since a substantial portion (approximately 29% by Cut-Off Date Group I Loan
Balance and 29% by Cut-Off Date Group II Loan Balance) of the Mortgaged
Properties is located in California, an overall decline in the California
residential real estate market could adversely affect the values of the
Mortgaged Properties securing such Mortgage Loans (as defined herein) such
that the Loan Balances of the related Mortgage Loans, together with any
primary financing on such Mortgaged Properties, could equal or exceed the
value of such Mortgaged Properties. As the residential real estate market is
influenced by many factors, including the general condition of the economy
and interest rates, no assurances can be given that the California real
estate market will not weaken further. If the California residential real
estate market should experience an overall decline in property values after
the dates of origination of the Mortgage Loans, the rates of losses on the
Mortgage Loans may be expected to increase, and may increase substantially.
Because a substantial portion of the Mortgaged Properties is in California,
the risk of occurrence of earthquake damage exists that may not be covered by
any hazard insurance.
NATURE OF MORTGAGES; MORTGAGED PROPERTIES. The Mortgage Loans are
secured by first- and junior-lien mortgages and security deeds. Mortgage
Loans secured by junior-lien mortgages are entitled to proceeds that remain
from the sale of the related Mortgaged Property after any related senior
mortgage loan or mortgage loans and prior statutory liens have been
satisfied. In the event that such proceeds are insufficient to satisfy such
loans and prior liens in the aggregate or any FHA Insurance, if applicable,
is insufficient or unavailable and the Certificate Insurer does not perform
its obligations under the related Policy, the Trust and, accordingly, the
Certificateholders, bear (i) the risk of delay in distributions while a
deficiency judgment against the Obligor is obtained and (ii) the risk of loss
if the deficiency judgment cannot be obtained or is not realized upon. See
"Certain Legal Aspects of the Loans" in the Prospectus.
Furthermore, secured Title I Loans generally are not required to be
written with any equity in the Mortgaged Property above the aggregate amount
of the liens (including the amount of the related lien securing the Mortgage
Loan on the related Mortgaged Property). In addition, a junior lienholder
may not foreclose on the property securing a junior lien unless it forecloses
subject to the senior lien(s), in which case it must either pay the entire
amount due on the senior lien(s) to the senior mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgage(s) in the event the mortgagor is in default thereunder. See
"Certain Legal Aspects of the Loans" in the Prospectus. In servicing secured
Title I Loans in its portfolios, it is not the Master Servicer's or the
Servicer's practice to satisfy the senior lien(s) at or prior to the
foreclosure sale, nor to advance funds to keep the senior mortgage(s)
current. The Trust will have no source of funds (and may not be permitted
under the REMIC provisions of the Code) to satisfy the senior mortgagee(s) or
make payments due to the senior mortgagee(s), and therefore,
Certificateholders should not expect that any senior mortgage(s) will be kept
current by the Trust for the purpose of protecting the Trust's junior lien.
As a result, it is not expected that the Master Servicer or the Servicer will
pursue foreclosure proceedings with respect to the FHA Loans secured by a
junior lien on a Mortgaged Property. See "The Title I Loan Program and the
Contract of Insurance" herein.
GROUP II LOANS. General credit risk will be greater to the holders of
Group II Certificates than to holders of the Group I Certificates because
approximately 11% (by Cut-Off Date Group II Loan Balance) of the Group II
Loans are unsecured general obligations of the related Obligors. A default by
an Obligor on an unsecured Loan or the application of federal bankruptcy laws
and state debtor relief laws could result in such loan being written-off by
the Servicer or Master Servicer. All of such Group II Loans that are
unsecured general obligations, however, are FHA Loans. In the event of a
default of a Group II Unsecured FHA Loan, if the FHA Insurance is
insufficient and the Certificate Insurer does not perform its obligations
under the related Policy, the Trust and, accordingly, the Certificateholders
of the Group II Certificates will bear (i) the risk of delay in distributions
while a judgment against the Obligor is obtained and (ii) the risk of loss if
the judgment cannot be obtained or is not realized upon.
RELATED SERIES TRUSTS. The Contract of Insurance Holder is First Trust
of New York, National Association for the benefit of the Trust. The Contract
of Insurance will be held for the benefit of the Trust, as well as the Mego
Mortgage FHA Title I Loan Trust 1996-1 and the Mego Mortgage FHA Title I Loan
Trust 1996-2 as well as any other subsequently created trust of which the
Trustee is the trustee and to which Title I Loans are sold directly or
indirectly by the Seller and the related senior certificates of which are
insured by a certificate guaranty insurance policy issued by the Certificate
Insurer (each, a "Related Series Trust"). The Secretary of HUD will not
earmark the insurance coverage in the FHA Reserve Account for the benefit of
any particular Related Series Trust, but each of the Contract of Insurance
Holder and the Claims Administrator has agreed in the Agreement to earmark
$3,674,309.75 (the "Trust Designated Insurance Amount") of such insurance
coverage exclusively for the benefit of the Trust. Unless the Certificate
Insurer consents, the Contract of Insurance Holder and the Claims
Administrator will not submit any claim to the FHA in respect of the FHA
Loans if the amount of such claim and all claims paid in respect of the FHA
Loans would exceed the Trust Designated Insurance Amount. The Trust
Designated Insurance Amount and any trust designated insurance amount for any
other Related Series Trust may be increased up to the Combined FHA Insurance
Amount with the consent of the Certificate Insurer. In the event that any
portion of the Combined FHA Insurance Amount is applied to loans in a Related
Series Trust other than the Trust in excess of the designated insurance
amount for such Related Series Trust, the Combined FHA Insurance Amount
available to cover defaults on the FHA Loans may be reduced below the
remaining Trust Designated Insurance Amount. Such an occurrence could result
in shortfalls on the Offered Certificates, to the extent such shortfalls are
not otherwise covered by overcollateralization (in the case of the Group
IA Certificates) or by the Policies (in the case of both Certificate Groups).
As of the Closing Date, the Combined FHA Insurance Amount that is
expected to be available under the Contract of Insurance in respect of the
FHA Loans and the loans of the Related Series Trusts is $16,971,823.75. The
Combined FHA Insurance Amount available under the Contract of Insurance will
be reduced by the amount of proceeds, if any, received under the Contract of
Insurance. See "The Title I Loan Program and the Contract of Insurance--The
Contract of Insurance" herein.
LIMITATIONS ON FHA INSURANCE. The availability of FHA Insurance
following a default on an FHA Loan is limited and is subject to a number of
conditions, including strict compliance by the Seller, the Contract of
Insurance Holder, the Claims Administrator, the Master Servicer and the
Servicer with FHA Regulations in originating and servicing the FHA Loan and
limits on the aggregate insurance coverage available with respect to all
Title I Loans then owned and reported for FHA Insurance by the Contract of
Insurance Holder. The availability of FHA Insurance in respect of the FHA
Loans is also limited to the extent of the Trust Designated Insurance Amount.
Although the Seller has represented that it has complied with all applicable
FHA Regulations, such regulations are susceptible to differences in
interpretation. The Contract of Insurance Holder is not required to obtain,
and has not obtained, approval from FHA of the origination and servicing
practices of the Seller, the Master Servicer and the Servicer. Failure to
comply with all FHA Regulations may result in a denial of FHA Insurance
claims, and there can be no assurance that FHA's interpretation of its
regulations will not become more strict in the future. In addition, any
claim paid by FHA will cover, at most, 90% of the sum of the unpaid principal
on the FHA Loan, a portion of the unpaid interest and certain other
liquidation costs up to the Contract of Insurance Holder's aggregate amount
of FHA insurance coverage. The Seller and, in limited circumstances, the
Master Servicer have agreed in the Agreement to purchase from the Trust any
FHA Loan that is rejected by the FHA for insurance benefits under the
Contract of Insurance (other than rejection for clerical error in computing
the claim amount or due to the exhaustion of the Combined FHA Insurance
Amount).
LEGAL CONSIDERATIONS. The sale of the Loans from the Seller to the
Depositor pursuant to the Purchase Agreement will be treated by the Seller
and the Depositor as a sale of the Loans. The Seller will warrant that such
transfer is a sale of its interest in the Loans. In the event of an
insolvency of the Seller, the bankruptcy trustee of the Seller may attempt to
recharacterize the sale of the Loans as a borrowing by the Seller secured by
a pledge of the Loans. If such attempt were successful, the Trust would have
a perfected security interest in the Loans. If the bankruptcy trustee
decided to challenge such transfer, delays in payments on the Certificates
and possible reductions in the amount thereof could occur. The Depositor
will warrant in the Agreement that the transfer of the Loans to the Trust is
a valid transfer of all of the Depositor's right, title and interest in the
Loans to the Trust.
The assignments to the Trustee of any mortgage or deed of trust securing
a Mortgage Loan will be recorded in the appropriate public office for real
property records within the time period specified in the Agreement, except
where, in the opinion of counsel, such recording is not required to protect
the Trustee's interest in the related Mortgage Loan against the claim of any
subsequent transferee or any successor to a creditor of the Depositor or the
Seller. See "Description of the Certificates--Assignment of Loans" herein
and "Certain Legal Aspects of the Loans" in the Prospectus.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS. Applicable
state laws generally regulate interest rates and other charges and require
certain 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 Loans.
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 to collect all or part of the principal of or interest on
the Loans, may entitle the Obligor to a refund of amounts previously paid
and, in addition, could subject the owner of the Loans to damages and
administrative enforcement. See "Risk Factors--Certain Other Legal
Considerations Regarding the Mortgage Loans" in the Prospectus.
CIVIL RELIEF ACT SHORTFALLS. The amount required to be distributed as
interest on the Senior Certificates will be reduced as a result of shortfalls
on the Loans attributable to the application of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended ("Civil Relief Act Interest
Shortfalls"). See "Description of the Certificates--Interest" and "Certain
Legal Aspects of the Loans--Soldiers' and Sailors' Civil Relief Act" in the
Prospectus. Civil Relief Act Interest Shortfalls will not be covered by the
Policies.
CERTIFICATE RATINGS. The ratings of the Offered Certificates depend
primarily on assessments by the Rating Agencies of the claims-paying ability
of the Certificate Insurer. Any reduction in the ratings assigned to the
claims-paying ability of the Certificate Insurer below the ratings initially
assigned to the Offered Certificates may result in a reduction in the ratings
of the Offered Certificates. See "Risk Factors -- Rating of the Securities"
in the Prospectus.
PROPERTY OF THE TRUST
The Mego Mortgage Home Loan Trust 1996-3 (the "Trust") will be formed
pursuant to a Pooling and Servicing Agreement, dated as of November 1, 1996
(the "Agreement"), among the Depositor, the Seller, the Master Servicer, the
Servicer, the Claims Administrator, the Trustee and the Contract of Insurance
Holder. The property of the Trust will include (i) the Loans and the
related Loan Balances as of the Cut-Off Date, (ii) payments in respect of the
Loans received on or after the Cut-Off Date (including amounts due prior to
the Cut-Off Date but received thereafter), (iii) Mortgaged Properties that
are acquired by foreclosure or deed in lieu of foreclosure, (iv) an
assignment of the Depositor's rights under a purchase agreement dated as of
November 1, 1996, between Mego and the Depositor (the "Purchase Agreement"),
(v) rights under certain insurance policies covering the Mortgaged
Properties, (vi) the rights to the FHA Insurance reserves attributable to the
FHA Loans and (vii) the Collection Accounts and Distribution Accounts. In
addition, the Depositor will cause the Certificate Insurer to issue two
irrevocable and unconditional certificate guaranty insurance policies (the
"Policies") to the Trustee for the benefit of the holders of the Senior
Certificates pursuant to which it will guarantee certain payments to the
Trustee for the benefit of holders of the Senior Certificates. See "The
Certificate Guaranty Insurance Policies" herein.
The Trust property will include the unpaid principal balance of each
Loan as of the Cut-Off Date (the "Cut-Off Date Loan Balance") for such Loan.
The aggregate of the Cut-Off Date Loan Balances of the Group I Loans and the
Group II Loans equal $40,062,299.05 and $27,199,925.48, respectively (the
"Cut-Off Date Group I Loan Balance" and the "Cut-Off Date Group II Loan
Balance", respectively) and the aggregate of the Cut-Off Date Loan Balances
of all Loans equals $67,262,224.53 (the "Cut-Off Date Aggregate Loan
Balance"). With respect to any date, the "Aggregate Loan Balance" will be
equal to the aggregate of the Loan Balances of all Loans as of such date and
with respect to any date the "Group I Loan Balance" and the "Group II Loan
Balance" will be equal to the aggregate of the Loan Balances of all Loans in
such Loan Group as of such date. The "Loan Balance" of a Loan on any day is
equal to its Cut-Off Date Loan Balance, minus all collections of principal
credited against the Loan Balance of such Loan on and after the Cut-Off Date;
provided that with respect to a Defaulted Loan, the Loan Balance will be zero
immediately after the Due Period in which such Loan became a Defaulted
Loan. A "Defaulted Loan" is a Loan with respect to which: (i) a claim has
been paid or rejected pursuant to the Contract of Insurance, (ii) any related
Mortgaged Property has been repossessed and sold, or (iii) any portion of a
payment on a Loan is more than 180 days past due (without giving effect to
any grace period).
The Trust may be terminated and thereby effect an early retirement of
the Certificates, at the option of the Master Servicer or Mego, with the
consent of the Certificate Insurer if such purchase would result in a claim
under either Policy, upon the purchase from the Trust of all (but not fewer
than all) remaining Loans and certain other property on any Distribution Date
when each of the Group I Loan Balance and the Group II Loan Balance is less
than 10% of the Cut-Off Date Group I Loan Balance and the Cut-Off Date Group
II Loan Balance, respectively. See "Description of the Certificates--
Termination; Retirement of the Certificates" herein.
MEGO MORTGAGE CORPORATION
GENERAL
Mego Mortgage Corporation ("Mego"), a Delaware corporation commenced
operations in March 1994. Mego is a publicly traded company listed on the
NASDAQ National Market. Mego is an approved Title I lender that is engaged
in the business of originating, purchasing, selling and servicing loans for
property improvement that qualify under the provisions of Title I (such
loans, "Title I Loans" and the program, the "Title I Program") of the
National Housing Act of 1934, as amended, which is administered by the
Federal Housing Administration (the "FHA") of the U.S. Department of Housing
and Urban Development ("HUD"). The principal amounts of the Title I Loans
purchased or originated by Mego generally range from a minimum of $2,500 to a
maximum of $25,000. The mortgaged properties securing such Title I Loans are
generally one- to four-family residences, including condominiums and
townhomes, and such properties may or may not be occupied by the owner.
Mego also originates, purchases and services conventional uninsured home
improvement or home equity loans typically undertaken to pay for a home
improvement project, a combination of home improvement and debt consolidation
or solely for debt consolidation ("conventional loans"). All of the
conventional loans are secured by a first- or junior-lien mortgage on the
borrower's principal residence. Mego generally originates conventional loans
to high credit quality borrowers who tend to have limited equity in their
residence after giving effect to the amount of senior loans. Mego is a FNMA
approved seller/servicer. Mego has not applied for and therefore is not a
FHLMC approved seller/servicer.
Mego has two principal divisions for the origination of Title I Loans
and conventional loans, the Correspondent Division and the Dealer Division.
The Correspondent Division represents Mego's largest source of Title I Loans
and virtually all of the conventional loans. Through its Correspondent
Division, Mego originates loans from a nationwide network of financial
intermediaries, mortgage companies, commercial banks and savings and loan
institutions (collectively, "Correspondents"). Mego typically originates
loans from Correspondents on an individual loan basis, pursuant to which each
loan is pre-approved by Mego and is purchased after the closing, generally
before the first payment is due. The Correspondent Division conducts
operations from its headquarters in Atlanta, Georgia. At August 31, 1996,
Mego had a network of approximately 310 active Correspondents. In addition
to purchasing individual Title I Loans and conventional loans, from time to
time the Correspondent Division purchases portfolios of loans from
Correspondents. Mego generally pays its Correspondents premiums on the loans
it purchases based on the credit score (described below) of the borrower and
the interest rate on the respective loan.
The Dealer Division originates Title I Loans and recently has commenced
the origination of conventional loans through a network of home improvement
construction contractors (collectively, "Dealers"), approved by Mego in
accordance with Title I, by acquiring individual retail installment sale
contracts ("Installment Contracts") from Dealers. An Installment Contract is
an agreement between the Dealer and the borrower pursuant to which the Dealer
performs the improvements to the property and the borrower agrees to pay in
installments the price of the improvements. Before entering into an
Installment Contract with a customer, the Dealer assists the borrower in
submitting a loan application to Mego. If the loan application is approved,
the Dealer enters into an Installment Contract with the borrower, the Dealer
assigns the Installment Contract to Mego upon completion of the home
improvements and Mego, upon receipt of the requisite loan documentation and
completion of a satisfactory telephonic interview with the borrower,
purchases the Installment Contract from the Dealer. As of August 31, 1996,
Mego maintained 13 branch offices located in Montvale, New Jersey; Kansas
City, Missouri; Las Vegas, Nevada; Austin, Texas; Oklahoma City, Oklahoma;
Seattle, Washington; Columbus, Ohio; Elmhurst, Illinois; Waterford, Michigan;
Philadelphia, Pennsylvania; Denver, Colorado; Bowie, Maryland and Woodbridge,
Virginia through which it conducts its marketing to Dealers in the state in
which the branch is located as well as certain contiguous states. At August
31, 1996, Mego had a network of approximately 435 active Dealers in 32
states.
Correspondents and Dealers qualify to participate in Mego's programs
only after a review by Mego's management of their reputation and expertise,
including a review of references and financial statements, as well as a
personal visit to Dealers by one or more representatives of Mego. Title I
requires Mego to reapprove its Dealers annually and to monitor the
performance of those Correspondents that are sponsored by Mego.
UNDERWRITING
The following is a brief description of the underwriting policies
customarily employed by Mego with respect to its home improvement loan
program (including secured and unsecured Title I Loans and secured
conventional loans).
Mego's loan application and approval process generally is conducted over
the telephone and applications usually are transmitted to Mego's centralized
processing facility from Correspondents and Dealers by facsimile
transmission. Upon receipt of an application, the information is entered
into Mego's system and processing begins. All loan applications are
individually analyzed by Mego employees at its loan processing headquarters
in Atlanta, Georgia.
Mego has developed a proprietary credit index profile ("CIP") as a
statistical credit based tool to predict likely future performance of a
borrower. A significant component of this customized system is the credit
evaluation score methodology developed by Fair, Isaac and Company ("FICO"), a
consulting firm specializing in creating default predictive models through a
high number of variable components. The other components of the CIP include
debt to income analysis, employment stability, self employment criteria,
residence stability and occupancy status of the subject property. By
utilizing both scoring models in tandem, all applicants are considered on
the basis of their ability to repay the loan obligation while allowing Mego
to maintain its risk based pricing for each loan.
Based upon FICO score default predictors and Mego's internal CIP score,
loans are classified by Mego into gradations of descending credit risks and
quality, from "A" credits to "D" credits, with subratings within those
categories. Quality is a function of both the borrower's creditworthiness,
and the value of the collateral. "A+" credits generally have a FICO score
greater than 680. An applicant with a FICO score of less than 620 would be
rated a "C" credit unless the loan-to-value ratio was 75% or less
which would raise the credit risk to Mego to a "B" or better depending on the
borrower's debt service capability. Depending on loan size, typical loan-to-
value ratios for "A" and "B" credits range from 90% to 125%, while loan-to-
value ratios for "C" and "D" credits range from 60% up to 90%. "D" credits
are only accepted if there are compensating factors.
Mego's underwriters review the applicant's credit history, based on the
information contained in the application as well as reports available from
credit reporting bureaus and Mego's CIP score, to determine the applicant's
acceptability under Mego's underwriting guidelines. Based on the
underwriter's approval authority level, certain exceptions to the guidelines
may be made when there are compensating factors subject to approval from a
corporate officer. The underwriter's decision is communicated to the
Correspondent or Dealer and, if approved, fully explains the proposed loan
terms and contingencies to be satisfied prior to funding.
CONVENTIONAL LOANS. Mego has implemented policies for its conventional
loan program that are designed to minimize losses by adhering to high credit
quality standards or requiring adequate loan-to-value levels. Mego will only
make conventional loans to borrowers with an "A" or "B" credit grade using
the CIP. Terms of conventional loans made by Mego, as well as the maximum
loan-to-value ratios and debt to income ratios (calculated by dividing fixed
monthly debt payments by gross monthly income), vary depending upon Mego's
evaluation of the borrower's creditworthiness. Borrowers with lower
creditworthiness generally pay higher interest rates and loan origination
fees.
As part of the underwriting process for conventional loans, Mego
generally requires an appraisal of the mortgaged property as a condition to
the commitment to purchase. Mego requires an independent appraiser to be
state licensed and certified. Mego requires that all appraisals be completed
within the Uniform Standards of Professional Appraisal Practice as adopted by
the Appraisal Standards Board of the Appraisal Foundation. Prior to
originating a conventional loan, Mego audits the appraisal for accuracy to
insure that the appraiser used sufficient care in analyzing data to avoid
errors that would significantly affect the appraiser's opinion and
conclusion. This audit includes a review of economic demand, physical
adaptability of the real estate, neighborhood trends and the highest and best
use of the real estate. In the event the audit reveals any discrepancies as
to the method and technique that are necessary to produce a credible
appraisal, Mego will perform additional property data research or may request
a second appraisal to be performed by an independent appraiser selected by
Mego in order to further substantiate the value of the subject property.
Mego also requires a title report on all subject properties securing its
conventional loans to verify property ownership, lien position and the
possibility of outstanding tax liens or judgments. In the case of loans
greater than $50,000 or first liens, Mego requires a full title insurance
policy substantially in compliance with the requirements of the American Loan
Title Association.
TITLE I LOANS. Mego's underwriting guidelines for Title I Loans meets
the FHA's underwriting criteria.
The Title I Loans originated by Mego are executed on forms meeting FHA
requirements as well as federal and state regulations. Loan applications and
Installment Contracts are submitted to Mego's processing headquarters for
credit verification. The information provided in loan applications is first
verified by, among other things, (i) written confirmations of the applicant's
income and, if necessary, bank deposits, (ii) a formal credit bureau report
on the applicant from a credit reporting agency, (iii) a title report, (iv)
if necessary, a real estate appraisal and (v) if necessary, evidence of flood
insurance.
Mego will make Title I Loans to borrowers with an "A" to "C" credit
grade based on CIP score and lien position.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's complete credit history is
required. The credit report typically contains information reflecting
delinquencies, repossessions, judgments, foreclosures, garnishments,
bankruptcies and similar instances of adverse credit that can be discovered
by a search of public records. An applicant's past credit performance weighs
heavily in the evaluation of risk by Mego. Slow payments on the borrower's
credit report must be satisfactorily explained and will normally reduce the
amount of the loan for which the applicant can be approved.
With respect to all non-owner occupied secured Title I Loans with an
original principal amount in excess of $15,000, Mego requires that an
appraisal of the related mortgaged property be performed in connection with
the origination of such loan to the extent required by Title I. Title I
regulations were amended to eliminate this requirement with respect to all
Title I Loans for which a FHA Title I case number is requested on or after
June 3, 1996. Appraisals are performed, if necessary, by third party, pre-
approved, fee-based appraisers that meet Mego's standards for experience,
education and reputation. Each such appraisal includes, among other things,
a drive-by inspection of the mortgaged property and, where available, data
from sales within the preceding 12 months of similar properties within the
same general location as the subject property.
Mego does not require title insurance on the mortgaged properties
securing the Title I Loans it originates or purchases but reviews a title
report on the related mortgaged property prepared by a pre-approved title
insurance company. The applicant is also required to secure flood insurance
if the mortgaged property is located in an area that has been identified by
the Federal Emergency Management Agency (FEMA) as having special flood
hazards, in an amount sufficient to cover the Title I Loan, subject to the
maximum amount available under the National Flood Insurance Program.
In evaluating a borrower for creditworthiness a key factor viewed by
Mego is the debt to income ratio. The monthly first and all junior lien
payments plus impounds for real estate taxes and insurance premiums are
factored into the debt to income ratio which generally may not exceed
approximately 45% of the applicant's stable monthly income. If the property
is subject to any homeowner's association fees or common elements, property
charges or maintenance charges, they are included in the calculation of the
debt to income ratio. In cases where compensating factors exist, the 45%
debt to income ratio may be exceeded.
Subject to underwriting approval of an application forwarded to Mego by
a Dealer, Mego issues a commitment to purchase an Installment Contract from a
Dealer upon Mego's receipt of a fully completed loan package and notice from
the borrower of satisfactory work completion. Subject to underwriting
approval of an application forwarded to Mego by a Correspondent, Mego issues
a commitment to purchase a Title I Loan upon Mego's receipt of a fully
completed loan package. Commitments indicate loan amounts, fees, funding
conditions, approval expiration dates and interest rates. Loan commitments
are generally issued for periods up to 45 days in the case of Correspondents
and 90 days in the case of Dealers.
Mego's underwriting personnel review completed loan applications to
verify compliance with Mego's underwriting standards, FHA requirements and
Federal and state regulations. In the case of Title I Loans being acquired
from Dealers, Mego conducts a prefunding telephonic interview with the
property owner to determine that the improvements have been completed in
accordance with the terms of the Installment Contract and to the owner's
satisfaction. Mego utilizes a nationwide network of independent
inspectors to perform required on-site inspections of improvements within the
time-frames specified by the Title I Program.
Since Mego does not currently originate or acquire Title I Loans on an
individual basis with an original principal balance in excess of $25,000, the
FHA does not individually review the Title I Loans originated by Mego.
QUALITY CONTROL. In accordance with Mego policy, the Quality Control
Department reviews a statistical sample of loans closed each month. This
review is generally completed within 60 days of funding. Typical review
procedures include reverification of employment and income, re-appraisal of
the subject property, obtaining separate credit reports and recalculation of
debt to income ratios. The statistical sample is intended to cover 10% of
all new loan originations with particular emphasis on new Correspondents and
Dealers. Emphasis will also be placed on those loan sources where higher
levels of delinquency are experienced, physical inspections reveal a higher
level of non-compliance, or payment defaults occur within the first six
months of funding. On occasion, the Quality Control Department may review
all loans generated from a particular loan source in the event an initial
review determines a higher than normal number of exceptions. The account
selection of the Quality Control Department is also designed to include a
statistical sample of loans by each underwriter and each funding auditor and
thereby provide management with information as to any aberration from Mego
policies and procedures in the loan origination process.
Under the direction of the Vice President of Credit Quality and
Regulatory Compliance, a variety of review functions are accomplished. On a
daily basis, a sample of recently approved loans are reviewed to insure
compliance with underwriting standards. Particular attention is focused on
those underwriters who have developed a higher than normal level of
exceptions. In addition to this review, Mego has developed a staff of post-
disbursement review auditors which reviews 100% of recently funded accounts,
typically within two weeks of funding. All credit reports are analyzed, debt
to income ratios recalculated, contingencies monitored and loan documents
inspected. Exception reports are forwarded to the respective Vice Presidents
of Production as well as senior management. Mego also employees a Physical
Inspection Group that is responsible for monitoring the inspection of all
homes which are the subject of home improvement loans. Non-compliance is
tracked by loan source and serves as another method of evaluating a loan
source relationship.
SERVICING
Pursuant to a servicing agreement dated as of November 1, 1996 (the
"Servicing Agreement") between the Master Servicer and Mego, as servicer (in
such capacity, the "Servicer"), the Servicer will be responsible for
servicing, managing and making collections on the Loans. Upon the occurrence
of certain events specified in the Servicing Agreement, any of the Master
Servicer or the Certificate Insurer, or, in certain circumstances, the
Trustee may terminate all of the Servicer's rights under the Servicing
Agreement.
Under the Agreement, Mego will act as Claims Administrator and as such
will be responsible for the administration of claims under Title I in respect
of the Title I Loans.
The following is a description of the servicing policies and procedures
customarily and currently employed by Mego with respect to its Title I and
conventional loan portfolio. Mego revises such policies and procedures from
time to time in connection with changing economic and market conditions and
changing legal requirements.
Mego's loan servicing activities, which are facilitated under an
existing sub-servicing agreement by a direct link to the servicing system of
Mego's affiliate, Preferred Equity Corporation ("PEC"), include responding to
borrower inquiries, processing and administering loan payments, reporting and
remitting principal and interest to the purchasers who own interests in the
loans, collecting delinquent loan payments, processing Title I insurance
claims, conducting foreclosure proceedings and disposing of foreclosed
property and otherwise administering the loans. Mego uses a computer based
mortgage servicing system developed and maintained by PEC. It provides
payment processing and cashiering functions, automated payoff statements, on-
line collections, statement and notice mailing along with a full range of
investor reporting requirements. PEC's servicing systems conform to the
servicing standards and procedures mandated by the Title I Program.
Mego's loan collection functions are organized into two areas of
operation: routine collections and management of nonperforming loans.
Routine collection personnel are responsible for collecting loan
payments that are less than 60 days contractually past due and providing
prompt and accurate responses to all customer inquiries and complaints.
Borrowers are contacted on the due date for each of the first six payments in
order to encourage continued prompt payment. Generally, after six months of
seasoning, collection activity will commence if a loan payment has not been
made within five days of the due date. Borrowers usually will be contacted
by telephone at least once every five days and also by written correspondence
before the loan becomes 60 days delinquent. With respect to loan payments
that are less than 60 days late, routine collection personnel utilize a
system of mailed notices and telephonic conferences for reminding borrowers
of late payments and encouraging borrowers to bring their accounts current.
Installment payment invoices and return envelopes are mailed to each borrower
on a monthly basis.
Once a loan becomes 30 days past due, a collection supervisor generally
analyzes the account to determine the appropriate course of remedial action.
On or about the 45th day of delinquency, the supervisor determines if the
property needs immediate inspection to determine if it is occupied or vacant.
Depending upon the circumstances surrounding the delinquent account, a
temporary suspension of payments or a repayment plan to return the account to
current status may be authorized by the Vice President of Loan
Administration. In any event, it is Mego's policy to work with the
delinquent customer to resolve the past due balance before Title I claim
processing or legal action is initiated.
Nonperforming loan management personnel are responsible for collection
of severely delinquent loan payments (over 60 days late), filing Title I
insurance claims or initiating legal action for foreclosure and recovery.
Operating from Mego's headquarters in Atlanta, Georgia, collection personnel
are responsible for collecting delinquent loan payments and seeking to
mitigate losses by providing various alternatives for further actions,
including modifications, special refinancing and indulgence plans. Title I
insurance claim personnel are responsible for managing Title I insurance
claims, utilizing a claim management system designed to track insurance
claims for Title I Loans so that all required conditions precedent to claim
perfection are met. In the case of conventional loans, a foreclosure
coordinator will review all previous collection activity, evaluate the lien
and equity position and obtain any additional information as necessary. The
ultimate decision to foreclose, after all necessary information is obtained,
is made by an officer of Mego. Foreclosure regulations and practices and the
rights of the owner in default vary from state to state, but generally
procedures may be initiated if: (i) the loan is 90 days (120 days under
California law) or more delinquent; (ii) a notice of default on a senior lien
is received; or (iii) Mego discovers circumstances indicating potential loss
exposure.
See "The Title I Loan Program and the Contract of Insurance--Claims
Procedures Under Title I" herein for a description of the procedures followed
by Mego following the default and acceleration of the maturity of a secured
Title I home improvement loan.
DELINQUENCY EXPERIENCE
The following table sets forth information relating to the delinquency
and Title I insurance claims experience of Mego for its servicing portfolio
of all Title I Loans and conventional loans (including loans serviced for
others) for the periods indicated.
The information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of Mego's loan portfolio
during the periods shown. Accordingly, delinquency as percentages of
aggregate principal balance of loans serviced for each period would be higher
than those shown if a group of loans were artificially isolated at a point in
time and the information showed the activity only in that isolated group.
However, since most of the loans in Mego's portfolio are not fully seasoned,
the delinquency information for such an isolated group would also be
distorted to some degree.
<TABLE>
<CAPTION>
August 31,
1994(1) 1995 1996
(dollars in thousands)
<S> <C> <C> <C>
Delinquency period(2)
31-60 days past due . . . . . . . . . . . . . . . . 2.06% 2.58% 2.17%
61-90 days past due . . . . . . . . . . . . . . . . 0.48% 0.73% 0.85%
91 days and over past due . . . . . . . . . . . . . 0.36% 0.99% 4.53% (3)
91 days and over past due, net of claims filed (4) . 0.26% 0.61% 1.94%
Claims filed with HUD(5) . . . . . . . . . . . . . . . . 0.10% 0.38% 2.59%
Number of Title I insurance claims . . . . . . . . . . . 1 23 255
Total servicing portfolio at end of period . . . . . . . $8,026 $92,286 $214,189
Amount of FHA insurance available for all Title I Loans
serviced by Mego . . . . . . . . . . . . . . . . . . . . 813 $9,552 $21,205(6)
Amount of FHA insurance available as a percentage of
Title I Loans serviced (end of year) . . . . . . . . 10.13% 10.35% 10.46%(6)
Losses on liquidated loans(7) . . . . . . . . . . . . . . $0.00 $16.8 $32.0
</TABLE>
____________________
(1) Mego commenced originating loans in March 1994.
(2) Represents the dollar amount of delinquent loans as a percentage of
total dollar amount of loans serviced by Mego (including loans owned by
Mego) as of the date indicated.
(3) During the year ended August 31, 1996, the processing and payment of
claims filed with HUD was delayed. See the following paragraph for a
further discussion.
(4) Represents the dollar amount of delinquent loans net of delinquent Title
I Loans for which claims have been filed with HUD and payment is pending
as a percentage of total dollar amount of loans serviced by Mego
(including loans owned by Mego) as of the date indicated.
(5) Represents the dollar amount of delinquent Title I Loans for which
claims have been filed with HUD and payment is pending as a percentage
of total dollar amount of loans serviced by Mego (including loans owned
by Mego) as of the date indicated.
(6) If all claims with HUD had been processed as of period end, the amount
of FHA insurance available would have been reduced to $16,215,000, which
as a percentage of Title I loans serviced would have been 8.22%.
(7) A loss is recognized upon receipt of payment of a claim or final
rejection thereof. Claims paid in a period may relate to a claim filed
in an earlier period. Since Mego commenced its Title I lending
operations in March 1994, there has been no final rejection of a claim
by the FHA. Aggregate losses on liquidated Title I Loans related to 83
of the 338 Title I insurance claims made by Mego since commencing
operations through August 31, 1996. Losses on liquidated loans will
increase as the balance of the claims are processed by HUD. Mego has
received an average payment from HUD equal to 90% of the outstanding
principal balance of such Title I Loans, plus appropriate interest and
costs.
The processing and payment of claims filed with HUD have been delayed
for a number of reasons including (i) furloughs experienced by HUD personnel
in December 1995 and January 1996, (ii) the growth in the volume of Title I
Loans originated from approximately $750 million in 1994 to $1.3 billion in
1995 without a corresponding increase in HUD personnel to service claims and
(iii) the transition of processing operations to regional centers during the
second and third quarters of 1996. It is expected that
once appropriate staffing and training have been completed at HUD regional
centers, the timeframe for payment of HUD claims will be significantly
shortened.
If the loss and delinquency levels for the loans in a Related Series
Trust exceed certain levels specified in the related pooling and servicing
agreement, the Master Servicer (and the Servicer) may be terminated by the
Certificate Insurer. See "Description of the Certificates - Events of Master
Servicing Termination." Such levels have been exceeded in the Mego Mortgage
FHA Title I Loan Trust 1996-1, however at this time the Certificate Insurer
has elected not to terminate the Master Servicer under the related pooling
and servicing agreement or the Servicer under the related servicing agreement
for such Related Series Trust.
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE
THE TITLE I PROGRAM
The National Housing Act of 1934, as amended (the "Housing Act"),
authorized the creation of the FHA and the Title I Program. Under the Title
I Program, the FHA is authorized to insure qualified lending institutions
against losses on certain types of loans, including loans to finance actions
or items that substantially protect or improve the basic livability or
utility of several types of properties ("home improvement loans"). All of
the FHA Loans are home improvement loans for single family residences that
have been originated under the Title I Program and will be partially insured
under the Title I Program. None of the FHA Loans are loans made to finance
improvements of manufactured housing or multifamily residences. The
regulations referenced herein apply only to non-manufactured housing home
improvement loans. See "Certain Legal Aspects of the Loans--The Title I
Program" in the Prospectus.
The Title I Program operates as a coinsurance program in which the FHA
insures up to 90% of certain losses incurred on an individual insured loan,
including the unpaid principal balance thereof, but only to the extent of the
insurance coverage available in the lender's Insurance Coverage Reserve
Account (as defined below). See "--FHA Insurance Coverage" herein. The
owner of the loan bears the uninsured loss on each loan.
There are two basic methods of lending or originating loans which
include a "direct loan" or a "dealer loan." With respect to a direct loan,
the borrower makes application directly to a lender without any assistance
from a dealer. Such application must be executed by the borrower and any
co-maker or co-signer. The lender may disburse the loan proceeds of direct
loans solely to the borrower or jointly to the borrower and other parties to
the transaction. With respect to a dealer loan, the dealer, who has a direct
or indirect financial interest in the loan transaction assists the borrower
in preparing the loan application or otherwise assists the borrower in
obtaining the loan from the lender. The lender may disburse proceeds of
dealer loans solely to the dealer or the borrower or jointly to the borrower
and the dealer or other parties. A dealer may be a seller, a contractor or
supplier of goods or services. The FHA Loans include direct and dealer
loans. See "Mego Mortgage Corporation--General."
Title I Loans are required to have fixed interest rates and generally
provide for equal installment payments due weekly, biweekly, semi-monthly, or
monthly, except that a loan may be payable quarterly or semi-annually in
certain circumstances where the borrower has an irregular flow of income.
The first or last payments (or both) may vary in amount but may not exceed
150% of the regular installment payment, and the first payment may be due no
later than two (2) months from the date the loan is funded. The note must
contain a provision permitting full or partial prepayment of the loan. The
interest rate must be negotiated and agreed to by the borrower and the lender
and must be fixed for the term of the loan and recited in the note. Interest
on a Title I Loan must accrue from the date of the loan and be
calculated according to the actuarial method. The lender must assure that
the note and all other documents evidencing the loan are in compliance with
applicable federal, state and local laws.
The Title I Program requires each lender to use prudent lending
standards in underwriting loans and to satisfy the applicable loan
underwriting requirements under the Title I Program prior to its approval of
the loan. Generally, the lender must exercise prudence and diligence to
determine whether the borrower and any co-maker is solvent and an acceptable
credit risk, with a reasonable ability to make payments on the loan. The
lender's credit application and review must determine whether the borrower's
income will be adequate to meet the periodic payments required by the loan,
as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
established by the Secretary of HUD unless the lender determines and
documents in the loan file evidence of the existence of compensating factors
concerning the borrower's creditworthiness which support approval of the
loan.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT APPROVE FOR QUALIFICATION
FOR INSURANCE ANY LOAN INSURED THEREUNDER AT THE TIME OF APPROVAL BY THE
LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER FEDERAL LOAN
INSURANCE PROGRAMS). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, the lender is required promptly to
report this to the Secretary of HUD. In such case, provided that the
validity of any lien on the property has not been impaired, the insurance of
the loan under the Title I Program will not be affected by such material
misstatement or misuse of loan proceeds unless such material misstatement of
fact or misuse of loan proceeds was caused by (or was knowingly sanctioned
by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS
The maximum principal amounts for home improvement loans insured under
the Title I Program must not exceed the actual cost of the project plus any
applicable fees and charges allowed under the Title I Program. The following
is the maximum loan amount for certain types of loans: (i) $25,000 for a home
improvement loan secured by a single family property; (ii) the lesser of
$60,000 or an average of $12,000 per dwelling unit for a home improvement
loan secured by a multifamily property; and (iii) $7,500 for an unsecured
home improvement loan. Prior to June 3, 1996, any Title I home improvement
loan that would result in a single borrower having a total unpaid principal
obligation in excess of $25,000 required the prior approval of the Secretary
of HUD. As of June 3, 1996, HUD has eliminated this requirement. Generally,
the term of a secured Title I home improvement loan may not be less than six
months nor greater than 20 years and 32 days. A borrower may obtain multiple
Title I home improvement loans with respect to multiple properties, and a
borrower may obtain more than one Title I home improvement loan with respect
to a single property, as long as the total outstanding balance of all Title I
home improvement loans on the same property does not exceed the maximum loan
amount for the type of Title I home improvement loans thereon.
Borrower eligibility for a secured Title I home improvement loan
requires that the borrower have at least a one-half interest in either fee
simple title to the real property, a lease thereof for a term expiring at
least six months after the final maturity of the Title I home improvement
loan or a properly recorded land installment contract for the purchase of the
real property. Since August 1994 and prior to June 3, 1996, in the case of a
Title I home improvement loan with a principal balance over $15,000, a
borrower was required to have equity in the property being improved at least
equal to the principal amount of the
loan, as demonstrated by a current appraisal, unless the borrower occupied
the property as his/her primary residence and the structure thereon had been
completed and occupied for at least six months prior to the date of the Title
I loan application. As of June 3, 1996, this equity requirement has been
eliminated in its entirety.
Generally, any Title I home improvement loan originated after August
1994 in excess of $7,500 must be secured by a recorded lien on the improved
property which is evidenced by a mortgage or deed of trust executed by the
borrower and all other owners in fee simple. Prior to August 1994, any Title
I home improvement loan in excess of $5,000 was required to be secured by
such a recorded lien. In order to facilitate the financing of small home
improvement projects, the FHA does not require loans of $7,500 or less, in
the case of Title I Loans originated after August 1994, and $5,000 or less,
in the case of Title I Loans originated prior to August 1994, to be secured
by the property being improved. Notwithstanding the preceding sentence, such
loans must be secured by a recorded lien on the improved property, if,
including such loan, the total amount of all Title I home improvement loans
obtained by the borrower exceeds $7,500 or $5,000, as the case may be. All
of the Loans are secured by a recorded lien on the related Mortgaged
Property.
The proceeds from a Title I home improvement loan may be used only to
finance property improvements which substantially protect or improve the
basic livability or utility of the property as disclosed in the loan
application. The Secretary of HUD has established a list of items and
activities which cannot be financed with proceeds from any Title I home
improvement loans which the Secretary of HUD may amend from time to time.
Generally, loan proceeds may only be used to finance property improvements
commenced after the approval of the loan. With respect to any dealer Title I
home improvement loan, prior to disbursing funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I home improvement
loan, the lender is required to obtain, promptly upon completion of the
improvements but not later than six months after disbursement of the loan
proceeds with one 6 month extension if necessary, a completion certificate
signed by the borrower. The lender is required to conduct an on-site
inspection on any Title I home improvement loan where the original principal
balance is $7,500 or more and on any direct Title I Loan where the borrower
fails to submit a completion certificate.
FHA INSURANCE COVERAGE
Under the Title I Program, the FHA establishes an insurance coverage
reserve account (an "Insurance Coverage Reserve Account") for each lender
which has been granted a Title I contract of insurance. The amount of
insurance coverage in this account is a maximum of 10% of the amount
disbursed, advanced or expended by the lender in originating or purchasing
eligible loans registered with the FHA for Title I insurance, with certain
adjustments. The balance in the Insurance Coverage Reserve Account is the
maximum amount of insurance claims the FHA is required to pay to the Title I
lender. Loans to be insured under the Title I Program will be registered for
insurance by the FHA and the insurance coverage attributable to such loans
will be included in the Insurance Coverage Reserve Account for the
originating or purchasing lender following the receipt and acknowledgment by
the FHA of a loan report on the prescribed form pursuant to the Title I
regulations. For each eligible loan reported and acknowledged for insurance,
the FHA charges a fee (the "Insurance Premium"). For loans having a maturity
of 25 months or less, the FHA bills the lender for the entire Insurance
Premium in an amount equal to the product of 0.50% of the original loan
amount and the loan term. For home improvement loans with a maturity greater
than 25 months, each year that a loan is outstanding the FHA bills the
lender for an Insurance Premium in an amount equal to 0.50% of the original
loan amount. If a loan is prepaid during the year, the FHA will not refund
or abate the Insurance Premium paid for such year.
Originations and acquisitions of new eligible loans will continue to
increase a lender's Insurance Coverage Reserve Account balance by the lesser
of (a) the amount of the FHA Insurance available for transfer at the time of
transfer from the qualified lender selling the loans and (b) 10% of the
amount disbursed, advanced or expended in originating or acquiring such
eligible loans registered with the FHA for insurance under the Title I
Program. The Secretary of HUD may transfer insurance coverage between
Insurance Coverage Reserve Accounts and earmark the insurance coverage for to
a particular insured loan or group of insured loans when a determination is
made that it is in the Secretary's interest to do so. As described under the
caption "The Title I Loan Program--The Contract of Insurance," the FHA
Insurance in the FHA Reserve Account will not be earmarked by the Secretary
of HUD solely for the Trust or any other Related Series Trust.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guarantee or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's Insurance Coverage Reserve Account to the transferee's Insurance
Coverage Reserve Account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's Insurance Coverage
Reserve Account during any October 1 to September 30 fiscal year without the
prior approval of the Secretary of HUD. Amounts which may be recovered by
the Secretary of HUD after payment of an insurance claim are not added to the
amount of insurance coverage in the related lender's Insurance Coverage
Reserve Account.
CLAIMS PROCEDURES UNDER TITLE I
Under the Title I Program the lender may accelerate an insured loan
following a default on such loan only after the lender or its agent has
contacted the borrower in a face-to-face meeting or by telephone to discuss
the reasons for the default and to seek its cure. If the borrower does not
cure the default or agree to a modification agreement or repayment plan, the
lender will notify the borrower in writing that, unless within 30 days the
default is cured or the borrower enters into a modification agreement or
repayment plan, the loan will be accelerated and that, if the default
persists, the lender will report the default to an appropriate credit agency.
The lender may rescind the acceleration of maturity after full payment is due
and reinstate the loan only if the borrower brings the loan current, executes
a modification agreement or agrees to an acceptable repayment plan. See
"Certain Legal Aspects of the Loans--The Title I Program" in the Prospectus.
Following acceleration of maturity on a secured Title I home improvement
loan, the lender may either (a) proceed against the related mortgaged
property under any security instrument, or (b) make a claim under the
lender's contract of insurance. Generally lenders make a claim under their
contract of insurance. If the lender chooses to proceed against the
mortgaged property under a security instrument (or if it accepts a voluntary
conveyance or surrender of the mortgaged property), the lender can later file
an insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any
foreclosure or repossession, and where the borrower is in bankruptcy or
deceased, evidence that the lender has properly filed proofs of claims.
Generally, a claim for reimbursement for loss on any eligible loan must be
filed with the FHA no later than 9 months after the date of default for home
improvement loans. Concurrently with filing the insurance claim, the lender
must assign to the United States of America the lender's entire interest in
the loan note (or a judgment in lieu of the note), in any security held and
in any claim filed in any legal proceedings. If, at the time the note is
assigned to the U.S., the Secretary of HUD has reason to believe that the
note is not valid or enforceable against the borrower, the FHA may deny the
claim and reassign the note to the lender. If either such defect is
discovered after the FHA has paid a claim, the FHA may require the lender to
repurchase the paid claim and to accept a reassignment of the loan note. If
the lender subsequently obtains a valid and enforceable judgment against the
borrower, the lender may resubmit a new insurance claim with an assignment of
the judgment. Although regulations permit the FHA to contest any insurance
claim and to make a demand for repurchase of the loan at any time up to two
years from the date the claim was certified for payment (and may do so
thereafter in the event of fraud or misrepresentation on the part of the
lender), the FHA has expressed an intention to take such action within one
year from the date the claim was certified for payment.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that
enforcement of the regulations would impose an injustice upon a lender which
has substantially complied with the regulations in good faith. See "Risk
Factors--Limitations on FHA Insurance."
Under the Title I Program, the amount of a FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's Insurance Coverage Reserve Account established by
HUD. The "Claimable Amount" for home improvement loans is equal to 90% of
the sum of: (a) the unpaid loan obligation (equal to the net unpaid principal
and the uncollected interest earned to the date of default) with adjustments
thereto if the lender has proceeded against property securing such loan; (b)
the interest on the unpaid amount of the loan obligation from the date of
default to the date of the claim's initial submission for payment plus 15
calendar days (but not to exceed 9 months from the date of default),
calculated at the rate of 7% per annum; (c) the uncollected court costs; (d)
the attorneys' fees not to exceed $500; and (e) the expenses for recording
the assignment of the security to the United States.
THE CONTRACT OF INSURANCE
The aggregate amount of insurance provided by the FHA pursuant to the
Title I Program that is expected to be available to the Claims Administrator
in respect of the FHA Loans is $3,674,309.75 (the "Trust Designated Insurance
Amount"). Such amount represents 10% of the sum of the Loan Balances of the
FHA Loans as of the Cut-Off Date.
First Trust of New York, National Association holds the Contract of
Insurance for the benefit of the Trust and other Related Series Trusts
(defined herein). As of the Closing Date, the aggregate amount of insurance
transferred or to be transferred by the FHA pursuant to the Title I Program
to the Contract of Insurance Holder is $16,971,823.75 (the "Combined FHA
Insurance Amount") and for any date of determination thereafter, the Combined
FHA Insurance Amount will equal such amount plus all amounts
subsequently transferred by the Secretary of HUD to the Contract of Insurance
Holder's FHA Reserve Account less the amount of FHA Insurance proceeds
received since the Closing Date under the Contract of Insurance with respect
to the FHA Loans and loans in other Related Series Trusts. The Combined FHA
Insurance Amount will be reflected in an insurance coverage reserve account
maintained by the FHA in the name of the Contract of Insurance Holder (the
"FHA Reserve Account"). All proceeds received under the Contract of
Insurance in respect of claims relating to the FHA Loans shall be deposited
into the related Distribution Account.
With respect to those FHA Loans for which FHA Insurance coverage
reserves have not been transferred to the FHA Reserve Account by the Closing
Date, the Seller will be required to take appropriate steps to cause the FHA
to transfer the appropriate amounts of FHA Insurance coverage reserves from
the Seller's Insurance Coverage Reserve Account to the FHA Reserve Account.
To accomplish this transfer, on or after the date on which the Seller
receives the FHA Title I Case Numbers for such FHA Loans, the Seller will be
required to submit a transfer of note report to the Secretary of HUD
regarding the conveyance of such FHA Loans to the Trustee.
The Secretary of HUD will not earmark the insurance coverage in the FHA
Reserve Account for the benefit of the Trust or any other Related Series
Trust; however, each of the Contract of Insurance Holder and the Claims
Administrator has agreed in the Agreement to earmark the Trust Designated
Insurance Amount exclusively for the benefit of the Trust. The Trust
Designated Insurance Amount and any trust designated insurance amount for any
Related Series Trust may be increased up to the Combined FHA Insurance Amount
with the consent of the Certificate Insurer. In the event that any portion
of the Combined FHA Insurance Amount is applied to loans in a Related Series
Trust other than the Trust in excess of the trust designated insurance amount
for such Related Series Trust, the Combined FHA Insurance Amount available to
cover defaults on the FHA Loans may be reduced below the remaining Trust
Designated Insurance Amount for the Trust.
THE MASTER SERVICER
NORWEST BANK MINNESOTA, N.A.
The information set forth below has been provided by Norwest Bank
Minnesota, N.A. (the "Master Servicer") and the Depositor does not make any
representations or warranties as to the accuracy or completeness of such
information.
The Master Servicer is a national banking association, with executive
offices located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota
55479 and its master servicing offices are located at 11000 Broken Land
Parkway, Columbia, Maryland 21044.
The Master Servicer will enter into the Servicing Agreement with the
Servicer, pursuant to which the Servicer will service all of the Loans.
However, the Servicing Agreement will not relieve the Master Servicer of any
of its duties and obligations to the Trustee under the Agreement. The Master
Servicer will be obligated with respect thereto as if it alone were
performing all duties and obligations in connection with the collection and
servicing in respect of the Loans.
DELINQUENCY AND LOSSES
The Master Servicer is engaged in the business of master servicing, on
behalf of third party investors, residential single family mortgage loans
secured by properties located in all 50 states and the District of Columbia.
As of September 30, 1996, the Master Servicer was master servicing more than
171,000 mortgage loans representing an aggregate outstanding principal
balance of approximately $20.2 billion. No specific delinquency or
foreclosure data relating to the Master Servicer's master servicing portfolio
is provided because the Master Servicer has limited master servicing
experience with Title I Loans and conventional loans of the type included in
the Trust.
DESCRIPTION OF THE LOANS
GENERAL
The "Group I Loans" consist of closed-end fixed-rate home improvement
loans and retail installment sale contracts and home equity loans (the "Group
I Mortgage Loans") secured by first- and junior-lien mortgages, deeds of
trust and security deeds on residences (which are primarily condominiums,
townhouses and one- to four-family residences), including investment
properties. The "Group II Loans" consist of closed-end fixed-rate home
improvement loans and retail installment sale contracts which are partially
insured by the FHA under the Title I Program but which are unsecured general
obligations of the related borrowers (the "Group II Unsecured FHA Loans") and
closed-end fixed-rate home improvement loans and home equity loans (the
"Group II Conventional Loans"), secured by first- and junior-lien mortgages,
deeds of trust and security deeds on residential properties (collectively
with the properties securing the Group I Loans, the "Mortgaged Properties").
The Group I Loans together with the Group II Conventional Loans are referred
to collectively herein as the "Mortgage Loans." All Group I Loans together
with all Group II Loans are referred to collectively herein as the "Loans."
The Group I FHA Loans and the Group II Unsecured FHA Loans are collectively
referred to herein as the "FHA Loans." The Group I Conventional Loans and
the Group II Conventional Loans are referred to herein as the "Conventional
Loans."
Interest on each Loan is payable monthly on the outstanding Loan Balance
thereof at a fixed rate per annum (the "Loan Rate"). The Loans are actuarial
loans which provide that interest is charged to the obligors thereunder (the
"Obligors"), and payments are due from such Obligors, as of a scheduled day
of each month which is fixed at the time of origination. Each payment made
by the Obligor is, therefore, treated as containing a predetermined amount of
interest and principal. Scheduled monthly payments made by the Obligors on
the 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. Interest accrued on the Loans will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Approximately 55% of the Loans will be partially insured under the Title I
Program. See "The Title I Loan Program and the Contract of Insurance"
herein.
The statistical information presented herein with respect to the Loans
describes the Loans as of the Cut-Off Date. Unless otherwise specified,
percentages are stated by the related Loan Group Balance as of the Cut-Off
Date. In addition, all weighted averages specified herein are weighted based
on the Loan Balances of the Loans in the related Loan Group as of the Cut-Off
Date.
GROUP I LOANS. The Loan Balances of the Group I Loans range from
$1,264.53 to $60,000 and average $18,152.38. The Loan Rates for the Group I
Loans range from 11.25% to 17.99% and the weighted average Loan Rate is
13.99%. The weighted average remaining term to maturity of the Group I Loans
is expected to be 205 months and the remaining terms to maturity of the Group
I Loans range from 34 months to 300 months. No Group I Loan is expected to
mature later than November 2021. The Mortgaged Properties with respect to
the Group I Loans are located 35 states and the District of Columbia.
Approximately 84% of the Group I Loans are partially insured under the
Title I Program (the "Group I FHA Loans"). See "The Title I Loan Program and
the Contract of Insurance". Group I Loans that are not insured under the
Title I Program were originated by Mego pursuant to its conventional loan
underwriting guidelines and are secured by first and junior-lien mortgages,
deeds of trust and security deeds on Mortgaged Properties (the "Group I
Conventional Loans"). See "Mego Mortgage Corporation--Conventional Loans"
herein.
The sum of the percentages set forth in the following tables may not
equal 100.0% due to rounding.
<TABLE>
<CAPTION>
Certain Statistical Characteristics of the Group I Loans
Original Loan Balances
Number of Loan Balances % of Cut-Off Date
Range of Original Loan Group I as of Group I Loan
Balances Loans Cut-Off Date Balance
----------------------- ---------- -------------- -----------------
<S> <C> <C> <C>
$ 1,950.00 - $ 5,000.00 56 $ 218,072.17 0.54%
$ 5,000.01 - $10,000.00 399 3,225,636.46 8.05
$10,000.01 - $15,000.00 469 6,235,274.42 15.56%
$15,000.01 - $20,000.00 335 5,997,721.86 14.97
$20,000.01 - $25,000.00 869 21,330,877.04 53.24
$25,000.01 - $30,000.00 20 571,021.55 1.43
$30,000.01 - $35,000.00 26 883,679.64 2.21
$35,000.01 - $40,000.00 10 391,654.85 0.98
$40,000.01 - $45,000.00 5 216,937.26 0.54
$45,000.01 - $50,000.00 7 340,768.93 0.85
$50,000.01 - $55,000.00 1 53,000.00 0.13
$55,000.01 - $60,000.00 10 597,654.87 1.49
- ---------------------------------- ----- -------------- -------
TOTAL 2,207 $40,062,299.05 100.00%
</TABLE>
RANGE OF LOAN RATES
<TABLE>
<CAPTION>
Number of Loan Balances % of Cut-Off Date
Group I as of Group I Loan
Range of Loan Rates Loans Cut-Off Date Balance
- ------------------------ ---------- --------------- -----------------
<S> <C> <C> <C>
11.250% - 11.499% 2 $ 21,759.56 0.05%
11.500% - 11.999% 270 4,358,492.43 10.88
12.000% - 12.499% 3 75,105.58 0.19
12.500% - 12.999% 359 6,376,390.41 15.92
13.000% - 13.499% 11 260,166.39 0.65
13.500% - 13.999% 759 14,397,938.48 35.94
14.000% - 14.499% 10 211,057.46 0.53
14.500% - 14.999% 540 9,868,938.98 24.63
15.000% - 15.499% 9 148,048.53 0.37
15.500% - 15.999% 207 3,643,717.60 9.10
16.000% - 16.499% 3 74,986.03 0.19
16.500% - 16.999% 31 566,081.11 1.41
17.500% - 17.990% 3 59,616.49 0.15
- ----------------- ----- -------------- ------
TOTAL 2,207 $40,062,299.05 100.00%
================== ===== ============== =======
</TABLE>
*.*
NUMBER OF MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
Number of Number of Loan Balances % of Cut-Off Date
Months Since Group I as of Group I Loan
Origination Loans Cut-Off Date Balance
- ------------------------- --------- -------------
<S> <C> <C> <C>
0 months 948 $17,438,488.94 43.53%
1 602 10,471,786.45 26.14
2 575 10,363,861.97 25.87
3 43 950,401.83 2.37
4 24 702,081.45 1.75
5 3 73,386.10 0.18
6 2 20,897.05 0.05
9 1 5,282.08 0.01
12 2 6,049.08 0.02
13 2 5,085.32 0.01
15 3 15,942.83 0.04
16 2 9,035.95 0.02
- ---------------------------------------------------------------------------------------------------
TOTAL 2,207 $40,062,299.05 100.00%
===================================================================================================
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
Number of Loan Balances % Cut-Off Date
Months Remaining Group I as of Group I Loan
To Scheduled Maturity Loans Cut-Off Date Balance
- --------------------------------- --------- ------------------- ------------------
<S> <C> <C> <C>
34 - 36 months 7 $ 27,368.86 0.07%
37 - 48 14 68,776.96 0.17
49 - 60 75 561,315.67 1.40
61 - 72 14 95,089.98 0.24
73 - 84 54 425,936.93 1.06
85 - 96 15 111,967.35 0.28
97 - 108 2 13,140.40 0.03
109 - 120 262 2,777,764.80 6.93
133 - 144 30 368,002.77 0.92
157 - 168 4 14,015.64 0.03
169 - 180 794 14,018,812.41 34.99
205 - 216 1 9,943.00 0.02
217 - 228 3 12,774.41 0.03
229 - 240 904 20,728,116.21 51.74
289 - 300 28 829,273.66 2.07
- --------------------------------- --------- ------------------- ------------------
TOTAL 2,207 $40,062,299.05 100.00%
================================= ========= =================== ==================
</TABLE>
Geographical Distribution of Mortgaged Properties by State/(1)/
<TABLE>
<CAPTION>
Number of Loan Balances % of Cut-Off Date
Group I as of Group I Loan
State Loans Cut-Off Date Balance
- ------------------------------- --------- --------------------- ------------------
<S> <C> <C> <C>
Arizona 43 $ 803,916.80 2.01%
Arkansas 31 348,535.76 0.87
California 499 11,561,958.01 28.86
Colorado 42 783,141.25 1.95
Connecticut 3 67,271.69 0.17
Delaware 8 95,594.29 0.24
District of Columbia 10 207,411.80 0.52
Florida 418 8,355,891.48 20.86
Georgia 91 1,502,594.90 3.75
Idaho 1 24,979.41 0.06
Illinois 36 691,220.73 1.73
Indiana 2 18,745.72 0.05
Iowa 1 6,176.77 0.02
Kansas 21 287,199.77 0.72
Kentucky 2 8,405.31 0.02
Louisiana 20 276,421.09 0.69
Maryland 39 769,646.85 1.92
Michigan 7 113,324.00 0.28
Minnesota 16 296,070.45 0.74
Missouri 55 712,467.46 1.78
Nevada 47 1,049,925.38 2.62
New Jersey 89 1,246,642.18 3.11
New York 136 2,371,078.74 5.92
North Carolina 44 480,832.22 1.20
Ohio 64 982,958.40 2.45
Oklahoma 47 428,231.36 1.07
Oregon 23 495,970.73 1.24
Pennsylvania 205 2,881,598.31 7.19
South Carolina 13 163,111.62 0.41
Tennessee 8 92,944.48 0.23
Texas 103 1,451,693.49 3.62
Utah 7 150,432.29 0.38
Virginia 31 423,138.99 1.06
Washington 37 786,530.23 1.96
West Virginia 6 76,256.33 0.19
Wisconsin 2 49,980.76 0.12
- ------------------------------- --------- --------------------- ------------------
TOTAL 2,207 $40,062,299.05 100.00%
=============================== ========= ===================== ==================
</TABLE>
(1) Determined by mailing address of the related Obligor. The mailing
address is not always the same address as the address of the related
Mortgaged Property.
GROUP II LOANS. The Loan Balances of the Group II Loans range from
$1,104.66 to $60,000 and average $18,604.60. The Loan Rates for the Group II
Loans range from 11.75% to 18.25% and the weighted average Loan Rate is
14.29%. The weighted average remaining term to maturity of the Group II Loans
is expected to be 212 months and the remaining terms to maturity of the Group
II Loans range from 14 months to 300 months. No Group II Loan is expected to
mature later than November 2021.
The Group II Unsecured FHA Loans represent approximately 11% (by Cut-Off
Date Group II Loan Balance) of the Group II Loans. All of the Group II
Unsecured FHA Loans are partially insured under the Title I Program. Group
II Loans that are not insured under the Title I Program were originated by
Mego pursuant to its conventional loan underwriting guidelines and are
secured by first- and junior-lien mortgages, deeds of trust and security
deeds on Mortgaged Properties (the "Group II Conventional Loans"). See "Mego
Mortgage--Conventional Loans" herein.
The sum of the percentages set forth in the following tables may not
equal 100.0% due to rounding.
Certain Statistical Characteristics of the Group II Loans
Original Loan Balances
<TABLE>
<CAPTION>
Number of Loan Balances % of Cut-Off Date
Range of Original Loan Group II as of Group II Loan
Balances Loans Cut-Off Date Balance
- --------------------------------- --------- --------------------- -------------------
<S> <C> <C> <C>
$ 1,500.00 - $ 5,000.00 317 $ 1,071,256.44 3.94%
$ 5,000.01 - $10,000.00 311 1,962,950.23 7.22
$10,000.01 - $15,000.00 39 517,962.25 1.90
$15,000.01 - $20,000.00 90 1,682,159.59 6.18
$20,000.01 - $25,000.00 320 7,807,013.51 28.70
$25,000.01 - $30,000.00 108 3,067,598.53 11.28
$30,000.01 - $35,000.00 131 4,438,018.02 16.32
$35,000.01 - $40,000.00 54 2,088,321.28 7.68
$40,000.01 - $45,000.00 30 1,301,359.45 4.78
$45,000.01 - $50,000.00 38 1,866,400.73 6.86
$50,000.01 - $55,000.00 5 270,234.99 0.99
$55,000.01 - $60,000.00 19 1,126,650.46 4.14
- ---------------------------------- --------- --------------------- -------------------
TOTAL 1,462 $27,199,925.48 100.00%
================================== ========= ===================== ===================
</TABLE>
RANGE OF LOAN RATES
<TABLE>
<CAPTION>
Number of Loan Balances % of Cut-Off Date
Group II as of Group II Loan
Range of Loan Rates Loans Cut-Off Date Balance
- ---------------------------------- --------- --------------------- -------------------
<S> <C> <C> <C>
11.750% - 11.999% 10 $ 245,455.07 0.90%
12.000% - 12.499% 6 175,450.00 0.65
12.500% - 12.999% 119 3,163,635.30 11.63
13.000% - 13.499% 17 532,452.65 1.96
13.500% - 13.999% 717 11,069,796.24 40.70
14.000% - 14.499% 23 653,367.23 2.40
14.500% - 14.999% 364 7,605,235.46 27.96
15.000% - 15.499% 16 507,610.50 1.87
15.500% - 15.999% 168 2,719,065.83 10.00
16.000% - 16.499% 11 293,271.31 1.08
16.500% - 16.999% 7 134,700.87 0.50
17.500% - 17.999% 2 49,944.31 0.18
18.000% - 18.250% 2 49,940.71 0.18
- ---------------------------------- ---------- --------------------- ------------------
TOTAL 1,462 $27,199,925.48 100.00%
================================== ========== ===================== ===================
</TABLE>
NUMBER OF MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
Number of Number of Loan Balances % of Cut-Off Date
Months Since Group II as of Group II Loan
Origination Loans Cut-Off Date Balance
- ---------------------------------- --------- ----------------------- -------------------
<S> <C> <C> <C>
0 months 470 $11,684,345.60 42.96%
1 160 3,686,048.72 13.55
2 191 4,033,482.89 14.83
3 146 3,106,519.01 11.42
4 136 2,654,757.05 9.76
5 59 613,818.58 2.26
6 48 249,265.50 0.92
7 54 237,730.03 0.87
8 71 339,327.54 1.25
9 44 211,298.73 0.78
10 68 316,166.97 1.16
11 12 53,005.30 0.19
14 1 6,438.56 0.02
15 1 3,887.19 0.01
16 1 3,833.81 0.01
- ---------------------------------- --------- --------------------- -------------------
TOTAL 1,462 $27,199,925.48 100.00%
================================== ========= ===================== ===================
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
Number of Loan Balances % of Cut-Off Date
Months Remaining Group II as of Group II Loan
To Scheduled Maturity Loans Cut-Off Date Balance
- ---------------------------------- --------- --------------------- -------------------
<S> <C> <C> <C>
14 - 24 months 6 $ 14,201.04 0.05%
25 - 36 69 180,701.48 0.66
37 - 48 64 217,141.97 0.80
49 - 60 172 821,773.73 3.02
61 - 72 29 143,757.82 0.53
73 - 84 66 399,416.07 1.47
85 - 96 30 180,979.92 0.67
97 - 108 4 24,360.94 0.09
109 - 120 220 1,987,886.68 7.31
133 - 144 1 10,887.42 0.04
169 - 180 228 5,953,562.39 21.89
229 - 240 446 13,292,203.59 48.87
289 - 300 127 3,973,052.43 14.61
- ---------------------------------- --------- --------------------- -------------------
TOTAL 1,462 $27,199,925.48 100.00%
================================== ========= ===================== ===================
</TABLE>
Geographical Distribution of Mortgaged Properties by State/(1)/
<TABLE>
<CAPTION> Number of Loan Balances % of Cut-Off Date
Group II as of Group II Loan
State Loans Cut-Off Date Balance
- ---------------------------------- ---------- --------------------- -------------------
<S> <C> <C> <C>
Arizona 31 $ 973,131.16 3.58%
Arkansas 38 191,219.38 0.70
California 248 7,760,663.21 28.53
Colorado 24 635,567.26 2.34
Connecticut 2 28,833.81 0.11
Delaware 3 17,777.99 0.07
Florida 277 5,834,168.99 21.45
Georgia 95 1,987,891.99 7.31
Idaho 2 64,955.27 0.24
Illinois 21 407,172.27 1.50
Indiana 1 23,993.26 0.09
Iowa 5 20,879.06 0.08
Kansas 10 42,180.18 0.16
Kentucky 4 34,319.47 0.13
Louisiana 11 110,089.25 0.40
Maryland 5 42,025.60 0.15
Massachusetts 2 74,396.59 0.27
Michigan 5 31,199.86 0.11
Minnesota 37 985,197.58 3.62
Missouri 18 81,396.06 0.30
Nevada 111 3,240,653.01 11.91
New Jersey 48 362,784.81 1.33
New York 42 274,639.14 1.01
North Carolina 43 213,877.51 0.79
North Dakota 1 6,799.09 0.02
Ohio 23 106,440.14 0.39
Oklahoma 61 274,918.81 1.01
Pennsylvania 106 504,362.75 1.85
South Carolina 13 66,040.27 0.24
Tennessee 22 278,949.97 1.03
Texas 63 314,399.70 1.16
Utah 4 149,772.95 0.55
Virginia 30 477,167.59 1.75
Washington 49 1,546,716.92 5.69
West Virginia 7 35,344.58 0.13
- ---------------------------------- ---------- --------------------- -------------------
TOTAL 1,462 $27,199,925.48 100.00%
================================== ========== ===================== ===================
</TABLE>
(1) Determined by mailing address of the related Obligor. The mailing
address is not always the same address as the address of the related
Mortgaged Property.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Home Loan Asset-Backed Certificates, Series 1996-3 (the
"Certificates") will consist of the Class IA-1 Certificates, Class IA-2
Certificates, Class IA-3 Certificates, Class IIA Certificates (the "Class A
Certificates"), Class IS Certificates, Class IIS Certificates (the "Class S
Certificates" and together with the Class A Certificates, the "Senior
Certificates") and the Class R Certificates. Only the Class A Certificates
(the "Offered Certificates") are being offered hereby.
The Class IA-1 Certificates, Class IA-2 Certificates, Class IA-3
Certificates (the "Group IA Certificates"), Class IS Certificates and Class R
Certificates (collectively, the "Group I Certificates") will represent an
undivided ownership interest in the Group I Loans. The Class IIA
Certificates (the "Group IIA Certificates") and the Class IIS Certificates
(collectively, the "Group II Certificates") will represent an undivided
ownership interest in the Group II Loans. Each of the Group I Certificates
and the Group II Certificates are sometimes referred to herein as a
"Certificate Group". The aggregate undivided interest in the Group I Loans
represented by the Group IA Certificates initially will equal $39,521,458 of
principal, which represents approximately 98.65% of the Cut-Off Date Group I
Loan Balance. The aggregate undivided interest in the Group II Loans
represented by the Group IIA Certificates initially will equal $27,199,925 of
principal, which represents approximately 100% of the Cut-Off Date Group II
Loan Balance.
The principal amount of a class of Class A Certificates (each a "Class
Principal Balance") on any date is equal to the applicable Class Principal
Balance set forth on the cover hereof minus the aggregate of amounts actually
distributed as principal to the holders of such Class A Certificates and,
with respect to the Group IIA Certificates, for so long as an Insurer Default
has occurred and is continuing, certain losses allocated in reduction of the
Class Principal Balance of the Class IIA Certificates. On any date, the
"Aggregate Class A Principal Balance" for a Certificate Group is the
aggregate of the Class Principal Balances of all Class A Certificates in such
Certificate Group on such date.
The Class IS Certificates represent the right to receive interest at a
Pass-Through Rate of 0.45% per annum, payable monthly, on a notional amount
(the "Class IS Notional Amount") equal with respect to any Distribution Date
to the Group I Loan Balance as of the beginning of the calendar month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, the Cut-Off Date Group I Loan Balance). The Class IIS
Certificates represent the right to receive interest at a Pass-Through Rate
of 0.50% per annum, payable monthly, on a notional amount (the "Class IIS
Notional Amount" and together with the Class IS Notional Amount, the "Class S
Notional Amounts") equal with respect to any Distribution Date to the Group
II Loan Balance as of the beginning of the calendar month preceding the month
of such Distribution Date (or, in the case of the first Distribution Date,
the Cut-Off Date Group II Loan Balance). The Class S Certificates have no
class principal balances.
The Class R Certificates have no class principal balance, will bear no
interest and will be entitled to distributions as described herein.
When used herein, "Business Day" means a day that, in any of the City of
New York, the city in which the corporate trust office of the Trustee is
located or the city or cities in which the Certificate Insurer's offices or
the Master Servicer's or Servicer's servicing operations are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
The Class A Certificates will be issued in book-entry form as described
below. The Class A Certificates will be issued in minimum dollar
denominations of $1,000 and integral multiples thereof.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates. The Class A
Certificates will be issued on one or more certificates, the original
aggregate principal balances of which will equal the Class Principal Balances
as of the Closing Date and will be held by a nominee of The Depository Trust
Company (together with any successor depository selected by the Depositor,
the "Depository"). Beneficial interests in the Class A Certificates will be
indirectly held by investors through the book-entry facilities of the
Depository, as described herein. The Depositor has been informed by the
Depository that its nominee will be Cede & Co. ("Cede"). Accordingly, Cede
is expected to be the holder of record of the Class A Certificates. Except
as described below, no person acquiring a Class A Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate").
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 the Depository (or of a participating firm that
acts as agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of the Depository, if the beneficial owner's
Financial Intermediary is not a Depository participant). Therefore, the
beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Class A Certificate. Beneficial ownership of a
Class A Certificate may be transferred only in compliance with the procedures
of such Financial Intermediaries and Depository participants.
The Depository, which is a New York-chartered limited purpose trust
company, performs services for its participants, some of which (and/or their
representatives) own the Depository. In accordance with its normal
procedures, the Depository is expected to record the positions held by each
Depository participant in the Class A Certificates, whether held for its own
account or as a nominee for another person. In general, beneficial ownership
of the Class A Certificates will be subject to the rules, regulations and
procedures governing the Depository and Depository participants as in effect
from time to time.
Distributions on the Class A Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing
such payments to the beneficial owners of the Class A 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 Class A Certificates that it represents.
Under a book-entry format, beneficial owners of the Class A Certificates
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to Cede. Neither the Trustee nor the
Depositor shall be responsible or liable for such delays in the application
of such payments to such beneficial owners. Because the Depository can
only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Class A Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect
of the Class A Certificates, may be limited due to the absence of physical
certificates for the Class A Certificates. In addition, issuance of the
Class A 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.
Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Class A Certificates will be Cede,
as nominee of the Depository. Beneficial owners of the Class A Certificates
will not be Certificateholders, as that term is used in the Agreement.
Beneficial owners are only permitted to exercise the rights of
Certificateholders indirectly through Financial Intermediaries and the
Depository. Reports on the Trust provided by the Servicer to Cede, as
nominee of the Depository, 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
Depository accounts the Class A Certificates of such beneficial owners are
credited.
The Depository has advised the Depositor and the Trustee that, unless
and until Definitive Certificates are issued, the Depository will take any
action permitted to be taken by the holders of the Class A Certificates under
the Agreement only at the direction of one or more Financial Intermediaries
to whose Depository accounts the Class A Certificates are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries
whose holdings include such Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the Class
A Certificates, or their nominees, rather than to the Depository, only if (a)
the Depositor advises the Trustee in writing that the Depository is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Class A Certificates and the
Depositor or the Trustee is unable to locate a qualified successor; (b) the
Depositor, at its sole option, advises the Trustee that it elects to
terminate a book-entry system through the Depository; or (c) with the consent
of the Certificate Insurer after occurrence of an Event of Default (as
described below), beneficial owners of the Class A Certificates having not
less than 51% of the Voting Rights evidenced by the Class A Certificates
advise the Trustee and the Depository through the Financial Intermediaries in
writing that the continuation of a book-entry system with respect such Book-
Entry Certificates through the Depository (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 all beneficial
owners of the Class A Certificates through the Depository of the occurrence
of such event and the availability of Definitive Certificates. Upon
surrender by the Depository of the global certificate or certificates
representing the Class A Certificates and instructions for reregistration,
the Trustee will issue the Definitive Certificates, and thereafter the
Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
ASSIGNMENT OF LOANS
At the time of issuance of the Certificates, the Depositor will transfer
to the Trust all of its right, title and interest in and to each Loan, the
related note or contract or any mortgages relating to the Loans and other
related documents (collectively, the "Related Documents"), including all
payments received on or with respect to each such Loan on or after the
related Cut-Off Date. The Trustee, concurrently with the transfer of the
Loans, will deliver the Certificates to the Depositor. Each Loan transferred
to the Trust will be identified on a schedule (the "Loan Schedule") delivered
to the Trustee pursuant to the Agreement. Such schedule will include
information as to the Loan Balance of each Loan as of the Cut-Off Date, as
well as information with respect to the related Loan Rate.
The Agreement requires that, within the time period specified therein,
the Depositor deliver or cause to be delivered to the Trustee (or a
custodian, as the Trustee's agent for such purpose) the mortgages relating to
the Mortgage Loans with evidence of a recording indicated thereon, the notes
and retail installment sale contracts relating to the Loans, and certain
other Related Documents (the "Loan Files"). In lieu of delivery of original
mortgages, the Depositor may deliver or cause to be delivered true and
correct copies thereof which have been certified as to authenticity by the
appropriate county recording office where such mortgage is recorded. The
Agreement provides, however, that the Servicer, for the benefit of and as
agent for the Certificateholders and the Certificate Insurer will retain
possession of certain portions of the Related Documents, including, without
limitation, the application and credit underwriting file with respect to each
Loan (the "Credit File"). The assignments to the Trustee (or any co-trustee
appointed under the Agreement) of any mortgage or deed of trust securing a
Mortgage Loan will be recorded in the appropriate public office for real
property records within the time period specified in the Agreement, except
where, in the opinion of counsel, such recording is not required to protect
the Trustee's interest in the related Mortgage Loan against the claim of any
subsequent transferee or any successor to a creditor of the Depositor or the
Seller.
If the FHA has not assigned a case number under the Contract of
Insurance to an FHA Loan, to indicate that such an FHA Loan is eligible for
Title I Insurance coverage under the Contract of Insurance, on or before the
120th day after the Closing Date, the Seller shall be obligated, on the last
day of the calendar month in which such 120th day occurs, to repurchase such
FHA Loan. If the FHA reserve amount with respect to an FHA Loan, which will
be in an amount equal to 10% of the Loan Balance of such FHA Loan as of the
Cut-Off Date, has not been transferred to the Contract of Insurance Holder's
FHA Reserve Account on or before the 150th day after the Closing Date, the
Seller shall be obligated, on the last day of the calendar month in which
such 150th day occurs, to repurchase such FHA Loan.
Within 45 Business Days of the Closing Date, the Trustee will review the
Related Documents. If at that time any Related Document is found to be
defective in any material respect and such defect is not cured within 60 days
following the receipt of notice thereof, the Seller will be obligated to
either (i) substitute for such Loan an Eligible Substitute Loan (provided,
however, that such substitution is permitted only within two years of the
Closing Date) or (ii) purchase such Loan at a price (the "Purchase Price")
equal to the outstanding Loan Balance of such Loan as of the date of
purchase, plus unpaid accrued interest at the Loan Rate to the last day of
the month in which such purchase occurs; provided, however, that no such
substitution may be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify the Trust as a REMIC or
result in a prohibited transaction tax under the Code. In certain
circumstances, the Certificate Insurer may elect to extend by up to 150 days
the cure periods described in the preceding sentence. The Purchase Price
will be deposited in the Distribution Account relating to the Loan Group of
the Loan being repurchased on or prior to the last Business Day of the month
in which such obligation arises. The obligation of the Seller to repurchase
or substitute for a Defective Loan (as defined below) is the sole remedy
regarding any defects in the Loans and Related Documents available to the
Trustee or the Certificateholders against the Seller.
In connection with the substitution of an Eligible Substitute Loan, the
Seller will be required to deposit in the Distribution Account relating to
the Loan Group of the Loan being substituted and as of the Determination Date
on which such obligation arises, an amount (the "Substitution Adjustment")
equal to the excess of the Loan Balance of the related Defective Loan over
the Loan Balance of such Eligible Substitute Loan.
An "Eligible Substitute Loan" is a loan substituted by the Seller for a
Defective Loan which must, on the date of such substitution, (i) have an
outstanding Loan Balance (or in the case of a substitution of more than one
Loan for a Defective Loan, an aggregate Loan Balance), not in excess of, and
not more than 1% less than, the Loan Balance of the Defective Loan; (ii) have
a Loan Rate at least equal to the Loan Rate of the Defective Loan; (iii) have
a remaining term to maturity not later than the remaining term to maturity of
the Defective Loan; (iv) comply with each representation and warranty
applicable to the Defective Loan set forth in the Agreement (deemed to be
made as of the date of substitution); and (v) satisfy certain other
conditions specified in the Agreement. Additionally, if more than one
Eligible Substitute Loan is being substituted for one or more Defective Loans
on any day, in lieu of the requirement in clause (ii) above, the weighted
average Loan Rate of such Eligible Substitute Loans must equal or exceed the
weighted average Loan Rate of the Defective Loans immediately prior to giving
effect to the substitution.
The Seller will make certain representations and warranties as of the
Cut-Off Date (or such later date as may be specified in the Agreement) as to
the accuracy in all material respects of certain information furnished to the
Trustee with respect to each Loan (e.g., Cut-Off Date Loan Balance and the
Loan Rate). In addition, the Seller will represent and warrant, among other
things, that the Seller has transferred all of its right, title and interest
in each Loan and the Related Documents free and clear of liens and that each
Loan complied, at the time of origination, in all material respects with
applicable state and federal laws, including, without limitation, the
requirements of Title I with respect to the FHA Loans. Upon discovery of a
breach of any representation and warranty which materially and adversely
affects the interests of the Certificateholders or the Certificate Insurer in
the related Loan and Related Documents, the Seller will have a period of
sixty Business Days following the date of such discovery to cure such breach.
If the breach cannot be cured within such sixty Business Day period, the
Seller will be obligated to (i) substitute for such Defective Loan an
Eligible Substitute Loan or (ii) purchase such Defective Loan from the Trust.
The same procedure and limitations that are set forth above for the
substitution or purchase of Defective Loans as a result of deficient
documentation relating thereto will apply to the substitution or purchase of
a Defective Loan as a result of a breach of a representation or warranty in
the Agreement that materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer.
Loans required to be repurchased or substituted by the Seller as
described in the preceding paragraphs are referred to as "Defective Loans."
PAYMENTS ON LOANS; COLLECTION ACCOUNTS AND DISTRIBUTION ACCOUNTS
The Trustee will establish and shall maintain on behalf of the Trust one
or more accounts for each Certificate Group (each a "Collection Account") for
the benefit of the related Certificateholders. Each Collection Account will
be an Eligible Account (as defined herein). Amounts deposited to a
Collection Account may be invested in Eligible Investments maturing no later
than the Business Day on which the amount on deposit therein is required to
be deposited in the Distribution Account.
The Trustee will establish an account for each Certificate Group (each a
"Distribution Account") into which will be deposited all amounts for
distribution to Certificateholders of such Certificate Group on a
Distribution Date. Each Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Eligible Investments maturing
on or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is (i) an account that is a segregated trust
account that is maintained with the corporate trust department of a
depository institution acceptable to the Certificate Insurer (so long as an
Insurer Default shall not have occurred and be continuing), or (ii) a
segregated direct deposit account maintained with a depository institution or
trust company organized under the laws of the United States of America, or
any of the States thereof, or the District of Columbia, having a certificate
of deposit, short term deposit or commercial paper rating of at least A-1+ by
Standard & Poor's and P-1 by Moody's and (so long as an Insurer Default shall
not have occurred and be continuing) acceptable to the Certificate Insurer.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies and approval of
the Certificate Insurer from time to time as being consistent with their then
current ratings of the Offered Certificates.
The Master Servicer shall cause the Servicer to deposit into the
Collection Account for a Certificate Group all payments in respect of the
Loans in the related Loan Group received by it promptly upon receipt. The
Master Servicer shall also cause the Servicer to deposit into the Collection
Account for a Certificate Group all payments of premiums with respect to FHA
Insurance received from Obligors on FHA Loans in the related Loan Group.
The following amounts will be deposited to the Distribution Account for
a Certificate Group in respect of a Due Period and constitute available funds
for such Certificate Group (for each Certificate Group, the "Available
Funds") for the following Distribution Date: (i) from amounts withdrawn from
the related Collection Account not later than two Business Days prior to each
Distribution Date, (a) payments of interest and principal in respect of the
Loans in the related Loan Group received during such Due Period and (b) FHA
Insurance premiums in respect of FHA Loans in the related Loan Group received
during the related Due Period; (ii) net liquidation proceeds for the related
Loan Group from the sale of Foreclosed Property during such Due Period; (iii)
the Purchase Price for repurchased Loans and Substitution Adjustments in
respect of substitutions of Loans in each case for the Loans in the related
Loan Group during such Due Period; (iv) Insurance Proceeds received for the
related Loan Group by the Master Servicer during such Due Period; (v)
payments of FHA Insurance in respect of FHA Loans in the related Loan Group
received during such Due Period; (vi) payments received during such Due
Period in each case for the Loans in the related Loan Group from the Master
Servicer or the Seller in connection with the termination of the Trust as
provided in the Agreement; (vii) Interest Advances for the Loans in the
related Loan Group in respect of such Distribution Date; and (viii) any
amounts paid under the related Policy in respect of such Certificate Group.
INTEREST ADVANCES
The Master Servicer is required to remit to the Trustee no later than
the fifth Business Day prior to the related Distribution Date (the
"Determination Date") for deposit in each Distribution Account an amount
equal to the scheduled installment of interest on each Loan in the related
Loan Group (calculated at the rate set forth in the Agreement) (other than a
Defaulted Loan (as defined herein)) due on a date during the related Due
Period (the "Due Date") less the amount of scheduled installment of interest
on each Loan in such Loan Group due during such Due Period and received by
the Servicer and deposited into the related Distribution Account during the
related Due Period (an "Interest Advance"). Interest Advances will be made by
the Master Servicer from its own funds, from funds held in the related
Collection Account for future distributions to Certificateholders or from any
combination of the foregoing.
Notwithstanding the foregoing, the Master Servicer is not required to
make any Interest Advances if in the good faith judgment of the Master
Servicer, the Master Servicer determines that such advance will not
ultimately be recoverable from collections received from the Obligor under
the related Loan or other recoveries of such Loan.
If Interest Advances are made by the Master Servicer from funds held in
a Collection Account for future distribution to Certificateholders, the
Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Collection Account with
respect to such Distribution Date would be less than the amount required to
be available for distribution on such Distribution Date as a result of such
Interest Advances. The Master Servicer will be entitled to be reimbursed for
previously unreimbursed Interest Advances made from its own funds with
respect to a Loan on Distribution Dates subsequent to the Distribution Date
in respect of which such Interest Advance was made from payments in respect
of such Loan. If a Loan shall become a Defaulted Loan and the Master Servicer
shall not have been fully reimbursed for any Interest Advances with respect
to such Loan, the Master Servicer shall be entitled to be reimbursed for the
outstanding amount of such Interest Advances from unrelated Loans. No
interest shall be due to the Master Servicer in respect of any Interest
Advance for any period prior to the reimbursement thereof.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the
25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing on December 26, 1996 (each, a
"Distribution Date"), to the holders in whose names such Certificates are
registered at the close of business on the last Business Day of the month
preceding the month of such Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed,
via first class mail, postage prepaid, to the address of the
Certificateholder entitled thereto as it appears on the Certificate Register
or, in the case of any holder of Offered Certificates of at least a
$1,000,000 denomination or any holder of a Class S Certificate, an aggregate
Percentage Interest of at least 30%, that has so notified the Trustee in
writing in accordance with the Agreement, by wire transfer in immediately
available funds to the account of such holder at a bank or other depository
institution having appropriate wire transfer facilities; provided, however,
that the final distribution in retirement of the Offered Certificates will
be made only upon presentation and surrender of such Certificates at
the Corporate Trust Office of the Trustee. On each Distribution Date,
the holder of an Offered Certificate will be entitled to receive its
Percentage Interest of the amounts distributed in respect of such
Certificates. The "Percentage Interest" evidenced by each Class A
Certificate will equal the percentage derived by dividing the denomination of
such Certificate by the related Class Principal Balance as of the Closing
Date.
Group I Certificates
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers, to the extent of Available Funds for the Group I
Loans then on deposit in the Distribution Account for the Group I
Certificates in the following order of priority:
(i) for deposit in the FHA Premium Account, the FHA Premium Account
Deposit for the Group I FHA Loans on such Distribution Date;
(ii) (a) to the Master Servicer, the Master Servicing Fee and (b)
to the Servicer, the Servicing Fee, in each case for the Group I Loans
on such Distribution Date;
(iii) to the Master Servicer or Servicer, any amount in respect of
reimbursement of Interest Advances or Foreclosure Advances for the Group
I Loans to which the Master Servicer or Servicer is entitled with
respect to such Distribution Date and, to the Claims Administrator, any
amount in respect of reimbursement of expenses of filing FHA Insurance
claims for the Group I FHA Loans;
(iv) to the Trustee, the Trustee Fee and any Additional Trustee Fee
for the Group I Loans on such Distribution Date;
(v) to the Certificate Insurer, amounts owing to the Certificate
Insurer under the Insurance Agreement with respect to the Group I
Certificates for the premium payable pursuant thereto;
(vi) to the holders of the Class IS Certificates, an amount equal
to the related Class Interest Distribution for such Distribution Date;
(vii) to the holders of the Group IA Certificates, an amount equal
to the related Class Interest Distribution for such Distribution Date;
(viii) sequentially, to the holders of the Class IA-1 Certificates,
Class IA-2 Certificates, and Class IA-3 Certificates, in that order,
until the respective Class Principal Balances thereof are reduced to
zero, the Class A Principal Distribution for the Group I Certificates
(other than the portion thereof constituting the Distributable Excess
Spread) for such Distribution Date; provided, however, in the event an
Insurer Default has occurred and is continuing and the
overcollateralization amount relating to the Group I Certificates is
first eliminated, such portion of the Class A Principal Distribution
will be distributed pro rata to the holders of the Group IA
Certificates, based on their respective Class Principal Balances;
(ix) to the Certificate Insurer, amounts owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws
made on the related Policy for the Group I Certificates (with interest
thereon at the rate specified in the Insurance Agreement);
(x) sequentially, to the holders of the Class IA-1 Certificates,
Class IA-2 Certificates and Class IA-3 Certificates, in that order,
until the respective Class Principal Balances thereof are reduced to
zero, Distributable Excess Spread, if any, for such Distribution Date;
provided, however, in the event that an Insurer Default has occurred and
is continuing and the overcollateralization amount relating to the Group
IA Certificates is first eliminated, the Distributable Excess Spread
will be distributed pro rata to the holders of the classes of Group IA
Certificates, based on the respective Class Principal Balances;
(xi) sequentially, to the holders of the Class IA-1 Certificates,
Class IA-2 Certificates and Class IA-3 Certificates, in that order,
until the respective Class Principal Balances thereof are reduced to
zero, the Class A Guaranteed Principal Distribution Amount for the Group
IA Certificates, if any, for such Distribution Date;
(xii) to the Certificate Insurer, any other amounts with respect to
the Group I Certificates owing to the Certificate Insurer under the
Insurance Agreement;
(xiii) to any successor Master Servicer, such fees and expenses
reimbursable to such Master Servicer pursuant to the Agreement, if any,
for such Distribution Date with respect to the Group I Certificates in
addition to the Master Servicer Fee paid pursuant to (ii) above;
(xiv) payments in respect of certain fees and other amounts
relating to the Group I Loans to the persons entitled thereto pursuant
to the Agreement;
(xv) to an account held for the benefit of the Certificate Insurer
an amount specified in the Insurance Agreement; and
(xvi) to the Class R Certificateholders, any remaining amounts.
Group II Certificates
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers, to the extent of Available Funds for the Group
II Loans then on deposit in the Distribution Account for the Group II
Certificates in the following order of priority:
(i) for deposit in the FHA Premium Account, the FHA Premium Account
Deposit for the Group II Unsecured FHA Loans on such Distribution Date;
(ii) (a) to the Master Servicer, the related Master Servicing Fee
and (b) to the Servicer, the related Servicing Fee, in each case for the
Group II Loans on such Distribution Date;
(iii) to the Master Servicer or Servicer, any amount in respect of
reimbursement of Interest Advances or Foreclosure Advances for the Group
II Loans to which the Master Servicer or Servicer is entitled with
respect to such Distribution Date and, to the Claims Administrator,
any amount in respect of reimbursement of expenses of filing FHA
Insurance claims for the Group II Unsecured FHA Loans;
(iv) to the Trustee, the Trustee Fee and any Additional Trustee Fee
for the Group II Loans on such Distribution Date;
(v) to the Certificate Insurer, amounts owing to the Certificate
Insurer under the Insurance Agreement with respect to the Group II
Certificates for the premium payable pursuant thereto;
(vi) to the holders of the Class IIS Certificates, an amount equal
to the related Class Interest Distribution for such Distribution Date;
(vii) to the holders of the Class IIA Certificates, an amount equal
to the Class Interest Distribution for the Class IIA Certificates for
such Distribution Date;
(viii) to the holders of the Class IIA Certificates, until the
Class Principal Balance thereof is reduced to zero, the Class A
Principal Distribution for the Group II Certificates for such
Distribution Date;
(ix) to the holders of the Class IIA Certificates, any Loss
Carryforward Amounts (as defined herein) not previously reimbursed;
(x) to the Certificate Insurer, amounts owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws
made on the Policy for the Group II Certificates (with interest thereon
at the rate specified in the Insurance Agreement);
(xi) to the holders of the Class IIA Certificates, until the Class
Principal Balance thereof is reduced to zero, the Class A Guaranteed
Principal Distribution Amount for the Group IIA Certificates, if any,
for such Distribution Date;
(xii) to the Certificate Insurer, any other amounts with respect to
the Group II Certificates owing to the Certificate Insurer under the
Insurance Agreement;
(xiii) to any successor Master Servicer, such fees and expenses
reimbursable to such Master Servicer pursuant to the Agreement, if any,
for such Distribution Date with respect to the Group II Certificates in
addition to the Master Servicer Fee paid pursuant to (ii) above;
(xiv) payments in respect of certain fees and other amounts
relating to the Group II Loans to the persons entitled thereto pursuant
to the Agreement;
(xv) to an account held for the benefit of the Certificate
Insurer, an amount specified in the Insurance Agreement; and
(xvi) to the Seller, any remaining amounts.
The "Trustee Fee" for each Loan Group and Distribution Date will be
one-twelfth of the product of 0.045% and the related Loan Group Balance as of
the beginning of the calendar month preceding the month of such Distribution
Date (or, in the case of the first Distribution Date, the related Loan Group
Balance as of the Cut-Off Date).
The "Additional Trustee Fee" will be with respect to the December
Distribution Date of each year, beginning in 1997 and each Loan Group, the
excess of $6,500, with respect to the Group I Loans, and $3,500, with respect
to the Group II Loans, over the aggregate Trustee Fee received by the Trustee
in respect of such Loan Group on the such Distribution Date and the eleven
prior Distribution Dates.
See "Collection and Other Servicing Procedures on Loans; Claims
Administration" below for a discussion of Foreclosure Advances.
INTEREST
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Distributions,"
interest will be distributed to holders of each class of Senior Certificates
in an amount equal to the related Class Interest Distribution. For each
Distribution Date and each class of Senior Certificates, the "Class Interest
Distribution" is the sum of (a) one month's interest at the related Pass-
Through Rate on the related Class Principal Balance or the Class S Notional
Amount, as applicable, for such Distribution Date (the "Class Monthly
Interest Amount") and (b) any Class Interest Shortfall for such class of
Senior Certificates for such Distribution Date. As to any Distribution Date
and class of Senior Certificates, Class Interest Shortfall is the sum of (a)
the excess of the related Class Monthly Interest Amount for the preceding
Distribution Date and any outstanding Class Interest Shortfall with respect
to such class on such preceding Distribution Date, over the amount in respect
of interest that is actually distributed to holders of such class on such
preceding Distribution Date and (b) one month's interest on such excess, to
the extent permitted by law, at the related Pass-Through Rate.
Notwithstanding the foregoing, the Class Monthly Interest Amount for any
Distribution Date and class will be reduced by such class's pro rata share
(based on the interest such class would otherwise be entitled to receive in
the absence of the shortfalls specified below) of (x) any Prepayment Interest
Shortfalls in respect of the related Loan Group to the extent not covered by
the Servicing Fee and (y) any Civil Relief Act Interest Shortfalls in respect
of a Loan Group for such Distribution Date. Neither Prepayment Interest
Shortfalls nor Civil Relief Act Interest Shortfalls in respect of the related
Loan Group will be covered by payments under the related Policy. See "Risk
Factors--Civil Relief Act Shortfalls" herein and in the Prospectus and
"Certain Legal Aspects of the Loans" in the Prospectus. Distributions of the
related Class Interest Distribution to the Class S Certificates of a
Certificate Group will be made prior to the distribution of the Class
Interest Distribution to the Class A Certificates of such Certificate Group.
PRINCIPAL
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Distributions,"
principal will be distributed to the holders of Class A Certificates of each
Certificate Group then entitled to distributions of principal in an amount
equal to the lesser of (a) the related Aggregate Class A Principal Balance
and (b) the Class A Principal Distribution for such Certificate Group on such
Distribution Date. The "Class A Principal Distribution" means, with respect
to any Distribution Date and Certificate Group, the sum of the Class A
Monthly Principal Amount for such Distribution Date and such Certificate
Group and, with respect to the Group IA Certificates, any outstanding Class A
Principal Shortfall as of the close of business on the preceding Distribution
Date, provided that on the Distribution Date in November 2022, the
"Class A Principal Distribution" will equal the Aggregate Class A Principal
Balance for each of the Group I Certificates and the Group II
Certificates, respectively.
"Class A Monthly Principal Amount" means, with respect to any
Distribution Date and Certificate Group, the amount equal to the sum of the
following amounts (without duplication) with respect to the immediately
preceding Due Period (as defined below): (i) that portion of all payments
received on Loans in the related Loan Group (other than Defaulted Loans)
allocable to principal, including all full and partial principal prepayments,
(ii) the Loan Balance of each Loan in the related Loan Group as of the end of
the immediately preceding Due Period that became a Defaulted Loan for the
first time during such Due Period, (iii) the portion of the Purchase Price
allocable to principal of all Defective Loans in the related Loan Group with
respect to such Due Period and the portion of the purchase amount paid in
connection with the termination of the Trust allocable to principal with
respect to the Loans in the related Loan Group, (iv) any Substitution
Adjustments for the related Loan Group received on or prior to the previous
Determination Date and not yet distributed, and (v) only with respect to the
Group I Certificates, the amount of Distributable Excess Spread, if any, in
respect of such Distribution Date.
"Class A Principal Shortfall" means with respect to any Distribution
Date and Group IA Certificates, the excess of the sum of the Class A Monthly
Principal Amount for such Certificate Group for the preceding Distribution
Date and any outstanding Class A Principal Shortfall for such Certificate
Group on such preceding Distribution Date over the amount in respect of
principal that is actually distributed to the holders of the Group IA
Certificates on such preceding Distribution Date.
If on any Distribution Date the required level of overcollateralization
is reduced below the then existing amount of overcollateralization (described
below) or a full distribution of the Class A Monthly Principal Amount would
cause the amount of overcollateralization to exceed the required level, the
amount of the Class A Monthly Principal Amount distributed on the Group IA
Certificates will be correspondingly reduced by the amount of such reduction
or by the amount necessary such that the overcollateralization will not
exceed the required level of overcollateralization after giving effect to the
distribution in respect of principal to be made on such Distribution Date.
With respect to the Group IIA Certificates, if the Certificate Insurer
defaults in its obligation to pay the related Class A Guaranteed Principal
Distribution Amount on any Distribution Date, the Class Principal Balance of
the Group IIA Certificates on such Distribution Date will be reduced by the
amount the Certificate Insurer fails to pay without a corresponding receipt
of cash to the holders of the Group IIA Certificates. Holders of Group IIA
Certificates will be entitled to receive the amount of such reduction on
future Distribution Dates ("Loss Carryforward Amounts") in accordance with
the priorities set forth under "--Distributions--Group II Certificates". Any
payments of the Loss Carryforward Amount will not result in a further
reduction to the Class Principal Balance of the Group IIA Certificates and
interest will not accrue on any such amounts.
"Class A Guaranteed Principal Distribution Amount" means, with respect
to a Distribution Date and Certificate Group, the amount, if any, by which
(i) the Aggregate Class A Principal Balance for such Certificate Group
exceeds (ii) the Aggregate Loan Balance of the related Loan Group at the end
of the previous Due Period (after giving effect to all amounts distributable
and allocable to principal on the related Certificates on such Distribution
Date); provided, however, that with respect to the Distribution Date in
November 2022, the Class A Guaranteed Principal Distribution Amount for each
of the Group I Certificates and the Group II Certificates, respectively, will
be equal to the amount specified in clause (i) of this paragraph for such
Certificate Group on such Distribution Date.
A "Defaulted Loan" is a Loan with respect to which: (i) a claim has been
paid or rejected pursuant to the Contract of Insurance, (ii) any related
Mortgaged Property has been repossessed and sold or, (iii) any portion of a
payment on a Loan is more than 180 days past due (without giving effect to
any grace period).
"Distributable Excess Spread" means, with respect to any Distribution
Date and the Group IA Certificates, the portion (not greater than 100%) of
Excess Spread, if any, required to be distributed on such Distribution Date
to satisfy the overcollateralization requirement in effect for the Group IA
Certificates on such Distribution Date as specified in the Agreement.
"Due Period" means, with respect to any Determination Date or
Distribution Date, the calendar month immediately preceding such
Determination Date or Distribution Date, as the case may be.
"Excess Spread" means, with respect to any Distribution Date and the
Group I Loans, the positive excess, if any, of (x) the sum of the amounts
deposited into the related Distribution Account as described in clauses (i)
through (vii) in the sixth paragraph under "--Payments on Loans; Collection
Account and Distribution Account" above with respect to such Distribution
Date over (y) the amount required to be distributed pursuant to priorities
(i) through (ix) above under "--Distributions--Group I Certificates."
An "Insurer Default" will occur in the event the Certificate Insurer
fails to make a payment required under either Policy or if certain events of
bankruptcy or insolvency occur with respect to the Certificate Insurer.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust's existence:
November 1, 1996 or in the case
of Loans originated thereafter,
the date of origination ... Cut-Off Date.
November 1 to
November 30, 1996 .... (A) Initial Due Period. The Servicer receives (x)
scheduled payments of principal and interest
and (y) Principal Prepayments and interest
thereon to the date of such prepayment. For
succeeding Distribution Dates, the Due Period
will commence on the first day of the preceding
calendar month and end on the last day of such
month.
November 30, 1996 .... (B) Record Date (the last Business Day of the month
preceding the month of the related Distribution
Date).
December 19, 1996 .... (C) Determination Date (the fifth Business Day
preceding such Distribution Date).
December 26, 1996 .... (D) Distribution Date.
Succeeding monthly periods follow the pattern of (A) through (D).
- ---------------------------
(A) Principal payments received during this period will be distributed to
holders of the Senior Certificates on December 26, 1996. When a Loan is
prepaid in full, interest on the amount prepaid is collected only from
the last scheduled Due Date to the date of prepayment.
(B) Distributions of principal and interest on December 26, 1996 will be
made to holders of the Certificates of record as of the close of
business on the Record Date.
(C) Determination Date. No later than each Determination Date, the Trustee
will determine the amount of principal and interest (including the
amount, if any, of Interest Advances to be made by the Master Servicer)
which will be passed through to holders of the Certificates. The Trustee
will be obligated to distribute on the related Distribution Date all
scheduled payments due during the related Due Period and all Principal
Prepayments, in each case to the extent actually received on Loans
during the related Due Period. In the event a shortfall in the interest
resulting from Principal Prepayments in full occurs during such Due
Period, the Servicing Fee otherwise payable to the Servicer for such
month shall, to the extent of such shortfall, be paid to the holders of
the Certificates on December 26, 1996.
(D) The Trustee will make distributions to holders of the Certificates on
the 25th day of the month following the month in which the related Due
Period ends, or if such day is not a Business Day, on the next Business
Day.
WEIGHTED AVERAGE LIVES OF THE CLASS A CERTIFICATES
The timing of changes in the rate of Principal Prepayments may
significantly affect an investor's actual yield to maturity, even if the
average rate of Principal Prepayments is consistent with such investor's
expectation. In general, the earlier a Principal Prepayment on a Loan
occurs, the greater the effect of such Principal Prepayment on an investor's
yield to maturity. 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 may not be offset by a subsequent like decrease (or
increase) in the rate of Principal Prepayments.
The weighted average life of a Class A Certificate refers to the average
amount of time that will elapse from the date of issuance to the date each
dollar of principal of such Certificate is repaid to the investor. The
weighted average life or lives of the Class A Certificates in a Certificate
Group will be influenced by the rate at which principal payments on the Loans
in the related Loan Group are paid, which may be in the form of scheduled
amortization, accelerated amortization or prepayments (for this purpose, the
term "prepayment" includes liquidations due to default). Prepayments on
loans are commonly measured relative to a prepayment standard or model.
The model used in this Prospectus Supplement (the "Constant Prepayment
Rate" or "CPR") represents an assumed annualized rate of prepayment relative
to the then outstanding principal balance on a pool of new mortgage loans.
The percentages and weighted average lives in the following table were
determined, assuming that: (i) all distributions with respect to the Senior
Certificates will be made at the scheduled times as described below under
"Description of the Certificates--Distributions"; (ii) the Loans will prepay
at the indicated constant CPR percentages and all prepayments will include
thirty days' interest thereon; (iii) the Pass-Through Rates for the Class A
Certificates are as set forth on the cover hereof and the Pass-Through Rates
for the Class IS Certificates and Class IIS Certificates are 0.45% per annum
and 0.50% per annum, respectively; (iv) no Loan is ever delinquent; (v)
neither the Master Servicer nor Mego will exercise its right of early
termination of the Trust as described below under "Description Of The
Certificates--Termination; Retirement of the Certificates"; (vi) there is no
substitution or repurchase of a Loan; (vii) the Loans consist of 15 pools of
Loans with Cut-Off Date Loan Balances, Loan Rates and original and remaining
terms to maturity as set forth below under "Assumed Loan Characteristics";
(viii) the Group I Certificates will be amortized from cashflows from the
Group I Loans and the Group II Certificates will be amortized from cashflows
from the Group II Loans; (ix) the Closing Date for the Offered Certificates
occurs on November 18, 1996; (x) interest on each class of Senior Certificates
in respect of any Distribution Date will accrue from the first day of the
month preceding such Distribution Date through the last day of the
month preceding such Distribution Date on the basis of a 360-day year
consisting of twelve 30-day months; (xi) the Aggregate Class A Principal
Balances of the Group IA Certificates and Group IIA Certificates as of the
Closing Date are 98.65% and 100% of the Cut-Off Date Group I Loan Balance and
Cut-Off Date Group II Loan Balance respectively, and (xii) the initial
overcollateralization level (the excess of the Cut-Off Date Group I Loan
Balance over the Aggregate Class A Principal Balance of the Group I
Certificates as of the Cut-Off Date) is 1.35% and thereafter is subject to
decreases and increases in accordance with the provisions of the Agreement.
ASSUMED LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
Remaining
Term to Original Term
Loan Balance as Loan Maturity to Maturity
Pool of Cut-Off Date Loan Group Rate (Months) (Months)
- ---- --------------------------- ----- --------- -------------
<S> <C> <C> <C> <C> <C>
1 $274,695.49 I 13.5760% 95 95
2 2,002,197.61 I 14.1099% 179 180
3 3,216,842.96 I 14.1749% 238 240
4 809,273.66 I 14.4982% 300 300
5 3,782,690.46 I 13.6646% 104 105
6 12,373,658.52 I 13.8637% 178 179
7 17,582,940.35 I 14.0734% 239 240
8 20,000.00 I 14.2500% 300 300
9 1,050,090.04 II 13.9844% 110 112
10 5,870,651.00 II 14.1846% 179 180
11 13,347,290.17 II 14.2380% 238 240
12 3,948,086.10 II 14.6428% 300 300
13 2,920,129.61 II 14.3763% 81 86
14 53,944.17 II 14.2849% 178 180
15 9,734.39 II 13.7500% 238 240
</TABLE>
Based upon the foregoing assumptions, some or all of which are unlikely
to reflect actual experience, the following table indicates the projected
weighted average lives of the Offered Certificates, and sets forth the
percentages of the Class Principal Balance as of the Cut-Off Date that would
be outstanding after each of the dates shown, at various CPR percentages. As
used in the tables, 15% indicates prepayments at an annual rate of 15%; 18%
indicates prepayments at an annual rate of 18% and so on.
There is no assurance that prepayments will occur, or, if they do occur,
that they will occur at any constant CPR percentage. Neither the CPR model
nor any other prepayment model or assumption purports 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 Loans. Variations
in the actual prepayment experience and balance of the Loans that prepay may
occur even if the average prepayment experience of all such Loans in a Loan
Group equals any of the specified CPR percentages.
Since the tables were prepared on the basis of the assumptions set forth
above, there are discrepancies between characteristics of the actual Loans
and the characteristics of the Loans assumed in preparing the tables. Any
such discrepancy may have an effect upon the percentages of the original
Class Principal Balance outstanding and weighted average lives of the Offered
Certificates set forth in the tables. In addition, since the actual Loans in
the Trust have characteristics which differ from those assumed in preparing
the table set forth below, the distributions of principal on the Certificates
may be made earlier or later than as indicated on the tables.
CLASS IA-1
PREPAYMENT ASSUMPTION(1)
------------------------
<TABLE>
<CAPTION>
Distribution
Dates 0% CPR 12% CPR 15% CPR 18% CPR 20% CPR
------------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
November 25, 1997 91% 67% 61% 55% 51%
November 25, 1998 86% 42% 32% 22% 16%
November 25, 1999 81% 21% 8% 0% 0%
November 25, 2000 75% 1% 0% 0% 0%
November 25, 2001 68% 0% 0% 0% 0%
November 25, 2002 60% 0% 0% 0% 0%
November 25, 2003 51% 0% 0% 0% 0%
November 25, 2004 40% 0% 0% 0% 0%
November 25, 2005 30% 0% 0% 0% 0%
November 25, 2006 21% 0% 0% 0% 0%
November 25, 2007 10% 0% 0% 0% 0%
November 25, 2008 0% 0% 0% 0% 0%
November 25, 2009 0% 0% 0% 0% 0%
November 25, 2010 0% 0% 0% 0% 0%
November 25, 2011 0% 0% 0% 0% 0%
November 25, 2012 0% 0% 0% 0% 0%
November 25, 2013 0% 0% 0% 0% 0%
November 25, 2014 0% 0% 0% 0% 0%
November 25, 2015 0% 0% 0% 0% 0%
November 25, 2016 0% 0% 0% 0% 0%
November 25, 2017 0% 0% 0% 0% 0%
November 25, 2018 0% 0% 0% 0% 0%
November 25, 2019 0% 0% 0% 0% 0%
Weighted Average Life 6.68 1.85 1.52 1.29 1.17
Years(2)
</TABLE>
_______________
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of the Offered Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date, (ii)
adding the results and (iii) dividing the sum by the Original Class A
Principal Balance.
CLASS IA-2
PREPAYMENT ASSUMPTION(1)
------------------------
<TABLE>
<CAPTION>
Distribution
Dates 0% CPR 12% CPR 15% CPR 18% CPR 20% CPR
------------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
November 25, 1997 100% 100% 100% 100% 100%
November 25, 1998 100% 100% 100% 100% 100%
November 25, 1999 100% 100% 100% 92% 79%
November 25, 2000 100% 100% 77% 56% 43%
November 25, 2001 100% 73% 48% 26% 13%
November 25, 2002 100% 48% 23% 2% 0%
November 25, 2003 100% 26% 2% 0% 0%
November 25, 2004 100% 6% 0% 0% 0%
November 25, 2005 100% 0% 0% 0% 0%
November 25, 2006 100% 0% 0% 0% 0%
November 25, 2007 100% 0% 0% 0% 0%
November 25, 2008 96% 0% 0% 0% 0%
November 25, 2009 71% 0% 0% 0% 0%
November 25, 2010 44% 0% 0% 0% 0%
November 25, 2011 16% 0% 0% 0% 0%
November 25, 2012 1% 0% 0% 0% 0%
November 25, 2013 0% 0% 0% 0% 0%
November 25, 2014 0% 0% 0% 0% 0%
November 25, 2015 0% 0% 0% 0% 0%
November 25, 2016 0% 0% 0% 0% 0%
November 25, 2017 0% 0% 0% 0% 0%
November 25, 2018 0% 0% 0% 0% 0%
November 25, 2019 0% 0% 0% 0% 0%
Weighted Average Life 13.84 6.06 5.08 4.33 3.93
Years(2)
</TABLE>
_______________
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of the Offered Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date, (ii)
adding the results and (iii) dividing the sum by the Original Class A
Principal Balance.
CLASS IA-3
PREPAYMENT ASSUMPTION(1)
------------------------
<TABLE>
<CAPTION>
Distribution
Dates 0% CPR 12% CPR 15% CPR 18% CPR 20% CPR
------------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
November 25, 1997 100% 100% 100% 100% 100%
November 25, 1998 100% 100% 100% 100% 100%
November 25, 1999 100% 100% 100% 100% 100%
November 25, 2000 100% 100% 100% 100% 100%
November 25, 2001 100% 100% 100% 100% 100%
November 25, 2002 100% 100% 100% 100% 88%
November 25, 2003 100% 100% 100% 80% 67%
November 25, 2004 100% 100% 81% 61% 50%
November 25, 2005 100% 88% 64% 46% 36%
November 25, 2006 100% 72% 51% 34% 26%
November 25, 2007 100% 58% 39% 24% 18%
November 25, 2008 100% 45% 28% 17% 11%
November 25, 2009 100% 33% 20% 11% 7%
November 25, 2010 100% 23% 12% 6% 3%
November 25, 2011 100% 14% 7% 2% 0%
November 25, 2012 100% 10% 4% 0% 0%
November 25, 2013 81% 6% 1% 0% 0%
November 25, 2014 58% 2% 0% 0% 0%
November 25, 2015 30% 0% 0% 0% 0%
November 25, 2016 0% 0% 0% 0% 0%
November 25, 2017 0% 0% 0% 0% 0%
November 25, 2018 0% 0% 0% 0% 0%
November 25, 2019 0% 0% 0% 0% 0%
Weighted Average Life 18.26 12.08 10.62 9.36 8.62
Years(2)
</TABLE>
_______________
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of the Offered Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date, (ii)
adding the results and (iii) dividing the sum by the Original Class A
Principal Balance.
CLASS IIA
PREPAYMENT ASSUMPTION(1)
------------------------
<TABLE>
<CAPTION>
Distribution
Dates 0% CPR 12% CPR 15% CPR 18% CPR 20% CPR
------------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
November 25, 1997 98% 86% 83% 80% 78%
November 25, 1998 95% 74% 69% 64% 61%
November 25, 1999 92% 63% 57% 51% 47%
November 25, 2000 89% 53% 46% 40% 36%
November 25, 2001 85% 45% 38% 31% 28%
November 25, 2002 80% 37% 30% 24% 21%
November 25, 2003 76% 31% 24% 19% 16%
November 25, 2004 72% 26% 20% 15% 12%
November 25, 2005 69% 22% 16% 11% 9%
November 25, 2006 65% 18% 13% 9% 7%
November 25, 2007 61% 15% 10% 7% 5%
November 25, 2008 56% 12% 8% 5% 4%
November 25, 2009 51% 10% 6% 4% 3%
November 25, 2010 44% 7% 5% 3% 2%
November 25, 2011 37% 5% 3% 2% 1%
November 25, 2012 33% 4% 2% 1% 1%
November 25, 2013 28% 3% 2% 1% 1%
November 25, 2014 21% 2% 1% 1% 0%
November 25, 2015 14% 1% 1% 0% 0%
November 25, 2016 8% 1% 0% 0% 0%
November 25, 2017 7% 0% 0% 0% 0%
November 25, 2018 5% 0% 0% 0% 0%
November 25, 2019 4% 0% 0% 0% 0%
November 25, 2020 2% 0% 0% 0% 0%
November 25, 2021 0% 0% 0% 0% 0%
Weighted Average Life 12.48 5.71 4.89 4.24 3.87
Years(2)
</TABLE>
_______________
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of the Offered Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Distribution Date, (ii)
adding the results and (iii) dividing the sum by the Original Class A
Principal Balance.
OVERCOLLATERALIZATION PROVISIONS
The provisions of the Agreement provide for limited
overcollateralization as of the Closing Date and for a limited acceleration
of principal payments on the Group IA Certificates relative to the
amortization of the Group I Loans in the early months of the transaction.
The acceleration of principal payments on the Group IA Certificates is
achieved by distributing Distributable Excess Spread as principal thereon.
This acceleration feature creates overcollateralization (i.e., the excess of
the Group I Loan Balance over the Aggregate Class A Principal Balance of the
Group IA Certificates), in addition to the overcollateralization in effect on
the Closing Date. Once the required level of overcollateralization is
reached and subject to the provisions described in the next paragraph, the
acceleration feature will cease, unless necessary to maintain the required
level of overcollateralization specified in the Agreement.
The Agreement provides that, subject to certain floors, caps and
triggers, the required level of overcollateralization may increase or
decrease over time. Any decrease in the required level of
overcollateralization beyond that which is specified in the Agreement will
only occur at the sole discretion of the Certificate Insurer. Any such
decrease will have the effect of reducing the rate of principal payments on
the Group IA Certificates relative to the rate that would otherwise have
occurred.
PASS-THROUGH RATE
The "Pass-Through Rate" for the Offered Certificates is the applicable
per annum rate set forth on the cover page hereof. Notwithstanding the
foregoing, in no event will the Pass-Through Rate for the Group IA
Certificates on any Distribution Date exceed a rate equal to the quotient of
(a) the excess of (i) interest due on the Group I Loans during the preceding
Due Period net of the portion thereof allocable to Master Servicing Fee and
Servicing Fee for the Group I Loans over (ii) the aggregate of the amounts
described in subparagraphs (i), (iv)-(vi) under "--Distributions--Group I
Certificates" herein required to be paid or distributed by the Trust on such
Distribution Date and (b) one-twelfth of the Aggregate Class A Principal
Balance of the Group IA Certificates on such Distribution Date (prior to
giving effect to distributions made on such date). Interest on each class of
Offered Certificates in respect of any Distribution Date will accrue from the
first day of the month preceding such Distribution Date through the last day
of the month preceding such Distribution Date on the basis of a 360-day year
consisting of twelve 30-day months.
The "Pass-Through Rate" with respect to the Class IS Certificates and
the Class IIS Certificates on any Distribution Date is 0.45% per annum and
0.50% per annum, respectively.
FHA INSURANCE PREMIUM ACCOUNT
A separate account for each Loan Group (each a "FHA Premium Account")
will be established by the Trustee into which an initial deposit of
$14,066.37 in the case of the Group I Loans and $1,243.25 in the case of the
Group II Loans (each an "Initial FHA Premium Account Deposit") will be made
on the Closing Date. No later than the second Business Day preceding each
Distribution Date, the Trustee will deposit into the applicable FHA Premium
Account, FHA insurance premiums received from Obligors on the Invoiced Loans
(as defined below) of the related Loan Group. The Trustee will also deposit
into the applicable FHA Premium Account, to the extent of funds available
therefor in the related Distribution Account, an amount equal to the greater
of (i) 0.75% of the Loan Balance of each outstanding FHA Loan in such Loan
Group, (determined without including the Loan Balances of any Invoiced Loans
in such Loan Group), divided by 12 and (ii) the positive excess, if any, of
(A) the amount of premium and other charges due under the Contract of
Insurance in respect of the FHA Loans (other than Invoiced Loans) in such
Loan Group for the next succeeding Due Period over (B) the balance in the
related FHA Premium Account as of the related Determination Date (each a
"FHA Premium Account Deposit"). "Invoiced Loans" are FHA Loans with respect to
which the related obligor is required to pay the premium on FHA Insurance as
a separate amount with respect to such FHA Loan.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to Certificateholders, the Trustee
will forward to each Certificateholder and the Certificate Insurer a
statement setting forth as to each class of Certificates among other items:
(i) the aggregate amount of the distribution to each class of
Certificateholders on the Distribution Date set forth above;
(ii) the amount of distribution set forth in paragraph (i) above
in respect of interest and the amount thereof in respect of any Class
Interest Shortfall for each class, and the amount of any Class Interest
Shortfall remaining for each class of such Certificate Group;
(iii) with respect to the Class A Certificates, the distribution
amount set forth in paragraph (i) above in respect of principal, the
amount thereof in respect of the Class A Principal Shortfall, and any
remaining Class A Principal Shortfall for the Group IA Certificates and
the Loss Carryforward Amount, if any, with respect to the Group IIA
Certificates;
(iv) with respect to the Group I Certificates, the amount of
Distributable Excess Spread paid as principal in respect of the Group IA
Certificates;
(v) the Class A Guaranteed Principal Distribution Amount (if
applicable) for each Certificate Group;
(vi) the amount paid in respect of each class of Certificates
under the Policies for such Distribution Date on account of the Class
Interest Distribution of each such class and the portion of the Class A
Guaranteed Principal Distribution Amount paid on the Class A
Certificates for each Certificate Group;
(vii) the related Master Servicing Fee and the related Servicing
Fee for each Loan Group;
(viii) the Group I Loan Balance and the Group II Loan Balance as
of the close of business on the last day of the preceding Due Period;
(ix) the Aggregate Class A Principal Balance of the Class A
Certificates of each Certificate Group after giving effect to payments
allocated to principal in paragraph (iii) above for such Certificate
Group;
(x) with respect to the Group I Certificates, the amount of
overcollateralization required by the Agreement for such Distribution
Date and the amount of overcollateralization as of the close of business
on the Distribution Date, after giving effect to distributions of
principal on such Distribution Date;
(xi) the Class IS Notional Amount and the Class IIS Notional
Amount for such Distribution Date;
(xii) the aggregate amount of claims filed, paid and rejected
under the FHA Insurance for the related Due Period and each Loan Group
and the cumulative amount of such claims for each Loan Group as of the
date of the statement;
(xiii) the Loan Balance of each Defaulted Loan and delinquent Loan
and the aggregate amount of Defaulted Loans and delinquent Loans for the
related Due Period in each Loan Group; and
(xiv) the number and aggregate Loan Balance of Loans in the each
Loan Group that have been repurchased by the Seller for the related Due
Period.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with
a $1,000 denomination.
COLLECTION AND OTHER SERVICING PROCEDURES ON LOANS; CLAIMS ADMINISTRATION
The Master Servicer has agreed to manage, service, administer and make
collections on the Loans, and perform the other actions required by the
Master Servicer under the Agreement. In performing such obligations, the
Master Servicer is required to act in good faith in a commercially reasonable
manner and in accordance with all requirements of the FHA applicable to the
servicing of the FHA Loans, and to service and administer such FHA Loans in
accordance with the Title I Program, the terms of the Agreement and the
respective FHA Loans. The obligations of the Master Servicer under the
Agreement are expected to be performed by the Servicer pursuant to the
Servicing Agreement. The Master Servicer has full power and authority,
acting alone and/or through the Servicer subject only to the specific
requirements and prohibitions of the Title I Program with respect to the FHA
Loans, the Agreement and the respective Loans, to do any and all things in
connection with such servicing and administration which are consistent with
the manner in which it services similar types of loans owned by the Master
Servicer or any of its affiliates or serviced by the Master Servicer for
others and which are consistent with the ordinary practices of prudent
mortgage lending institutions.
If any payment due under any Loan is not paid when the same becomes due
and payable, or if the related Obligor fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable
grace period, the Master Servicer must take such action (consistent with
Title I, in the case of the FHA Loans, including efforts to cure the default
of such FHA Loan) as it shall deem to be in the best interest of the Trust.
With respect to the FHA Loans, if the maturity of the related note or
obligation has been accelerated pursuant to the requirements of Title I
following the Master Servicer's efforts to cure the default of such FHA Loan
(and such FHA Loan is not required to be purchased pursuant to the Agreement)
and (i) if the Trust Designated Insurance Amount has not been depleted at
that time, the Claims Administrator shall initiate, on behalf of the Trust
and the Contract of Insurance Holder, a claim under the Contract of Insurance
for reimbursement for loss on such FHA Loan pursuant to Title I or, (ii) if
the Trust Designated Insurance Amount has been depleted at that time (an "FHA
Insurance Coverage Insufficiency"), the Master Servicer shall determine
within 90 days whether or not to proceed against the property securing the FHA
Loan if such FHA Loan is a Mortgage Loan or against the Obligor if the
FHA Loan is unsecured pursuant to the provisions of the Agreement. Thereafter,
if an FHA Insurance Coverage Insufficiency does not exist and the claim
period has not expired, the Master Servicer may notify the Claims
Administrator to seek approval of the Secretary of HUD to submit a claim
under the Contract of Insurance with respect to such FHA Loan.
In the event that in accordance with clause (ii) above the Master
Servicer determines not to proceed against the Mortgaged Property or the
Obligor, on or before the Determination Date following such determination the
Master Servicer shall determine if in good faith in accordance with customary
mortgage loan servicing practices all amounts which it expects to receive
with respect to such FHA Loan have been received. If the Master Servicer
makes such a determination, it shall include such information in its records.
If the FHA rejects or refuses to pay any claim made under the Contract
of Insurance (including a rejection of a previously paid claim and a demand
by the FHA of a previously paid claim amount for such FHA Loan) for an FHA
Loan (other than a refusal or rejection for clerical error in computing the
claim amount or due to an exhaustion of the Combined FHA Insurance Amount),
upon receipt of the FHA's rejection notice or demand and determination by the
Claims Administrator that the rejection or demand was not due to clerical
error, then (i) the Claims Administrator must promptly notify the Trustee (if
the Trustee shall not initially have received such notice) and the
Certificate Insurer of such fact, and (ii) if the FHA indicates rejection for
other than a failure to service such FHA Loan in accordance with Title I or
the exhaustion of the Combined FHA Insurance Amount, the Seller shall be
liable on or before the last day of the calendar month next following the
date of such notice from the Claims Administrator to repurchase such FHA Loan
for the Purchase Price thereof. In connection with its rejection or refusal
to pay a claim or demand for payment related to a previously paid but
rejected claim, if the FHA shall have indicated in writing, or if the FHA
does not indicate in writing the reason for its rejection or refusal or
demand and it is otherwise evident that such rejection or refusal or demand
is due to a failure to service such FHA Loan in accordance with Title I, the
Claims Administrator shall notify the Seller, the Master Servicer and the
Certificate Insurer of such determination, and the Master Servicer shall on
or before the later to occur of (i) the last day of the calendar month next
succeeding the date of such rejection or demand and (ii) ten Business Days
from the date on which notice of such rejection is received by the Claims
Administrator from the FHA, either directly or from the Seller or the
Trustee, repurchase such FHA Loan from the Trust or the FHA, as applicable,
for the Purchase Price.
The Trustee will deposit in the applicable Distribution Account on the
day of receipt all amounts received from the FHA or any other Person with
respect to the FHA Loans or any other assets of the Trust.
If prior to the liquidation of the last asset of the Trust pursuant to
the Agreement, the FHA rejects an insurance claim, in whole or part, under
the Contract of Insurance after previously paying such insurance claim and
the FHA demands that the Contract of Insurance Holder repurchase such FHA
Loan from the FHA, the Claims Administrator will pursue such appeals with the
FHA as are reasonable. If the FHA continues to demand that the Contract of
Insurance Holder repurchase such FHA Loan from the FHA after the Claims
Administrator exhausts such administrative appeals as are reasonable, then
notwithstanding that the Seller, the Claims Administrator or any other person
is required to repurchase such FHA Loan, the Claims Administrator must notify
the Contract of Insurance Holder of such fact and the Contract of Insurance
Holder shall cause the Trust to repurchase such FHA Loan from funds available
in the Distribution Account for the related Loan Group.
The Seller will reimburse the Contract of Insurance Holder for any
amounts paid by the Contract of Insurance Holder to the FHA in order to
repurchase FHA Loans for which the FHA has rejected an insurance claim for
any reason other than a failure to comply with FHA servicing requirements or
the exhaustion of the Combined FHA Insurance Amount. The Master Servicer will
reimburse the Contract of Insurance Holder for any amounts paid by the
Contract of Insurance Holder to FHA in order to repurchase FHA Loans for
which the FHA has rejected an insurance claim as a result of a failure to
service such Loan in accordance with Title I.
In addition, with respect to any Mortgage Loan, the Master Servicer is
required to advance funds for the payment of certain expenses in connection
with the foreclosure of a Mortgaged Property (the "Foreclosed Property")
relating to insurance, taxes, property protection, maintenance, third party
expenses and similar expenses ("Foreclosure Advances"). The Master Servicer
must advance the Foreclosure Advances but only if it has approved the
foreclosure in writing and the Master Servicer would make such an advance if
it or an affiliate held the affected Mortgage Loan or Foreclosed Property for
its own account and, in the Master Servicer's good faith judgment, such
amounts will be recoverable from the related proceeds. In making such
assessment with respect to the institution of foreclosure proceedings, the
Master Servicer shall not advance funds with respect to a Mortgage Loan
unless the appraised value of the related Mortgaged Property exceeds the sum
of (i) the amounts necessary to satisfy any liens prior to the Mortgage and
(ii) the reasonably anticipated costs of foreclosure or similar proceedings.
The Master Servicer may modify any provision of any Loan if, in the
Master Servicer's good faith judgment, such modification (i) would minimize
the loss that might otherwise be experienced with respect to such Loan and
with respect to FHA Loans, complies with the requirements of Title I or (ii)
with respect to FHA Loans, is required by Title I and, in either case, only
in the event of a payment default with respect to such Loan or in the event
that a payment default with respect to such Loan is reasonably foreseeable by
the Master Servicer. The Master Servicer will agree to subordinate the
position of the security interest in the Mortgaged Property which secures any
Mortgage Loan upon the Master Servicer's receipt of written approval of the
Secretary of HUD to such subordination, if such Loan is an FHA Loan and
provided such subordination (i) would permit the borrower to refinance a
senior lien to take advantage of a lower interest rate or (ii) would permit
the borrower to extend the term of the senior lien.
INSURANCE
FHA regulations require borrowers to maintain flood insurance with
respect to the Mortgaged Property securing an FHA Loan where the Mortgaged
Property securing the Loan is located in an area that has been identified by
the Federal Emergency Management Agency ("FEMA") as having special flood
hazards in accordance with FHA regulations. The amount of such insurance
shall be at least equal to the outstanding Loan Balance of such FHA Loan and
the insurance must be maintained by the borrower for the full term of the FHA
Loan or until the Mortgaged Property is either repossessed or foreclosed by
the Master Servicer. The Master Servicer will cause to be maintained flood
insurance with respect to each Mortgaged Property located in any such area as
having been identified by FEMA as having special flood hazards in accordance
with FHA regulations in an amount equal to the outstanding Loan Balance of
the related FHA Loan.
FHA Regulations do not require hazard insurance to be maintained on the
Mortgaged Properties and the Master Servicer will not require such insurance
to be maintained on the Mortgaged Properties.
With respect to each Conventional Loan, the Master Servicer shall cause
to be maintained fire and hazard insurance naming Mego and its successor and
assigns as loss payee and providing extended coverage in an amount which is
at least equal to the lesser of (i) the maximum insurable value of the
improvements securing such Conventional Loan from time to time, (ii) the
combined principal balance owing on such Conventional Loan and any mortgage
loan senior to such Conventional Loan and (iii) the minimum amount required
to compensate for damage or loss on a replacement cost basis. In cases in
which any Mortgaged Property securing a Conventional Loan is located in a
federally designated flood area, the hazard insurance to be maintained for
the related Loan shall include flood insurance to the extent such flood
insurance is available and the Master Servicer has determined such insurance
to be necessary in accordance with accepted mortgage loan servicing standards
for mortgage loans similar to the Mortgage Loans. All such flood insurance
shall be in amounts equal to the least of (A) the maximum insurable value of
the improvement securing such Conventional Loan, (B) the combined principal
balance owing on such Conventional Loan and any mortgage loan senior to such
Conventional Loan and (C) the maximum amount of insurance available under the
National Flood Insurance Act of 1968, as amended.
REALIZATION UPON DEFAULTED LOANS
With respect to any Mortgage Loan, the Master Servicer may institute
foreclosure proceedings, exercise any power of sale to the extent permitted
by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession
of or title to any Mortgaged Property, by operation of law or otherwise, and
only in the event that in the Master Servicer's reasonable judgment such
action is likely to result in a positive economic benefit to the Trust by
creating net liquidation proceeds (after reimbursement of all amounts owed
with respect to such Mortgage Loan to the Master Servicer or the Servicer)
and provided that prior to taking title to any Mortgaged Property, the Master
Servicer has requested that the Trustee obtain, and the Trustee shall have
obtained, a review to be performed on the Mortgaged Property by a company
having appropriate experience and otherwise reasonably acceptable to the
Trustee and the Certificate Insurer, the scope of which is limited to the
review of public records and documents for information regarding whether such
Mortgaged Property has on it, under it or is near, hazardous or toxic
material or waste. If such review reveals that the Mortgaged Property has on
it, under it or is near hazardous or toxic material or waste or reveals any
other environmental problem, the Trustee shall provide a copy of the related
report to the Master Servicer and the Certificate Insurer and title shall be
taken to such Mortgaged Property only after obtaining the written consent of
the Master Servicer and the Certificate Insurer. In general, with respect to
the Group I FHA Loans, the Master Servicer will only institute such
foreclosure proceedings if the Trust Designated Insurance Amount is depleted
and the other considerations set forth in this paragraph are satisfied.
In connection with any foreclosure proceeding, power of sale, deed in
lieu of foreclosure or other acquisition of a Mortgaged Property, the Master
Servicer shall comply with the requirements under Title I, if such Mortgage
Loan is an FHA Loan, the REMIC regulations if such Loan is a Group I Loan and
the Agreement, shall follow such practices and procedures in a manner which
is consistent with the Master Servicer's procedure for foreclosure and
operation of the foreclosed property with respect to similar loans held in
the Master Servicer's portfolio for its own account or, if there are no such
loans, such loans serviced by the Master Servicer for others, giving due
consideration to accepted servicing practices of prudent lending
institutions, and shall sell or liquidate the Loan or Mortgaged Property.
Notwithstanding the foregoing with respect to any Defaulted Loan that is an
FHA Loan assuming the Trust Designated Insurance Amount has not been
depleted, the Claims Administrator will make a claim under the Contract of
Insurance prior to initiating any foreclosure proceedings on the related
Mortgaged Property. Concurrently with the filing of any such insurance
claim, the Trust will assign its entire interest in the FHA Loan to the
United States of America.
With respect to any Group II Unsecured FHA Loan, if an FHA Insurance
Coverage Insufficiency exists at the time of acceleration of the maturity of
such Loan, the Master Servicer may seek a judgment against the related
borrower.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period and Loan Group, the Master Servicer will
receive from interest payments in respect of the Loans in the related Loan
Group, a portion of such interest payments as a monthly master servicing fee
(each a "Master Servicing Fee") in the amount equal to 0.08% per annum
("Master Servicing Fee Rate") on the Principal Balance of each Loan in the
related Loan Group, as of the first day of each such Due Period (or as of the
Cut-Off Date, with respect to the first Due Period) as to which such payment
was made. The Servicer will receive from payments in respect of interest on
the Loans in the related Loan Group, a monthly servicing fee (each a
"Servicing Fee") in the amount equal to 1.00% per annum (the "Servicing Fee
Rate") on the Loan Balance of each Loan in the related Loan Group, as of the
first day of each such Due Period (or as of the Cut Off-Date, with respect to
the first Due Period) as to which such payment was made, subject to reduction
as a result of interest shortfalls on Loans in the related Loan Group due to
prepayments thereof in full and any Additional Trustee Fee owed to the
Trustee. All assumption fees, late payment charges, prepayment penalties and
other fees and charges, to the extent collected from borrowers, will be
retained by the Servicer as additional servicing compensation.
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID LOANS
When an Obligor prepays a Loan in full between scheduled monthly payment
dates ("Due Dates"), the Obligor pays interest on the amount prepaid only to
the date of prepayment. In order to mitigate the effect of any such
shortfall in interest distributions to holders of the Offered Certificates in
a Certificate Group on any Distribution Date the amount of the related
Servicing Fee for the related Loan Group otherwise payable to the Servicer
for the related Loan Group for such month shall, to the extent of such
shortfall, be reduced. However, any such reduction in a Servicing Fee will
be made only to the extent of the Servicing Fee otherwise payable to the
Servicer with respect to payments on the Loans in the related Loan Group
received during the Due Period to which such Distribution Date relates. See
"Description of the Certificates--Example of Distributions" herein. Any
excess of the Prepayment Interest Shortfall for a Loan Group over the related
Servicing Fee will not be covered by the portion of any Excess Spread or by
the related Policy.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee, the Certificate
Insurer and the Rating Agencies of an annual statement signed by an officer
of the Master Servicer to the effect that the Master Servicer has fulfilled
its obligations under the Agreement throughout the preceding year, except as
specified in such statement.
Each year (within 150 days following the end of the Master Servicer's
fiscal year), beginning in 1997, the Master Servicer will furnish a report
prepared by a firm of nationally recognized independent public accountants
(who may also render other services to the Master Servicer or the Depositor)
to the Trustee and the Certificate Insurer to the effect that such firm has
examined certain documents and the records relating to servicing of the
Loans as specified in the Agreement and such firm's conclusion that the
Master Servicer is in compliance with respect thereto.
The Master Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND SERVICER
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder except (i) with the consent of the
Certificate Insurer and the Rating Agencies or (ii) upon determination that
by reason of a change in legal requirements the performance of its duties
under the Agreement would cause it to be in violation of such legal
requirements in a manner which would result in a material adverse effect on
the Master Servicer and the Certificate Insurer (so long as an Insurer
Default shall not have occurred and be continuing) does not elect to waive
the obligations of the Master Servicer to perform the duties which render it
legally unable to act or to delegate those duties. Any such determination
permitting the resignation of the Master Servicer by reason of a change in
such legal requirements shall be evidenced by an opinion of counsel to such
effect delivered and acceptable to the Trustee and the Certificate Insurer
(unless an Insurer Default shall have occurred and be continuing). No
resignation of the Master Servicer shall become effective until the Trustee
or a successor master servicer acceptable to the Certificate Insurer shall
have assumed the Master Servicer's servicing responsibilities and
obligations.
The Master Servicer has agreed not to merge or consolidate with any
other company or permit any other company to become the successor to the
Master Servicer's business unless, after the merger or consolidation, the
successor or surviving entity (i) shall be an Eligible Servicer (as defined
in the Agreement), (ii) shall be capable of fulfilling the duties of the
Master Servicer contained in the Agreement and (iii) shall have a long-term
debt rating which is at least investment grade from each of the Rating
Agencies. Any company into which the Master Servicer may be merged or
consolidated, shall execute an agreement of assumption to perform every
obligation of the Master Servicer under the Agreement and, shall be the
successor to the Master Servicer under the Agreement.
The Master Servicer will enter into the Servicing Agreement with the
Servicer, the Trustee and the Trust. The Servicing Agreement will not relieve
the Master Servicer of any of its duties and obligations to the Trustee on
behalf of Certificateholders with respect to the servicing and administration
of the Loans. The Master Servicer will be obligated with respect thereto to
the same extent and under the same terms and conditions as if it alone were
performing all duties and obligations in connection with the servicing and
administration of such Loans.
The Master Servicer will be required to verify that the Servicer is
collecting and appropriately accounting for Obligor payments of premium on
FHA Insurance on Invoiced Loans, otherwise to monitor the performance by the
Servicer under the Servicing Agreement and will be obligated to ensure that
the Servicer deposits payments on the Loans into the Collection Account.
The Certificate Insurer and the Master Servicer have various rights to
terminate the Servicing Agreement upon the occurrence of a Servicer
Termination Event, as defined in the Servicing Agreement. The Master Servicer
is required to perform the obligations of the Servicer in the event the
Servicer fails to perform its duties and obligations under the Servicing
Agreement.
The Agreement provides that neither the Master Servicer nor any of its
directors, officers, employees or agents shall be under any liability to the
Trust or to the Certificateholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Agreement, or for
errors in judgment, unless liability would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in performing or failing to
perform duties.
EVENTS OF MASTER SERVICING TERMINATION
"Events of Master Servicing Termination" will consist of, among other
things: (i) (A) any failure by the Master Servicer to make any required
Interest Advance or (B) any other failure of the Master Servicer to deposit
or cause the Servicer to deposit in the Collection Account any amount
required to be deposited under the Agreement, which failure continues
unremedied for two Business Days or (C) any failure by the Master Servicer to
pay when due any amount payable by it under the Agreement and such failure
results in a drawing under the Policies or (D) any failure by the Master
Servicer to pay when due any amount payable by it under the Insurance
Agreement, which failure continues unremedied for two Business Days; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Agreement, which
failure continues unremedied for thirty Business Days after notice; (iii) the
Master Servicer's failure to maintain a long-term debt rating of at least BBB
and Baa2 by Standard & Poor's and Moody's respectively; (iv) the loss and
delinquency experience with respect to the Loans exceeds certain levels as
specified in the Agreement; or (v) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
relating to the Master Servicer and certain actions by the Master Servicer
indicating insolvency, reorganization or inability to pay its obligations (an
"Insolvency Event") or the Master Servicer shall dissolve or liquidate, in
whole or part, in any material respect.
If an Event of Master Servicing Termination shall occur and be
continuing, the Certificate Insurer (or, if an Insurer Default shall have
occurred and be continuing, the Trustee at the direction of the
Certificateholders), by notice given in writing to the Master Servicer (and
to the Trustee if given by the Certificate Insurer or the Certificateholders)
may terminate all of the rights and obligations of the Master Servicer under
the Agreement. On or after the receipt by the Master Servicer of such written
notice, and the appointment of and acceptance by a successor Master Servicer,
all authority, power, obligations and responsibilities of the Master Servicer
under the Agreement shall become obligations and responsibilities of the
successor Master Servicer. After the Master Servicer receives a notice of
termination or upon the resignation of the Master Servicer, the Trustee shall
be the successor in all respects to the Master Servicer in its capacity as
master servicer under the Agreement.
Any successor Master Servicer shall be entitled to such compensation
(whether payable out of the Distribution Amount or otherwise) as the Master
Servicer would have been entitled to under the Agreement if the Master
Servicer had not resigned or been terminated hereunder. The Certificate
Insurer and a successor Master Servicer may agree on additional compensation
to be paid to such successor Master Servicer. In addition, any successor
Master Servicer shall be entitled to reasonable transition expenses incurred
in acting as successor Master Servicer.
An Event of Master Servicing Termination with respect to the Master
Servicer and an event of servicing termination under the applicable servicing
agreement with respect to the Servicer has occurred and is continuing for the
Mego Mortgage FHA Title I Loan Trust 1996-1. See "Mego Mortgage Corporation
- - Delinquency Experience."
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Master
Servicer, the Depositor and the Trustee as specified in this paragraph and
with the consent of the Certificate Insurer, provided that any amendment be
accompanied by an opinion of counsel to the Trustee to the effect that such
amendment complies with the provisions of the Agreement. If the purpose of
the amendment (as detailed therein) is to correct any mistake, eliminate any
inconsistency, cure any ambiguity or deal with any matter not covered (i.e.
to give effect to the intent of the parties, and if applicable, the
expectations of the Certificateholders), it shall not be necessary to obtain
the consent of any Certificateholder, but the Trustee shall be furnished with
a letter from the Rating Agencies that the amendment will not result in the
downgrading or withdrawal of the ratings then assigned to the Offered
Certificates. If the purpose of the amendment is to prevent the imposition of
any federal or state taxes at any time that any Certificates are outstanding
(i.e. technical in nature), it shall not be necessary to obtain the consent
of any Certificateholder, but the Trustee shall be furnished with an opinion
of counsel that such amendment is necessary or helpful to prevent the
imposition of such taxes and is not materially adverse to any
Certificateholder. If the purpose of the amendment is to add or eliminate or
change any provision of the Agreement other than as contemplated in the prior
two sentences, the amendment shall require the consent of the holders of
Certificates evidencing at least 51% of the Percentage Interest of each class
affected thereby, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, payments on or payments
received which are required to be made on any Certificate without the consent
of the related Certificateholder or (ii) reduce the aforesaid percentage
required to consent to any such amendment, without the consent of the holders
of all Offered Certificates then outstanding. It shall not be necessary for
the consent of the Certificateholders to approve the particular form of any
proposed amendment, but it shall be sufficient if such consent approves the
substance thereof.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer unless
the Certificate Insurer shall otherwise consent and (B) the earliest of (i)
the Distribution Date on which the Aggregate Class A Principal Balance for
each Certificate Group has been reduced to zero, (ii) the final payment or
other liquidation of the last Loan in the Trust, (iii) the optional purchase
by the Master Servicer or Mego of the Loans, as described below and (iv) the
Distribution Date in November 2022.
At its option, either the Master Servicer or Mego, each with the consent
of the Certificate Insurer if such purchase would result in a claim under the
Policies, may each purchase from the Trust all (but not fewer than all)
remaining Loans and other property acquired by foreclosure, deed in lieu of
foreclosure, or otherwise then constituting property of the Trust, and
thereby effect early retirement of the Certificates, on any Distribution Date
when each of the Group I Loan Balance and the Group II Loan Balance is less
than 10% of the Cut-Off Date Group I Loan Balance and the Cut-Off Date Group
II Loan Balance, respectively. The purchase price will be equal to the
Aggregate Loan Balance (subject to reductions as provided in the Agreement if
the purchase price is based in part on the appraised value of any Foreclosed
Property included in the Trust and such appraised value is less than the Loan
Balance of the related Loan) and accrued and unpaid interest thereon at the
weighted average of the Loan Rates through the day preceding the final
Distribution Datetogetherwith all amounts due and owing to the Certificate
Insurer.
The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations.
THE TRUSTEE
First Trust of New York, National Association, a national banking
association, has been named Trustee pursuant to the Agreement. The
commercial bank or trust company serving as Trustee may have normal banking
relationships with the Depositor and the Master Servicer.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor may also remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. 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 CERTIFICATE GUARANTY INSURANCE POLICIES
The Certificate Insurer, in consideration of the payment of the premiums
and subject to the terms of two certificate guaranty insurance policies (the
"Policies"), relating to the Mego Mortgage Home Loan Trust 1996-3, Home Loan
Asset-Backed Certificates, Series 1996-3, Class IA-1 Certificates, Class IA-2
Certificates, Class IA-3 Certificates, Class IIA Certificates, Class IS
Certificates and Class IIS Certificates (collectively, the "Obligations"),
will unconditionally and irrevocably guarantee to any Owner (as described
below) that an amount equal to each full and complete Insured Payment (as
described below) will be received by First Trust of New York, National
Association, or its successor, as trustee for the Owners (the "Trustee"), on
behalf of the Owners, from the Certificate Insurer for distribution by the
Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under a Policy with respect
to a particular Insured Payment shall be discharged to the extent funds equal
to the applicable Insured Payment are received by the Trustee from the
Certificate Insurer, whether or not such funds are properly applied by the
Trustee. Insured Payments shall be made only at the time set forth in the
Policies and no accelerated Insured Payments shall be made regardless of any
acceleration of the Obligations, unless such acceleration is at the sole
option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the 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 such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day by
the Fiscal Agent (as described below) of (i) a certified copy of the order
requiring the return of such Preference Amount, (ii) an opinion of counsel
satisfactory to the Certificate Insurer that such order is final and not
subject to appeal, (iii) 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
Obligations against the debtor which made such preference payment or
otherwise with respect to such preference payment, and (iv) appropriate
instruments to effect the appointment of the Certificate Insurer as agent for
such Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Certificate 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 Certificate Insurer will pay any other amount payable under a Policy
no later than 12:00 noon New York City time on the later of the Distribution
Date on which the Deficiency Amount is due or the second 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 (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 claims under a Policy it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Certificate Insurer or the Fiscal Agent, as the case may
be, shall promptly so advise the Trustee and the Trustee may submit an
amended Notice.
Insured Payments due under a Policy 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 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 shall 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 Policy.
As used in the related Policy, the following terms shall have the
following meanings:
"Aggregate Interest Distribution" means, as to any Distribution Date and
Related Certificate Group, the aggregate of the Class Interest Distributions
for each class of Obligations in the Related Certificate Group.
"Agreement" means the Pooling and Servicing Agreement dated as of
November 1, 1996 among Financial Asset Securities Corp., as Depositor, Mego
Mortgage Corporation, as Seller, Servicer and Claims Administrator, Norwest
Bank Minnesota, N.A., as Master Servicer and First Trust of New York,
National Association as Trustee and Contract of Insurance Holder.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which the Certificate Insurer and banking institutions in the City of 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, executive
order or government decree to be closed.
"Deficiency Amount" means, as to any Distribution Date and Related
Certificate Group, an amount equal to the sum of (a) the amount by which the
Aggregate Interest Distribution for the Related Certificate Group exceeds the
amount on deposit in the related Distribution Account available to be
distributed therefor on such Distribution Date and (b) the Class A Guaranteed
Principal Distribution Amount, if any, for such Distribution Date and Related
Certificate Group.
"Insured Payment" means (i) on each Distribution Date, an amount equal
to the Deficiency Amount and (ii) any unpaid Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy substantially in the form of Exhibit A to the Policy,
the original of which is subsequently delivered by registered or certified
mail, from the Trustee specifying the Insured Payment which shall be due and
owing on the applicable Distribution Date.
"Owner" means each Certificateholder (other than the Master Servicer,
Depositor or Trustee) (as defined in the Agreement) who, on the applicable
Distribution Date, is entitled under the terms of the applicable Obligation
to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner
on the Obligations 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.
"Related Certificate Group" means Group I Certificates or Group II
Certificates, as the case may be.
Any notice under a Policy or service of process on the Fiscal Agent of
the Certificate Insurer may be made at the address listed below for the
Fiscal Agent of the Certificate Insurer or such other address as the
Certificate Insurer shall specify in writing to the Trustee.
Capitalized terms used in each Policy and not otherwise defined therein
will have the respective meanings set forth in the Agreement as of the date
of execution of such Policy, without giving effect to any subsequent
amendment to or modification of the Agreement unless such amendment or
modification has been approved by the Certificate Insurer.
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.
The 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 each Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policies are not cancelable for any reason. The premium on a Policy
is not refundable for any reason including payment, or provision being made
for payment, prior to maturity of the Obligations.
THE CERTIFICATE INSURER
The information set forth in this section has been provided by MBIA
Insurance Corporation (the "Certificate Insurer"). No representation is made
by the Seller, the Master Servicer, the Depositor or any of their affiliates
as to the accuracy or completeness of any such information.
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 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.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995,
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, 1995 and the consolidated financial statements of the
Certificate Insurer and its subsidiaries for the nine months ended
September 30, 1996 and for the periods ending September 30, 1996 and
September 30, 1995 included in the Quarterly Report on Form 10-Q of MBIA Inc.
for the period ending September 30, 1996, are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference
herein shall be modified or superseded for purposes of this Prospectus
Supplement to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the 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 Offered 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 ("SAP")
as well as generally accepted accounting principles ("GAAP"):
SAP
----------------------------------------------
<TABLE>
<CAPTION> DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(Audited) (Unaudited)
(in millions)
<S> <C> <C>
Admitted Assets . . . . . . . . . . . . $3,814 $4,348
Liabilities . . . . . . . . . . . . . . 2,540 2,911
Capital and Surplus . . . . . . . . . . 1,274 1,437
</TABLE>
GAAP
------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(Audited) (Unaudited)
(in millions)
<S> <C> <C>
Assets . . . . . . . . . . . . . . . . . $4,463 $4,861
Liabilities . . . . . . . . . . . . . . 1,937 2,161
Shareholder's Equity . . . . . . . . . . 2,526 2,700
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1995
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.
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 Policies and the Certificate
Insurer set forth under the headings "The Certificate Guaranty Insurance
Policies" and "The Certificate Insurer." Additionally, the Certificate
Insurer makes no representation regarding the Offered Certificates or the
advisability of investing in the Offered Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa."
Standard & Poor's Rating Services, a division of the McGraw Hill
Companies, Inc., rates the claims paying ability of the Certificate Insurer
"AAA."
Fitch Investors Service, L.P. rates the claims paying ability 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
Offered 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 Offered Certificates. The Certificate Insurer does not
guaranty the market price of the Offered Certificates nor does it guaranty
that the ratings on the Offered Certificates will not be revised or
withdrawn.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Depositor towards the purchase of the Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GROUP I CERTIFICATES
An election will be made to treat the Group I Loans as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. In
the opinion of Brown & Wood LLP, counsel to Mego, the Depositor and the
Underwriter, the Group IA Certificates and the Class IS Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will
constitute the sole class of "residual interests" in the REMIC.
GROUP II CERTIFICATES
An election will be made to treat the Group II Loans as a "grantor
trust" for federal income tax purposes, and not as an association taxable as
a corporation. In the opinion of Brown and Wood LLP, the portion of the
Trust containing the Group II Loans will be classified as a grantor trust
under subpart E, Part I of subchapter J of the Code. Certificateholders of
Group IIA Certificates will be treated for federal income tax purposes as
owners of a pro rata undivided interest in the Group II Loans. See "Certain
Material Federal Income Tax Consequences--Tax Status as a Grantor Trust" in
the Prospectus.
Generally, income on the Group II Certificates must be reported in
accordance with the accounting method of a particular Certificateholder. In
computing its federal income tax liability, a Certificateholder will be
entitled to deduct, consistent with its method of accounting, its pro rata
share of reasonable fees that are paid or incurred by the grantor trust as
provided in Section 162 or 212 of the Code. If a Certificateholder is an
individual, estate or trust, the deduction for its pro rata share of such
fees will be allowed only to the extent that all of its miscellaneous
itemized deductions, including its share of such fees, exceed 2% of its
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer
will be reduced by the lesser of (i) 3% of the excess, if any, of adjusted
gross income over a statutorily defined threshold, or (i) 80% of the amount
of itemized deductions otherwise allowable for such year. As a result,
investors who own Group II Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Group II Certificates with respect
to interest at the related Certificate Rate. A Certificateholder using the
cash method of accounting must take into account its pro rata share of income
and deductions as and when collected by or paid by the grantor trust.
A Certificateholder using the accrual method of accounting must take into
account its pro rata share of income and deductions as and when such amounts
become due to or payable by the grantor trust.
If a Group II Certificate is sold, gain or loss will be recognized equal
to the difference between the amount realized on the sale (exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary interest income) and the Certificateholder's adjusted basis in the
Group II Certificate. A Certificateholder's adjusted basis will equal its
cost for such Group II Certificate, increased by any discount previously
included in income, and decreased (but not below zero) by any previously
amortized premium and by the amount of principal payments previously received
on the Group II Loans. In general, gain or loss will be a capital gain or
loss if the Group II Certificate was held as a capital asset. A capital gain
or loss will be long-term or short-term depending on whether or not the Group
II Certificates have been owned for more than one year. See "Certain
Material Federal Income Tax Consequences--Tax Status as a Grantor Trust" in
the Prospectus.
ORIGINAL ISSUE DISCOUNT
The Class S-1 Certificates will, and the Group IA Certificates may,
depending on their issue prices, be issued with original issue discount for
federal income tax purposes. For purposes of determining the amount and rate
of accrual of original issue discount and market discount, the Depositor
intends to assume that there will be prepayments on the Loans at a rate equal
to 15% CPR. No representation is made as to whether the Loans will prepay at
that rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" herein and "Certain Material Federal Income Tax Consequences"
in the Prospectus.
The Group I Certificates may be treated as being issued at a premium. In
such case, the holders of the Certificates may elect under Section 171 of the
Code to amortize such premium under the constant yield method and to treat
such amortizable premium as an offset to interest income on the Group I
Certificates. Such election, however, applies to all the Certificateholder's
debt instruments acquired on or after the first taxable year in which the
election is first made, and should only be made after consulting with a tax
adviser.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
holder of a Certificate, such holder will be permitted to offset such amounts
only against the respective future income, if any, from such Certificate.
Although the tax treatment is uncertain, a holder of a Certificate may be
permitted to deduct a loss to the extent that such holder's respective
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such holder is entitled, assuming no further Principal
Prepayments of the Loans are received. Although the matter is not free from
doubt, any such loss might be treated as a capital loss.
SPECIAL TAX ATTRIBUTES OF THE OFFERED CERTIFICATES
As is described more fully under "Certain Material Federal Income Tax
Consequences" in the Prospectus, the Offered Certificates will represent
qualifying assets under Sections 856(c)(5)(A) and 7701(a)(19)(C)(v) of the
Code, and net interest income attributable to the Offered Certificates will
be "interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, to the extent the assets of the
Trust are assets described in such sections. The Offered Certificates will
represent qualifying assets under Section 860G(a)(3) if acquired by a
REMIC within the prescribed time periods of the Code.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Loan, the receipt of income from a source other
than a Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Loans for temporary investment pending distribution
on the Certificates. It is not anticipated that the Trust will engage in any
prohibited transactions in which it would recognize a material amount of net
income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of
its interests could result in the imposition of a tax on the trust fund equal
to 100% of the value of the contributed property (the "Contributions Tax").
The Trust will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable
to real estate investment trusts. "Net income from foreclosure property"
generally means gain from the sale of a foreclosure property other than
qualifying rents and other qualifying income for a real estate investment
trust. It is not anticipated that the Trust will recognize net income from
foreclosure property subject to federal income tax.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Material Federal Income
Tax Consequences--REMIC Certificates" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Certificates
should consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an
employee benefit plan subject to ERISA and/or a plan or other arrangement
subject to the excise tax provisions set forth under Section 4975 of the Code
(each of the foregoing, a "Plan") from engaging in certain transactions
involving such Plan and its assets unless a statutory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes
certain excise taxes on prohibited transactions involving plans described
under that Section; ERISA authorizes the imposition of civil penalties for
prohibited transactions involving plans not covered under Section 4975 of the
Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Offered Certificates should consult with its counsel with respect to the
potential consequences under ERISA and the Code of the Plan's acquisition and
ownership of such Certificates. See "ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code may nonetheless be subject to the prohibited transaction rules set forth
in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. A fiduciary which
decides to invest the assets of a Plan in the Offered Certificates should
consider, among other factors, the extreme sensitivity of the investments to
the rate of principal payments (including prepayments) on the Loans.
GROUP I CERTIFICATES
The U.S. Department of Labor has granted to Greenwich Capital Markets,
Inc. an administrative exemption (Prohibited Transaction Exemption 90-59;
Exemption Application No. D-8374) (the "Exemption") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions
of Section 4975 of the Code with respect to the initial purchase, the holding
and the subsequent resale by Plans of certificates in pass-through trusts
that consist of certain receivables, loans and other obligations that meet
the conditions and requirements of the Exemption. The Exemption will apply to
the acquisition, holding and resale of the Group I Certificates (other than
the Class R Certificates).
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 interest evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust fund;
(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 Standard & Poor's Rating Services ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating
Co. ("DCR") or Fitch Investors Service, L.P. ("Fitch");
(4) the trustee must not be 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 fund represents not
more than the fair market value of such loans; the sum of all payments
made to and retained by the servicer and any other servicer represents
not more than reasonable compensation for such person's services under
the agreement pursuant to which the loans are pooled and reimbursements
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 fund must also meet the following requirements:
(i) the corpus of the trust fund 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 S&P, Moody's,
Fitch or D&P 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 any 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 as to which the
fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent (50%) of each class of certificates in which Plans have
invested is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five percent
(5%) or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not
exceed twenty-five percent (25%) 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 (25%) of the assets of the 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 Underwriter, the Trustee, the Servicer, any obligor with respect to
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").
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Group I Certificates (other than the Class R
Certificates) by Plans and that all conditions of the Exemption other than
those within the control of the investors will be met. In addition, as of the
date hereof, there is no single Obligor that is the obligor on five percent
(5%) of the Group I Loans included in the Trust by aggregate unamortized
principal thereof.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in such
Certificates. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment prudence and diversification,
an investment in such 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.
GROUP II CERTIFICATES
Because the Underwriter believes the Group II Certificates do not meet
the requirements of the Exemption or any other issued exemption under ERISA,
the purchase and holding of the Group II Certificates by a Plan or by
individual retirement accounts or other plans subject to Section 4975 of the
Code may result in prohibited transactions or the imposition of excise taxes
or civil penalties. Consequently, transfer of the Group II Certificates will
not be registered by the Trustee unless the Trustee receives: (i) a
representation from the transferee of such Certificate, acceptable to and in
form and substance satisfactory to the Trustee, to the effect that such
transferee is not an employee benefit plan subject to Section 406 of ERISA or
a plan or arrangement subject to Section 4975 of the Code, nor a person
acting on behalf of any such plan or arrangement or using the assets of any
such plan or arrangement to effect such transfer; or (ii) an opinion of
counsel satisfactory to the Trustee that the purchase or holding of such
Certificate by a Plan, any person acting on behalf of a Plan or using such
Plan's assets, will not result in the assets of the Trust being deemed to be
"plan assets" and subject to the prohibited transaction requirements of ERISA
and the Code and will not subject the Trustee to any obligation in addition
to those undertaken in the Agreement. In the event that such representation
is violated, or any attempt to transfer to a Plan or person acting on behalf
of a Plan or using such Plan's assets is attempted without such opinion of
counsel, such attempted transfer or acquisition shall be void and of no
effect.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Offered
Certificates. Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the
sale of the Offered Certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but has no obligation to do so.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue.
The Depositor is an affiliate of the Underwriter.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Offered Certificates
will be rated in the highest rating category of the Rating Agencies, the
Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"),
because not all of the mortgages securing the Loans are first mortgages.
Accordingly, many institutions with legal authority to invest in comparably
rated securities based on first mortgage loans may not be legally authorized
to invest in the Offered Certificates, which because they evidence interests
in a pool that includes junior mortgage loans are not "mortgage related
securities" under SMMEA.
LEGAL MATTERS
Certain legal matters will be passed upon on behalf of the Seller by
Brown & Wood LLP, New York, New York and by Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, Miami, Florida; on behalf of the Depositor and the
Underwriter by Brown & Wood LLP, New York, New York; and on behalf of the
Certificate Insurer by Kutak Rock, Omaha, Nebraska.
RATINGS
It is a condition to the issuance of Offered Certificates that the
Offered Certificates receive ratings of "AAA" by Standard & Poor's Rating
Services, ("S&P") and "Aaa" by Moody's Investors Service, Inc. ("Moody's" and
together with S&P, each a "Rating Agency").
A securities rating addresses the likelihood of the receipt by
Certificateholders of the Offered Certificates of distributions on the Loans.
The rating takes into consideration the characteristics of the Loans and the
structural, legal and tax aspects associated with the Offered Certificates.
The ratings on the Offered Certificates do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the Loans
or the possibility that Certificateholders of the Offered Certificates might
realize a lower than anticipated yield due to prepayments.
The ratings assigned to the Offered Certificates will depend primarily
upon the creditworthiness of the Certificate Insurer. Any reduction in a
rating assigned to the claims-paying ability of the Certificate Insurer below
the ratings initially assigned to the Offered Certificates may result in a
reduction of one or more of the ratings assigned to the Offered Certificates.
A securities 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 securities rating should be evaluated
independently of similar ratings on different securities.
REPORTS OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation as
of December 31, 1995 and 1994 and for the three years ended December 31, 1995
incorporated by reference into this Prospectus Supplement have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report thereon incorporated by reference herein in reliance upon the
authority of such firm as experts in accounting and auditing.
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
---------------
This Prospectus relates to the issuance of Asset Backed Certificates
(the "Certificates") and the Asset Backed Notes (the "Notes" and, together
with the Certificates, the "Securities"), which may be sold from time to time
in one or more series (each, a "Series") by Financial Asset Securities Corp.
(the "Depositor") on terms determined at the time of sale and described in
this Prospectus and the related Prospectus Supplement. The Securities of a
Series will evidence beneficial ownership of a trust fund (a "Trust Fund").
As specified in the related Prospectus Supplement, the Trust Fund for a
Series of Securities will include certain assets (the "Trust Fund Assets")
which will primarily consist of (i) closed-end and/or revolving home equity
loans (the "Home Equity Loans") secured primarily by subordinateliens on one-
to four-family residential properties, (ii) home improvement installment
sales contracts and installment loan agreements (the "Home Improvement
Contracts") that are either unsecured or secured primarily by subordinate
liens on one- to four-family residential properties, or by purchase money
security interests in the home improvements financed thereby (the "Home
Improvements") and/or (iii) Private Asset Backed Securities (as defined
herein). The Home Equity Loans and the Home Improvement Contracts are
collectively referred to herein as the "Loans". The Trust Fund Assets will
be acquired by the Depositor, either directly or indirectly, from one or more
institutions (each, a "Seller"), which may be affiliates of the Depositor,
and conveyed by the Depositor to the related Trust Fund. A Trust Fund also
may include insurance policies, reserve accounts, reinvestment income,
guaranties, obligations, agreements, letters of credit or other assets to the
extent described in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right of
payment to one or more other classes of Securities of such Series. One or
more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof prior to one
or more other classes of Securities of such Series or after the occurrence of
specified events, in each case as specified in the related Prospectus
Supplement.
Distributions to Securityholders will be made monthly, quarterly, semi-
annually or at such other intervals and on the dates specified in the related
Prospectus Supplement. Distributions on the Securities of a Series will be
made from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Securityholders as specified in the related
Prospectus Supplement.
The related Prospectus Supplement will describe any insurance or
guarantee provided with respect to the related Series of Securities
including, without limitation, any insurance or guarantee provided by the
Department of Housing and Urban Development, the United States Department of
Veterans' Affairs or any private insurer or guarantor. The only obligations
of the Depositor with respect to a Series of Securities will be to obtain
certain representations and warranties from each Seller and to assign to the
Trustee for the related Series of Securities the Depositor's rights with
respect to such representations and warranties. The principal obligations of
the Master Servicer named in the related Prospectus Supplement with respect
to the related Series of Securities will be limited to obligations pursuant
to certain representations and warranties and to its contractual servicing
obligations, including any obligation it may have to advance delinquent
payments on the Trust Fund Assets in the related Trust Fund.
The yield on each class of Securities of a Series will be affected by,
among other things, the rate of payments of principal (including prepayments)
on the Trust Fund Assets in the related Trust Fund and the timing of receipt
of such payments as described herein and in the related Prospectus
Supplement. A Trust Fund may be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be
made to treat the related Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. See "Certain Material Federal Income Tax Consequences."
----------------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 12.
THE CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS IN, AND THE
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, THE RELATED TRUST FUND
ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
ANY SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT DESCRIBED
IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES NOR
THE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY, EXCEPT TO THE EXTENT DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
Prior to issuance there will have been no market for the Securities of
any Series and there can be no assurance that a secondary market for any
Securities will develop, or if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of Securities of any Series
unless accompanied by a Prospectus Supplement. Offers of the Securities may
be made through one or more different methods, including offerings through
underwriters, as more fully described under "Method of Distribution" herein
and in the related Prospectus Supplement. All Securities will be distributed
by, or sold by underwriters managed by:
---------------------
GREENWICH CAPITAL
MARKETS, INC.
December 11, 1996
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities and the Pass-Through Rate or method of
determining the rate or the amount of interest, if any, to be passed through
to each such class; (ii) the aggregate principal amount and Distribution
Dates relating to such Series and, if applicable, the initial and final
scheduled Distribution Dates for each class; (iii) information as to the
assets comprising the Trust Fund, including the general characteristics of
the Trust Fund Assets included therein and, if applicable, the insurance
policies, surety bonds, guaranties, letters of credit or other instruments or
agreements included in the Trust Fund or otherwise, and the amount and source
of any reserve account; (iv) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (v) the method used to calculate
the amount of principal to be distributed with respect to each class of
Securities; (vi) the order of application of distributions to each of the
classes within such Series, whether sequential, pro rata, or otherwise; (vii)
the Distribution Dates with respect to such Series; (viii) additional
information with respect to the method of distribution of such Securities;
(ix) whether one or more REMIC elections will be made and designation of the
regular interests and residual interests; (x) the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class
of Securities; (xi) information as to the Trustee; (xii) information as to
the nature and extent of subordination with respect to any class of
Securities that is subordinate in right of payment to any other class; and
(xiii) information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 14 or 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") prior to the termination of the
offering of Securities evidencing interests therein. Upon request by any
person to whom this Prospectus is delivered in connection with the offering
of one or more classes of Securities, the Depositor will provide or cause to
be provided without charge a copy of any such documents and/or reports
incorporated herein by reference, in each case to the extent such documents
or reports relate to such classes of Securities, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by
reference in such documents). Requests to the Depositor should be directed
in writing to: Charles A. Forbes, Jr., Financial Asset Securities Corp., 600
Steamboat Road, Greenwich, Connecticut 06830, telephone number
(203) 625-5673. The Depositor has determined that its financial statements
are not material to the offering of any Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of
the Commission. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048. In addition,
the Securities and Exchange Commission (the "Commission") maintains a Web
site at http://www.sec.gov containing reports, proxy and information statements
and other information regarding registrants, including the Depositor, that file
electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Securities offered hereby and thereby nor an offer of the Securities to any
person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under an Agreement to be forwarded to
Securityholders. However, such reports will neither be examined nor reported
on by an independent public accountant. See "Description of the Securities--
Reports to Securityholders".
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities.. Asset Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together with
the Certificates, the "Securities"), which are
issuable in Series.
Depositor ........... Financial Asset Securities Corp., a Delaware
corporation, and an indirect limited purpose finance
subsidiary of National Westminster Bank Plc and an
affiliate of Greenwich Capital Markets, Inc. See
"The Depositor" herein.
Trustee ............. The trustee (the "Trustee") for each Series of
Securities will be specified in the related
Prospectus Supplement. See "The Agreements" herein
for a description of the Trustee's rights and
obligations.
Master Servicer....... The entity or entities named as Master Servicer (the
"Master Servicer") will be specified in the related
Prospectus Supplement. See "The Agreements--Certain
Matters Regarding the Master Servicer and the
Depositor".
Trust Fund Assets ..... Assets of the Trust Fund for a Series of Securities
will include certain assets (the "Trust Fund
Assets") which will primarily consist of (a) Loans
or (b) Private Asset Backed Securities, together
with payments in respect of such Trust Fund Assets
and certain other accounts, obligations or
agreements, in each case as specified in the related
Prospectus Supplement. The Loans will be collected
in a pool (each, a "Pool") as of the first day of
the month of the issuance of the related Series of
Securities or such other date specified in the
Prospectus Supplement (the "Cut-off Date"). Trust
Fund assets also may include insurance policies,
cash accounts, reinvestment income, guaranties,
letters of credit or other assets to the extent
described in the related Prospectus Supplement. See
"Credit Enhancement". In addition, if the related
Prospectus Supplement so provides, the related Trust
Funds' assets will include the funds on deposit in
an account (a "Pre-Funding Account") which will be
used to purchase additional Loans during the period
specified in the related Prospectus Supplement. See
"The Agreements--Pre-Funding Accounts".
A. Loans ........... The Loans will consist of (i) closed-end loans (the
"Closed-End Loans") and/or revolving home equity
loans or certain balances therein (the "Revolving
Credit Line Loans", together with the Closed-End
Loans, the "Home Equity Loans"), and (ii) home
improvement installment sales contracts and
installment loan agreements (the "Home Improvement
Contracts"). The Home Equity Loans and the
Home Improvement Contracts are collectively referred
to herein as the "Loans". All Loans will have been
purchased by the Depositor, either directly or
through an affiliate, from one or more Sellers.
As specified in the related Prospectus Supplement,
the Home Equity Loans will, and the Home Improvement
Contracts may, be secured by mortgages or deeds of
trust or other similar security instruments creating
a lien on a mortgaged property (the "Mortgaged
Property"), which may be subordinated to one or
more senior liens on the Mortgaged Property, as
described in the related Prospectus Supplement.
As specified in the related Prospectus Supplement,
Home Improvement Contracts may be unsecured or
secured by purchase money security interests in the
Home Improvements financed thereby.
The Mortgaged Properties and the Home Improvements are
collectively referred to herein as the "Properties".
B. Private Asset-
Backed Securities... Private Asset Backed Securities may include (a)
pass-through certificates representing beneficial
interests in certain loans and/or (b) collateralized
obligations secured by such loans. Private Asset
Backed Securities may include stripped securities
representing an undivided interest in all or a part
of either the principal distributions (but not the
interest distributions) or the interest
distributions (but not the principal distributions)
or in some specified portion of the principal and
interest distributions (but not all of such
distributions) on certain loans. Although
individual loans underlying a Private Asset Backed
Security may be insured or guaranteed by the United
States or an agency or instrumentality thereof, they
need not be, and the Private Asset Backed Securities
themselves will not be so insured or guaranteed.
Payments on the Private Asset Backed Securities will
be distributed directly to the Trustee as registered
owner of such Private Asset Backed Securities. See
"The Trust Fund--Private Asset Backed Securities".
Description of
the Securities...... Each Security will represent a beneficial ownership
interest in, or will be secured by the assets of, a
Trust Fund created by the Depositor pursuant to an
Agreement among the Depositor, the Master Servicer
and the Trustee for the related Series. The
Securities of any Series may be issued in one or
more classes as specified in the related Prospectus
Supplement. A Series of Securities may include one
or more classes of senior Securities (collectively,
the "Senior Securities") and one or more classes of
subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or
classes of Securities may be covered by insurance
policies or other forms of credit enhancement, in
each case as described herein and in the related
Prospectus Supplement.
One or more classes of Securities of each Series
(i) may be entitled to receive distributions
allocable only to principal, only to interest or to
any combination thereof; (ii) may be entitled
to receive distributions only of prepayments of
principal throughout the lives of the Securities or
during specified periods; (iii) may be
subordinated in the right to receive distributions
of scheduled payments of principal, prepayments of
principal, interest or any combination thereof to
one or more other classes of Securities of such Series
throughout the lives of the Securities or during
specified periods; (iv) may be entitled to
receive such distributions only after the occurrence
of events specified in the related Prospectus
Supplement; (v) may be entitled to receive
distributions in accordance with a schedule or formula
or on the basis of collections from designated
portions of the assets in the related Trust Fund; (vi)
as to Securities entitled to distributions allocable
to interest, may be entitled to receive interest
at a fixed rate or a rate that is subject to change
from time to time; and (vii) as to Securities entitled
to distributions allocable to interest, may be
entitled to distributions allocable to interest
only after the occurrence of events specified in
the related Prospectus Supplement and may accrue
interest until such events occur, in each case
as specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over time, or
otherwise as specified in the related Prospectus
Supplement.
Distributions on
the Securities...... Distributions on the Securities entitled thereto
will be made monthly or at such other intervals and
on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") out of the
payments received in respect of the assets of the
related Trust Fund or Funds or other assets pledged
for the benefit of the Securities as specified in
the related Prospectus Supplement. The amount
allocable to payments of principal and interest on
any Distribution Date will be determined as
specified in the related Prospectus Supplement.
Allocations of distributions among Securityholders
of a single class shall be set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance
of the Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If
specified in the related Prospectus Supplement,
the Securities will have an aggregate original
principal balance equal to the aggregate unpaid
principal balance of the Trust Fund Assets as of
the first day of the month of creation of the Trust
Fund and will bear interest in the aggregate at a
rate equal to the interest rate borne by the
underlying Loans (the "Loan Rate") and/or Private
Asset Backed Securities, net of the aggregate
servicing fees and any other amounts specified in
the related Prospectus Supplement (the "Pass-
Through Rate"). If specified in the related
Prospectus Supplement, the aggregate original
principal balance of the Securities and interest
rates on the classes of Securities will be
determined based on the cash flow on the Trust Fund
Assets.
The rate at which interest will be passed through
to holders of each class of Securities entitled
thereto may be a fixed rate or a rate that is subject
to change from time to time from the time and for
the periods, in each case as specified in the
related Prospectus Supplement. Any such rate may
be calculated on a loan-by-loan, weighted average,
notional amount or other basis, in each case as
described in the related Prospectus Supplement.
Compensating
Interest ....... If so specified in the related Prospectus Supplement,
the Master Servicer will be required to remit to the
Trustee, with respect to each Loan in the related
Trust Fund as to which a principal prepayment in
full or a principal payment which is in excess
of the scheduled monthly payment and is not
intended to cure a delinquency was received during
any Due Period, an amount, from and to the extent
of amounts otherwise payable to the Master Servicer
as servicing compensation, equal to (i) the excess,
if any, of (a) 30 days' interest on the principal
balance of the related Loan at the Loan Rate net of
the per annum rate at which the Master Servicer's
servicing fee accrues, over (b) the amount of
interest actually received on such Loan during such
Due Period, net of the Master Servicer's servicing fee
or (ii) such other amount as described in the related
Prospectus Supplement. See "Description of the
Securities--Compensating Interest".
Credit Enhancement .... The assets in a Trust Fund or the Securities of one
or more classes in the related Series may have the
benefit of one or more types of credit enhancement
as described in the related Prospectus Supplement.
The protection against losses afforded by any such
credit support may be limited. The type,
characteristics and amount of credit enhancement
will be determined based on the characteristics of
the Loans and/or Private Asset Backed Securities
underlying or comprising the Trust Fund Assets and
other factors and will be established on the basis
of requirements of each Rating Agency rating the
Securities of such Series. See "Credit
Enhancement."
A. Subordination ...... The rights of the holders of the Subordinated
Securities of a Series to receive distributions with
respect to the assets in the related Trust Fund will
be subordinated to such rights of the holders of the
Senior Securities of the same Series to the extent
described in the related Prospectus Supplement.
This subordination is intended to enhance the
likelihood of regular receipt by holders of Senior
Securities of the full amount of monthly payments of
principal and interest due them. The protection
afforded to the holders of Senior Securities of a
Series by means of the subordination feature will be
accomplished by (i) the preferential right of such
holders to receive, prior to any distribution being
made in respect of the related Subordinated
Securities, the amounts of interest and/or principal
due them on each Distribution Date out of the funds
available for distribution on such date in the
related Security Account and, to the extent
described in the related Prospectus Supplement, by
the right of such holders to receive future
distributions on the assets in the related Trust Fund
that would otherwise have been payable to the holders
of Subordinated Securities; (ii) reducing the
ownership interest of the related Subordinated
Securities; (iii) a combination of clauses (i) and
(ii) above; or (iv) as otherwise described in
the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, subordination
may apply only in the event of certain types of
losses not covered by other forms of credit support,
such as hazard losses not covered by standard hazard
insurance policies, losses due to the bankruptcy or
fraud of the borrower. The related Prospectus
Supplement will set forth information concerning,
among other things, the amount of subordination of a
class or classes of Subordinated Securities in a
Series, the circumstances in which such subordination
will be applicable, and the manner, if any, in which
the amount of subordination will decrease over time.
B. Reserve Account.... One or more reserve accounts (each, a "Reserve
Account") may be established and maintained for each
Series. The related Prospectus Supplement will
specify whether or not such Reserve Accounts will be
included in the corpus of the Trust Fund for such
Series and will also specify the manner of funding
the related Reserve Accounts and the conditions
under which the amounts in any such Reserve Accounts
will be used to make distributions to holders of
Securities of a particular class or released from
the related Reserve Account.
C. Special Hazard Insurance
Policy .......... Certain classes of Securities may have the benefit
of a Special Hazard Insurance Policy. Certain
physical risks that are not otherwise insured against
by standard hazard insurance policies may be covered
by a Special Hazard Insurance Policy or Policies.
Each Special Hazard Insurance Policy will be limited
in scope and will cover losses pursuant to the
provisions of each such Special Hazard Insurance
Policy as described in the related Prospectus
Supplement.
D. Bankruptcy Bond.... One or more bankruptcy bonds (each a "Bankruptcy
Bond") may be obtained covering certain losses
resulting from action which may be taken by a
bankruptcy court in connection with a Loan. The
level of coverage and the limitations in scope of
each Bankruptcy Bond will be specified in the
related Prospectus Supplement.
E. Loan Pool
Insurance Policy.... A mortgage pool insurance policy or policies may be
obtained and maintained for Loans relating to any
Series, which shall be limited in scope, covering
defaults on the related Loans in an initial amount
equal to a specified percentage of the aggregate
principal balance of all Loans included in the Pool
as of the Cut-off Date.
F. FHA Insurance ..... If specified in the related Prospectus Supplement,
(i) all or a portion of the Loans in a Pool may be
insured by the Federal Housing Administration (the
"FHA") and/or (ii) all or a portion of the Loans may
be partially guaranteed by the Department of
Veterans' Affairs (the "VA"). See "Certain Legal
Considerations--Title I Program".
G. Cross-Support ..... If specified in the related Prospectus Supplement,
the beneficial ownership of separate groups of
assets included in a Trust Fund 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 be made with respect to
Securities evidencing beneficial ownership of one or
more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial
ownership interest in, or secured by, other asset
groups within the same Trust Fund.
If specified in the related Prospectus Supplement,
the coverage provided by one or more forms of
credit support may apply concurrently to two or
more separate Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds 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 Trust Funds.
H. Other Arrangements.. Other arrangements as described in the related
Prospectus Supplement including, but not
limited to, one or more letters of credit,
surety bonds, other insurance or third-party
guarantees may be used to provide coverage for
certain risks of defaults or various types of
losses.
Advances ............ The Master Servicer and, if applicable, each
mortgage servicing institution that services a Loan in
a Pool on behalf of the Master Servicer (a "Sub-
Servicer") may be obligated to advance amounts
(each, an "Advance") corresponding to delinquent
interest and/or principal payments on such Loan
until the date, as specified in the related
Prospectus Supplement, following the date on which the
related Property is sold at a foreclosure sale or the
related Loan is otherwise liquidated. Any obligation
to make Advances may be subject to limitations as
specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement,
Advances may be drawn from a cash account available
for such purpose as described in such Prospectus
Supplement.
Any such obligation of the Master Servicer or a
Sub-Servicer to make Advances may be supported by the
delivery to the Trustee of a support letter from an
affiliate of the Master Servicer or such Sub-Servicer
or an unaffiliated third party (a "Support Servicer")
guaranteeing the payment of such Advances by the Master
Servicer or Sub-Servicer, as the case may be, as
specified in the related Prospectus Supplement.
In the event the Master Servicer, Support Servicer or
Sub-Servicer fails to make a required Advance, the
Trustee may be obligated to advance such amounts
otherwise required to be advanced by the Master
Servicer, Support Servicer or Sub-Servicer.
See "Description of the Securities--Advances."
Optional Termination ... The Master Servicer or the party specified in
the related Prospectus Supplement, including
the holder of the residual interest in a REMIC,
may have the option to effect early retirement
of a Series of Securities through the purchase
of the Trust Fund Assets and other assets in
the related Trust Fund under the circumstances
and in the manner described in "The Agreements-
-Termination; Optional Termination" herein and
in the related Prospectus Supplement.
Legal Investment ...... The Prospectus Supplement for each series of
Securities will specify which, if any, of the
classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal
investments for certain types of institutional
investors to the extent provided in SMMEA, subject,
in any case, to any other regulations which may
govern investments by such institutional investors.
Institutions whose investment activities are subject
to review by federal or state authorities should
consult with their counsel or the applicable
authorities to determine whether an investment in a
particular class of Securities (whether or not such
class constitutes a "mortgage related security")
complies with applicable guidelines, policy
statements or restrictions. See "Legal Investment."
Certain Material
Federal Income Tax
Consequences .... The material federal income tax consequences
to Securityholders will vary depending on whether
one or more elections are made to treat the Trust
Fund or specified portions thereof as a real estate
mortgage investment conduit ("REMIC") under the
provisions of the Internal Revenue Code of 1986, as
amended (the "Code"). The Prospectus Supplement for
each Series of Securities will specify whether such an
election will be made. See "Certain Material Federal
Income Tax Consequences".
ERISA Considerations.. A fiduciary of any employee benefit plan or
other retirement plan or arrangement subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its legal advisors
whether the purchase or holding of Securities
could give rise to a transaction prohibited or
not otherwise permissible under ERISA or the
Code. See "ERISA Considerations". Certain
classes of Securities may not be transferred
unless the Trustee and the Depositor are
furnished with a letter of representation or an
opinion of counsel to the effect that such
transfer will not result in a violation of
the prohibited transaction provisions of ERISA and
the Code and will not subject the Trustee, the
Depositor or the Master Servicer to additional
obligations. See "Description of the Securities-
General" and "ERISA Considerations".
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of
such Series.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the
Trust Fund for any other Series. There will be no recourse to the Depositor
or any other person for any failure to receive distributions on the
Securities. Further, at the times set forth in the related Prospectus
Supplement, certain Trust Fund Assets and/or any balance remaining in the
Security Account immediately after making all payments due on the Securities
of such Series, after making adequate provision for future payments on
certain classes of Securities and after making any other payments specified
in the related Prospectus Supplement, may be promptly released or remitted to
the Depositor, the Servicer, any credit enhancement provider or any other
person entitled thereto and will no longer be available for making payments
to Securityholders. Consequently, holders of Securities of each Series must
rely solely upon payments with respect to the Trust Fund Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of
such Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The
only obligations, if any, of the Depositor with respect to the Trust Fund
Assets or the Securities of any Series will be pursuant to certain
representations and warranties. The Depositor does not have, and is not
expected in the future to have, any significant assets with which to meet any
obligation to repurchase Trust Fund Assets with respect to which there has
been a breach of any representation or warranty. If, for example, the
Depositor were required to repurchase a Loan, its only sources of funds to
make such repurchase would be from funds obtained (i) from the enforcement of
a corresponding obligation, if any, on the part of the Seller or originator
of such Loan, or (ii) from a Reserve Account or similar credit enhancement
established to provide funds for such repurchases. The Master Servicer's
servicing obligations under the related Agreement may include its limited
obligation to make certain advances in the event of delinquencies on the
Loans, but only to the extent deemed recoverable. To the extent described in
the related Prospectus Supplement, the Depositor or Master Servicer will be
obligated under certain limited circumstances to purchase or act as a
remarketing agent with respect to a convertible Loan upon conversion to a
fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof,
the amount of such credit enhancement will be limited, as set forth in the
related Prospectus Supplement, and may decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders may suffer losses. Moreover,
such credit enhancement may not cover all potential losses or risks. For
example, credit enhancement may or may not cover fraud or negligence by a
loan originator or other parties. See "Credit Enhancement".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans and, in the case of Private Asset Backed Securities,
the underlying loans related thereto, comprising the Trust Fund, which
prepayments may be influenced by a variety of factors, (ii) the manner of
allocating principal and/or payments among the classes of Securities of a
Series as specified in the related Prospectus Supplement, (iii) the exercise
by the party entitled thereto of any right of optional termination and (iv)
the rate and timing of payment defaults and losses incurred with respect to
the Trust Fund Assets. Prepayments of principal may also result from
repurchases of Trust Fund Assets due to material breaches of the Depositor's
or the Master Servicer's representations and warranties, as applicable. The
yield to maturity experienced by a holder of Securities may be affected by
the rate of prepayment of the Loans comprising or underlying the Trust Fund
Assets. See "Yield and Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate. See
"Description of the Securities - Distributions of Interest".
BALLOON PAYMENTS
Certain of the Loans as of the Cut-off Date may not be fully amortizing
over their terms to maturity and, thus, will require substantial principal
payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Property.
The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
rates at the time of sale or refinancing, the borrower's equity in the
related Property, the financial condition of the borrower and tax laws.
NATURE OF MORTGAGES
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loans, together
with any senior financing on the Properties, if applicable, would equal or
exceed the value of the Properties. Among the factors that could adversely
affect the value of the Properties are an overall decline in the residential
real estate market in the areas in which the Properties are located or a
decline in the general condition of the Properties as a result of failure of
borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods. In
the case of Home Equity Loans, such decline could extinguish the value of the
interest of a junior mortgagee in the Property before having any effect on
the interest of the related senior mortgagee. If such a decline occurs, the
actual rates of delinquencies, foreclosures and losses on all Loans could be
higher than those currently experienced in the mortgage lending industry in
general.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a
default by a borrower, these restrictions, among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of
legal action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted loan having a small remaining principal balance as
it would in the case of a defaulted loan having a large remaining principal
balance, the amount realized after expenses of liquidation would be smaller
as a percentage of the outstanding principal balance of the small loan than
would be the case with the defaulted loan having a large remaining principal
balance. Since the mortgages and deeds of trust securing the Home Equity
Loans will be primarily junior liens subordinate to the rights of the
mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to any senior mortgage, in which case it must either pay the entire
amount due on any senior mortgage to the related senior mortgagee at or prior
to the foreclosure sale or undertake the obligation to make payments on any
such senior mortgage in the event the mortgagor is in default thereunder.
The Trust Fund will not have any source of funds to satisfy any senior
mortgages or make payments due to any senior mortgagees.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the origination, servicing and collection of the Loans.
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 Master Servicer to collect all or part of the
principal of or interest on the Loans, may entitle the borrower to a refund
of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See "Certain Legal Aspects
of the Loans".
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition under the laws of some
states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as
an "owner" or "operator", for costs of addressing releases or threatened
releases of hazardous substances that require remedy at a property, if agents
or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether the environmental damage or
threat was caused by a prior owner. A lender also risks such liability on
foreclosure of the related property. See "Certain Legal Aspects of the
Loans--Environmental Risks".
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience; and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional application disclosures, limits changes that may be
made to the loan documents without the borrower's consent and restricts
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of
1994. These provisions impose additional disclosure and other requirements
on creditors with respect to non-purchase money mortgage loans with high
interest rates or high up-front fees and charges. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of
the creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation,
the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission
and other similar federal and state statutes and regulations (collectively,
the "Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the
obligor to withhold payment if the work does not meet the quality and
durability standards agreed to by the homeowner and the contractor. The
Holder in Due Course Rules have the effect of subjecting any assignee of the
seller in a consumer credit transaction to all claims and defenses which the
obligor in the credit sale transaction could assert against the seller of the
goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. See "Certain Legal Aspects of the Loans".
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities that
they be rated in one of the four highest rating categories by the Rating
Agency identified in the related Prospectus Supplement. Any such rating
would be based on among other things, the adequacy of the value of the Trust
Fund Assets and any credit enhancement with respect to such class and will
respect such Rating Agency's assessment solely of the likelihood that holders
of a class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the Series of Securities. Such rating shall not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. Such rating
will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn, among other reasons, because of an adverse change in
the financial or other condition of a credit enhancement provider or a change
in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of similar loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of similar loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that the values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that
such losses are not covered by credit enhancement, such losses will be borne,
at least in part, by the holders of one or more classes of the Securities of
the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the liquidity
of the Securities in the secondary trading market since investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Securities can be effected only through
the Depository Trust Company ("DTC"), participating organizations
("Participants"), Financial Intermediaries and certain banks, the ability of
a Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of
such Securities, may be limited due to lack of a physical certificate
representing the Securities.
In addition, Securityholders may experience some delay in their receipt
of distributions of interest and principal on the Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Participants
which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial
Intermediaries. See "Description of the Securities--Book-Entry Registration
of Securities".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing Date
the Depositor will deposit an amount (the "Pre-Funded Amount") specified in
such Prospectus Supplement into the Pre-Funding Account. In no event shall
the Pre-Funded Amount exceed 25% of the initial aggregate principal amount of
the Certificates and/or Notes of the related Series of Securities. The Pre-
Funded Amount will be used to purchase Loans ("Subsequent Loans") in a period
from the Closing Date to a date not more than three months after the Closing
Date (such period, the "Funding Period") from the Depositor (which, in turn,
will acquire such Subsequent Loans from the Seller or Sellers specified in
the related Prospectus Supplement). To the extent that the entire Pre-Funded
Amount has not been applied to the purchase of Subsequent Loans by the end of
the related Funding Period, any amounts remaining in the Pre-Funding Account
will be distributed as a prepayment of principal to Certificateholders and/or
Noteholders on the Distribution Date immediately following the end of the
Funding Period, in the amounts and pursuant to the priorities set forth in
the related Prospectus Supplement.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or
any other assets of a Series will at any time be equal to or greater than the
principal amount of the Securities of such Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the
Agreement for a Series and a sale of the assets in the Trust Fund or upon a
sale of the assets of a Trust Fund for a Series of Securities, the Trustee,
the Master Servicer, the credit enhancer, if any, and any other service
provider specified in the related Prospectus Supplement generally will be
entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement
prior to distributions to Securityholders. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on
the Securities of such Series.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets
of the related Trust Fund, and the Notes of each Series will be secured by
the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement. The Pool will be created on
the first day of the month of the issuance of the related Series of
Securities or such other date specified in the Prospectus Supplement (the
"Cut-off Date"). The Securities will be entitled to payment from the assets
of the related Trust Fund or Funds or other assets pledged for the benefit of
the Securityholders as specified in the related Prospectus Supplement and
will not be entitled to payments in respect of the assets of any other trust
fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either directly
or through affiliates, from originators or sellers which may be affiliates of
the Depositor (the "Sellers"), and conveyed by the Depositor to the related
Trust Fund. Loans acquired by the Depositor will have been originated in
accordance with the underwriting criteria specified below under "Loan
Program-Underwriting Standards" or as otherwise described in a related
Prospectus Supplement. See "Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named
in the related Prospectus Supplement will service the Trust Fund Assets,
either directly or through other servicing institutions ("Sub-Servicers"),
pursuant to a Pooling and Servicing Agreement among the Depositor, the Master
Servicer and the Trustee with respect to a Series of Certificates, or a
servicing agreement (each, a "Servicing Agreement") between the Trustee and
the Servicer with respect to a Series of Notes, and will receive a fee for
such services. See "Loan Program" and "The Pooling and Servicing Agreement".
With respect to Loans serviced by the Master Servicer through a Sub-Servicer,
the Master Servicer will remain liable for its servicing obligations under
the related Agreement as if the Master Servicer alone were servicing such
Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and
with respect to a Series of Notes, the Indenture and the Servicing Agreement,
as the context requires.
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* Whenever the terms "Pool", "Certificates" and "Notes" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Pool and the Certificates representing certain
undivided interests in, or Notes secured by the assets of, a single trust fund
(the "Trust Fund") consisting primarily of the Loans in such Pool. Similarly,
the term "Pass-Through Rate" will refer to the Pass-Through Rate borne by the
Certificates or Notes of one specific Series and the term "Trust Fund" will
refer to one specific Trust Fund.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the
laws of the state specified in the related Prospectus Supplement pursuant to
a trust agreement (each, a "Trust Agreement") between the Depositor and the
trustee of such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other
than acquiring, managing and holding of the related Trust Fund Assets and
other assets contemplated herein and in the related Prospectus Supplement and
the proceeds thereof, issuing Securities and making payments and
distributions thereon and certain related activities. No Trust Fund is
expected to have any source of capital other than its assets and any related
credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will
be to obtain certain representations and warranties from the Sellers and to
assign to the Trustee for such Series of Securities the Depositor's rights
with respect to such representations and warranties. See "The Agreements--
Assignment of Trust Fund Assets". The obligations of the Master Servicer
with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation
to enforce the obligations of the Sub-Servicers or Sellers, or both, as more
fully described herein under "Loan Program--Representations by Sellers;
Repurchases" and "The Agreements--Sub-Servicing of Loans", "--Assignment of
Trust Fund Assets") and its obligation, if any, to make certain cash advances
in the event of delinquencies in payments on or with respect to the Loans in
the amounts described herein under "Description of the Securities--Advances".
The obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust
Fund Assets is not known at the time the related Series of Securities
initially is offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such Securities (the "Detailed Description"). A copy of the
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 Trust Fund Assets relating to such Series will be attached to the
Agreement delivered to the Trustee upon delivery of the Securities.
THE LOANS
General. For purposes hereof, "Home Equity Loans" includes "Closed-End
Loans" and "Revolving Credit Line Loans". The real property which secures
repayment of the Loans is referred to as "Properties". Unless otherwise
specified in the related Prospectus Supplement, the Loans will be secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on a Property, which may be subordinated to one or more senior liens on
the related Properties, each as described in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement,
the Loans may be "conventional" loans or loans that are insured or guaranteed
by a governmental agency such as the FHA or VA.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments,
and certain other dwelling units ("Single Family Properties") or Small Mixed-
Used Properties (as defined herein) which consist of structures of not more
than three stories which include one- to four-family residential dwelling
units and space used for retail, professional or other commercial uses. Such
Properties may include vacation and second homes, investment properties
and leasehold interests. The Properties may be located in any one of the
fifty states, the District of Columbia, Guam, Puerto Rico or any other
territory of the United States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features, all as
described above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index (which will be specified in
the related Prospectus Supplement), a rate that is fixed for a period of
time or under certain circumstances and 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. 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 loan for such periods
and under such circumstances as may be specified in the related
Prospectus Supplement. Loans may provide for the payment of interest at
a rate lower than the specified interest rate borne by such Mortgage
(the "Loan Rate") for a period of time or for the life of the Loan, and
the amount of any difference may be contributed from funds supplied by
the Seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the 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 interest rate on the Loan 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 payment"). Principal
may include interest that has been deferred and added to the principal
balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the loan, may increase over a specified period of time or
may change from period to period. 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.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time,
and may be prohibited for the life of the loan or for certain periods
("lockout periods"). Certain loans may permit prepayments after
expiration of the applicable lockout period and may require the payment
of a prepayment fee in connection with any such subsequent prepayment.
Other loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The loans may include
"due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or certain transfers of the
related Property. Other loans may be assumable by persons meeting the
then applicable underwriting standards of the Seller.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on
the average daily outstanding principal balance of such Loan. Principal
amounts on a Revolving Credit Line Loan may be drawn down (up to a maximum
amount as set forth in the related Prospectus Supplement) or repaid under
each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. The full amount
of a Closed-End Loan is advanced at the inception of the loan and generally
is repayable in equal (or substantially equal) installments of an amount to
fully amortize such loan at its stated maturity. Except to the extent
provided in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loan will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End
Loan, a borrower may choose an interest only payment option and is obligated
to pay only the amount of interest which accrues on the loan during the
billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance
of the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
basis for a representation that a given percentage of the Loans is secured by
Single Family Property that is owner-occupied will be either (i) the making
of a representation by the borrower at origination of the Loan either that
the underlying Property will be used by the borrower for a period of at least
six months every year or that the borrower intends to use the Property as a
primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having terms
to maturity of up to 30 years and secured by first-lien mortgages originated
on Properties containing one to four residential units and no more than three
income producing non-residential units ("Small Mixed-Use Properties"). At
least 50% of the units contained in a Small Mixed-Use Property will consist
of residential units. Income from such non-residential units will not exceed
40% of the adjusted gross income of the related borrower. The maximum Loan-
to-Value Ratio on Small Mixed-Use Properties will not exceed 65%. Small
Mixed-Use Properties may be owner occupied or investor properties and the
loan purpose may be a refinancing or a purchase.
Home Improvement Contracts. The Trust Fund Assets for a Series may
consist, in whole or part, of home improvement installment sales contracts
and installment loan agreements (the "Home Improvement Contracts") originated
by a home improvement contractor, a thrift or a commercial mortgage banker in
the ordinary course of business. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or
secured by the Mortgages primarily on Single Family Properties which are
generally subordinate to other mortgages on the same Property, or secured by
purchase money security interest in the Home Improvements financed thereby.
Except as otherwise specified in the related Prospectus Supplement, the Home
Improvement Contracts will be fully amortizing and may have fixed interest
rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts will include, but are not limited to, replacement windows, house
siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling goods and solar heating panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the Depositor, with respect to the Loans contained
in the related Pool, including (i) the aggregate outstanding principal
balance and the average outstanding principal balance of the Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Loan (e.g.,
one- to four-family houses, individual units in condominium apartment
buildings, vacation and second homes or other real property), (iii) the
original terms to maturity of the Loans, (iv) the largest principal balance
and the smallest principal balance of any of the Loans, (v) the earliest
origination date and latest maturity date of any of the Loans, (vi) the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable, of the
Loans, (vii) the Loan Rates or annual percentage rates ("APR") or range of
Loan Rates or APR's borne by the Loans, and (viii) the geographical location
of the Loans on a state-by-state basis. If specific information respecting
the Loans is not known to the Depositor at the time the related Securities
are initially offered, more general information of the nature described above
will be provided in the related Prospectus Supplement, and specific
information will be set forth in the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement, the
"Combined Loan-to-Value Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal
balance of the Loan (or, in the case of a Revolving Credit Line Loan, the
maximum amount thereof available) and (b) the outstanding principal balance
at the date of origination of the Loan of any senior mortgage loan(s) or, in
the case of any open-ended senior mortgage loan, the maximum available line
of credit with respect to such mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the Loan, to (ii) the
Collateral Value of the related Property. Except as otherwise specified in
the related Prospectus Supplement, the "Collateral Value" of the Property,
other than with respect to certain Loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "Refinance Loan"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Loan and (b) the sales price for such
Property. In the case of Refinance Loans, the "Collateral Value" of the
related Property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
General. Private Asset Backed Securities may consist of (a) pass-
through certificates or participation certificates evidencing an undivided
interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home
improvement loans. Private Asset Backed Securities may include stripped
asset backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain home equity or home improvement loans.
Private Asset Backed Securities will have been issued pursuant to a pooling
and servicing agreement, an indenture or similar agreement (a "PABS
Agreement"). The seller/servicer of the underlying Loans will have entered
into the PABS Agreement with the trustee under such PABS Agreement (the "PABS
Trustee"). The PABS Trustee or its agent, or a custodian, will possess the
loans underlying such Private Asset Backed Security. Loans underlying a
Private Asset Backed Security will be serviced by a servicer (the "PABS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PABS Servicer. Except as otherwise specified in the
related Prospectus Supplement, the PABS Servicer will be a FNMA or FHLMC
approved servicer and, if FHA Loans underlie the Private Asset Backed
Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts and selling beneficial interests in such
trusts. The PABS Issuer shall not be an affiliate of the Depositor. The
obligations of the PABS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
the related trust. Except as otherwise specified in the related Prospectus
Supplement, the PABS Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Asset Backed Securities
issued under the PABS Agreement. Additionally, although the loans underlying
the Private Asset Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Asset Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest
distributions. Principal and interest distributions will be made on the
Private Asset Backed Securities by the PABS Trustee or the PABS Servicer.
The PABS Issuer or the PABS Servicer may have the right to repurchase assets
underlying the Private Asset Backed Securities after a certain date or under
other circumstances as specified in the related Prospectus Supplement.
Underlying Loans. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment loans, buydown loans, adjustable
rate loans, or loans having balloon or other special payment features. Such
loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a cooperative and the
related shares issued by such cooperative. Except as otherwise specified in
the related Prospectus Supplement, the underlying loans will have the
following characterizations: (i) no loan will have had a Loan-to-Value Ratio
at origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii)
each loan will have had an original term to stated maturity of not less than
5 years and not more than 40 years, (iv) no loan that was more than 89 days
delinquent as to the payment of principal or interest will have been eligible
for inclusion in the assets under the related PABS Agreement, (v) each loan
(other than a cooperative loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each loan
(other than a cooperative loan or a contract secured by a manufactured home)
will be covered by a title insurance policy.
Credit Support Relating to Private Asset Backed Securities. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety
bonds, insurance policies or other types of credit support may be provided
with respect to the loans underlying the Private Asset Backed Securities
themselves.
Rating of Private Asset Backed Securities. The PABS upon their issuance
will have been assigned a rating in one of the four highest rating categories
by at least one nationally recognized statistical rating agency.
Additional Information. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private Asset
Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the loans which comprise the underlying assets for the
Private Asset Backed Securities including (A) the payment features of such
loans, (B) the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the loans, and (D)
the minimum and maximum stated maturities of the underlying loans at
origination, (iii) the maximum original term-to-stated maturity of the
Private Asset Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Asset Backed Securities, (v) the pass-through or
certificate rate of the Private Asset Backed Securities, (vi) the weighted
average pass-through or certificate rate of the Private Asset Backed
Securities, (vii) the PABS Issuer, the PABS Servicer (if other than the PABS
Issuer) and the PABS Trustee for such Private Asset Backed Securities, (viii)
certain characteristics of credit support, if any, such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties relating to
the loans underlying the Private Asset Backed Securities or to such Private
Asset Backed Securities themselves, (ix) the term on which the underlying
loans for such Private Asset Backed Securities may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the
Private Asset Backed Securities, (x) the terms on which loans may be
substituted for those originally underlying the Private Asset Backed
Securities and (xi) to the extent provided in a periodic report to the
Trustee in its capacity as holder of the PABS, certain information regarding
the status of the credit support, if any, relating to the PABS.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used
by the Depositor for general corporate purposes. The Depositor expects to
sell Securities in Series from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the
volume of Trust Fund Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Trust Fund Assets and selling interests therein or
bonds secured thereby. It is an indirect limited purpose finance subsidiary
of National Westminster Bank Plc and an affiliate of Greenwich Capital
Markets, Inc. Greenwich Capital Markets, Inc. is a registered broker-dealer
engaged in the United States government securities and related capital
markets business. The Depositor maintains its principal office at 600
Steamboat Road, Greenwich, Connecticut 06830. Its telephone number is (203)
625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure
or guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination for similar types
of loans. As to any Loan insured by the FHA or partially guaranteed by the
VA, the Seller will represent that it has complied with underwriting policies
of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Property as collateral. In general, a prospective
borrower applying for a Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history with respect to any
senior mortgage, if any, which, unless otherwise specified in the related
Prospectus Supplement, the borrower's income will be verified by the Seller.
As part of the description of the borrower's financial condition, the
borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports the
length of employment with that organization, the current salary, and whether
it is expected that the borrower will continue such employment in the future.
If a prospective borrower is self-employed, the borrower may be required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the
borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing.
The appraiser is generally required to inspect the property, issue a report
on its condition and, if applicable, verify that construction, if new, has
been completed. The appraisal is based on the market value of comparable
homes, the estimated rental income (if considered applicable by the
appraiser) and the cost of replacing the home. The value of the property
being financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on
the basis of the monthly payments due in the year of origination) and other
expenses related to the property (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards
applied by Sellers, particularly with respect to the level of loan
documentation and the mortgagor's income and credit history, may be varied
in appropriate cases where factors such as low Combined Loan-to-Value Ratios
or other favorable credit exist.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans
of the type contained in the related Pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities
to originate and service those loans. Unless otherwise specified in the
related Prospectus Supplement, each Seller will be a seller/servicer approved
by either FNMA or FHLMC.
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus
Supplement, such representations and warranties include, among other things:
(i) that title insurance (or in the case of Properties located in areas where
such policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy (or certificate of title as
applicable) remained in effect on the date of purchase of the Loan from the
Seller by or on behalf of the Depositor; (ii) that the Seller had good title
to each such Loan and such Loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any buydown
agreement described herein may forgive certain indebtedness of a borrower;
(iii) that each Loan constituted a valid lien on the Property (subject only
to permissible liens disclosed, if applicable, title insurance exceptions, if
applicable, and certain other exceptions described in the Agreement) and that
the Property was free from damage and was in acceptable condition; (iv) that
there were no delinquent tax or assessment liens against the Property;
(v) that no required payment on a Loan was more than thirty days' delinquent;
and (vi) that each Loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and regulations in all
material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made
not as of the Cut-off Date but as of the date on which such Seller sold the
Loan to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Securities evidencing an interest in such
Loan. Since the representations and warranties of a Seller do not address
events that may occur following the sale of a Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event
that would otherwise have given rise to such an obligation with respect to a
Loan occurs after the date of sale of such Loan by such Seller to the
Depositor or its affiliates. However, the Depositor will not include any
Loan in the Trust Fund for any Series of Securities if anything has come to
the Depositor's attention that would cause it to believe that the
representationes and warranties of a Seller will not be accurate and complete
in all material respects in respect of such Loan as of the date of initial
issuance of the related Series of Securities. If the Master Servicer is also
a Seller of Loans with respect to a particular Series, such representations
will be in addition to the representations and warranties made by the Master
Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially
and adversely affects the interests of the Securityholders in such Loan.
Unless otherwise specified in the related Prospectus Supplement, if such
Seller cannot cure such breach within 90 days following notice from the
Master Servicer or the Trustee, as the case may be, then such Seller will be
obligated either (i) to repurchase such Loan from the Trust Fund at a price
(the "Purchase Price") equal to 100% of the unpaid principal balance thereof
as of the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the Loan Rate (less any
Advances or amount payable as related servicing compensation if the Seller
is the Master Servicer) or (ii) to substitute for such Loan a replacement
loan that satisfies certain requirements set forth in the Agreement. If a
REMIC election is to be made with respect to a Trust Fund, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any such
repurchase or substitution and the Trustee must have received a satisfactory
opinion of counsel that such repurchase or substitution will not cause the
Trust Fund to lose its status as a REMIC or otherwise subject the Trust Fund
to a prohibited transaction tax. The Master Servicer may be entitled to
reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of
the Securities--General". Except in those cases in which the Master Servicer
is the Seller, the Master Servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its
good faith business judgment were it the owner of such Loan. This repurchase
or substitution obligation will constitute the sole remedy available to
holders of Securities or the Trustee for a breach of representation by a
Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if
a Seller defaults on its obligation to do so, and no assurance can be given
that Sellers will carry out their respective repurchase or substitution
obligations with respect to Loans. However, to the extent that a breach of a
representation and warranty of a Seller may also constitute a breach of a
representation made by the Master Servicer, the Master Servicer may have a
repurchase or substitution obligation as described below under "The
Agreements--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each Series of Notes will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the entity
named in the related Prospectus Supplement as trustee (the "Trustee") with
respect to such Series. A form of Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. A Series
may consist of both Notes and Certificates. Each Agreement, dated as of the
related Cut-off Date, will be among the Depositor, the Master Servicer and
the Trustee for the benefit of the holders of the Securities of such Series.
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 Fund.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will
describe any provision of the Agreement relating to such Series that mainly
differs from the description thereof contained in this Prospectus. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreement for
each Series of Securities and the applicable Prospectus Supplement. The
Depositor will provide a copy of the Agreement (without exhibits) relating to
any Series without charge upon written request of a holder of record of a
Security of such Series addressed to Financial Asset Securities Corp., 600
Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed Finance
Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be
entitled to payments in respect of the assets included in any other Trust
Fund established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry
or fully registered form, in the authorized denominations specified in the
related Prospectus Supplement, will be secured by the pledge of the assets of
the related Trust Fund and will not be entitled to payments in respect of the
assets included in any other Trust Fund established by the Depositor. The
Securities will not represent obligations of the Depositor or any affiliate of
the Depositor. Certain of the Loans may be guaranteed or insured as set forth
in the related Prospectus Supplement. Each Trust Fund will consist of,
to the extent provided in the Agreement, (i) the Trust Fund Assets, as from
time to time are subject to the related Agreement (exclusive of any amounts
specified in the related Prospectus Supplement ("Retained Interest")),
including all payments of interest and principal received with respect to
the Loans after the Cut-off Date (to the extent not applied in computing the
Cut-off Date Principal Balance); (ii) such assets as from time to time are
required to be deposited in the related Security Account, as described
below under "The Agreements--Payments on Loans; Deposits to Security Account";
(iii) property which secured a Loan and which is acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund Assets,
a Reserve Account, a mortgage pool insurance policy, a Special Hazard
Insurance Policy, a Bankruptcy Bond, one or more letters of credit, a surety
bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to
payment to one or more other classes of Securities of such Series. One or
more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made
prior to one or more other classes, after the occurrence of specified events,
in accordance with a schedule or formula, on the basis of collections from
designated portions of the Trust Fund Assets in the related Trust Fund or on
a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among
classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee
on each Distribution Date (i.e., monthly or at such other intervals and on
the dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions
will be made to the persons in whose names the Securities are registered at
the close of business on the dates specified in the related Prospectus
Supplement (each, a "Record Date"). Distributions will be made in the manner
specified in the Prospectus Supplement to the persons entitled thereto at the
address appearing in the register maintained for holders of Securities (the
"Security Register"); provided, however, that the final distribution in
retirement of the Securities will be made only upon presentation and
surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange
or transfer of Securities of any Series but the Trustee may require payment
of a sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code may result in prohibited transactions within the meaning of
ERISA and the Code. See "ERISA Considerations". Unless otherwise specified
in the related Prospectus Supplement, the transfer of Securities of such a
class will not be registered unless the transferee (i) represents that it is
not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the
Trustee and the Depositor that the purchase of Securities of such a class by
or on behalf of such plan, account or arrangement is permissible under
applicable law and will not subject the Trustee, the Master Servicer or the
Depositor to any obligation or liability in addition to those undertaken in
the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus
Supplement will specify whether a REMIC election is to be made.
Alternatively, the Agreement for a Series may provide that a REMIC election
may be made at the discretion of the Depositor or the Master Servicer and may
only be made if certain conditions are satisfied. As to any such Series, the
terms and provisions applicable to the making of a REMIC election, as well as
any material federal income tax consequences to Securityholders not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the sole class of "residual interests" in the
related REMIC, as defined in the Code. All other classes of Securities in
such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC
election is to be made, the Master Servicer or a holder of the related
residual certificate will be obligated to take all actions required in order
to comply with applicable laws and regulations and will be obligated to pay
any prohibited transaction taxes. The Master Servicer, to the extent set
forth in the related Prospectus Supplement, will be entitled to reimbursement
for any such payment from the assets of the Trust Fund or from any holder of
the related residual certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See
"Credit Enhancement". Set forth below are descriptions of various methods
that may be used to determine the amount of distributions on the Securities
of a particular Series. The Prospectus Supplement for each Series of
Securities will describe the method to be used in determining the amount of
distributions on the Securities of such Series.
Distributions allocable to principal and interest on the Securities will
be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "Reserve Account"). As between Securities of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions to any class of Securities will be made pro rata to all
Securityholders of that class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement
and specified in the Agreement. Unless otherwise provided in the related
Prospectus Supplement, "Available Funds" for each Distribution Date will
equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Loans in the related Trust Fund
(including Liquidation Proceeds and Insurance Proceeds and amounts drawn
under letters of credit or other credit enhancement instruments as
permitted thereunder and as specified in the related Agreement) received
by the Master Servicer after the Cut-off Date and on or prior to the day
of the month of the related Distribution Date specified in the related
Prospectus Supplement (the "Determination Date") except
(a) all payments which were due on or before the Cut-off
Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Loan purchased
by the Depositor, Master Servicer, any Sub-Servicer or any Seller
pursuant to the Agreement that were received after the prepayment
period specified in the related Prospectus Supplement and all
related payments of interest representing interest for any period
after the interest accrual period;
(c) all scheduled payments of principal and interest due on a
date or dates subsequent to the Due Period relating to such
Distribution Date;
(d) amounts received on particular Loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer (including the related
Sub-Servicers, Support Servicers or the Trustee);
(e) amounts representing reimbursement, to the extent
permitted by the Agreement and as described under "Advances" below,
for advances made by the Master Servicer, Sub-Servicers, Support
Servicers or the Trustee that were deposited into the Security
Account, and amounts representing reimbursement for certain other
losses and expenses incurred by the Master Servicer or the
Depositor and described below;
(f) that portion of each collection of interest on a
particular Loan in such Trust Fund which represents servicing
compensation payable to the Master Servicer or Retained Interest
which is to be retained from such collection or is permitted to be
retained from related Insurance Proceeds, Liquidation Proceeds or
proceeds of Loans purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer, Sub
Servicer, Support Servicer or Trustee as described under "Advances"
below and deposited by it in the Security Account;
(iii) if applicable, amounts withdrawn from a Reserve Account;
(iv) if applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party guaranties; and
(v) if applicable, the amount of prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security
Principal Balance (or, in the case of Securities (i) entitled only to
distributions allocable to interest, the aggregate notional principal balance
or (ii) which, under certain circumstances, allow for the accrual of interest
otherwise scheduled for payment to remain unpaid until the occurrence of
certain events specified in the related Prospectus Supplement) of each class
of Securities entitled to interest from the date, at the Pass-Through Rate
(which may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement) and for the periods specified in such Prospectus Supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of Securities entitled to interest (other than
a class of Securities that provides for interest that accrues, but is not
currently payable, referred to hereafter as "Accrual Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Security Principal Balance of the Securities
of such class has been distributed in full or, in the case of Securities
entitled only to distributions allocable to interest, until the aggregate
notional principal balance of such Securities is reduced to zero or for the
period of time designated in the related Prospectus Supplement. The original
Security Principal Balance of each Security will equal the aggregate
distributions allocable to principal to which such Security is entitled.
Unless otherwise specified in the related Prospectus Supplement,
distributions allocable to interest on each Security that is not entitled to
distributions allocable to principal will be calculated based on the notional
principal balance of such Security. The notional principal balance of a
Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in
expressing the calculation of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Security
Principal Balance of such class of Securities on that Distribution Date.
Distributions of interest on any class of Accrual Securities will commence
only after the occurrence of the events specified in the related Prospectus
Supplement. Prior to such time, the beneficial ownership interest of such
class of Accrual Securities in the Trust Fund, as reflected in the aggregate
Security Principal Balance of such class of Accrual Securities, will increase
on each Distribution Date by the amount of interest that accrued on such
class of Accrual Securities during the preceding interest accrual period but
that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Securities will thereafter accrue interest
on its outstanding Security Principal Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Security Principal Balance of
any class of Securities entitled to distributions of principal generally will
be the aggregate original Security Principal Balance of such class of
Securities specified in such Prospectus Supplement, reduced by all
distributions reported to the holders of such Securities as allocable to
principal and, (i) in the case of Accrual Securities, increased by all
interest accrued but not then distributable on such Accrual Securities and
(ii) in the case of adjustable rate Securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes
of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in such Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securityholders will
have the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by other Securities in the Trust Fund.
Increasing the interests of the other Securities relative to that of certain
Securities allocated by the principal prepayments is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement-Subordination".
Unscheduled Distributions. The Securities will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Trust Fund Assets, the Trustee or
the Master Servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any Reserve Account,
may be insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with
respect to Securities of the same class, unscheduled distributions of
principal will be made on the same basis as such distributions would have
been made on the next Distribution Date on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or Support Servicers or
funds held in the Security Account for future distributions to the holders of
such Securities), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date and
were not advanced by any Sub-Servicer, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In
addition, to the extent provided in the related Prospectus Supplement, a cash
account may be established to provide for Advances to be made in the event of
certain Trust Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances
are made by the Master Servicer from cash being held for future distribution
to Securityholders, the Master Servicer will replace such funds on or before
any future Distribution Date to the extent that funds in the applicable
Security Account on such Distribution Date would be less than the amount
required to be available for distributions to Securityholders on such date.
Any Master Servicer funds advanced will be reimbursable to the Master
Servicer out of recoveries on the specific Loans with respect to which such
Advances were made (e.g., late payments made by the related borrower, any
related Insurance Proceeds, Liquidation Proceeds or proceeds of any Loan
purchased by a Sub-Servicer or a Seller under the circumstances described
hereinabove). Advances by the Master Servicer (and any advances by a
Sub-Servicer or a Support Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer or a Support Servicer) from cash otherwise
distributable to Securityholders (including the holders of Senior Securities)
to the extent that the Master Servicer determines that any such Advances
previously made are not ultimately recoverable as described above. To the
extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Funds
so advanced are reimbursable to the Master Servicer to the extent permitted
by the Agreement. The obligations of the Master Servicer to make advances
may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"Support Agreement") with a Support Servicer pursuant to which the Support
Servicer agrees to provide funds on behalf of the Master Servicer or Sub-
Servicer in connection with the obligation of the Master Servicer or Sub-
Servicer, as the case may be, to make Advances. The Support Agreement will
be delivered to the Trustee and the Trustee will be authorized to accept a
substitute Support Agreement in exchange for an original Support Agreement,
provided that such substitution of the Support Agreement will not adversely
affect the rating or ratings then in effect on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make
a required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it
will be entitled to be reimbursed for such Advance to the same extent and
degree as the Master Servicer, a Sub-Servicer or a Support Servicer is
entitled to be reimbursed for Advances. See "Description of the Securities--
Distributions on Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan
in the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to the excess, if any, of (a) 30
days' interest on the principal balance of the related Loan at the Loan Rate
net of the per annum rate at which the Master Servicer's servicing fee
accrues, over (b) the amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
and any applicable prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the amounts
distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional principal
balance of such class after giving effect to the distribution of
principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which such class will be entitled to receive on
the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained
or withdrawn from the Security Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master
Servicer attributable to penalties, fees, excess Liquidation Proceeds
and other similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60 days, (2) 61
to 90 days and (3) 91 or more days and (B) in foreclosure and delinquent
(1) 31 to 60 days, (2) 61 to 90 days and (3) 91 or more days, as of the
close of business on the last day of the calendar month preceding such
Distribution Date;
(x) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of payments
of interest on the Loans in the related Pool, the Pass-Through Rate, if
adjusted from the date of the last statement, of the Loans expected to
be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve
Account at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date;
and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) above for
such calendar year or, in the event such person was a Securityholder of
record during a portion of such calendar year, for the applicable portion of
such year and (b) such other customary information as may be deemed necessary
or desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States,
or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System
("Euroclear") (in Europe) if they are participants ("Participants") of such
systems, or indirectly through organizations which are Participants in such
systems. The Book-Entry Securities will be issued in one or more
certificates which equal the aggregate principal balance of the Securities
and will initially be registered in the name of Cede & Co., the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as
depositary for CEDEL and the Brussels, Belgium branch of Morgan Guarantee
Trust Company of New York ("Morgan") will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no Security Owner will
be entitled to receive a physical certificate representing such Security (a
"Definitive Security"). Unless and until Definitive Securities are issued,
it is anticipated that the only "Securityholders" of the Securities will be
Cede & Co., as nominee of DTC. Security Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Security Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security 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 Security Owner's Financial Intermediary is not a
Participant and on the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities 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 the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Security Owners have accounts with respect to
Securities are similarly required to make book-entry transfers and receive
and transmit such distributions on behalf of their respective Security
Owners. Accordingly, although Security Owners will not possess certificates,
the Rules provide a mechanism by which Security Owners will receive
distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not Participants may transfer
ownership of Securities only through Participants and indirect participants
by instructing such Participants and indirect 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 Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Security 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 herein) or Euroclear
Participant (as defined herein) 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 settlement in
DTC.
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.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating 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 its participants
("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 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 the Brussels,
Belgium office of Morgan, under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations
are conducted by Morgan, 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.
Morgan is the Belgian 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 Morgan 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.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with
respect to Securities 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. See
"Certain Material Federal Income Tax Consequences--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of Notes--Backup Withholding"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a beneficial owner to pledge Book-Entry Securities to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Securities, may be limited due to the
lack of physical certificates for such Book-Entry Securities. In addition,
issuance of the Book-Entry Securities in book-entry form may reduce the
liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot
obtain physical certificates.
Monthly and annual reports on the Trust will be provided to CEDE, as
nominee of DTC, and may be made available by CEDE 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 Securities of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of
the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the
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 Securities which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities 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.
None of the Servicer, the Depositor 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 Securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the Trust Fund Assets in the
related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named in the related Prospectus
Supplement, the subordination of one or more classes of the Securities of
such Series, the establishment of one or more Reserve Accounts, the use of a
cross-support feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract or another
method of credit enhancement described in the related Prospectus Supplement,
or any combination of the foregoing. Unless otherwise specified in the
related Prospectus Supplement, 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
which exceed the amount covered be credit enhancement or which are not
covered by the credit enhancement, Securityholders will bear their allocable
share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities of a
Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series
(the "Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders of Subordinated Securities under the
circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior
Securities of a Series by: (i) reducing the ownership interest of the related
Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. Delays in receipt of scheduled payments on the Loans
and losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives
of the Securities or at any time, the aggregate losses in respect of
defaulted Loans which must be borne by the Subordinated Securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securityholders that will be distributable
to Senior Securityholders on any Distribution Date may be limited as
specified in the related Prospectus Supplement. If aggregate distributions
in respect of delinquent payments on the Loans or aggregate losses in respect
of such Loans were to exceed an amount specified in the related Prospectus
Supplement, holders of Senior Securities would experience losses on the
Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related
Prospectus Supplement. As between classes of Subordinated Securities,
payments to holders of Senior Securities on account of delinquencies or
losses and payments to any Reserve Account will be allocated as specified in
the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate Special Hazard Insurance Policy may be obtained for the Pool
and issued by the insurer (the "Special Hazard Insurer") named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described below, protect holders of the related Securities from
(i) loss by reason of damage to Properties caused by certain hazards
(including earthquakes and, to a limited extent, tidal waves and related
water damage or as otherwise specified in the related Prospectus Supplement)
not insured against under the standard form of hazard insurance policy for
the respective states in which the Properties are located or under a flood
insurance policy if the Property is located in a federally designated flood
area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Agreements-Hazard
Insurance". Each Special Hazard Insurance Policy will not cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
or chemical reactions, flood (if the Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will
be specified in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the Property securing the Loan have been kept
in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in
the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed
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 borrower or the Master Servicer, the
Special Hazard 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
Special Hazard Insurer, the unpaid principal balance of such Loan at the
time of acquisition of such Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such Property. If
the unpaid principal balance of a Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further
coverage under the related Special Hazard Insurance Policy will be reduced
by such amount less any net proceeds from the sale of the Property. Any
amount paid as the cost of repair of the Property will further reduce
coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit or
any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in
lieu of or in addition to that provided by a Special Hazard Insurance Policy.
The amount of any Special Hazard Insurance Policy or of the deposit to the
special trust account relating to such Securities in lieu thereof may be
reduced so long as any such reduction will not result in a downgrading of the
rating of such Securities by any such Rating Agency.
BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and
interest on a Loan or a reduction by such court of the principal amount of a
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. The Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
Rating Agency rating the Securities of the related Series in a special trust
account to provide protection in lieu of or in addition to that provided by a
Bankruptcy Bond. Coverage under a Bankruptcy Bond may be cancelled or
reduced by the Master Servicer if such cancellation or reduction would not
adversely affect the then current rating or ratings of the related
Securities. See "Certain Legal Aspects of the Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided by
the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit,
demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the related Prospectus Supplement, (ii) by the
deposit therein from time to time of certain amounts, as specified in the
related Prospectus Supplement to which the Subordinate Securityholders, if
any, would otherwise be entitled or (iii) in such other manner as may be
specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of
the Securities, as beneficiary and will be issued by an entity acceptable to
each Rating Agency that rates the Securities. Additional information with
respect to such instruments deposited in the Reserve Accounts will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("Pool Insurance Policy") may be
obtained for the Pool and issued by the insurer (the "Pool Insurer") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject
to the limitations described below, cover loss by reason of default in
payment on Loans in the Pool in an amount equal to a percentage specified in
such Prospectus Supplement of the aggregate principal balance of such Loans
on the Cut-off Date which are not covered as to their entire outstanding
principal balances by Primary Mortgage Insurance Policies. As more fully
described below, the Master Servicer will present claims thereunder to the
Pool Insurer on behalf of itself, the Trustee and the holders of the
Securities. The Pool Insurance Policies, however, are not blanket policies
against loss, since claims thereunder may only be made respecting particular
defaulted Loans and only upon satisfaction of certain conditions precedent
described below. Unless otherwise specified in the related Prospectus
Supplement, the Pool Insurance Policies will not cover losses due to a
failure to pay or denial of a claim under a Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for
the defaulted Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in
either case net of certain amounts paid or assumed to have been paid under
the related Primary Mortgage Insurance Policy. If any Property securing a
defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Property in accordance with plans and specifications. A failure
of coverage attributable to one of the foregoing events might result in a
breach of the related Seller's representations described above, and, in such
events might give rise to an obligation on the part of such Seller to
purchase the defaulted Loan if the breach cannot be cured by such Seller. No
Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Loan occurring when
the servicer of such Loan, at the time of default or thereafter, was not
approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims
paid may include certain expenses incurred by the Master Servicer as well as
accrued interest on delinquent Loans to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Pool Insurance Policy
reach the original policy limit, coverage under that Pool Insurance Policy
will be exhausted and any further losses will be borne by the
Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing
Act of 1934, as amended. In addition to the Title I Program of the FHA, see
"Certain Legal Considerations -- Title I Program", certain Loans will be
insured under various FHA programs including the standard FHA 203(b) program
to finance the acquisition of one- to four-family housing units and the FHA
245 graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible,
into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or, other than Loans originated under the Title I
Program of the FHA, beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD
may provide relief by making payments to the Master Servicer or any Sub-
Servicer in partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting assignment
of the loan from the Master Servicer or any Sub-Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan, and HUD must have rejected any request for relief from the
mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount
equal to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the Loan to HUD, the insurance payment includes full compensation
for interest accrued and unpaid to the assignment date. The insurance
payment itself, upon foreclosure of an FHA-insured Loan, bears interest
from a date 30 days after the borrower's first uncorrected failure to
perform any obligation to make any payment due under the mortgage and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan
guarantee by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program
has no mortgage loan limits, requires no down payment from the purchaser and
permits the guarantee of mortgage loans of up to 30 years' duration.
However, no Loan guaranteed by the VA will have an original principal amount
greater than five times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage
loan, as further described in 38 United States Code Section 1803(a), as
amended. As of January 1, 1990, the maximum guarantee that may be issued by
the VA under a VA guaranteed mortgage loan of more than $144,000 is the
lesser of 25% of the original principal amount of the mortgage loan and
$46,000. The liability on the guarantee is reduced or increased pro rata
with any reduction or increase in the amount of indebtedness, but in no event
will the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee,
make full payment to a mortgage holder of unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance of the Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of
the Property. The amount payable under the guarantee may in no event exceed
the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund 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 be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset
groups within the same Trust Fund. The related Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds 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
Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled
to receive amounts deposited in various accounts held by the Trustee upon the
terms specified in such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will
be affected primarily by the amount and timing of principal payments received
on or in respect of the Trust Fund Assets included in the related Trust Fund.
With respect to a Trust Fund which includes Private Asset Backed Securities,
the possible effects of the amount and timing of principal payments received
with respect to the underlying mortgage loans will be described in the
related Prospectus Supplement. The original terms to maturity of the Loans
in a given Pool will vary depending upon the type of Loans included therein.
Each Prospectus Supplement will contain information with respect to the type
and maturities of the Loans in the related Pool. Unless otherwise specified
in the related Prospectus Supplement, Loans may be prepaid without penalty in
full or in part at any time. The prepayment experience on the Loans in a
Pool will affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary
borrower prepayments could cause rates of principal payments lower than, or
similar to, those of traditional fully-amortizing first mortgages. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and the frequency and amount of any future draws on any Revolving
Credit Line Loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying
senior mortgage loans, and the use of first mortgage loans as long-term
financing for home purchase and subordinate mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans
for federal income tax purposes may further increase the rate of prepayments
of the Loans. The enforcement of a "due-on-sale" provision (as described
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses". The yield to an
investor who purchases Securities in the secondary market at a price other
than par will vary from the anticipated yield if the rate of prepayment on
the Loans is actually different than the rate anticipated by such investor at
the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period
for certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make the required periodic payments. In addition,
collections on the Loans may vary due to seasonal purchasing and the payment
habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreements-Collection Procedures" and "Certain
Legal Aspects of the Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain
at or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may
experience a lower prepayment rate than if prevailing rates remain at or
below such Loan Rates. However, there can be no assurance that such will be
the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number
of days in the month actually elapsed up to the date of the prepayment,
rather than for a full month. Unless the Master Servicer remits amounts
otherwise payable to it as servicing compensation, see "Description of the
Securities-Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce
the amount of interest passed through in such month. Unless otherwise
specified in the related Prospectus Supplement, neither full nor partial
prepayments will be passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
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 took 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 large
remaining principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the remaining principal
balance of the small mortgage loan than would be the case with the other
defaulted mortgage loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws,
public policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to
the origination, servicing and collection of the Loans. 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 Master Servicer to collect all or part of the principal of
or interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to
damages and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis,
disproportionate principal prepayments among Loans with different Loan Rates
will affect the yield on such Securities. In most cases, the effective yield
to Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of
Securities. See "The Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Securities. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be
no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions
or terms used in the Agreements are referred to, such provisions or terms are
as specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The
provisions of an Agreement with respect to a Trust Fund which consists of or
includes Private Asset Backed Securities may contain provisions similar to
those described herein but will be more fully described in the related
Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund
to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the
related Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Securities to the Depositor in exchange for the
Loans. Each Loan will be identified in a schedule appearing as an exhibit to
the related Agreement. Such schedule will include information as to the
outstanding principal balance of each Loan after application of payments due
on or before the Cut-off Date, as well as information regarding the Loan Rate
or APR, the current scheduled monthly payment of principal and interest, the
maturity of the Loan, the Combined Loan-to-Value Ratios at origination and
certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and,
other than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order
to give notice of the right, title and interest of Securityholders to the
Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the
Trustee as the secured party and identifying all Home Improvement Contracts
as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trustee. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "Certain Legal Aspects of the Loans--The Home
Improvement Contracts."
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to
the custodian hereinafter referred to) as to each Home Equity Loan, among
other things, (i) the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording
office, in which case the Depositor will deliver or cause to be delivered a
copy of such Mortgage together with a certificate that the original of such
Mortgage was delivered to such recording office), (iii) an assignment of the
Mortgage to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, and (iv) such other security documents,
including those relating to any senior interests in the Property, as may be
specified in the related Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public
office for real property records, except in states in which, in the opinion
of counsel acceptable to the Trustee, such recording is not required to
protect the Trustee's interest in such Loans against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer
will notify the related Seller. If the Seller cannot cure the omission or
defect within a specified number of days after receipt of such notice (or
such other period as may be specified in the related Prospectus Supplement),
the Seller will be obligated either (i) to purchase the related Loan from the
Trust at the Purchase Price or (ii) to remove such Loan from the Trust Fund
and substitute in its place one or more other Loans. There can be no
assurance that a Seller will fulfill this purchase or substitution
obligation. Although the Master Servicer may be obligated to enforce such
obligation to the extent described above under "Loan Program-Representations
by Sellers; Repurchases", neither the Master Servicer nor the Depositor will
be obligated to purchase or replace such Loan if the Seller defaults on its
obligation, unless such breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Depositor, as the
case may be. Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in,
a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Securityholders in a Loan, the Master Servicer will be obligated
either to cure the breach in all material respects or to purchase or replace
the Loan at the Purchase Price. Unless otherwise specified in the
related Prospectus Supplement, this obligation to cure, purchase or
substitute constitutes the sole remedy available to the Securityholders or the
Trustee for such a breach of representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated
Private Asset Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund-Private Asset Backed Securities" herein. Each
Private Asset Backed Security will be identified in a schedule appearing as
an exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual pass-
through rate or interest rate and maturity date and certain other pertinent
information for each Private Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a
Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing Agreement
(as defined below under "-Sub-Servicing of Loans") will establish and
maintain an account (the "Sub-Servicing Account") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-
Servicing Account must be established with a Federal Home Loan Bank or with a
depository institution (including the Sub-Servicer itself) whose accounts are
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")) of the FDIC. If a Sub-Servicing Account
is maintained at an institution that is a Federal Home Loan Bank or an FDIC-
insured institution and, in either case, the amount on deposit in the Sub-
Servicing Account exceeds the FDIC insurance coverage amount, then such
excess amount must be remitted to the Master Servicer within one business day
of receipt. In addition, the Sub-Servicer must maintain a separate account
for escrow and impound funds relating to the Loans. Each Sub-Servicer is
required to deposit into its Sub-Servicing Account on a daily basis all
amounts described below under "-Sub-Servicing of Loans" that are received by
it in respect of the Loans, less its servicing or other compensation. On or
before the date specified in the Sub-Servicing Agreement, the Sub-Servicer
will remit or cause to be remitted to the Master Servicer or the Trustee all
funds held in the Sub-Servicing Account with respect to Loans that are
required to be so remitted. The Sub-Servicer may also be required to advance
on the scheduled date of remittance an amount corresponding to any monthly
installment of interest and/or principal, less its servicing or other
compensation, on any Loan for which payment was not received from the
mortgagor. Unless otherwise specified in the related Prospectus Supplement,
any such obligation of the Sub-Servicer to advance will continue up to and
including the first of the month following the date on which the related
Property is sold at a foreclosure sale or is acquired on behalf of the
Securityholders by deed in lieu of foreclosure, or until the related Loan is
liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of which) are rated in one of the two
highest rating categories by the Rating Agency or Rating Agencies that rated
one or more classes of the related Series of Securities, (ii) an account or
accounts the deposits in which are fully insured by either the BIF or SAIF,
(iii) an account or accounts the deposits in which are insured by the BIF or
SAIF (to the limits established by the FDIC), and the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Securityholders have a claim with respect to the funds in the Security
Account or a perfected first priority security interest against any
collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Security Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts
in the Security Account is limited to United States government securities and
other high-quality investments ("Permitted Investments"). A Security Account
may be maintained as an interest bearing account or the funds held therein
may be invested pending each succeeding Distribution Date in Permitted
Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive
any such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security
Account the amount of any loss immediately as realized. The Security Account
may be maintained with the Master Servicer or with a depository institution
that is an affiliate of the Master Servicer, provided it meets the standards
set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent
applicable and provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured Expenses")
incurred, and unreimbursed advances made, by the related Sub-Servicer,
if any) of the hazard insurance policies and any Primary Mortgage
Insurance Policies, to the extent such proceeds are not applied to the
restoration of the property or released to the Mortgagor in accordance
with the Master Servicer's normal servicing procedures (collectively,
"Insurance Proceeds") and all other cash amounts (net of unreimbursed
expenses incurred in connection with liquidation or foreclosure
("Liquidation Expenses") and unreimbursed advances made, by the related
Sub-Servicer, if any) received and retained in connection with the
liquidation of defaulted Loans, by foreclosure or otherwise
("Liquidation Proceeds"), together with any net proceeds received on a
monthly basis with respect to any properties acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Seller as described under "Loan Program-Representations by Sellers;
Repurchases" or "-Assignment of Trust Fund Assets" above and all
proceeds of any Loan repurchased as described under "-Termination;
Optional Termination" below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor
will deposit the Pre-Funded Amount on the related Closing Date. The Pre-
Funded Amount will not exceed 25% of the initial aggregate principal amount
of the Certificates and Notes of the related Series. The Pre-Funded Amount
will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. The Funding Period,
if any, for a Trust Fund will begin on the related Closing Date and
will end on the date specified in the related Prospectus Supplement,
which in no event will be later than the date that is three months after the
Closing Date. Any amounts remaining in the Pre-Funding Account at the end of
the Funding Period will be distributed to the related Securityholders in
the manner and priority specified in the related Prospectus Supplement, as
a prepayment of principal of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the Sub-
Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely
between the Master Servicer and the Sub-Servicer, the Agreement pursuant to
which a Series of Securities is issued will provide that, if for any reason
the Master Servicer for such Series of Securities is no longer the Master
Servicer of the related Loans, the Trustee or any successor Master Servicer
must recognize the Sub-Servicer's rights and obligations under such Sub-
Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer 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 of
mortgage loans. Such functions generally include collecting payments from
mortgagors or obligors and remitting such collections to the Master Servicer;
maintaining hazard insurance policies as described herein and in any related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any
such settlement; maintaining escrow or impoundment accounts of mortgagors or
obligors for payment of taxes, insurance and other items required to be paid
by the mortgagor or obligor pursuant to the related Loan; processing
assumptions or substitutions, although, the Master Servicer is generally
required to exercise due-on-sale clauses to the extent such exercise is
permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Properties under certain circumstances; maintaining accounting
records relating to the Loans; and, to the extent specified in the related
Prospectus Supplement, maintaining additional insurance policies or credit
support instruments and filing and settling claims thereunder. A Sub-
Servicer will also be obligated to make advances in respect of delinquent
installments of interest and/or principal on Loans, as described more fully
above under "-Payments on Loans; Deposits to Security Account", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under
the Agreement. The Master Servicer may purchase the servicing of Loans if
the Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "-Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master 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 omissions policy with respect to its
officers, employees and other persons acting on its behalf or on behalf of
the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to
the Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-
Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be
a Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will 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. In the event of such an assumption, the Master
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 new Sub-Servicing
Agreements may contain provisions different from those which are in effect in
the original Sub-Servicing Agreement. However, each Agreement will provide
that any such amendment or new agreement may not be inconsistent with or
violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to loans that are comparable to the
Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Loan and (ii) to the extent not inconsistent with the
coverage of such Loan by a Pool Insurance Policy, Primary Mortgage Insurance
Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or alternative
arrangements, if applicable, arrange with a borrower a schedule for the
liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Both the Sub-Servicer and the Master
Servicer may be obligated to make Advances during any period of such an
arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such
rights is permitted by applicable law. If these conditions are not met or if
the Master Servicer reasonably believes it is unable under applicable law to
enforce such due-on-sale clause, or the Master Servicer will enter into or
cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the
Loans-Due-on-Sale Clauses". In connection with any such assumption, the
terms of the related Loan may not be changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary
for the type of Property in the state in which such Property is located. All
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or
released to the mortgagor or obligor in accordance with the Master Servicer's
normal servicing procedures) will be deposited in the related Security
Account. In the event that the Master Servicer maintains a blanket policy
insuring against hazard losses on all the Loans comprising part of a Trust
Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. Such blanket policy may
contain a deductible clause, in which case the Master Servicer will be
required to deposit from its own funds into the related Security Account
the amounts which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state
laws, and most such policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mud flows), nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all inclusive. If the Property securing a Loan is
located in a federally designated special flood area at the time of
origination, the Master Servicer will require the mortgagor or obligor to
obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time
to carry insurance of a specified percentage of the full replacement value of
the insured property in order to recover the full amount of any partial loss.
If the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the larger
of (i) the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the improvements
damaged or destroyed or (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of such improvements. Since the amount of hazard insurance the Master
Servicer may cause to be maintained on the improvements securing the Loans
declines as the principal balances owing thereon decrease, and since improved
real estate generally has appreciated in value over time in the past, the
effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special
hazard insurance policy will be obtained to insure against certain of the
uninsured risks described above. See "Credit Enhancement-Special Hazard
Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master 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 Securityholders on liquidation of
the Loan after reimbursement of the Master Servicer for its expenses and (ii)
that such expenses will be recoverable by it from related Insurance Proceeds
or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will
realize a loss in the amount of such difference plus the aggregate of
expenses incurred by the Master Servicer in connection with such proceedings
and which are reimbursable under the Agreement. In the unlikely event that
any such proceedings result in a total recovery which is, after reimbursement
to the Master Servicer of its expenses, in excess of the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders,
the Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan and, unless otherwise specified in the related Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added
to any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan. In the event that the Master Servicer has expended its own
funds to restore the damaged Property and such funds have not been reimbursed
under the related hazard insurance policy, it will be entitled to withdraw
from the Security Account out of related Liquidation Proceeds or Insurance
Proceeds in an amount equal to such expenses incurred by it, in which event
the Trust Fund may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Master Servicer, no such payment or recovery will result in a
recovery to the Trust Fund which exceeds the principal balance of the
defaulted Loan together with accrued interest thereon. See "Credit
Enhancement".
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a
Primary Mortgage Insurance Policy with regard to each Loan for which such
coverage is required. The Master Servicer will not cancel or refuse to renew
any such Primary Mortgage Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with
an insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid
principal amount of the covered Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary
Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in
the origination of the Loans; (ii) failure to construct the Property subject
to the Loan in accordance with specified plans; (iii) physical damage to the
Property; and (iv) the related Master Servicer or Sub-servicer not being
approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary
and approved in advance by the Primary Insurer, (1) real estate property
taxes, (2) all expenses required to maintain the related Property in at least
as good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees; (ii) in the event of any physical loss
or damage to the Property, to have the Property restored and repaired to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to the Primary Insurer good and merchantable title to and possession of the
Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the Sub-
Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Securityholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy,
and will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Loans. As set forth
above, all collections by or on behalf of the Master Servicer under any
Primary Mortgage Insurance Policy and, when the Property has not been
restored, the hazard insurance policy, are to be deposited in the Security
Account, subject to withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the
related Primary Mortgage Insurance Policy, if any, the Master 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
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. In the unlikely event that any such proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Master Servicer will
be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation with respect to such Loan and,
except as otherwise specified in the Prospectus Supplement, amounts
representing the balance of such excess, exclusive of any amount required by
law to be forwarded to the related borrower, as additional servicing
compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified
in the related Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Loan, such amounts will decrease as
the Loans amortize. In addition to primary compensation, the Master Servicer
or the Sub-Servicers may be entitled to retain all assumption fees and late
payment charges, to the extent collected from borrowers, and, if so provided
in the related Prospectus Supplement, any prepayment penalties and any
interest or other income which may be earned on funds held in the Security
Account or any Sub-Servicing Account. Unless otherwise specified in the
related Prospectus Supplement, any Sub-Servicer will receive a portion of the
Master Servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay
from its servicing compensation certain expenses incurred in connection with
its servicing of the Loans, including, without limitation, payment of any
premium for any insurance policy, guaranty, surety or other form of credit
enhancement as specified in the related Prospectus Supplement, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC,
the servicing by or on behalf of the Master Servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans
or Private Asset Backed Securities by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related Sub-
Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law.
The Master Servicer may, however, be removed from its obligations and duties
as set forth in the Agreement. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Agreement, or for errors
in judgment; provided, however, that neither the Master Servicer, the
Depositor nor any such person will be protected against any liability which
would otherwise be imposed by reason of wilful misfeasance or gross
negligence in the performance of duties thereunder or by reasons of reckless
disregard of obligations and duties thereunder. To the extent provided in
the related Agreement, the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor may be
entitled to indemnification by the related Trust Fund and may be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Securities, other than any
loss, liability or expense related to any specific Loan or Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In
addition, each Agreement will provide that neither the Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Depositor, as the case may be, will be entitled to
be reimbursed therefor out of funds otherwise distributable to
Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer
to distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Securities of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced
by such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or to
the Master Servicer, the Depositor and the Trustee by the holders of
Securities of any class evidencing not less than 25% of the aggregate
Percentage Interests constituting such class; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will
be sold only under the circumstances and in the manner specified in the
related Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities of any class evidencing not less than 51% of the aggregate
Percentage Interests constituting such class and under such other
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of its rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Trust Fund Assets,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the Master Servicer under the Agreement, including, if
specified in the related Prospectus Supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee
and any such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made, and
such breach is not cured within sixty (60) days after notice thereof is given
in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series have
a Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of more than 50% of the Percentage Interests of
the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and
to continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes of
such Series as they would have become due if there had not been such a
declaration. In addition, the Trustee may not sell or otherwise liquidate
the collateral securing the Notes of a Series following an Event of Default,
other than a default in the payment of any principal or interest on any Note
of such Series for thirty (30) days or more, unless (a) the holders of 100%
of the Percentage Interests of the Notes of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding
Notes of such Series at the date of such sale or (c) the Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes
had not been declared due and payable, and the Trustee obtains the consent of
the holders of 662/3% of the Percentage Interests of the Notes of such
Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in
the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Trustee will have a prior lien on the proceeds of
any such liquidation for unpaid fees and expenses. As a result, upon the
occurrence of such an Event of Default, the amount available for distribution
to the Noteholders would be less than would otherwise be the case. However,
the Trustee may not institute a proceeding for the enforcement of its lien
except in connection with a proceeding for the enforcement of the lien of the
Indenture for the benefit of the Noteholders after the occurrence of such an
Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
holders of a majority of the then aggregate outstanding amount of the Notes of
such Series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to
the Notes of such Series, and the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series may, in certain
cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or
consent of all the holders of the outstanding Notes of such Series affected
thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided
that such action will not adversely affect in any material respect the
interests of any Securityholder. In addition, to the extent provided in the
related Agreement, an Agreement may be amended without the consent of any of
the Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is
necessary or helpful to maintain such qualification. Except as otherwise
specified in the related Prospectus Supplement, each Agreement may also be
amended by the Depositor, the Master Servicer and the Trustee with consent of
holders of Securities of such Series evidencing not less than 66% of the
aggregate Percentage Interests of each class affected thereby for the purpose
of adding any provisions to or changing in an manner or eliminating any of
the provisions of the Agreement or of modifying in any manner the rights of
the holders of the related Securities; provided, however, that no such
amendment may (i) reduce in any manner the amount of or delay the timing of,
payments received on Loans which are required to be distributed on any
Security without the consent of the holder of such Security, or (ii) reduce
the aforesaid percentage of Securities of any class of holders which are
required to consent to any such amendment without the consent of the holders
of all Securities of such class covered by such Agreement then outstanding.
If a REMIC election is made with respect to a Trust Fund, the Trustee will
not be entitled to consent to an amendment to the related Agreement without
having first received an opinion of counsel to the effect that such amendment
will not cause such Trust Fund to fail to qualify as a REMIC.
TERMINATIONS; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling
and Servicing Agreement and Trust Agreement for each Series of Securities
will terminate upon the payment to the related Securityholders of all amounts
held in the Security Account or by the Master Servicer and required to be
paid to them pursuant to such Agreement following the later of (i) the final
payment of or other liquidation of the last of the Trust Fund Assets subject
thereto or the disposition of all property acquired upon foreclosure of any
such Trust Fund Assets remaining in the Trust Fund and (ii) the purchase by
the Master Servicer or, if REMIC treatment has been elected and if specified
in the related Prospectus Supplement, by the holder of the residual interest
in the REMIC (see "Certain Material Federal Income Tax Consequences" below),
from the related Trust Fund of all of the remaining Trust Fund Assets and all
property acquired in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of the Trust Fund Assets at the Cut-off
Date for the Series. The foregoing is subject to the provision that if a
REMIC election is made with respect to a Trust Fund, any repurchase pursuant
to clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the
Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such Series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such Series, to replace stolen, lost or mutilated Notes of
such Series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of and each installment of interest on the Notes of such Series
on the last scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Indenture and the
Notes of such Series. In the event of any such defeasance and discharge of
Notes of such Series, holders of Notes of such Series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Depositor, the Master
Servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (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 security for the Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property subject to the loan is located.
A mortgage creates a lien upon the real property encumbered by the mortgage,
which lien is generally not prior to the lien for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two
parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner 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. A security deed and a deed to secure debt are special types
of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed
or deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-
judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any
default by the borrower under the terms of the note or deed of trust. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In general, the borrower, or any other person having
a junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, the borrower or junior lienholder no longer has the right to reinstate
the loan and must pay the loan in full to prevent the scheduled foreclosure
sale. If the deed of trust is not reinstated, a notice of sale must be
posted in a public place and, in most states, published for a specific period
of time in one or more newspapers. In addition, some state laws require that
a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest 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 parties. When the mortgagee's right to foreclosure is contested, the
legal proceedings necessary to resolve the issue can be time consuming.
After the completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
court officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided
in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure
in which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such judgment is
available. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burden 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.
Any loss may be reduced by the receipt of any mortgage guaranty insurance
proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of
the borrower's defaults under the loan documents. Some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. 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 does not
involve sufficient state action to afford constitutional protection to the
borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees".
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states,
contamination of a property may give risks to a lien on the property to
assure the payment of the costs of clean-up. In several states such a lien
has priority over the lien of an existing mortgage against such property. In
addition, under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the United States
Environmental Protection Agency ("EPA") may impose a lien on property where
EPA has incurred clean-up costs. However, a CERCLA lien is subordinate to
pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that
a secured lender may be held liable as an "owner" or "operator" for the costs
of addressing releases or threatened releases of hazardous substances at a
property, even though the environmental damage or threat was caused by a
prior or current owner or operator. CERCLA imposes liability for such costs
on any and all "responsible parties," including owners or operators.
However, CERCLA excludes from the definition of "owner or operator" a secured
creditor who holds indicia of ownership primarily to protect its security
interest (the "secured creditor exclusion") but without "participating in the
management" of the Property. Thus, if a lender's activities begin to
encroach on the actual management of a contaminated facility or property, the
lender may incur liability as an "owner or operator" under CERCLA.
Similarly, if a lender forecloses and takes title to a contaminated facility
or property, the lender may incur CERCLA liability in various circumstances,
including, but not limited to, when it holds the facility or property as an
investment (including leasing the facility or property to third party), or
fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a
matter of judicial interpretation of the statutory language, and court
decisions have been inconsistent. In 1990, the Court of Appeals for the
Eleventh Circuit suggested that the mere capacity of the lender to influence
a borrower's decisions regarding disposal of hazardous substances was
sufficient participation in the management of the borrower's business to deny
the protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act of
1996, which was signed into law by President Clinton on September 30, 1996.
The new legislation provides that in order to be deemed to have participated
in the management of a mortgaged property, a lender must actually participate
in the operational affairs of the property or the borrower. The legislation
also provides that participation in the management of the property does not
include "merely having the capacity to influence, or unexercised right to
control" operations. Rather, a lender will lose the protection of the
secured creditor exemption only if it exercises decision-making control over
the borrower's environmental compliance and hazardous substance handling
and disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous
owner or operator, who created the environmental hazard, but those persons or
entities may be bankrupt or otherwise judgment proof. The costs associated
with environmental cleanup may be substantial. It is conceivable that such
costs arising from the circumstances set forth above would result in a loss
to Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws
other than CERCLA, in particular Subtitle I of the federal Resource
Conservation and Recovery Act ("RCRA"), which regulates underground petroleum
storage tanks (except heating oil tanks). In addition, under the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
the protections accorded to lenders under CERCLA are also accorded to the
holders of security interests in underground storage tanks. It should be
noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors.
Except as otherwise specified in the related Prospectus Supplement, at
the time the Loans were originated, no environmental assessment or a very
limited environmental assessment of the Properties was conducted.
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 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 would
defeat the title of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. 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 adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the fair market value
of the real property sold at the foreclosure sale. 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, when applicable, is that lenders will usually
proceed first against the security rather than bringing a personal action
against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids
at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon its security. For example, in
a proceeding under the federal Bankruptcy Code, a lender may not foreclose on
the Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is
not the debtor's principal residence and the court determines that the value
of the Property is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the Property as of
the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the
monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to
any automatic stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the aggregate
amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien
of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of loans secured
by Single Family Properties. These laws include 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
regulations. These federal and state laws impose specific statutory
liabilities upon lenders who fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the loans or contracts.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will provide that
if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. The
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act"), subject to certain exceptions, preempts state constitutional,
statutory and case law prohibiting the enforcement of due-on-sale clauses.
As a result, due-on-sale clauses have become generally enforceable except in
those states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain
Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St. Germain
Act sets forth nine specific instances in which a mortgagee covered by the
Act may not exercise its rights under a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. The inability to
enforce a due-on-sale clause may result in transfer of the related Property
to an uncreditworthy person, which could increase the likelihood of default
or may result in a mortgage bearing an interest rate below the current market
rate being assumed by a new home buyer, which may affect the average life of
the Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also
limit the amounts that a lender may collect from a borrower as an additional
charge if the loan is prepaid. Late charges and prepayment fees are
typically retained by servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
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 security
agreements receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that, in some cases involving the sale by a
trustee under a deed of trust or by a mortgagee under a mortgage having a
power of sale, there is insufficient state action to afford constitutional
protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Federal Home Loan Bank Board
(the "FHLBB") prohibit the imposition of a prepayment penalty or equivalent
fee in connection with the acceleration of a loan by exercise of a due-on-
sale clause. A mortgagee to whom a prepayment in full has been tendered may
be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to Loans having higher mortgage rates, may increase
the likelihood of refinancing or other early retirements of the Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("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. The Office of
Thrift Supervision, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1993
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real
estate (such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the Uniform Commercial Code (the
"UCC"). Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under
the related Agreement, the Depositor will transfer physical possession of the
contracts to the Trustee or a designated custodian or may retain possession
of the contracts as custodian for the Trustee. In addition, the Depositor
will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the
contracts. Unless otherwise specified in the related Prospectus Supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the Depositor to the Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured
by the Home Improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such Home Improvements to
secure all or part of the purchase price of such Home Improvements and
related services. A financing statement generally is not required to be
filed to perfect a purchase money security interest in consumer goods. Such
purchase money security interests are assignable. In general, a purchase
money security interest grants to the holder a security interest that has
priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral
subject to a purchase money security interest becomes a fixture, in order for
the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In
general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building
material or other goods that are deemed to lose such characterization upon
incorporation of such materials into the related property, will not be
secured by a purchase money security interest in the Home Improvement being
financed.
Enforcement of Security Interest in Home Improvements. So long as the
Home Improvement has not become subject to the real estate law, a creditor
can repossess a Home Improvement securing a contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10 to 30
days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of
the unit that the debtor may redeem at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to all
claims and defenses which the debtor could assert against the seller of
goods. Liability under this rule is limited to amounts paid under a
contract; however, the obligor also may be able to assert the rule to set
off remaining amounts due as a defense against a claim brought by the Trustee
against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and
lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of
these laws, the failure to comply with their provisions may affect the
enforceability of the related contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"),
provides that, subject to the following conditions, state usury limitations
shall not apply to any contract which is secured by a first lien on certain
kinds of consumer goods. The contracts would be covered if they satisfy
certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an
installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the
property and enters into an agreement with the purchaser hereinafter referred
to in this section as the "borrower") for the payment of the purchase price,
plus interest, over the term of such contract. Only after full performance
by the borrower of the contract is the lender obligated to convey title to
the property to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the Installment Contract, the borrower is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender
in such a situation does not have to foreclose in order to obtain title to
the property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may
be required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the Installment
Contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is
repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the Master Servicer to collect full amounts of interest on certain of the
Loans. Any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the Securityholders. The Relief
Act also imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Loan during the borrower's period of
active duty status. Moreover, the Relief Act permits the extension of a
Loan's maturity and the re-adjustment of its payment schedule beyond the
completion of military service. Thus, in the event that such a Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other
lenders or institutional investors, the rights of the Trust Fund (and
therefore the Securityholders), as mortgagee under any such junior mortgage,
are subordinate to those of any mortgagee under any senior mortgage. The
senior mortgagee has the right to receive hazard insurance and condemnation
proceeds and to cause the property securing the Loan to be sold upon default
of the mortgagor, thereby extinguishing the junior mortgagee's lien unless
the junior mortgagee asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure such default and bring the senior loan current,
in either event adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the mortgage or deed of trust,
no notice of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage, in such order as the mortgagee may
determine. 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, the mortgagee or beneficiary under underlying senior mortgages
will have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness,
in most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee under the
mortgage. Upon a failure of the mortgagor to perform any of these
obligations, the mortgagee is given the right under certain mortgages to
perform the obligation itself, at its election, with the mortgagor agreeing
to reimburse the mortgagee for any sums expended by the mortgagee on behalf
of the mortgagor. All sums so expended by the mortgagee become part of the
indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the
beneficiary or lender are to be secured by the deed of trust or mortgage.
Any amounts so advanced after the Cut-off Date with respect to any mortgage
will not be included in the Trust Fund. The priority of the lien securing
any advance made under the clause may depend in most states on whether the
deed of trust or mortgage is called and recorded as a credit line deed of
trust or mortgage. If the beneficiary or lender advances additional amounts,
the advance is entitled to receive the same priority as amounts initially
advanced under the trust deed or mortgage, notwithstanding the fact that
there may be junior trust deeds or mortgages and other liens which intervene
between the date of recording of the trust deed or mortgage and the date of
the future advance, and notwithstanding that the beneficiary or lender had
actual knowledge of such intervening junior trust deeds or mortgages and
other liens at the time of the advance. In most states, the trust deed or
mortgage lien securing mortgage loans of the type which includes home equity
credit lines applies retroactively to the date of the original recording of
the trust deed or mortgage, provided that the total amount of advances under
the home equity credit line does not exceed the maximum specified principal
amount of the recorded trust deed or mortgage, except as to advances made
after receipt by the lender of a written notice of lien from a judgment lien
creditor of the trustor.
THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including
the unpaid principal balance of the loan, but only to the extent of the
insurance coverage available in the lender's FHA insurance coverage reserve
account. The owner of the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan
means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes single
family improvement loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan,
the borrower makes application directly to a lender without any assistance
from a dealer, which application may be filled out by the borrower or by a
person acting at the direction of the borrower who does not have a financial
interest in the loan transaction, and the lender may disburse the loan
proceeds solely to the borrower or jointly to the borrower and other parties
to the transaction. With respect to a dealer loan, the dealer, who has a
direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower
in obtaining the loan from the lender. The lender may disburse proceeds
solely to the dealer or the borrower or jointly to the borrower and the
dealer or other parties to the transaction. With respect to a dealer Title I
Loan, a dealer may include a seller, a contractor or supplier of goods or
services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually where a borrower has an irregular flow of income.
The first or last payments (or both) may vary in amount but may not exceed
150% of the regular installment payment, and the first payment may be due no
later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest
rate must be negotiated and agreed to by the borrower and the lender and must
be fixed for the term of the loan and recited in the note. Interest on an
insured loan must accrue from the date of the loan and be calculated
according to the actuarial method. The lender must assure that the note and
all other documents evidencing the loan are in compliance with applicable
federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must
determine whether the borrower's income will be adequate to meet the periodic
payments required by the loan, as well as the borrower's other housing and
recurring expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of HUD unless the lender
determines and documents in the loan file the existence of compensating
factors concerning the borrower's creditworthiness which support approval of
the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with
other federal loan programs). If, after a loan has been made and reported
for insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the
FHA. In such case, provided that the validity of any lien on the property
has not been impaired, the insurance of the loan under the Title I Program
will not be affected unless such material misstatements of fact or misuse of
loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable
fees and charges allowed under the Title I Program; provided that such
maximum amount does not exceed $25,000 (or the current applicable amount) for
a single family property improvement loan. Generally, the term of a Title I
Loan may not be less than six months nor greater than 20 years and 32 days.
A borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding balance
of all Title I Loans in the same property does not exceed the maximum loan
amount for the type of Title I Loan thereon having the highest permissible
loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property,
a lease thereof for a term expiring at least six months after the final
maturity of the Title I Loan or a recorded land installment contract for the
purchase of the real property. In the case of a Title I Loan with a total
principal balance in excess of $15,000, if the property is not occupied by
the owner, the borrower must have equity in the property being improved at
least equal to the principal amount of the loan, as demonstrated by a current
appraisal. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or
deed of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary
of HUD has published a list of items and activities which cannot be financed
with proceeds from any Title I Loan and from time to time the Secretary of
HUD may amend such list of items and activities. With respect to any dealer
Title I Loan, before the lender may disburse funds, the lender must have in
its possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender
is required to obtain, promptly upon completion of the improvements but not
later than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower.
The lender is required to conduct an on-site inspection on any Title I Loan
where the principal obligation is $7,500 or more, and on any direct Title I
Loan where the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program the FHA establishes
an insurance coverage reserve account for each lender which has been granted
a Title I insurance contract. The amount of insurance coverage in this
account is a maximum of 10% of the amount disbursed, advanced or expended by
the lender in originating or purchasing eligible loans registered with FHA
for Title I insurance, with certain adjustments. The balance in the
insurance coverage reserve account is the maximum amount of insurance claims
the FHA is required to pay. Loans to be insured under the Title I Program
will be registered for insurance by the FHA and the insurance coverage
attributable to such loans will be included in the insurance coverage
reserve account for the originating or purchasing lender following the
receipt and acknowledgment by the FHA of a loan report on the prescribed form
pursuant to the Title I regulations. The FHA charges a fee of 0.50% per
annum of the net proceeds (the original balance) of any eligible loan so
reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured
loan is prepaid during the year, FHA will not refund or abate the insurance
premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount
of the FHA insurance claims approved for payment relating to such insured
loans and (ii) the amount of insurance coverage attributable to insured loans
sold by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. The balance of the lender's FHA
insurance coverage reserve account will be further adjusted as required under
Title I or by the FHA, and the insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to
do so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such
eligible loans registered with the FHA for insurance under the Title I
Program. The Secretary of HUD may transfer insurance coverage between
insurance coverage reserve accounts with earmarking with respect to a
particular insured loan or group of insured loans when a determination is
made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage
reserve account during any October 1 to September 30 period without the prior
approval of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after
the lender or its agent has contacted the borrower in a face-to-face meeting
or by telephone to discuss the reasons for the default and to seek its cure.
If the borrower does not cure the default or agree to a modification
agreement or repayment plan, the lender will notify the borrower in writing
that, unless within 30 days the default is cured or the borrower enters into
a modification agreement or repayment plan, the loan will be accelerated and
that, if the default persists, the lender will report the default to an
appropriate credit agency. The lender may rescind the acceleration of
maturity after full payment is due and reinstate the loan only if the
borrower brings the loan current, executes a modification agreement or agrees
to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If
the lender chooses to proceed against the property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
property), the lender may file an insurance claim only with the prior
approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local
laws in carrying out any foreclosure or repossession, and evidence that
the lender has properly filed proofs of claims, where the borrower is
bankrupt or deceased. Generally, a claim for reimbursement for loss on any
Title I Loan must be filed with the FHA no later than 9 months after the date
of default of such loan. Concurrently with filing the insurance claim, the
lender shall assign to the United States of America the lender's entire
interest in the loan note (or a judgment in lien of the note), in any
security held and in any claim filed in any legal proceedings. If, at the
time the note is assigned to the United States, the Secretary has reason to
believe that the note is not valid or enforceable against the borrower, the
FHA may deny the claim and reassign the note to the lender. If either such
defect is discovered after the FHA has paid a claim, the FHA may require the
lender to repurchase the paid claim and to accept a reassignment of the loan
note. If the lender subsequently obtains a valid and enforceable judgment
against the borrower, the lender may resubmit a new insurance claim with an
assignment of the judgment. Although the FHA may contest any insurance claim
and make a demand for repurchase of the loan at any time up to two years from
the date the claim was certified for payment and may do so thereafter in the
event of fraud or misrepresentation on the part of the lender, the FHA has
expressed an intention to limit the period of time within which it will take
such action to one year from the date the claim was certified for payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the
purposes hereof, the "Claimable Amount" means an amount equal to 90% of the
sum of: (a) the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with adjustments thereto
if the lender has proceeded against property securing such loan; (b) the
interest on the unpaid amount of the loan obligation from the date of default
to the date of the claim's initial submission for payment plus 15 calendar
days (but not to exceed 9 months from the date of default), calculated at the
rate of 7% per annum; (c) the uncollected court costs; (d) the attorney's
fees not to exceed $500; and (e) the expenses for recording the assignment of
the security to the United States.
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation Z,
which requires certain disclosures to the borrowers regarding the terms of
the Loans; (ii) the Equal Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; and (iii) the Fair Credit Reporting Act, which regulates
the use and reporting of information related to the borrower's credit
experience. Violations of certain provisions of these federal laws may limit
the ability of the Sellers to collect all or part of the principal of or
interest on the Loans and in addition could subject the Sellers to damages
and administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel
to the Depositor (in such capacity, "Tax Counsel"). The summary is based
upon the provisions of the Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code. Prospective investors may
wish to consult their own tax advisers concerning the federal, state,
local and any other tax consequences as relates specifically to such
investors in connection with the purchase, ownership and disposition of
the Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii)
an election is made to treat the Trust Fund relating to a particular Series
of Securities as a real estate mortgage investment conduit ("REMIC") under
the Internal Revenue Code of 1986, as amended (the "Code"); (iii) the
Securities represent an ownership interest in some or all of the assets
included in the Trust Fund for a Series; or (iv) an election is made to treat
the Trust Fund relating to a particular Series of Certificates as a
partnership. The Prospectus Supplement for each Series of Securities will
specify how the Securities will be treated for federal income tax purposes
and will discuss whether a REMIC election, if any, will be made with respect
to such Series.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests
in a REMIC ("Regular Interest Securities") or represent interests in a
grantor trust, Tax Counsel is of the opinion that: (i) Securities held by a
mutual savings bank or domestic building and loan association will represent
interests in "qualifying real property loans" within the meaning of Code
section 593(d); (ii) Securities held by a domestic building and loan
association will constitute "loans... secured by an interest in real
property" within the meaning of Code section 7701(a)(19)(C)(v); and (iii)
Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c)(5)(A) and interest
on Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the
meaning of Code section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to holders in the same
manner as evidences of indebtedness issued by the REMIC. Stated interest on
the Regular Interest Securities will be taxable as ordinary income and taken
into account using the accrual method of accounting, regardless of the
holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be
includible in income by holders thereof in accordance with their usual
methods of accounting. Securities characterized as debt for federal income
tax purposes and Regular Interest Securities will be referred to hereinafter
collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at
a discount may, be issued with "original issue discount" ("OID"). The
following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations
issued thereunder on February 2, 1994 (the "OID Regulations"). A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero
if it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than
a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The
issue price of a Debt Security also includes the amount paid by an initial Debt
Security holder for accrued interest that relates to a period prior to the
issue date of the Debt Security. The stated redemption price at maturity
of a Debt Security includes the original principal amount of the Debt
Security, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payment. Certain Debt
Securities may provide for default remedies in the event of late payment or
nonpayment of interest. In the opinion of Tax Counsel, the interest on such
Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments will be included in the Debt Security's stated redemption
price at maturity and taxed as OID. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Debt Securities with
respect to which deferred interest will accrue, will not constitute qualified
stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Debt Security is either longer or shorter than
the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included in
the stated redemption price at maturity and tested under the de minimis rule
described below. In the case of a Debt Security with a long first period
which has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own
tax advisors to determine the issue price and stated redemption price at
maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the
Debt Security is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue
date until each distribution in reduction of stated redemption price at
maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Debt Security and the denominator of which is the stated
redemption price at maturity of the Debt Security. Holders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the Debt Security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as
well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i)
such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating
rate," an "objective rate," or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates or defers
interest payments on such Debt Security. In the case of Compound Interest
Securities, certain Interest Weighted Securities, and certain of the other
Debt Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will
be included in the stated redemption price.
The Internal Revenue Services (the "IRS") recently issued proposed
regulations (the "Proposed Contingent Regulations") governing the calculation
of OID on instruments having contingent interest payments. The Proposed
Contingent Regulations, although not effective until 60 days after finalized,
represent the only guidance regarding the views of the IRS with respect to
contingent interest instruments and specifically do not apply for purposes of
calculating OID on debt instruments subject to Code Section 1272(a)(6), such
as the Debt Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the Trustee intends to base its
computation on Code Section 1272(a)(6) and the OID Regulations as described
in this 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 holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount.
The amount of OID includible in income by a holder will be computed by
allocating to each day during a taxable year a pro rata portion of the
original issue discount that accrued during the relevant accrual period. In
the case of a Debt Security that is not a Regular Interest Security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the Loans, the amount of OID includible in income of a holder
for an accrual period (generally the period over which interest accrues on
the debt instrument) will equal the product of the yield to maturity of the
Debt Security and the adjusted issue price of the Debt Security, reduced by
any payments of qualified stated interest. The adjusted issue price is the
sum of its issue price plus prior accruals or OID, reduced by the total
payments made with respect to such Debt Security in all prior periods, other
than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject
to acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account
the anticipated rate of prepayments assumed in pricing the debt instrument
(the "Prepayment Assumption"). The amount of OID that will accrue during an
accrual period on a Pay-Through Security is the excess (if any) of the sum of
(a) the present value of all payments remaining to be made on the Pay-Through
Security as of the close of the accrual period and (b) the payments during
the accrual period of amounts included in the stated redemption price of the
Pay-Through Security, over the adjusted issue price of the Pay-Through
Security at the beginning of the accrual period. The present value of the
remaining payments is to be determined on the basis of three factors: (i)
the original yield to maturity of the Pay-Through Security (determined on the
basis of compounding at the end of each accrual period and properly adjusted
for the length of the accrual period), (ii) events which have occurred before
the end of the accrual period and (iii) the assumption that the remaining
payments will be made in accordance with the original Prepayment Assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect
to the Loans at a rate that exceeds the Prepayment Assumption, and to
decrease (but not below zero for any period) the portions of original issue
discount required to be included in income by a holder of a Pay-Through
Security to take into account prepayments with respect to the Loans at a rate
that is slower than the Prepayment Assumption. Although original issue
discount will be reported to holders of Pay-Through Securities based on the
Prepayment Assumption, no representation is made to holders that Loans will
be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that
it believes to be appropriate, to take account of realized losses on the
Loans, although the OID Regulations do not provide for such adjustments. If
the Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the
related Prospectus Supplement, the Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but such a holder who purchases such Debt Security for
an amount that exceeds its adjusted issue price will be entitled (as will
an initial holder who pays more than a Debt Security's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
holders will be required to report income with respect to the related
Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Loans, except possibly to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a holder of such a Security in any period could significantly
exceed the amount of cash distributed to such holder in that period. The
holder will eventually be allowed a loss (or will be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is deduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own
tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities
(as defined under "--Tax Status as a Grantor Trust; General" herein) the
payments on which consist solely or primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC or on Loans
underlying Pass-Through Securities ("Interest Weighted Securities"). The
Issuer intends to take the position that all of the income derived from an
Interest Weighted Security should be treated as OID and that the amount and
rate of accrual of such OID should be calculated by treating the Interest
Weighted Security as a Compound Interest Security. However, in the case of
Interest Weighted Securities that are entitled to some payments of principal
and that are Regular Interest Securities the Internal Revenue Service could
assert that income derived from an Interest Weighted Security should be
calculated as if the Security were a security purchased at a premium equal to
the excess of the price paid by such holder for such Security over its stated
principal amount, if any. Under this approach, a holder would be entitled to
amortize such premium only if it has in effect an election under Section 171
of the Code with respect to all taxable debt instruments held by such holder,
as described below. Alternatively, the Internal Revenue Service could assert
that an Interest Weighted Security should be taxable under the rules
governing bonds issued with contingent payments. Such treatment may be more
likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "--Tax Status as a Grantor Trust--
Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i)
the yield to maturity of such Debt Securities and (ii) in the case of
Pay-Through Securities, the present value of all payments remaining to be
made on such Debt Securities, should be calculated as if the interest index
remained at its value as of the issue date of such Securities. Because the
proper method of adjusting accruals of OID on a variable rate Debt Security
is uncertain, holders of variable rate Debt Securities should consult their
own tax advisers regarding the appropriate treatment of such Securities for
federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of Sections 1276-1278 of
the Code. A Holder that acquires a Debt Security with more than a prescribed
de minimis amount of "market discount" (generally, the excess of the
principal amount of the Debt Security over the purchaser's purchase price)
will be required to include accrued market discount in income as ordinary
income in each month, but limited to an amount not exceeding the principal
payments on the Debt Security received in that month and, if the Securities
are sold, the gain realized. Such market discount would accrue in a manner
to be provided in Treasury regulations but, until such regulations are
issued, such market discount would in general accrue either (i) on the basis
of a constant yield (in the case of a Pay-Through Security, taking into
account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below,
the Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the
case of Securities (or, in the case of a Pass-Through Security, as described
below, the Loans underlying such Security) originally issued at a discount,
OID in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
underlying Loans) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in
which such interest expense was incurred. In general, the deferred portion
of any interest expense will be deductible when such market discount is
included in income, including upon the sale, disposition, or repayment of the
Security (or in the case of a Pass-Through Security, an underlying Loan). A
holder may elect to include market discount in income currently as it
accrues, on all market discount obligations acquired by such holder during
the taxable year such election is made and thereafter, in which case the
interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium,
which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
Although no regulations addressing the computation of premium accrual on
securities similar to the Securities have been issued, the legislative
history of the 1986 Act indicates that premium is to be accrued in the same
manner as market discount. Accordingly, it appears that the accrual of
premium on a class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such class. If a holder makes an
election to amortize premium on a Debt Security, such election will apply to
all taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If such an election were to
be made with respect to a Debt Security with market discount, the holder of
the Debt Security would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such holder of the Debt Security acquires during
the year of the election or thereafter. Similarly, a holder of a Debt
Security that makes this election for a Debt Security that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as
all of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the
opinion of Tax Counsel (i) Securities held by a mutual savings bank or
domestic building and loan association will represent interests in
"qualifying real property loans" within the meaning of Code Section 593(d)
(assuming that at least 95% of the REMIC's assets are "qualifying real
property loans"); (ii) Securities held by a domestic building and loan
association will constitute "a regular or a residual interest in a REMIC"
within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at least
95% of the REMIC's assets consist of cash, government securities, "loans
secured by an interest in real property," and other types of assets
described in Code Section 7701(a)(19)(C)); and (iii) Securities held by
a real estate investment trust will constitute "real estate assets" within
the meaning of Code Section 856(c)(6)(B), and income with respect to the
Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B) (assuming, for both purposes, that at
least 95% of the REMIC's assets are qualifying assets). If less than 95% of
the REMIC's assets consist of assets described in (i), (ii) or (iii) above,
then a Security will qualify for the tax treatment described in (i), (ii) or
(iii) in the proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses of
a REMIC will be taken into account by holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses
will be allocated, under Treasury regulations, among the holders of the
Regular Interest Securities and the holders of the Residual Interest
Securities on a daily basis in proportion to the relative amounts of income
accruing to each holder on that day. In the case of a holder of a Regular
Interest Security who is an individual or a "pass-through interest holder"
(including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder,
exceed 2% of such Holder's adjusted gross income. In addition, for taxable
years beginning after December 31, 1990, the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted
gross income exceeds the applicable amount (which amount will be adjusted for
inflation for taxable years beginning after 1990) will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable
for such taxable year. The reduction or disallowance of this deduction may
have a significant impact on the yield of the Regular Interest Security to
such a holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is
similar to such a trust and which is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise specified in the
related Prospectus Supplement, the expenses of the REMIC will be allocated to
holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with
certain adjustments. In general, the taxable income or net loss will be the
difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any original issue discount or market discount
on loans and other assets, and (ii) deductions, including stated interest and
original issue discount accrued on Regular Interest Securities, amortization
of any premium with respect to Loans, and servicing fees and other expenses
of the REMIC. A holder of a Residual Interest Security that is an individual
or a "pass-through interest holder" (including certain pass-through entities,
but not including real estate investment trusts) will be unable to deduct
servicing fees payable on the loans or other administrative expenses of the
REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such holder's other miscellaneous itemized deductions for
that year, do not exceed two percent of such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). That aggregate basis will be allocated among the assets of the
REMIC in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through
Securities accrue original issue discount (i.e., under the constant yield
method taking into account the Prepayment Assumption). The REMIC will deduct
OID on the Regular Interest Securities in the same manner that the holders of
the Regular Interest Securities include such discount in income, but without
regard to the de minimis rules. See "Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the
life of the loans (taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding
recovery of premium attributable to loans originated on or before such date,
it is possible that such premium may be recovered in proportion to payments
of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In
general, prohibited transactions include: (i) subject to limited exceptions,
the sale or other disposition of any qualified mortgage transferred to the
REMIC; (ii) subject to a limited exception, the sale or other disposition of
a cash flow investment; (iii) the receipt of any income from assets not
permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt
of any fees or other compensation for services rendered by the REMIC. It is
anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition,
subject to a number of exceptions, a tax is imposed at the rate of 100% on
amounts contributed to a REMIC after the close of the three-month period
beginning on the Startup Day. The holders of Residual Interest Securities
will generally be responsible for the payment of any such taxes imposed on
the REMIC. To the extent not paid by such holders or otherwise, however,
such taxes will be paid out of the Trust Fund and will be allocated pro rata
to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the holder of a Certificate representing
a residual interest (a "Residual Interest Security") will take into account
the "daily portion" of the taxable income or net loss of the REMIC for each
day during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on
such day) of the Residual Interest Securities in proportion to their
respective holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest
Security must report its proportionate share of the taxable income of the
REMIC whether or not it receives cash distributions from the REMIC
attributable to such income or loss. The reporting of taxable income without
corresponding distributions could occur, for example, in certain REMIC issues
in which the loans held by the REMIC were issued or acquired at a discount,
since mortgage prepayments cause recognition of discount income, while the
corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC Regular Interests issued without any
discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable
income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond
or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to
the holder's adjusted basis at the end of the calendar quarter in which such
loss arises. A holder's basis in a Residual Interest Security will initially
equal such holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased
(but not below zero) by the amount of distributions made and the amount of
the REMIC's net loss allocated to the holder. Any disallowed loss may be
carried forward indefinitely, but may be used only to offset income of the
REMIC generated by the same REMIC. The ability of holders of Residual
Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which such holders should consult their tax
advisers.
Distributions. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result
of prepayments) will generally not result in any additional taxable income or
loss to a holder of a Residual Interest Security. If the amount of such
payment exceeds a holder's adjusted basis in the Residual Interest Security,
however, the holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the
amount realized and such holder's adjusted basis in the Residual Interest
Security at the time of such sale or exchange. Except to the extent provided
in regulations, which have not yet been issued, any loss upon disposition of
a Residual Interest Security will be disallowed if the selling holder
acquires any residual interest in a REMIC or similar mortgage pool within six
months before or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a holder of a Residual Interest Security consisting
of "excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such holder's federal income tax return.
An exception applies to organizations to which Code Section 593 applies
(generally, certain thrift institutions); however, such exception will not
apply if the aggregate value of the Residual Interest Securities is not
considered to be "significant," as described below. Further, if the holder
of a Residual Interest Security is an organization subject to the tax on
unrelated business income imposed by Code Section 511, such holder's excess
inclusion income will be treated as unrelated business taxable income of such
holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund,
or certain cooperatives were to own a Residual Interest Security, a portion
of dividends (or other distributions) paid by the real estate investment
trust (or other entity) would be treated as excess inclusion income. If a
Residual Security is owned by a foreign person excess inclusion income is
subject to tax at a rate of 30% which may not be reduced by treaty, is not
eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "Tax Treatment of Foreign Investors." The Small
Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1,
1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income
for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must
be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period
allocable to a Residual Interest Security, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a Residual Interest at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a holder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a REMIC residual interest by any
"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of any of
the foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security
will be permitted unless the proposed transferee shall have furnished to the
Trustee an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a
Disqualified Organization holds an interest in a pass-through entity after
March 31, 1988 (including, among others, a partnership, trust, real estate
investment trust, regulated investment company, or any person holding as
nominee), that owns a Residual Interest Security, the pass-through entity
will be required to pay an annual tax on its allocable share of the excess
inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is
a "noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest 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 REMIC at or after the
time at which the taxes accrue on the anticipated excess inclusions in an
amount sufficient to satisfy the accrued taxes. If a transfer of a Residual
Interest is disregarded, the transferor would be liable for any Federal
income tax imposed upon taxable income derived by the transferee from the
REMIC. The REMIC Regulations provide no guidance as to how to determine if a
significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain
transfers of residual interests by foreign persons to United States persons.
See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently released proposed
regulations (the "Proposed Mark-to-Market Regulations") which provide that a
REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. The Proposed Mark-to-Market Regulations change the
temporary regulations discussed below which allowed a REMIC Residual Interest
Security to be marked-to-market provided that it was not a "negative value"
residual interest and did not have the same economic effect as a "negative
value" residual interest. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The temporary regulations
released on December 28, 1993 (the "Temporary Mark to Market Regulations")
provided that for purposes of this mark-to-market requirement, a "negative
value" REMIC residual interest is not treated as a security and thus may not
be marked to market. In addition, a dealer was not required to identify such
REMIC Residual Interest Security as held for investment. In general, a REMIC
Residual Interest Security has negative value if, as of the date a taxpayer
acquires the REMIC Residual Interest Security, the present value of the tax
liabilities associated with holding the REMIC Residual Interest Security
exceeds the sum of (i) the present value of the expected future distributions
on the REMIC Residual Interest Security, and (ii) the present value of the
anticipated tax savings associated with holding the REMIC Residual Interest
Security as the REMIC generates losses. The amounts and present values of
the anticipated tax liabilities, expected future distributions and
anticipated tax savings were all to be determined using (i) the prepayment
and reinvestment assumptions adopted under Section 1272(a)(6), or that would
have been adopted had the REMIC's regular interests been issued with OID,
(ii) any required or permitted clean up calls, or required qualified
liquidation provided for in the REMIC's organizational documents and (iii) a
discount rate equal to the "applicable Federal rate" (as specified in Section
1274(d)(1)) that would have applied to a debt instrument issued on the date
of acquisition of the REMIC Residual Interest Security. Furthermore, the
Temporary Mark to Market Regulations provided the IRS with the authority to
treat any REMIC Residual Interest Security having substantially the same
economic effect as a "negative value" residual interest. The IRS could issue
subsequent regulations, which could apply retroactively, providing additional
or different requirements with respect to such deemed negative value residual
interests. Prospective purchasers of a REMIC Residual Interest Security
should consult their tax advisors regarding the possible application of the
Proposed Mark to Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS
in a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to
a Series of Securities will be classified for federal income tax purposes as
a grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not
as an association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of
the principal and interest payments on the Loans. In such circumstances, a
holder will be considered to have purchased a pro rata undivided interest in
each of the Loans. In other cases ("Stripped Securities"), sale of the
Securities will produce a separation in the ownership of all or a portion of
the principal payments from all or a portion of the interest payments on the
Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "Servicing Fee")), at the same time and in
the same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and
paid directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the
case of Stripped Securities, such income will consist of a pro rata share of
the income derived from each stripped bond or stripped coupon in which the
holder owns an interest. The holder of a Security will generally be entitled
to deduct such Servicing Fees under Section 162 or Section 212 of the Code to
the extent that such Servicing Fees represent "reasonable" compensation for
the services rendered by the Trustee and the Servicer (or third parties that
are compensated for the performance of services). In the case of a
noncorporate holder, however, Servicing Fees (to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such holder's regular tax liability only to the
extent that such fees, when added to other miscellaneous itemized deductions,
exceed 2% of adjusted gross income and may not be deductible to any extent in
computing such holder's alternative minimum tax liability. In addition, for
taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values,
determined as of the time of purchase of the Securities. In the typical
case, the Trustee (to the extent necessary to fulfill its reporting
obligations) will treat each Loan as having a fair market value proportional
to the share of the aggregate principal balances of all of the Loans that it
represents, since the Securities, unless otherwise specified in the related
Prospectus Supplement, will have a relatively uniform interest rate and other
common characteristics. To the extent that the portion of the purchase price
of a Pass-Through Security allocated to a Loan (other than to a right to
receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance
of the Loan allocable to the Security, the interest in the Loan allocable to
the Pass-Through Security will be deemed to have been acquired at a discount
or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a
Security will be required to report as interest income in each taxable year
its share of the amount of OID that accrues during that year in the manner
described above. OID with respect to a Loan could arise, for example, by
virtue of the financing of points by the originator of the Loan, or by virtue
of the charging of points by the originator of the Loan in an amount greater
than a statutory de minimis exception, in circumstances under which the
points are not currently deductible pursuant to applicable Code provisions.
Any market discount or premium on a Loan will be includible in income,
generally in the manner described above, except that in the case of Pass-
Through Securities, market discount is calculated with respect to the Loans
underlying the Certificate, rather than with respect to the Security. A
holder that acquires an interest in a Loan originated after July 18, 1984
with more than a de minimis amount of market discount (generally, the excess
of the principal amount of the Loan over the purchaser's allocable purchase
price) will be required to include accrued market discount in income in the
manner set forth above. See "--Taxation of Debt Securities; Market Discount"
and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to
be included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to Section 1286 of
the Code, the separation of ownership of the right to receive some or all of
the interest payments on an obligation from ownership of the right to receive
some or all of the principal payments results in the creation of "stripped
bonds" with respect to principal payments and "stripped coupons" with respect
to interest payments. Section 1286 of the Code applies the OID rules to
stripped bonds and stripped coupons. For purposes of computing original
issue discount, a stripped bond or a stripped coupon is treated as a debt
instrument issued on the date that such stripped interest is purchased with
an issue price equal to its purchase price or, if more than one stripped
interest is purchased, the ratable share of the purchase price allocable to
such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to
apply to Stripped Securities and other Pass-Through Securities. Under the
method described above for Pay-Through Securities (the "Cash Flow Bond
Method"), a prepayment assumption is used and periodic recalculations are
made which take into account with respect to each accrual period the effect
of prepayments during such period. However, the 1986 Act does not, absent
Treasury regulations, appear specifically to cover instruments such as the
Stripped Securities which technically represent ownership interests in the
underlying Loans, rather than being debt instruments "secured by" those
loans. Nevertheless, it is believed that the Cash Flow Bond Method is a
reasonable method of reporting income for such Securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related Prospectus Supplement. In applying the calculation to Pass-Through
Securities, the Trustee will treat all payments to be received by a holder
with respect to the underlying Loans as payments on a single installment
obligation. The IRS could, however, assert that original issue discount must
be calculated separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a holder's recognition of income. If, however, the Loans prepay
at a rate slower than the Prepayment Assumption, in some circumstances the
use of this method may decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
Security holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest
in Loans and an installment obligation consisting of stripped principal
payments; (ii) the non-Interest Weighted Securities are subject to the
contingent payment provisions of the Proposed Regulations; or (iii) each
Interest Weighted Stripped Security is composed of an unstripped undivided
ownership interest in Loans and an installment obligation consisting of
stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character
of the Securities, for federal income tax purposes, will be the same as the
Loans. The IRS could take the position that the Loans character is not
carried over to the Securities in such circumstances. Pass-Through
Securities will be, and, although the matter is not free from doubt, Stripped
Securities should be considered to represent "qualifying real property loans"
within the meaning of Section 593(d) of the Code, "real estate assets" within
the meaning of Section 856(c)(6)(B) of the Code, and "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and interest income attributable to the Securities should be
considered to represent "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. Reserves or funds underlying the Securities may
cause a proportionate reduction in the above-described qualifying status
categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, in the opinion of Tax Counsel, a holder's tax
basis in its Security is the price such holder pays for a Security, plus
amounts of original issue or market discount included in income and reduced
by any payments received (other than qualified stated interest payments) and
any amortized premium. Gain or loss recognized on a sale, exchange, or
redemption of a Security, measured by the difference between the amount
realized and the Security's basis as so adjusted, will generally be capital
gain or loss, assuming that the Security is held as a capital asset. In the
case of a Security held by a bank, thrift, or similar institution described
in Section 582 of the Code, however, gain or loss realized on the sale or
exchange of a Regular Interest Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security
that might otherwise be capital gain will be treated as ordinary income to
the extent of the excess, if any, of (i) the amount that would have been
includible in the holder's income if the yield on such Regular Interest
Security had equaled 110% of the applicable federal rate as of the beginning
of such holder's holding period, over the amount of ordinary income actually
recognized by the holder with respect to such Regular Interest Security. For
taxable years beginning after December 31, 1993, the maximum tax rate on
ordinary income for individual taxpayers is 39.6% and the maximum tax rate on
long-term capital gains reported after December 31, 1990 for such taxpayers
is 28%. The maximum tax rate on both ordinary income and long-term capital
gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than
a holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to
distributions or the proceeds of a sale of certificates to or through brokers
that represent interest or original issue discount on the Securities. This
withholding generally applies if the holder of a Security (i) fails to
furnish the Trustee with its taxpayer identification number ("TIN"); (ii)
furnishes the Trustee an incorrect TIN; (iii) fails to report properly
interest, dividends or other "reportable payments" as defined in the Code; or
(iv) under certain circumstances, fails to provide the Trustee or such
holder's securities broker with a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that the holder
is not subject to backup withholding. Backup withholding will not apply,
however, with respect to certain payments made to holders, including payments
to certain exempt recipients (such as exempt organizations) and to certain
Nonresidents (as defined below). Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the
Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including
OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted
in the United States by a nonresident alien individual, foreign partnership
or foreign corporation ("Nonresidents"), in the opinion of Tax Counsel, such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the
capital or profits interest in the issuer, or (ii) the recipient is a
controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of obligations to
withhold tax from such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate (unless such rate were reduced
or eliminated by an applicable tax treaty) on, among other things, interest
and other fixed or determinable, annual or periodic income paid to
Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to
the extent that the Loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess
inclusion income, a holder of a Residual Interest Security will not be
entitled to an exemption from or reduction of the 30% (or lower treaty rate)
withholding tax rule. If the payments are subject to United States
withholding tax, they generally will be taken into account for withholding
tax purposes only when paid or distributed (or when the Residual Interest
Security is disposed of). The Treasury has statutory authority, however, to
promulgate regulations which would require such amounts to be taken into
account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution
of cash in the case of Residual Interest Securities that do not have
significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest
Security to a Nonresident will be disregarded for all Federal tax purposes.
A Residual Interest Security has tax avoidance potential unless, at the time
of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal
at least 30% of each excess inclusion, and that such amounts will be
distributed at or after the time at which the excess inclusions accrue and
not later than the calendar year following the calendar year of accrual. If
a Nonresident transfers a Residual Interest Security to a United States
person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and
the transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. See "--
Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that (1) the
Trust Fund will not have certain characteristics necessary for a business
trust to be classified as an association taxable as a corporation and (2) the
nature of the income of the Trust Fund will exempt it from the rule that
certain publicly traded partnerships are taxable as corporations or the
issuance of the Certificates has been structured as a private placement under
an IRS safe harbor, so that the Trust Fund will not be characterized as a
publicly traded partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available
to make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue
price) does not exceed a de minimis amount (i.e., 0.25% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID regulations. If these conditions are not
satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the applicable
Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon
will be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's method of tax accounting. Under
the OID regulations, a holder of a Note issued with a de minimis amount of
OID must include such OID in income, on a pro rata basis, as principal
payments are made on the Note. It is believed that any prepayment premium
paid as a result of a mandatory redemption will be taxable as contingent
interest when it becomes fixed and unconditionally payable. A purchaser who
buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules
of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a
cash basis holder of a Short-Term Note reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Note
until the taxable disposition of the Short-Term Note. A cash basis taxpayer
may elect under Section 1281 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to
a particular Noteholder will equal the holder's cost for the Note, increased
by any market discount, acquisition discount, OID and gain previously
included by such Noteholder in income with respect to the Note and decreased
by the amount of bond premium (if any) previously amortized and by the amount
of principal payments previously received by such Noteholder with respect to
such Note. Any such gain or loss will be capital gain or loss if the Note
was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation
or other non-United States person (a "foreign person") generally will be
considered "portfolio interest", and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or the
Seller (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Seller is a "related person" within the meaning of the Code and (ii) provides
the Owner Trustee or other person who is otherwise required to withhold U.S.
tax with respect to the Notes with an appropriate statement (on Form W-8 or a
similar form), signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the foreign person that owns the
Note. If such interest is not portfolio interest, then it will be subject to
United States federal income and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust
Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of Tax Counsel, the
Trust Fund might be treated as a publicly traded partnership that would not
be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including
pension funds) would be "unrelated business taxable income", income to
foreign holders generally would be subject to U.S. tax and U.S. tax return
filing and withholding requirements, and individual holders might be subject
to certain limitations on their ability to deduct their share of the Trust
Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust Fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However,
the proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions
are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned
on the Loans (including appropriate adjustments for market discount, OID and
bond premium) and any gain upon collection or disposition of Loans. The
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations
and the partnership agreement (here, the Trust Agreement and related
documents). The Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for
each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to
any excess of the principal amount of the Certificates over their initial
issue price (iii) prepayment premium payable to the Certificateholders for
such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the
Depositor. Based on the economic arrangement of the parties, in the opinion
of Tax Counsel, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can
be given that the IRS would not require a greater amount of income to be
allocated to Certificateholders. Moreover, in the opinion of Tax Counsel,
even under the foregoing method of allocation, Certificateholders may be
allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders
will in effect be required to report income from the Certificates on the
accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay
such taxes. In addition, because tax allocations and tax reporting will be
done on a uniform basis for all Certificateholders but Certificateholders may
be purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable
income that is greater or less than the amount reported to them by the Trust
Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might
be disallowed to the individual in whole or in part and might result in such
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Loan, the Trust
Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase.
If so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section
708 of the Code, the Trust Fund will be deemed to terminate for federal
income tax purposes if 50% or more of the capital and profits interests in
the Trust Fund are sold or exchanged within a 12-month period. If such a
termination occurs, the Trust Fund will be considered to distribute its
assets to the partners, who would then be treated as recontributing those
assets to the Trust Fund as a new partnership. The Trust Fund will not
comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust Fund may be subject
to certain tax penalties and may incur additional expenses if it is required
to comply with those requirements. Furthermore, the Trust Fund might not be
able to comply due to lack of data.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an
amount equal to the difference between the amount realized and the seller's
tax basis in the Certificates sold. A Certificateholder's tax basis in a
Certificate will generally equal the holder's cost increased by the holder's
share of Trust Fund income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both
the tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day of such month. As a result, a
holder purchasing Certificates may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to
reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records,
as well as potentially onerous information reporting requirements, the Trust
Fund will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and
the fiscal year of the Trust will be the calendar year. The Trustee will
file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust Fund and will report each Certificateholder's
allocable share of items of Trust Fund income and expense to holders and the
IRS on Schedule K-1. The Trust Fund will provide the Schedule K-l
information to nominees that fail to provide the Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies .
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required
to furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of
the Exchange Act is not required to furnish any such information statement to
the Trust Fund. The information referred to above for any calendar year must
be furnished to the Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
Fund with the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing
the Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder
may be precluded from separately litigating a proposed adjustment to the
items of the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the
income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust Fund would be engaged in a trade or business in
the United States for such purposes, the Trust Fund will withhold as if it
were so engaged in order to protect the Trust Fund from possible adverse
consequences of a failure to withhold. The Trust Fund expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust to change its
withholding procedures. In determining a holder's withholding status, the
Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust on Form W-8 in order to assure appropriate crediting
of the taxes withheld. A foreign holder generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust
Fund taking the position that no taxes were due because the Trust Fund was
not engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments
are properly characterized as guaranteed payments, then the interest will not
be considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable treaty.
In such case, a foreign holder would only be entitled to claim a refund for
that portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law
may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences
of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to
ERISA and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Generally, ERISA applies to investments made by
Plans. Among other things, ERISA requires that the assets of Plans be held
in trust and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may
be invested in Securities without regard to the ERISA considerations
described above and below, subject to the provisions of applicable state law.
Any such plan which is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules
set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain
other entities in which a Plan makes an "equity" investment could be deemed
for purposes of ERISA to be assets of the investing Plan in certain
circumstances. However, the regulation provides that, generally, the assets
of a corporation or partnership in which a Plan invests will not be deemed
for purposes of ERISA to be assets of such Plan if the equity interest
acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in the Labor Reg. Section 2510.3-101,
is a security that is widely held, freely transferable and registered under
the Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because
the Loans may be deemed Plan assets of each Plan that purchases Securities,
an investment in the Securities by a Plan might be a prohibited transaction
under ERISA Sections 406 and 407 and subject to an excise tax under Code
Section 4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation
of residential mortgage pool investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans related to the origination, maintenance
and termination of mortgage pools consisting of mortgage loans secured by
first or second mortgages or deeds of trust on single-family residential
property, and the acquisition and holding of certain mortgage pool pass-
through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTE 83-1 are
satisfied, investments by a Plan in Securities that represent interests in a
Pool consisting of Loans ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid
to the pool sponsor, the Plan does not purchase more than 25% of all Single
Family Securities, and at least 50% of all Single Family Securities are
purchased by persons independent of the pool sponsor or pool trustee. PTE
83-1 does not provide an exemption for transactions involving Subordinate
Securities. Accordingly, unless otherwise provided in the related Prospectus
Supplement, no transfer of a Subordinate Security or a Security which is not a
Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single class of
Securities; and (ii) Securities issued in a Series in which there is only one
class of Trust Securities; provided that the Securities in the case of clause
(i), or the Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments (greater
than 0%) and a specified percentage (greater than 0%) of future principal
payments on the Loans. It is not clear whether a class of Securities that
evidences the beneficial ownership in a Trust Fund divided into Loan groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a class of Securities entitled to receive payments of interest
and principal on the Loans only after payments to other classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions
in pass-through payments due to property damage or defaults in loan payments
in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal
balance of the largest covered pooled mortgage loan; (ii) the existence of a
pool trustee who is not an affiliate of the pool sponsor; and (iii) a
limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than adequate
consideration for selling the mortgage loans plus reasonable compensation for
services provided by the pool sponsor to the Pool. The Depositor believes
that the first general condition referred to above will be satisfied with
respect to the Securities in a Series issued without a subordination feature,
or the Securities only in a Series issued with a subordination feature,
provided that the subordination and Reserve Account, subordination by
shifting of interests, the pool insurance or other form of credit enhancement
described herein (such subordination, pool insurance or other form of credit
enhancement being the system of insurance or other protection referred to
above) with respect to a Series of Securities is maintained in an amount not
less than the greater of one percent of the aggregate principal balance of
the Loans or the principal balance of the largest Loan. See "Description of
the Securities" herein. In the absence of a ruling that the system of
insurance or other protection with respect to a Series of Securities
satisfies the first general condition referred to above, there can be no
assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc.,
an individual exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374, 55 Fed. Reg. 36724) (the "Underwriter Exemption")
which applies to certain sales and servicing of "certificates" that are
obligations of a "trust" with respect to which Greenwich Capital Markets,
Inc. is the underwriter, manager or co-manager of an underwriting syndicate.
The Underwriter Exemption provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an
expanded definition of "certificate" which includes an interest which
entitles the holder to pass-through payments of principal, interest and/or
other payments. The Underwriter Exemption contains an expanded definition of
"trust" which permits the trust corpus to consist of secured consumer
receivables. The definition of "trust", however, does not include any
investment pool unless, inter alia, (i) the investment pool consists only
of assets of the type which have been included in other investment pools,
(ii) certificates evidencing interests in such other investment pools
have been purchased by investors other than Plans for at least one year
prior to the Plan's acquisition of certificates pursuant to the Underwriter
Exemption, and (iii) certificates in such other investment pools have been
rated in one of the three highest generic rating categories of the four
credit rating agencies noted below. Generally, the Underwriter Exemption
holds that the acquisition of the certificates by a Plan must be 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. The Underwriter Exemption requires that the rights and
interests evidenced by the certificates not be "subordinated" to the rights
and interests evidenced by other certificates of the same trust. The
Underwriter Exemption requires that certificates acquired by a Plan have
received a rating at the time of their acquisition that is in one of the
three highest generic rating categories of Standard & Poor's Corporation,
Moody's Investors Service, Inc., Duff & Phelps Inc. or Fitch Investors
Service, Inc. The Underwriter Exemption specifies that the pool trustee must
not be an affiliate of the pool sponsor, nor an affiliate of the Underwriter,
the pool 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
entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the certificates must be 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.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will 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 (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any such entities. Under
SMMEA, if a state enacted legislation prior to October 4, 1991 specifically
limiting the legal investment authority of any such entities with respect to
"mortgage related securities", securities will constitute legal investments
for entities subject to such legislation only to the extent provided therein.
Approximately twenty-one states adopted such legislation prior to the October
4, 1991 deadline. 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 securities, or require the sale or
other disposition of securities, so long as such contractual commitment was
made or such securities were 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 in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates 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 authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration ("NCUA")
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No.
108, which includes guidelines to assist federal credit unions in making
investment decisions for mortgage related securities and the NCUA's
regulation "Investment and Deposit Activities" (12 C.F.R. Part 703),
which sets forth certain restrictions on investment by federal credit unions
in mortgage related securities.
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
the Securities Activities (to the extent adopted by their respective
regulators) (the "Policy Statement") setting forth, in relevant part, certain
securities trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on) investing in
mortgage derivative products, including "mortgage related securities", which
are "high-risk mortgage securities" as defined in the Policy Statement.
According to the Policy Statement such "high-risk mortgage securities"
include securities such as Securities not entitled to distributions allocated
to principal or interest, or Subordinated Securities. Under the Policy
Statement, it is the responsibility of each depository institution to
determine, prior to purchase (and at stated intervals thereafter), whether a
particular mortgage derivative product is a "high-risk mortgage security",
and whether the purchase (or retention) of such a product would be consistent
with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions which may restrict or prohibit
investment in securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to
purchase Securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Securities constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices to be determined at the
time of sale or at the time of commitment therefor. If so specified in the
related Prospectus Supplement, the Securities will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Greenwich Capital Markets, Inc. ("GCM") acting as
underwriter with other underwriters, if any, named therein. In such event,
the related Prospectus Supplement may also specify that the underwriters will
not be obligated to pay for any Securities agreed to be purchased by
purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of the Securities, underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the
form of discounts, concessions or commissions. The related Prospectus
Supplement will describe any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of Securities, GCM will
receive a selling commission with respect to each Series of Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Trust Fund Assets as of the Cut-off Date.
The exact percentage for each Series of Securities will be disclosed in the
related Prospectus Supplement. To the extent that GCM elects to purchase
Securities as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Securities of such Series.
The Depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make
in respect thereof.
In the ordinary course of business, GCM and the Depositor may engage in
various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's loans or private
asset backed securities, pending the sale of such loans or private asset
backed securities, or interests therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. 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 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, One World Trade Center, New York,
New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the related Loans will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Series of
Securities. Such rating should not be deemed a recommendation to purchase,
hold or sell Securities, inasmuch as it does not address market price or
suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor purchasing a Security at a significant premium might fail
to recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn among other reasons, because of an adverse change in the
financial or other condition of a credit enhancement provider or a change in
the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of mortgage loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of mortgage loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In additional,
adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To
the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more classes
of the Securities of the related Series.
No dealer, salesman or other
person has been authorized to give
any information or to make any
representation not contained in
this Prospectus Supplement or the
Prospectus and, if given or made,
such information or representation
must not be relied upon as having
been authorized by the depositor
or the underwriter. This
Prospectus Supplement and the
Prospectus do not constitute an
offer of any securities other than MEGO MORTGAGE HOME
those to which they relate or an LOAN TRUST 1996-3
offer to sell or a solicitation of
an offer to buy, to any person in
any jurisdiction where such an
offer or solicitation would be
unlawful. Neither the delivery of
this Prospectus Supplement and the
Prospectus nor any sale made
hereunder shall, under any $66,721,383
circumstances, create any $19,630,000 CLASS IA-1
implication that the information 6.50%
contained herein is correct as of $10,790,000 CLASS IA-2
any time subsequent to their 6.84%
respective date. $9,101,458 CLASS IA-3
_________________ 7.23%
$27,199,925 CLASS IIA
TABLE OF CONTENTS 6.98%
PAGE
PROSPECTUS SUPPLEMENT
Summary of Terms . . . . . . S-4 FINANCIAL ASSET
Risk Factors . . . . . . . . S-18 SECURITIES CORP.
Property of the Trust . . . . S-22 (DEPOSITOR)
Mego Mortgage Corporation . . S-23
The Title I Loan Program and the
Contract of Insurance . . . . S-30
The Master Servicer . . . . . S-35
Description of the Loans . . S-36
Description of the Certificates
S-47
The Certificate Guaranty Insurance -------------------
Policies . . . . . . . . . . S-77
The Certificate Insurer . . . S-80
Use of Proceeds . . . . . . . S-82 PROSPECTUS SUPPLEMENT
Certain Federal Income Tax
Consequences . . . . . . . . S-82
State Taxes . . . . . . . . . S-84 -------------------
ERISA Considerations . . . . S-84
Method of Distribution . . . S-87
Legal Investment Considerations
S-88
Legal Matters . . . . . . . . S-88
Ratings . . . . . . . . . . . S-88
Reports of Experts . . . . . S-88 GREENWICH CAPITAL
M A R K E T S, I N C.
PROSPECTUS
Prospectus Supplement or Current
Report on Form 8-K . . . . . . 2
Incorporation of Certain Documents DECEMBER 11, 1996
by Reference . . . . . . . . . 2
Available Information . . . . . 2
Reports to Securityholders . . 3
Summary of Terms . . . . . . . 4
Risk Factors . . . . . . . . . 12
The Trust Fund . . . . . . . . 17
Use of Proceeds . . . . . . . . 22
The Depositor . . . . . . . . . 22
Loan Program . . . . . . . . . 23
Description of the Securities . 25
Credit Enhancement . . . . . . 35
Yield and Prepayment
Considerations . . . . . . . . 41
The Agreements . . . . . . . . 43
Certain Legal Aspects of the Loans
56
Certain Material Federal Income
Tax Considerations . . . . . . 68
State Tax Considerations . . . 88
ERISA Considerations . . . . . 88
Legal Investment . . . . . . . 91
Method of Distribution . . . . 92
Legal Matters . . . . . . . . . 92
Financial Information . . . . . 93
Rating . . . . . . . . . . . . 93
