AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1996
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FINANCIAL ASSET SECURITIES CORP.
(Exact name of registrant as specified in its charter)
Delaware 06-1442010
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
600 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
(203) 625-2700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHARLES A. FORBES, JR.
FINANCIAL ASSET SECURITIES CORP.
600 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
(203) 625-5673
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
WITH A COPY TO:
JOHN C. ANDERSON, ESQ. STEPHEN B. ESKO, ESQ.
FINANCIAL ASSET SECURITIES CORP. Brown & Wood
600 STEAMBOAT ROAD One World Trade Center
GREENWICH, CONNECTICUT 06830 New York, New York 10048
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time on or after the effective date of the registration
statement, as determined by market conditions.
---------------------------
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING
OFFERED PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK
THE FOLLOWING BOX. / /
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE
OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1933, PLEASE CHECK THE FOLLOWING BOX. /X/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN
OFFERING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK
THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT
NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME
OFFERING./ /____________
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE
462(C) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING./ /____________
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE
434, PLEASE CHECK THE FOLLOWING BOX./ /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION> Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit* Offering Price* Fee
<S> <C> <C> <C> <C>
Asset Backed Securities . . . . . . $1,000,000,000 100% $ 1,000,000,000 $344,828
</TABLE>
* Estimated for the purpose of calculating the registration fee.
Pursuant to Rule 429, this Registration Statement also constitutes
Post-Effective Amendment No. 1 to Registration Statement No. 33-99018,
which became effective on March 20, 1996.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 15, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED __________, 1996)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
$___________ (APPROXIMATE) CLASS A, ( %) (VARIABLE PASS-THROUGH RATE)
ASSET BACKED CERTIFICATES, SERIES 199_-___
DISTRIBUTIONS PAYABLE ON THE __TH DAY OF EACH MONTH, COMMENCING ON _______
__, 199_
The Series 199_-___ Certificates will consist of the Class A
Certificates (the "Senior Certificates"), one or more classes of
subordinate certificates (the "Subordinate Certificates"), and the Class R
Certificates (the "Residual Certificates"). The Senior Certificates, the
Subordinate Certificates and the Residual Certificates are collectively
referred to herein as the "Certificates." Only the Senior Certificates are
offered hereby.
The Certificates will represent the entire beneficial ownership
interest in a trust fund (the "Trust Fund") to be created pursuant to a
Pooling and Servicing Agreement, dated as of __________ __, 199_, among
Financial Asset Securities Corp. (the "Depositor"), ( ), as
servicer (referred to herein as "( )", the "Seller" or the
"Servicer," as applicable), and ( ), as trustee (the
"Trustee"). The Trust Fund will consist primarily of a pool of certain
(adjustable rate) (fixed rate) home equity (revolving credit line) loans
made or to be made in the future (the "Mortgage Loans") secured
(partially)(primarily) by second deeds of trust or mortgages on
residential properties (or, in certain limited cases, mixed-use
properties) that are primarily one- to four-family properties (each a
"Mortgaged Property"), the collections in respect of such Mortgage Loans,
and certain other property relating to such mortgage loans. (The Mortgage
Loans will be subject to monthly mortgage rate adjustments based upon
changes in the average of the prime rate published in The Wall Street
Journal (the "Index"), as described herein under "The Mortgage Pool.")
The Trust Fund is subject to optional termination under the limited
circumstances described herein. Any such optional termination may result
in an early retirement of the Senior Certificates offered hereby.
Distributions to Certificateholders will be made on the ___th day of each
month or, if such ___th day is not a business day, on the first business
day thereafter (each, a "Distribution Date"), commencing in _________
199_.
The Senior Certificates will have an initial aggregate principal
balance of approximately $___________ and will evidence in the aggregate
an initial beneficial ownership interest of approximately ____% in the
Trust Fund. The remaining beneficial ownership interest in the Trust Fund
will be evidenced by the Subordinate Certificates and the Residual
Certificates. The rights of the Subordinate Certificateholders to receive
distributions with respect to the Mortgage Loans will be subordinated to
the rights of the Senior Certificateholders to the extent described
herein.
Except for certain representations and warranties relating to the
Mortgage Loans, ( )'s obligations with respect to the
Certificates are limited to its contractual servicing obligations. The
Senior Certificates evidence interests in the Trust Fund only and are
payable solely from amounts received with respect thereto. The Senior
Certificates do not constitute an obligation of or an interest in the
Depositor, the Trustee or ( ), or any of their respective
affiliates, and will not be insured or guaranteed by any governmental
agency.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
THE SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-8
HEREIN AND IN THE PROSPECTUS ON PAGE 11.
THE SENIOR CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS
IN THE RELATED TRUST FUND ONLY AND DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE DEPOSITOR, ANY SELLER OR ANY AFFILIATES THERE-
OF, EXCEPT TO THE EXTENT DESCRIBED HEREIN. NEITHER THE SENIOR
CERTIFICATES NOR THE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
GREENWICH CAPITAL
M A R K E T S, I N C.
--------------------
___________ __, 199_
THE YIELD TO INVESTORS ON THE SENIOR CERTIFICATES WILL BE SENSITIVE
IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS (AND TO
THE LEVEL OF THE INDEX). THE YIELD TO MATURITY OF THE SENIOR CERTIFICATES
MAY VARY FROM THE ANTICIPATED YIELD TO THE EXTENT SUCH CERTIFICATES ARE
PURCHASED AT A DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING
OF PAYMENTS THEREON IS SENSITIVE TO PREPAYMENTS. CERTIFICATEHOLDERS OF THE
SENIOR CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY SUCH 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 SENIOR 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.
An election will be made to treat the Trust Fund as a real estate
mortgage investment conduit (the "REMIC") for federal income tax purposes.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Senior Certificates but has no obligation to do
so. There is currently no secondary market for the Senior Certificates and
there can be no assurance that such a market will develop or, if it does
develop, that it will continue.
______________________
The Senior 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 $____________, plus accrued interest, before deducting
issuance expenses payable by the Depositor.
The Senior 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 Senior Certificates will be made against
payment therefor on or about _______ __, 199_, at the offices of the
Underwriter, 600 Steamboat Road, Greenwich, Connecticut 06830.
______________________
This Prospectus Supplement does not contain complete information
about the offering of the Senior Certificates. Additional information is
contained in the Prospectus and purchasers are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Senior
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 Senior 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.
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.
Title of Certificates Asset Backed Certificates, Series 199__-___
(the "Certificates"), consisting of the
Class A Certificates (the "Senior
Certificates"), one or more classes of
subordinate certificates (the "Subordinate
Certificates") and the Class R Certificates
(the "Residual Certificates"). Only the
Senior Certificates are offered hereby.
The Depositor Financial Asset Securities Corp. (the
"Depositor"), a Delaware corporation, and an
indirect limited purpose finance subsidiary
of The Long-Term Credit Bank of Japan,
Limited 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, The Long-Term Credit Bank of
Japan, Limited or any of their affiliates or
any other person or entity will insure or
guarantee or otherwise be obligated with
respect to the Certificates.
Servicer and Seller ( ) ("( )") will serve as
the Servicer (in such capacity, the
"Servicer"). See "Servicing of Mortgage
Loans--The Servicer" herein. The
Mortgage Loans were originated by
( ) and were acquired by the
Depositor pursuant to a purchase
agreement, dated ______ (the "Purchase
Agreement"), between ( ), as seller,
and the Depositor, as purchaser.
Cut-off Date _______ __, 199_.
Closing Date On or about ____________ __, 199_.
Trustee ( ), a ( ), not
in its individual capacity but solely as
trustee on behalf of the Certificateholders
(the "Trustee").
Description of Certificates
A. General The Certificates will be issued pursuant
to a Pooling and Servicing Agreement,
dated as of ________ __, 199_ (the
"Pooling and Servicing Agreement"), among
the Depositor, the Servicer and the Trustee.
The Senior Certificates, together with
the Subordinate Certificates and the Residual
Certificates, will represent the entire
beneficial ownership interest in a trust fund
(the "Trust") whose assets include: a pool
of (adjustable) (fixed) rate home equity
(revolving credit line) loans made (or to be
made in the future) (the "Mortgage Loans")
under certain home equity (revolving credit
line) loan agreements (the "Loan
Agreements") and secured (partially)
(primarily) by second (deeds of trust)
(mortgages) on residential properties (or,
in certain limited cases, mixed-use
properties) that are primarily one-
to four-family properties (the "Mortgaged
Properties"); the collections in respect of
the Mortgage Loans received after the Cut-
Off Date; property that secured a Mortgage
Loan which has been acquired by foreclosure
or deed in lieu of foreclosure; (a surety
bond or letter of credit); an assignment
of the Depositor's rights under the
Purchase Agreement (as defined below); rights
under certain hazard insurance policies
covering the Mortgaged Properties; and
certain other property, as described more
fully herein.
B. Distributions Distributions on the Senior Certificates
will be made on the ___th day of each month
or, if such day is not a business day, on
the first business day thereafter,
commencing on ______ __, 199_ (each, a
"Distribution Date"). Distributions on each
Distribution Date will be made to
Certificateholders of record as of the last
business day of the month preceding the
month of such Distribution Date (each, a
"Record Date"), except that the final
distribution on the Senior Certificates will
be made only upon presentment and surrender
of the Senior Certificates at the office or
agency of the Trustee in New York, New York.
Distributions on the Mortgage Loans will be
applied to the payment of principal and
interest on the Certificates in accordance
with the priorities described below. The
rights of the Subordinate Certificateholders
and Residual Certificateholders to receive
distributions with respect to the Mortgage
Loans are subordinated to the rights of the
Senior Certificateholders to the extent
described herein.
1. Interest Interest will, to the extent funds are
available therefor, be paid on the Senior
Certificates in an amount equal to one month's
interest at the Pass-Through Rate on the
Certificate Principal Balance thereof,
together with any Unpaid Interest short-
fall with respect thereto. See "Description
of the Certificates--Distributions" herein.
2. Principal On each Distribution Date, Certificateholders
of the Senior Certificates will be entitled to
receive, as payments of principal, to the extent
funds are available therefor after distributions
of interest on the Senior Certificates, the
Class A Formula Amount for such Distribution
Date. Certificateholders of such Certificates
also will be entitled to receive any Unpaid
Liquidation Loss Amounts. See "Description of
the Certificates--Distributions" herein.
Pass-Through Rate The Pass-Through Rate for a particular
Distribution Date will be equal to (____%)
(the weighted average of the Net Loan Rates of
the Mortgage Loans). The Net Loan Rate
for any Mortgage Loan will be equal to the
Loan Rate of such Mortgage Loan on the first
day of the month preceding the month of
such Distribution Date, less ____% per annum
servicing fee rate (the "Servicing Fee
Rate"). The initial Pass-Through Rate for
the first Distribution Date for the
Certificates in _____ 199_ is expected
to be approximately ____%). See "The Mortgage
Pool--General" herein.
The Mortgage Loans The Mortgage Loans are (partially)(primarily)
secured by second deeds of trust or mortgages on
Mortgaged Properties. The Mortgage Loans
were originated by ( ) and on or prior to
the Closing Date, ( ) will sell the
Mortgage Loans to the Depositor pursuant
to a purchase agreement (the "Purchase
Agreement"). The aggregate Cut-Off Date
Principal Balance of the Mortgage Loans is
$___________ (the "Cut-Off Date Pool Balance").
The combined loan-to-value ratio of each
Mortgage Loan, computed using (the maximum
amount the borrower was permitted to
draw down under the related Loan Agreement
(the "Credit Limit")) and taking into account
the amounts of any related senior mortgage loans
(the "Combined Loan-to-Value Ratio") did not
exceed __% as of the Cut-Off Date. The
weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans was ____% as of the
Cut-Off Date. See "THE MORTGAGE LENDING
PROGRAM--Underwriting Procedures Relating
to the Mortgage Loans" herein.
Interest on each Mortgage Loan is payable
monthly and computed on the related average
daily outstanding Principal Balance for each
billing cycle at a (fixed)(variable) rate per
annum (the "Loan Rate") equal (to ___%)(at
any time (subject to minimum and maximum rates,
as described herein under "The Mortgage
Lending Program--Mortgage Loan Terms," and
further subject to applicable usury limita-
tions) to the sum of (i) (the prime rate
published in the "Money Rates" section of The
Wall Street Journal generally on the Monday
of the week in which such Loan Rate adjusts
(or, if no rate is published on such day,
then on the next succeeding calendar day
on which a prime rate is published), rounded
to the nearest ( ) percent) and (ii) a margin
generally within the range of ___% to ___%.
The Loan Rate is subject to adjustment
( ).) With respect to each Mortgage
Loan, a "billing cycle" is the calendar
month preceding a Due Date. Interest accrued
at such rate will be due on the Due Date in
the month following the close of the billing
cycle. (As to each Mortgage Loan, the Due
Date is the __th day of the month.) The
Cut-Off Date Principal Balances ranged from
zero to $_______ and averaged $_______.
(Credit Limits under the Mortgage Loans as
of the Cut-Off ranged from approximately
$_____ to $______ and averaged $______.)
Each Mortgage Loan was originated in the
period from _______ to _________, (and, as
of the Cut-Off Date, the weighted average
Credit Limit Utilization Rate (as defined
herein) was approximately ___%). See "THE
MORTGAGE LENDING PROGRAM" and "DESCRIPTION
OF THE MORTGAGE LOANS" herein.
Servicing ( ) will serve as the Servicer under
the Pooling and Servicing Agreement. The
Servicer will be responsible for the servicing
of the Mortgage Loans and will receive from
interest collected on the Mortgage
Loans a monthly servicing fee on each
Mortgage Loan equal to the Principal Balance
thereof multiplied by the Servicing Fee Rate
(such product, the "Servicing Fee"). See
"Servicing of Mortgage Loans--Servicing
Compensation and Payment of Expenses"
herein.
(The Servicer is obligated to
make cash advances ("Advances") with respect
to delinquent payments of principal of and
interest on any Mortgage Loan to the
extent described herein. The Trustee will be
obligated to make any such Advance if the
Servicer fails in its obligation to do so,
to the extent provided in the Pooling and
Servicing Agreement. See "Servicing of Mortgage
Loans--Advances" herein.)
Optional Termination On any Distribution Date on which the
aggregate Principal Balance of the Mortgage
Loans included in the Trust Fund (the "Pool
Principal Balance") is less than __% of the
Pool Principal Balance of the Mortgage Loans
as of the Cut-off Date (the "Cut-off Date
Principal Balance"), the Servicer will have
the option to purchase, in whole, the
Mortgage Loans and the REO Property, if any,
remaining in the Trust Fund. See
"Description of the Certificates--Optional
Termination" herein.
Federal Income Tax
Considerations An election will be made to treat the Trust
Fund as a "real estate mortgage investment
conduit" (the "REMIC") for federal income
tax purposes. The Senior and Subordinate
Certificates will constitute "regular
interests" in the REMIC and the Residual
Certificates will constitute the sole class
of "residual interests" in the REMIC. The
Senior Certificates may be issued at a
premium. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations The acquisition of a Senior Certificate by a
pension or other employee benefit plan (a
"Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), could, in some instances, result
in a prohibited transaction or other
violation of the fiduciary responsibility
provisions of ERISA and Code Section 4975.
Certain exemptions from the prohibited
transaction rules granted under Prohibited
Transaction Class Exemption 83-1 and under
Prohibited Transaction Exemption 90-59 could
be applicable to the acquisition of Senior
Certificates. Any Plan fiduciary considering
whether to purchase any Senior Certificates
on behalf of a Plan should consult with its
counsel regarding the applicability of the
provisions of ERISA and the Code.
Legal Investment The Senior Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") because some of the
Mortgages securing Mortgage Loans are not first
mortgages. Accordingly, many institutions with
legal authority to invest in comparably rated
securities based solely on first mortgages may
not be legally authorized to invest in the
Senior Certificates. See "Legal Investment"
in the Prospectus.
Ratings It is a condition of the issuance of the Senior
Certificates that they be rated "( )" by
( ) ("( )") and ( ) by
( ) ("( )" and, together with
( ), the "Rating Agencies"). The
security ratings of the Senior 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
(Cash Flow Considerations. During the first ( )-year draw down
period under the related Loan Agreements fort the Mortgage Loans,
collections on such Mortgage Loans may vary because, among other things,
borrowers are not required to make monthly payments of principal. With
respect to some of the Mortgage Loans, during the second ( )-year draw
down period, no monthly payments of principal are required. Collections
on the Mortgage Loans may also vary due to seasonal purchasing and payment
habits of borrowers.)
(General credit risk may also be greater to Certificateholders than
to holders of instruments representing interests in level payment first
mortgage loans since no payment of principal generally is required until
after either a five- or ten-year interest only period under the related
Loan Agreements. Minimum monthly payments will at least equal and may
exceed accrued interest. Even assuming that the Mortgaged Properties
provide adequate security for the Mortgage Loans, substantial delay could
be encountered in connection with the liquidation of Mortgage Loans that
are delinquent and corresponding delays in the receipt of related proceeds
by Certificateholders could occur. Further, liquidation expenses (such as
legal fees, real estate taxes, and maintenance and preservation expenses)
will reduce the proceeds payable to Certificateholders and thereby reduce
the security for the Mortgage Loans. In the event any of the Mortgaged
Properties fail to provide adequate security for the related Mortgage
Loans, Certificateholders could experience a loss.)
Prepayment Considerations. All of the Mortgage Loans may be prepaid
in whole or in part at any time without penalty. Home equity loans, such
as the Mortgage Loans, have been originated in significant volume only
during the past few years and neither the Depositor nor the Servicer is
aware of any publicly available studies or statistics on the rate of
prepayment of such loans. Generally, home equity loans are not viewed by
borrowers as permanent financing. Accordingly, the Mortgage Loans may
experience a higher rate of prepayment than traditional loans. The
Trust's prepayment experience may be affected by a wide variety of
factors, including general economic condition, interest rates, the
availability of alternative financing and homeowner mobility. In
addition, substantially all of the Mortgage Loans contain due-on-sale
provisions and the Servicer intends to enforce such provisions unless (i)
such enforcement is not permitted by applicable law or (ii) the Servicer,
in a manner consistent with reasonable commercial practice, permits the
purchaser of the related Mortgaged Property to assume the Mortgage Loan.
To the extent permitted by applicable law, such assumption will not
release the original borrower from its obligation under any such Mortgage
Loan. See "CERTAIN LEGAL ASPECTS OF THE LOANS--`Due-on-Sale' Clauses" in
the Prospectus.
Legal Considerations. The Mortgage Loans are secured by deeds of
trust or mortgages (which generally are second mortgages). With respect
to Mortgage Loans that are secured by first mortgages, the Servicer has
the power under certain circumstances to consent to a new mortgage lien on
the Mortgaged Property having priority over such Mortgage Loan. Mortgage
Loans secured by second mortgages are entitled to proceeds that remain
from the sale of the related Mortgaged Property after any related senior
mortgage loan 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, the Trust and, accordingly, the Certificateholders, bear
(i) the risk of delay in distributions while a deficiency judgment
against the borrower 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.
The sale of the Mortgage Loans from the Seller to the Depositor
pursuant to the Purchase Agreement will be treated as a sale of the
Mortgage Loans. The Seller will warrant that such transfer is either a
sale of its interest in the Mortgage Loans or a grant of a first priority
perfected security interest therein. In the event of an insolvency of the
Seller, the receiver of the Seller may attempt to recharacterize the sale
of the Mortgage Loans as a borrowing by the Seller secured by a pledge of
the Mortgage Loans. If the receiver decided to challenge such transfer,
delays in payments of the Certificates and possible reductions in the
amount thereof could occur. The Depositor will warrant in the Pooling and
Servicing Agreement that the transfer of its interest in the Mortgage
Loans to the Trust is a valid transfer and assignment of such interest.
In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee
or the Certificateholders from appointing a successor Servicer.
(Servicer's Ability to Change the Terms of the Mortgage Loans. The
Servicer may agree to changes in the terms of a Loan Agreement, provided
that such changes (i) do not adversely affect the interest of the
Certificateholders, and (ii) are consistent with prudent business
practice. There can be no assurance that changes in applicable law or the
marketplace for home equity loans or prudent business practice will not
result in changes in the terms of the Mortgage Loans.)
(Delinquent Mortgage Loans. The Trust will include Mortgage Loans
which are __ or fewer days delinquent. The Cut-Off Date Principal Balance
of such delinquent Mortgage Loans was $______________.)
THE MORTGAGE LENDING PROGRAM
The information set forth below concerning (_______) and its
underwriting policies has been provided by (_______). The Depositor does
not make any representation as to the accuracy or completeness of such
information.
GENERAL
All of the Mortgage Loans were originated by
(_____________________________), (the "Seller" or the "Servicer") under
its mortgage lending program. The Seller first offered (adjustable rate)
(fixed rate) home equity (revolving credit line) loans ("home equity
loans") in 19__. As of (_____________), (____________) owned and serviced
approximately $__________ aggregate principal amount of outstanding home
equity loans secured by properties located in __________ (the "Seller
Portfolio").
UNDERWRITING PROCEDURES RELATING TO THE MORTGAGE LOANS
Each home equity loan was originated after a review by the Seller in
accordance with its established underwriting procedures, which were
intended to assess the applicant's ability to assume and repay such home
equity loans and the adequacy of the real property which serves as
collateral for such home equity loans. The maximum (Principal
Balance)(Credit Limit) for a home equity loan provided by the Seller was
$__________.
Each applicant for a home equity loan was required to complete an
application which listed the applicant's assets, liabilities, income,
credit and employment history and other demographic and personal
information. If information in the loan application demonstrated that
there was sufficient income and equity to justify making a home equity
loan and the Seller (a) received a satisfactory independent credit bureau
report on the credit history of the borrower and (b) obtained, in the case
of all home equity loans originated prior to __________ a drive-by
appraisal of the related Mortgaged Property or for all home equity loans
originated as of __________, a satisfactory appraisal completed on forms
approved by FNMA, and if such information met the Seller's underwriting
standards, the Seller issued a commitment subject to satisfaction of
certain other conditions. These conditions included: (i) obtaining and
reviewing pay stubs, income tax returns or a verification of employment
from the applicant's employer; (ii) obtaining and reviewing a verification
of deposit; and (iii) obtaining and reviewing a verification of the loan
in the first lien position when the home equity loan was to be in a second
lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title policy insuring title
mortgage in accordance with the intended lien position. (Regardless of
Combined Loan-to-Value Ratios, it is the Seller's policy not to accept a
position junior to any mortgage lien other than a first mortgage.)
Generally, a home equity loan needed a Combined Loan-to-Value Ratio
of __% for loans which the Seller obtained full documentary support and
was not greater than __% for loans for which limited documentary support
was obtained.
After obtaining all applicable employment, credit and property
information, the Seller determined whether sufficient unencumbered equity
in the property existed and whether the prospective borrower had
sufficient monthly income available to support the payments of interest
(at the current Index Rate) in addition to any senior mortgage loan
payments (including any escrows for property taxes and hazard insurance
premiums) and other monthly credit obligations based on the prospective
borrower's debt-to-gross income ratio. The "debt-to-gross income ratio"
is the ratio of (a) certain of the borrower's debt obligations which
include: (i) the monthly first mortgage payment plus taxes; (ii) monthly
installment debt payments with a term of more than ten months; (iii)
five percent of the total revolving obligations; (iv) monthly alimony
and child support obligations; and (v) the payment on the home equity
loan (calculated at the Credit Limit and current prime rate plus margin
for such home equity loan) to (b) the borrower's gross verifiable monthly
income. The debt-to-gross income ratio generally did not exceed
(________%).
When the commitment conditions had been satisfied, the home equity
loan was completed by signing a Loan Agreement, rescission statement, and
mortgage which secured the repayment of principal of and interest on the
related home equity loan. The original mortgage was then recorded in the
appropriate county government office.
MORTGAGE LOAN TERMS
(A borrower may access a home equity loan by writing a check.) On
all home equity loans, there is (a ten-year) draw down period as long as
the borrower is not in default under the loan agreement. Home equity
loans bear interest at a variable rate which may change bi-weekly. (Home
equity loans may be subject to a maximum per annum interest rate (the
"Maximum Rate") of % per annum and
----
in all cases, are subject to applicable usury limitations.) See "CERTAIN
LEGAL ASPECTS OF THE LOANS--Applicability of Usury Laws" in the
Prospectus. (The daily periodic rate on the home equity loans (the "Loan
Rate") is the sum of the Index Rate plus a spread (the "Margin") which
generally ranges between ____% and ____%, divided by 365 days or 366 days,
as applicable.)
(The "Index Rate" is based on (the "prime rate" published in The Wall
Street Journal every second Monday rounded to the nearest one-eighth of
one percent or if not published on any such date, as next published in the
Wall Street Journal.) The annual percentage rate for any monthly period
will be based on the Prime Rate in effect the Monday on which the rate may
change. (If a prime rate range is published in The Wall Street Journal,
then the midpoint (average) of that range will be used.) There are no
limitations on increases or decreases (except for those home equity loans
which have Maximum Rates). Only the home equity loans that have Maximum
Rates of ____% also have annual adjustment caps of __% as to both
increases and decreases in their Loan Rates.)
(Billing statements are mailed monthly.) The statement details all
debits and credits and specifies the minimum payment due (and the
available credit line). Notice of changes in the applicable Loan Rate are
provided by the Seller to the Borrower with such statements. All payments
are due by the tenth day after the date the billing statement is issued.
(The Loan Agreements and Disclosure Statement further provide that if
publication of the Index Rate is discontinued, the Index Rate will be
changed upon notification in accordance with such Loan Agreements and
Disclosure Statements.)
The right to obtain additional credit may be suspended or terminated
or the borrower may be required to pay the entire balance due plus all
other accrued but unpaid charges immediately, if the borrower fails to
make any required payment by the due date, (if the total outstanding
principal balance including all charges payable exceeds the Credit Limit),
if the borrower made any statement or signature on any document which
is fraudulent or contained a material misrepresentation, if the
borrower dies or becomes incompetent, if the borrower becomes bankrupt
or insolvent, if the borrower becomes subject to any judgment, lien,
attachment or an execution is issued against the Mortgaged Property,
the borrower fails to obtain and maintain required property insurance
or if the borrower sells or transfers the Mortgaged Property or does
not maintain the property. (In addition, the right to obtain additional
credit may be suspended or a borrower's Credit Limit may be reduced, if the
value of the Mortgaged Property decreases for any reason to less than
80% of the original appraised value, if the borrower is in default under
the home equity loan, if government action impairs the Seller's lien
priority or if a regulatory agency has notified the Seller that
continued advances would constitute an unsafe and unsound practice.)
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience
for each of the periods shown for the home equity loans indicated on the
table. The Servicer believes that there have been no material trends or
anomalies in the historical delinquency and loss experience as represented
in the following tables. The data presented in the following tables are
for illustrative purposes only, and there is no assurance that the
delinquency and loss experience of the Mortgage Loans will be similar to
that set forth below.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of _________
_____
Number of
Loans Amount
---------- --------
<S> <C>
Amount Outstanding at
Period End . . . . . . . . . . . . . . . . .
Delinquency
30-59 Days . . . . . . . . . . . . . . . . . $
60-89 Days . . . . . . . . . . . . . . . . .
90 or More Days . . . . . . . . . . . . . . .
Foreclosures and Bankruptcies . . . . . . . . _________
Total Delinquencies . . . . . . . . . . . . . . $_________
30-59 Days Percentage . . . . . . . . . . . . . %
60-89 Days Percentage . . . . . . . . . . . . . %
90 or More Days Percentage . . . . . . . . . . %
Foreclosures and Bankruptcies . . . . . . . . .
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS
<TABLE>
<CAPTION> For the Year
Ending ________
<S> <C>
Average Amount
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Charge-Offs . . . . . . . . . . . . . . . . . . . . . . $
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Losses as a Percentage
of Average Amount Outstanding . . . . . . . . . . . . . . . %
</TABLE>
SERVICING OF THE MORTGAGE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does
not make any representation as to the accuracy or completeness of such
information.
SERVICING OF MORTGAGE LOANS
The Servicer will be responsible for servicing the Mortgage Loans as
agent for the Trust in accordance with the Servicer's policies and
procedures for servicing home equity loans and in accordance with the
terms of the Pooling and Servicing Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after
such loan is 90 days or more delinquent; (ii) if a notice of default on a
senior lien is received by the Servicer; or (iii) if circumstances are
discovered by the Servicer which would indicate that a potential for loss
exists. Foreclosure proceedings may be terminated if the delinquency is
cured. However, under certain circumstances, the Servicer may elect not
to commence foreclosure or stay the foreclosure proceeding if the
borrower's default is due to special circumstances which are temporary and
are not expected to last beyond a specified period. The loans to
borrowers in bankruptcy proceedings will be restructured in accordance
with law and with a view to maximizing recovery of such home equity loans,
including any deficiencies. Additionally, any time during foreclosure, a
forbearance, short sale, deed-in-lieu or a payment plan can be authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, who will liquidate
the Mortgaged Property and charge-off the balance of the home equity loan
balance which was not recovered by the liquidation proceeds. If the
Mortgaged Property was subject to a senior lien position, the Servicer
will either satisfy such lien at the time of foreclosure sale or take
other action as deemed necessary to protect the Servicer's interest in the
Mortgaged Property. If in the judgment of the Servicer, the cost of
maintaining or purchasing the senior lien position exceeds the economic
benefit of such action, the Servicer will generally charge-off the entire
home equity loan, seek a money judgment against the borrower or will not
pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in
the Servicer's real estate secured (revolving credit line) loans and
applicable laws and regulations, and other considerations.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each billing cycle, other than the first billing
cycle, the servicing compensation to be paid to the Servicer in respect of
its servicing activities relating to the Mortgage Loans will be paid to it
from interest collections in respect of the Mortgage Loans and will be
equal to ____% per annum (the "Servicing Fee Rate") on the aggregate
Principal Balances of the Mortgage Loans as of the first day of each such
billing cycle (the "Servicing Fee"). With respect to the first billing
cycle, the Servicer will receive from such collections ___ of the amount
calculated in the preceding sentence. All assumption fees, late payment
charges and other fees and charges, to the extent collected from
borrowers, will be retained by the Servicer as additional servicing
compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees
and disbursements of the Trustee, any custodian appointed by the Trustee,
the Registrar and any paying agent. In addition, the Servicer will be
entitled to reimbursement for certain expenses incurred by it in
connection with defaulted Mortgage Loans and in connection with the
restoration of Mortgaged Properties related thereto, such right of
reimbursement being prior to the rights of Certificateholders to receive
any related Liquidation Proceeds.
DESCRIPTION OF THE MORTGAGE LOANS
MORTGAGE LOANS
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Loan Agreements") and are secured by mortgages
or deeds of trust, most of which are second mortgages or second deeds of
trust, on Mortgaged Properties. The Mortgaged Properties securing the
Mortgage Loans consist primarily of residential properties (or, in certain
limited cases, mixed-use properties) that are one to four-family
properties. (All of the Mortgaged Properties are owner occupied.) Mixed-
use properties will consist of structures of not more than three stories
which include one to four residential dwellings units and space used for
retail, professional or other commercial uses. Such uses, which will not
involve more than 50% of the space in the structure, may include doctor,
dentist or law offices, real estate agencies, boutiques, newsstands,
convenience stores or other similar types of uses intended to cater to
individual customers. The properties may be located in suburban or
metropolitan districts. Any such non-residential use will be in
compliance with local zoning laws and regulations. See"--Mortgage Loan
Pool Statistics" below.
The Cut-Off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of ______, 199_ (the
"Cut-Off Date"). As of the _______, the Mortgage Loans were not more than
89 days delinquent and had a Loan Rate of at least ____% per annum. The
average Cut-Off Date Principal Balance was $_______, the minimum Mortgage
Cut-Off Date Principal Balance was zero, the maximum Cut-Off Date
Principal Balance was $_________, (the minimum Loan Rate and the maximum
Loan Rate on the Cut-Off Date were ____% and ____% per annum,
respectively,) and the weighted average Loan Rate on the Cut-Off Date was
____% per annum. (As of the Cut-Off Date, the weighted average Credit
Limit Utilization Rate was ____%, the minimum Credit Limit Utilization
Rate was zero and the maximum Credit Limit Utilization Rate was ______%.
The "Credit Limit Utilization Rate" is determined by dividing the Cut-Off
Date Principal Balance of a Mortgage Loan by the Credit Limit of the
related Loan Agreement.) The weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans was ____% as of the Cut-Off Date.
MORTGAGE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-Off Date with respect to the Mortgage Loans to be included in the
Trust.
(TABULAR INFORMATION)
ASSIGNMENT OF MORTGAGE 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
Mortgage Loan (including its right to purchase any Additional Balances
arising in the future), related Loan Agreements, mortgages and other
related documents (collectively, the "Related Documents"), including all
collections received on or with respect to each such Mortgage Loan on or
after the Cut-Off Date pursuant to an assignment of the Depositor's rights
and obligations under the Purchase Agreement. The Trustee, concurrently
with such transfer, will deliver the Certificates. Each Mortgage Loan
transferred to the Trust will be identified on a schedule (the "Mortgage
Loan Schedule") delivered to the Trustee pursuant to the Pooling and
Servicing Agreement. Such schedule will include information as to the
Cut-Off Date Principal Balance of each Mortgage Loan, as well as
information with respect to the Loan Rate.
(The Pooling and Servicing Agreement will require that, within the
time period specified therein, the Seller deliver to the Trustee (or a
custodian, as the Trustee's agent for such purpose) the Mortgage Loans
endorsed in blank and the Related Documents. In lieu of delivery of
original mortgages, the Seller may deliver trust and correct copies
thereof which have been certified as to authenticity by the appropriate
county recording office where such mortgage is recorded.)
Under the terms of the Pooling and Servicing Agreement, the Seller,
acting at the Depositor's request, will have (__ days after the Closing
Date) to prepare and record assignments of the mortgages related to each
Mortgage Loan in favor of the Trustee (unless opinions of counsel
satisfactory to the Rating Agencies are delivered to the Trustee to the
the effect that recordation of such assignments is not required in the
relevant jurisdictions to protect the interests of the Trustee in the
Mortgage Loans).
Within 90 days of the Closing Date, the Trustee will review the
Mortgage Loans and the Related Documents and if any Mortgage Loan or
Related Document is found to be defective in any material respect and such
defect is not cured within 90 days following notification thereof to the
Seller and the Depositor by the Trustee, the Seller will be obligated to
repurchase the Mortgage Loan and to deposit the Repurchase Price into the
Collection Account. Upon such retransfer, the Principal Balance of such
Mortgage Loan will be deducted from the Pool Balance. In lieu of any such
repurchase, the Seller may substitute an Eligible Substitute Mortgage
Loan. Any such repurchase or substitution will be considered a payment in
full of such Mortgage Loan. The obligation of the Seller to accept a
transfer of a Defective Mortgage Loan is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the
Trustee or the Certificateholders.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to
the Principal Balance of such Mortgage Loan at the time of any transfer
described above plus accrued and unpaid interest thereon to the date of
repurchase.
An "Eligible Substitute Mortgage Loan" is a mortgaged loan
substituted by the Seller for a Defective Mortgage Loan which must, on the
date of such substitution, (i) have an outstanding Principal Balance (or
in the case of a substitution of more than one Mortgage Loan for a
Defective Mortgage Loan, an aggregate Principal Balance), not 5% more or
less than the Principal Balance relating to such Defective Mortgage Loan;
(ii) (have a Loan Rate not less than the Loan Rate of the Defective
Mortgage Loan and not more than 1% in excess of the Loan Rate of such
Defective Mortgage Loan; (iii) have a Loan Rate based on the same Index
with adjustments to such Loan Rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Margin
that is not less than the Margin of the Defective Mortgage Loan and not
more than 100 basis points higher than the Margin for the Defective
Mortgage Loan); (v) have a mortgage of the same or higher level of
priority as the mortgage relating to the Defective Mortgage Loan; (vi)
have a remaining term to maturity not more than six months earlier and not
later than the remaining term to maturity of the Defective Mortgage Loan;
(vii) comply with each representation and warranty as to the Mortgage
Loans set forth in the Purchase Agreement (deemed to be made as of the
date of substitution); and (viii) satisfy certain other conditions
specified in the Purchase Agreement. To the extent the Principal Balance
of an Eligible Substitute Mortgage Loan is less than the Principal Balance
of the related Defective Mortgage Loan, the Seller will be required to
make a deposit to the Collection Account equal to such difference
("Substitution Adjustment Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent
and warrant, on the Closing Date, that, among other things: (i) at the
time of transfer to the Depositor, the Seller has transferred or
assigned all of its right, title and interest in each Mortgage Loan
and the Related Documents, free of any lien (subject to certain
exceptions); and (ii) each Mortgage Loan was generated under a
Loan Agreement that complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a
breach of any such representation and warranty which materially and
adversely affects the interests of the Certificateholders in the Mortgage
Loan and Related Documents, the Seller will have a period of 60 days after
discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 60-day period, the Seller will be obligated to
repurchase or substitute the Defective Mortgage Loan from the Trust. The
same procedure and limitations that are set forth above for the repurchase
or substitution of Defective Mortgage Loans will apply to the transfer of
a Mortgage Loan that is required to be repurchased or substituted because
of a breach of a representation or warranty in the Purchase Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described
in the preceding paragraphs are referred to as "Defective Mortgage Loans."
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Senior Certificates offered hereby will be issued pursuant to a
Pooling and Servicing Agreement, dated as of ______ __, 199_ (the "Pooling
and Servicing Agreement"), among the Depositor, the Servicer and the
Trustee. Set forth below are summaries of the specific terms and
provisions pursuant to which the Senior Certificates will be issued. The
following summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the
Pooling and Servicing Agreement. When particular provisions or terms used
in the Pooling and Servicing Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
The Series 199_-___ Certificates will consist of the Class A
Certificates (the "Senior Certificates"), one or more classes of
subordinate certificates (collectively, the "Subordinate Certificates"),
and the Class R Certificates (the "Residual Certificates"). The Senior
Certificates, the Subordinate Certificates and the Residual Certificates
are collectively referred to herein as the "Certificates." Only the Senior
Certificates are offered hereby.
The Senior Certificates will have an initial Certificate Principal
Balance of approximately $_______________, and will evidence in the
aggregate an initial beneficial ownership interest of approximately ____%
in the Trust Fund. The remaining beneficial ownership interest in the
Trust Fund will be evidenced by the Subordinate Certificates and the
Residual Certificates. The rights of the Subordinate Certificateholders
and the Residual Certificateholders to receive distributions with
respect to the Mortgage Loans will be subordinated to the rights of
the Senior Certificateholders to the extent described herein.
The Senior Certificates will be issuable in fully registered form
only. The Senior Certificates will be issued in minimum dollar
denominations of $(1,000) and integral multiples of $(1,000) in excess
thereof. A single Certificate may be issued in an amount different than
described above. The assumed final maturity date of the Senior
Certificates is ________ __, ____, which is the Distribution Date
immediately following the latest scheduled maturity date of any Mortgage
Loan in the Mortgage Pool.
BOOK-ENTRY CERTIFICATES
The Senior Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership
interests in the Senior Certificates ("Certificate Owners") will hold
their Certificates through the Depository Trust Company ("DTC") in the
United States(, or CEDEL or Euroclear (in Europe)) if they are
participants of such systems, or indirectly through organizations which
are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate principal
balance of the Certificates 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 will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries").) Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
integral multiples in excess thereof. Except as described below, no
person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until Definitive
Certificates are issued, it is anticipated that the only
"Certificateholder" of the Certificates will be Cede & Co., as nominee of
DTC. Certificate Owners will not be Certificateholders as that term is
used in the Pooling and Servicing Agreement. Certificate Owners are only
permitted to exercise their rights indirectly through Participants and
DTC.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND
DISTRIBUTION ACCOUNT
The Trustee shall establish and maintain on behalf of the Servicer an
account (the "Collection Account") for the benefit of the
Certificateholders. The Collection Account will be an Eligible Account
(as defined herein). Subject to the investment provision described in
the following paragraphs, upon receipt by the Servicer of amouts
in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee, administrative charges, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items), the Servicer will
deposit such amounts in the Collection Account. Amounts so deposited may
be invested in Eligible Investments (as described in the Pooling and
Servicing Agreement) maturing no later than one Business Day prior to the
date on which the amount on deposit therein is required to be deposited in
the Distribution Account or on such Distribution Date if approved by the
Rating Agencies.
The Trustee will establish an account (the "Distribution Account")
into which will be deposited amounts withdrawn from the Collection Account
for distribution to Certificateholders on a Distribution Date. The
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 an account that is ((i) maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies,
(ii) one or more accounts with a depository institution which accounts are
fully insured by either the Savings Association Insurance Fund ("SAIF") or
the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation with a minimum long-term unsecured debt rating of ( ),
(iii) a segregated trust account maintained with the Trustee or an
affiliate of the Trustee in its fiduciary capacity or (iv) otherwise
acceptable to each Rating Agency as evidenced by a letter from each Rating
Agency to the Trustee, without reduction or withdrawal of their then
current ratings of the Certificates).
Eligible Investments are specified in the Pooling and Servicing
Agreement and are limited to investments which meet the criteria of the
Rating Agencies from time to time as being consistent with their then
current ratings of the Certificates.
DISTRIBUTIONS
General. Distributions on the Senior Certificates will be made by the
Trustee on the __th day of each month, or if such day is not a business
day, on the first business day thereafter, commencing on _______ __, 199_
(each, a "Distribution Date"), to the persons 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
to the address of the person entitled thereto as it appears on the
applicable Certificate Register or, in the case of a Certificateholder who
holds Certificates with an aggregate initial Certificate Principal Balance
of $___________ or more and who has so notified the Trustee in writing in
accordance with the Pooling and Servicing Agreement, by wire transfer in
immediately available funds to the account of such Certificateholder at a
bank or other depository institution having appropriate wire transfer
facilities; provided, however, that the final distribution in retirement
of the Senior Certificates will be made only upon presentment and
surrender of such Certificates at the Corporate Trust Office of the
Trustee. On each Distribution Date, a Certificateholder of a Senior
Certificate will receive such Certificateholder's Percentage Interest
of the amounts required to be distributed with respect to the Senior
Certificates. The "Percentage Interest" evidenced by a Senior
Certificate will equal the percentage derived by dividing the
denomination of such Senior Certificate by the aggregate denominations
of all Senior Certificates.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
The Trustee shall maintain a distribution account (the "Distribution
Account") on behalf of the Certificateholders. The Trustee shall, promptly
upon receipt, deposit in the Distribution Account and retain therein the
following:
(i) the aggregate amount remitted by the Servicer from the
Certificate Account;
((ii) all Advances;) and
(iii) any amount required to be deposited by the Servicer in
connection with any losses on Permitted Investments.
WITHDRAWALS FROM THE DISTRIBUTION ACCOUNT
The Trustee shall withdraw funds from the Distribution Account for
distribution to Certificateholders as described below under "--Allocation
of Available Funds" and may from time to time make withdrawals from the
Distribution Account for the following purposes:
(i) to pay to the Servicer as servicing compensation earnings on
or investment income with respect to funds in or credited to the
Distribution Account;
(ii) to withdraw any amount deposited in the Distribution
Account and not required to be deposited therein; and
(iii) to clear and terminate the Distribution Account upon the
termination of the Pooling and Servicing Agreement.
ALLOCATION OF AVAILABLE FUNDS.
General. Distributions to Certificateholders will be made on each
Distribution Date in an amount equal to the amount of Available Funds.
"Available Funds" as of any Distribution Date, is the sum of the following
amounts:
(i) the aggregate amount on deposit in the Certificate Account
as of the close of business on the immediately preceding
Determination Date; and
(ii) Advances with respect to such Distribution Date,
less the sum of:
(x) the portion thereof representing (A) Principal
Prepayments and Liquidation Proceeds received after the last day
of the related Prepayment Period and (B) all Scheduled Payments
or portions thereof received in respect of scheduled principal
and interest on the Mortgage Loans due after the preceding Due
Date, and
(y) amounts permitted to be withdrawn from the Certificate
Account pursuant to clauses (i)-(vii), inclusive under "-
-Withdrawals from the Certificate Account" above.
On each Distribution Date, the Trustee shall withdraw from the
Distribution Account the Available Funds and make distributions thereof as
described below and to the extent of Available Funds:
(i) to the Senior Certificateholders, an amount equal to the sum of
(a) interest accrued during the related Interest Accrual Period at
the applicable Pass-Through Rate for the Senior Certificates on the
Senior Certificate Principal Balance immediately prior to the related
Distribution Date, reduced by such Class' pro rata share of
shortfalls in interest due to prepayments on the Mortgage Loans for
such Distribution Date and (b) any Unpaid Interest Shortfall with
respect to such Class;
(ii) to the Senior Certificateholders, an amount equal to the Class A
Principal Formula Amount to reduce the Certificate Principal Balance
thereof to zero; and
(iii) to the Servicer, Nonrecoverable Advances not previously
reimbursed.
As more fully described in the Pooling and Servicing Agreement, the
remaining Available Funds for such Distribution Date, if any, will be
distributed to the Certificateholders of the Subordinate and Residual
Certificates.
Definitions.
The "Pass-Through Rate" for any Distribution Date is defined in the
Summary of Terms above. The "Unpaid Interest Shortfall" as to any
Distribution Date is the amount, if any, by which the aggregate of the
Interest Shortfalls for a Class of Certificates for prior Distribution
Dates exceeds the aggregate of the amounts paid on prior Distribution
Dates to Certificateholders of Certificates of such Class as Unpaid
Interest Shortfalls. The "Interest Shortfall" as to any Distribution Date
is the amount, if any, by which the amount paid to Certificateholders of a
Class of Certificates on such Distribution Date is less than the amount of
current interest required to be paid to the Certificateholders of such
Class on such Distribution Date.
The "Class A Principal Formula Amount" with respect to any
Distribution Date is an amount equal to the sum of (i) the Class A
Percentage of the aggregate of the principal portion of each Scheduled
Payment due during the related Due Period, whether or not received; (ii)
the Class A Prepayment Percentage of the aggregate of Principal
Prepayments for such Distribution Date; (iii) with respect to unscheduled
recoveries allocable to principal (including insurance proceeds) of any
Mortgage Loan which was finally liquidated
during the related Prepayment Period, the lesser of (A) the Class A
Prepayment Percentage of such recovery attributable to principal of such
Mortgage Loan and (B) the Class A Percentage times the related Principal
Balance; and (iv) any Unpaid Principal Shortfall for such Distribution
Date.
The "Class A Percentage" with respect to any Distribution Date equals
the percentage equivalent of a fraction the numerator of which is the
Certificate Principal Balance of the Senior Certificates and the
denominator of which is the Pool Principal Balance. The "Pool Principal
Balance" with respect to any Distribution Date equals the aggregate of the
Principal Balances of the Mortgage Loans outstanding on the Due Date in
the month preceding the month of such Distribution Date.
The "Class A Prepayment Percentage" with respect to any Distribution
Date is 100%; provided, however, that the Class A Prepayment Percentage
for a Distribution Date occurring in or after _______ 199_ will be equal
to the Class A Percentage for such Distribution Date if:
(a) the percentage, for the preceding Distribution Date,
determined by dividing
(i) the aggregate Certificate Principal Balances of the
Subordinate Certificates by
(ii) the Pool Principal Balance
is equal to or greater than __%; and
(b) (i) either
(A) aggregate Realized Losses do not exceed __% of the
Original Certificate Principal Balance of the Subordinate
Certificates, and no more than __% of the Mortgage Loans
(measured by Principal Balance) are 61 days or more
delinquent (or are in foreclosure or converted to REO
Properties); or
(B) aggregate Realized Losses do not exceed __% of the
Original Certificate Principal Balance of the Subordinate
Certificates; and (ii) at least one of the following
conditions is satisfied: (1) no more than __% of the
Mortgage Loans (measured by Principal Balance) are 61 days
or more delinquent (or are in foreclosure or converted to
REO Properties) or (2) no more than __% (or ____%, if
certain additional tests are met regarding recent
performance) (measured by Principal Balance) are 91 days or
more delinquent (or are in foreclosure or converted to REO
Properties); and
(c) no Rating Agency has reduced the original rating assigned to
the Senior Certificates due to a perceived deterioration in the
credit quality of the Mortgage Loans;
or certain other criteria more fully described in the Pooling and
Servicing Agreement are met.
The "Certificate Principal Balance" with respect to the Class A
Certificates, as of any Distribution Date, will be equal to the
Certificate Principal Balance thereof on the Closing Date (the "Original
Certificate Principal Balance") minus all distributions of principal with
respect thereto on previous Distribution Dates.
A "Principal Prepayment" with respect to any Distribution Date is any
mortgagor payment or other recovery of principal on a Mortgage Loan that
is received in advance of its scheduled Due Date and is not accompanied by
an amount as to interest representing scheduled interest due on any date
or dates in any month or months subsequent to the month of prepayment.
The "Unpaid Liquidation Loss Amount" with respect to any Distribution
Date is the amount calculated under clause (iii)(B) of the definition of
"Class A Formula Amount" for all Liquidated Loans for the Distribution
Date following the Prepayment Period during which such Mortgage Loans or
related REO Properties became Liquidated Loans, less the sum of (a) the
aggregate of amounts actually distributed pursuant to clause (iii) of such
definition with respect to such Liquidated Loans on any such Distribution
Date and (b) the aggregate of Unpaid Liquidation Loss Amounts distributed
to the Certificateholders of the Senior Certificates on any prior
Distribution Date.
The "Unpaid Principal Shortfall" with respect to any Distribution
Date is the amount, if any, by which previous distributions of principal
of the Senior Certificates are less than the aggregate Class A Formula
Amounts (net of amounts under clause (iv) of the definition of "Class A
Formula Amount") distributed on prior Distribution Dates.
The "Principal Balance" of any Mortgage Loan or related REO Property
equals (i) as of the Cut-off Date, the Cut-off Date Principal Balance, and
(ii) as of any other date, the Cut-off Date Principal Balance minus the
sum of (a) the principal portion of the Scheduled Payments due with
respect to such Mortgage Loan or REO Property during each Due Period
ending prior to the most recent Distribution Date which were received or
with respect to which an Advance was made, and (b) all Principal
Prepayments with respect to such Mortgage Loan or REO Property, and all
Liquidation Proceeds to the extent applied by the Servicer as recoveries
of principal with respect to such Mortgage Loan or REO Property, which
were distributed on any previous Distribution Date, and (c) any Realized
Loss with respect thereto allocated for any previous Distribution Date.
A "Realized Loss" (i) with respect to any defaulted Mortgage Loan
that is finally liquidated (a "Liquidated Loan"), is the amount of loss
realized equal to the portion of the Principal Balance remaining after
application of all amounts recovered (net of amounts reimbursable to the
Servicer for related Advances, expenses and Servicing Fees) towards
interest and principal owing on the Mortgage Loan and (ii) with respect to
certain Mortgage Loans the principal balances or the scheduled payments of
principal and interest of which have been reduced in connection with
bankruptcy proceedings, the amount of such reduction.
SUBORDINATION OF THE SUBORDINATE CERTIFICATES
The rights of the Certificateholders of the Subordinate Certificates
and the Residual Certificates to receive distributions with respect to the
Mortgage Loans will be subordinated to such rights of the
Certificateholders of the Senior Certificates to the extent described
below. This subordination is intended to enhance the likelihood of regular
receipt by the Certificateholders of the Senior Certificates of the full
amount of the monthly distributions due them, and to afford such
Certificateholders protection against Realized Losses. The protection
afforded to the Certificateholders of Senior Certificates by means of the
subordination feature will be accomplished by the preferential right of
such Certificateholders to receive, prior to any distribution being made
on a Distribution Date in respect of the Subordinate Certificates, the
amounts due them on each Distribution Date out of Available Funds on
deposit on such date in the Certificate Account and, if necessary, by the
right of such Certificateholders to receive future distributions with
respect to the Mortgage Loans that would otherwise have been payable to
the Certificateholders of the Subordinate Certificates.
Unless reduced by cash flow deficiencies due to delinquencies or
liquidation losses, the entitlement of the Senior Certificates to a
disproportionate percentage (100% unless certain tests are satisfied as
set forth in the definition of Class A Prepayment Percentage) of all
Principal Prepayments will have the effect of accelerating the
amortization of such Class from what it would have been if such amounts
had been distributed pro rata on the basis of the Certificate Principal
Balances of all of the Classes of Certificates. Any such acceleration will
increase the relative interests of the Subordinate Certificates in the
Trust Fund and the protection afforded to the Senior Certificates afforded
thereby. If, however, as a result of losses on the Mortgage Loans, the
Pool Principal Balance becomes less than the aggregate Certificate
Principal Balance of the Senior Certificates, the protection afforded by
the subordination feature will be exhausted and the Senior
Certificateholders will thereafter bear all losses and delinquencies in
respect of the Mortgage Loans.
On each Distribution Date, the Certificateholders of Subordinate
Certificates will be entitled to distributions of principal and interest
from Available Funds, if any, remaining in the Certificate Account after
distribution to the Senior Certificateholders of amounts representing
principal and interest described above under "Distributions."
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence:
____ _ Cut-off Date.
____ _ - ____ (A) Prepayment Period. The Servicer receives
Principal Prepayments and interest thereon to the
date of such prepayment. For succeeding
Distribution Dates, the Prepayment
Period will commence on the __th of the preceding
calendar month and end on the __th of the month of
such Distribution Date.
____ __ (B) Record Date (the last business day of the
month preceding the month of the related
Distribution Date).
____ __ (C) Due Date (the first calendar day of the month in
which the related Distribution Date occurs). Scheduled
Payments of principal and interest on the
Mortgage Loans are due from Mortgagors.
Through ____ __ (D) The Servicer receives Scheduled Payments due
on ____ __ during this period.
____ __ (E) Determination Date (the __th day of each month).
The Trustee determines the amount of
principal and interest (including the amount, if
any, of Advances to be made by the Servicer)
to be distributed to Certificateholders on the
following Distribution Date.
____ __ (F) Distribution Date.
Succeeding monthly periods follow the pattern of (A) through (F), except
that the Prepayment Period is as indicated in the description above.
________________
(A) Principal Prepayments received during this period will be distributed
to Certificateholders on ____ __, 199_. When a Mortgage Loan is
prepaid in full, interest on the amount prepaid is collected only
from the last scheduled Due Date to the date of prepayment. Interest
in respect of Principal Prepayments received during the period from
the second through the __th day of a month will be paid to the
Servicer as additional servicing compensation. With respect to
Prepayment Interest Shortfalls resulting from Principal Prepayments
received during the period from the __th through the last day of a
calendar month, the Servicer will reduce its Servicing Fee for such
month and make a corresponding deposit in the Certificate Account, in
each case to the extent described under "Servicing of Mortgage Loans-
-Adjustment to Servicing Fee in Connection with Certain Prepaid
Mortgage Loans" herein.
(B) Distributions of principal and interest on ____ __, 199_ will be
made to Senior Certificateholders of record at the close of business
on the Record Date.
(C) Scheduled Payments are due on this date and, when received, will be
passed through on the related Distribution Date, with the interest
adjusted to the applicable Net Loan Rates.
(D) Scheduled Payments due on ____ _, 199_ will be deposited by the
Servicer in the Certificate Account within one Business Day of
receipt. Such payments will include the scheduled principal payments,
plus interest at the applicable Net Loan Rates on the Cut-off Date
Principal Balance.
(E) As of the close of business on __________ __, 199_ the Trustee will
determine the amount of principal and interest (including the amount,
if any, of Advances to be made by the Servicer) which will be passed
through to Senior Certificateholders. The Trustee will be obligated
to distribute those Scheduled Payments due on ____ _, 199_ which have
been received on or before ___________ __, 199_ (or which were the
subject of an Advance), as well as all Principal Prepayments received
on Mortgage Loans during the related Prepayment Period (the Cut-off
Date through ____ __, 199_). In the event a Prepayment Interest
Shortfall occurs during such Prepayment Period, the Servicing Fee
otherwise payable to the Servicer for such month shall, to the extent
of such Prepayment Interest Shortfall, be deposited by the Servicer
in the Certificate Account for distribution to Certificateholders on
____ __, 199_.
(F) The Trustee will make distributions to Certificateholders on the __th
day of the month in which the related Due Date occurs, or if such day
is not a business day, on the next business day.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each
Certificateholder a statement generally setting forth:
(i) the amount of the related distribution to Certificateholders
of such Class of Certificates allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments
included therein, any Unpaid Principal Shortfall included in such
distribution and any remaining Unpaid Principal Shortfall after
giving effect to such distribution;
(ii) the amount of such distribution to Certificateholders of
such Class of Certificates allocable to interest, any Unpaid Interest
Shortfall included in such distribution and any remaining Unpaid
Interest Shortfall after giving effect to such distribution;
(iii) if the distribution to the Certificateholders of such
Class of Certificates is less than the full amount that would be
distributable to such Certificateholders if there were sufficient
funds available therefor, the amount of the shortfall and the
allocation thereof as between principal and interest;
(iv) the Certificate Principal Balance of each Class of
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(v) the Pool Principal Balance for the following Distribution
Date;
(vi) the Class A Percentage for the following Distribution Date;
(vii) the related amount of the Servicing Fees paid to or
retained by the Servicer;
(viii) the Pass-Through Rate for such Class of Certificates with
respect to the current Due Period;
((ix) the amount of Advances included in the distribution on
such Distribution Date and the aggregate amount of Advances
outstanding as of the close of business on such Distribution Date;)
(x) the number and aggregate principal amounts of Mortgage Loans
(A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to
30 days, (2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days
and (B) in foreclosure and delinquent (1) 1 to 30 days, (2) 31 to 60
days, (3) 61 to 90 days and (4) 91 or more days, as of the close of
business on the last day of the calendar month preceding such
Distribution Date;
(xi) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number and
Principal Balance of such Mortgage Loan as of the close of business
on the Determination Date preceding such Distribution Date and the
date of acquisition thereof;
(xii) the total number and principal balance of any REO
Properties as of the close of business on the Determination Date
preceding such Distribution Date;
(xiii) the Class A Prepayment Percentage for the following
Distribution Date;
(xiv) the aggregate amount of Realized Losses incurred during
the preceding calendar month; and
(xv) the Unpaid Liquidation Loss Amount.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each
Certificateholder of record during the previous calendar year a statement
containing information necessary to enable Certificateholders to prepare
their tax returns. Such statements will not have been examined and
reported upon by an independent public accountant.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor,
the Servicer and the Trustee, without the consent of Certificateholders,
for any of the purposes set forth under "The Pooling and Servicing
Agreement--Amendment" in the Prospectus. In addition, the Pooling and
Servicing Agreement may be amended by the Depositor, the Servicer and the
Trustee with the consent of the Certificateholders of a Majority in
Interest of each Class of Senior and Subordinate Certificates affected
thereby for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, payments
required to be distributed on any Certificate without the consent of the
Certificateholder of such Certificate; (ii) adversely affect in any
material respect the interests of the Certificateholders of any Class of
Certificates in a manner other than as described in clause (i) above,
without the consent of the Certificateholders of Certificates of such
Class evidencing as to such Class Percentage Interests aggregating at
least 66%; or (iii) reduce the aforesaid percentage of aggregate
outstanding principal amounts of Certificates of each Class, the
Certificateholders of which are required to consent to any such amendment,
without the consent of the Certificateholders of all Certificates of such
Class.
OPTIONAL TERMINATION
The Servicer will have the right to repurchase all remaining Mortgage
Loans and REO Properties in the Mortgage Pool and thereby effect early
retirement of the Certificates, subject to the Pool Principal Balance of
such Mortgage Loans and REO Properties at the time of repurchase being
less than or equal to __ of the Cut-off Date Principal Balance thereof. In
the event the Servicer exercises such option, the purchase price
distributed with respect to each Certificate will be 100% of its then
outstanding Certificate Principal Balance and in the case of a Senior
Certificate, one month's interest thereon at the applicable Pass-Through
Rate plus any unpaid accrued interest. Any repurchase of the Mortgage
LoansandREOProperties mayresultinanearlyretirementof theSeniorCertificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 91 days or
more, the Servicer may, at its option, purchase such Mortgage Loan from
the Trust Fund at a price equal to 100% of the Principal Balance thereof
plus accrued interest thereon at the applicable Net Loan Rate from the
date through which interest was last paid by the related mortgagor or
advanced to the first day of the month in which such amount is to be
distributed.
EVENTS OF DEFAULT
Events of Default will consist of: (i) any failure by the Servicer to
deposit in the Certificate Account the required amounts or remit to the
Trustee any payment (other than an Advance required to be made
under the terms of the Pooling and Servicing Agreement) which continues
unremedied for five business days after the giving of written notice of
such failure to the Servicer by the Trustee or the Depositor or to the
Servicer and the Trustee by the Certificateholders of Certificates having
not less than 25% of the Voting Rights evidenced by the Certificates; (ii)
any failure by the Servicer to observe or perform in any material respect
any other of its covenants or agreements in the Pooling and Servicing
Agreement, which continues unremedied for 60 days after the giving of
written notice of such failure to the Servicer by the Trustee or the
Depositor, or to the Servicer and the Trustee by the Certificateholders of
Certificates evidencing not less than 25% of the Voting Rights evidenced
by the Certificates; (iii) insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings, and certain actions by
or on behalf of the Servicer indicating its insolvency or inability to pay
its obligations or (vi) any failure of the Servicer to make any Advance
which continues unremedied for the period of one business day after the
date on which telecopied notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Trustee. As of any
date of determination, 99% of the Voting Rights will be allocated among
Certificateholders of the Class A and Subordinate Certificates in
proportion to the Certificate Principal Balances of their respective
Certificates on such date; and Certificateholders of the Residual
Certificates will collectively be entitled to 1% of the Voting Rights.
Voting Rights will be allocated among the Certificates of each such Class
in accordance with the respective Percentage Interests.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under the Pooling and Servicing
Agreement remains unremedied, the Trustee may, and upon the receipt of
instructions from Certificateholders of Certificates having not less than
25% of the Voting Rights evidenced by the Certificates, the Trustee shall,
terminate all of the rights and obligations of the Servicer under the
Pooling and Servicing Agreement and in and to the Mortgage Loans,
whereupon the Trustee will succeed to all of the responsibilities, duties,
and liabilities of the Servicer under the Pooling and Servicing Agreement,
including the obligation to make Advances. Notwithstanding the foregoing,
in the event of an Event of Default arising from the Servicer's failure to
make an Advance as described in clause (vi) in the preceding paragraph,
the Trustee shall terminate all of the rights and obligations of the
Servicer under the Pooling and Servicing Agreement and in and to the
Mortgage Loans as described in the preceding sentence.
No Certificateholder, solely by virtue of such Certificateholder's
status as a Certificateholder, will have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect thereto,
unless such Certificateholder previously has given to the Trustee written
notice of default and unless the Certificateholders of Certificates having
not less than 25% of the Voting Rights evidenced by the Certificates have
made written request to 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 ___ days has neglected or refused to
institute any such proceeding.
THE TRUSTEE
( ) will be the Trustee under the Pooling and Servicing
Agreement. The Depositor and ( ) may maintain other banking
relationships in the ordinary course of business with the Trustee. Senior
Certificates may be surrendered at the Corporate Trust Office of the
Trustee located at (___________________________________ _____), Attention:
(__________ Series 199_-___) or at such other addresses as the Trustee may
designate from time to time.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
(DELAY IN DISTRIBUTIONS; INDEX LAG
The effective yield to the holders of the Senior Certificates will be
lower than the yield otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such
holders until the __th day (or following business day) of the month
following the month in which interest accrues on the Mortgage Loans
(without any additional distribution of interest or earnings thereon in
respect of such delay). (In addition, the Loan Rate applicable for any
Adjustment Date will be the most recent Index announced 45 days prior to
each Adjustment Date. See "The Mortgage Pool" herein.))
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Servicer may purchase from the Trust Fund a Mortgage Loan which
is delinquent in payment 91 days or more. The purchase price for such
Mortgage Loan shall be equal to 100% of the Principal Balance thereof plus
accrued interest thereon at the applicable Net Loan Rate from the date
through which interest was last paid by the related mortgagor or advanced
to the first day of the month in which such amount is to be distributed.
To the extent such rights are exercised, prepayments allocated to the
Senior Certificates will increase.
(LIMITATION ON ADJUSTMENTS
Although each of the Mortgage Loans bears interest at an
(fixed)(adjustable) Loan Rate, the monthly adjustments of the Loan Rate
for any Mortgage Loan will not exceed the Periodic Rate Cap and the Loan
Rate will in no event exceed the Maximum Rate for such Mortgage Loan,
regardless of the level of interest rates generally or the rate otherwise
produced by the Index and the Gross Margin. (In addition, such adjustments
will be subject to rounding to the nearest one-eighth of 1%.))
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Senior
Certificates (together with the net proceeds of the sale of the
Subordinate Certificates) against the purchase price of the Mortgage
Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes.
The Senior and Subordinate Certificates will constitute "regular
interests" in the REMIC and the Residual Certificates will constitute the
sole class of "residual interests" in the REMIC.
ORIGINAL ISSUE DISCOUNT
The Senior Certificates may be issued at a premium. 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 Mortgage Loans at a rate equal to __% CPR. No
representation is made as to whether the Mortgage Loans will prepay at
that rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" herein and "Certain Federal Income Tax Consequences" in
the Prospectus. If the Certificateholders of the Senior Certificates are
treated as holding such Certificates at a premium, such Certificateholders
should consult their tax advisors regarding the election to amortize bond
premium and the method to be employed.
As is described more fully under "Certain Federal Income Tax
Consequences" in the Prospectus, the Senior Certificates will represent
qualifying assets under Sections 593(d), 856(c)(5)(A) and
7701(a)(19)(C)(v) of the Code, and net interest income attributable to the
Senior 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 Fund are assets described in such
sections. The Senior Certificates will represent qualifying assets under
Section 860G(a)(3) if acquired by a REMIC within the prescribed time
periods of the Code.
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 Mortgage Loan, the receipt of
income from a source other than a Mortgage 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 Mortgage Loans
for temporary investment pending distribution on the Certificates. It is
not anticipated that the Trust Fund 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 Fund 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 Fund will recognize net income from
foreclosure property subject to federal income
tax.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax
that may be imposed on the REMIC arises out of a breach of the Servicer's
or the Trustee's obligations, as the case may be, under the Pooling and
Servicing Agreement and in respect of compliance with then applicable law,
such tax will be borne by the Servicer or Trustee in either case out of
its own funds. In the event that either the Servicer or the Trustee, as
the case may be, fails to pay or is not required to pay any such tax as
provided above, such tax will be borne by the Certificateholders of the
Subordinate Certificates. It is not anticipated that any material state or
local income or franchise tax will be imposed on the Trust Fund.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Senior Certificates should consult with its counsel with respect to
the potential consequences under the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and the Code, of the Plan's acquisition
and ownership of such Certificates. See "ERISA Considerations" in the
Prospectus. Section 406 of ERISA prohibits "parties in interest" with
respect to an employee benefit plan subject to ERISA and the excise tax
provisions set forth under Section 4975 of the Code (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.
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 Senior
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 Senior Certificates
should consider, among other factors, the extreme sensitivity of the
investments to the rate of principal payments (including prepayments) on
the Mortgage Loans.
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 applies to mortgage loans such as the
Mortgage Loans in the Trust Fund.
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 Corporation ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc.
("D&P") or Fitch Investors Service, Inc. ("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 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 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 of all of
the certificates of that Class outstanding at the time of the acquisition;
and (iv) immediately after the acquisition, no more than twenty-five
percent of the assets of 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 Seller, the
Underwriter, the Trustee, the Servicer, any obligor with respect to
Mortgage Loans included in the Trust Fund constituting more than five
percent of the aggregate unamortized principal balance of the assets in
the Trust Fund, or any affiliate of such parties (the "Restricted Group").
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Senior 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 Mortgagor that is the obligor on 5% of the Mortgage Loans included
in the Trust Fund by aggregate unamortized principal balance of the assets
of the Trust Fund.
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 the Senior Certificates. Moreover, each Plan fiduciary
should determine whether under the general fiduciary standards of
investment prudence and diversification, an investment in the Senior
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.
UNDERWRITING
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 Senior
Certificates. Distribution of the Senior 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 Senior 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 Senior Certificates but has no obligation to do so.
There can be no assurance that a secondary market for the Senior
Certificates will develop or, if it does develop, that it will continue.
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 MATTERS
Certain legal matters will be passed upon for the Depositor and for
the Underwriter by Brown & Wood, New York, New York.
RATINGS
It is a condition of the issuance of the Senior Certificates that
they be rated "( )" by ( ) and ( ) by ( ) (together with ( ),
the "Rating Agencies").
The ratings assigned by Duff & Phelps Credit Rating Co. ("D&P") to
securities address the likelihood of the receipt by the holders of such
securities of all distributions to which they are entitled under the
transaction structure. D&P's ratings reflect its analysis of the
riskiness of the mortgages and its analysis of the structure of the
transaction as set forth in the operative documents. D&P's ratings do not
address the effect on yield on the securities attributable to prepayments
or recoveries on the underlying assets.
The ratings assigned by Fitch Investors Service, L.P. ("Fitch") to
securities address the likelihood of the receipt of all distributions on
the assets by the related holders of securities under the agreements
pursuant to which such securities are issued. Fitch's ratings take into
consideration the credit quality of the related pool, including any credit
support providers, structural and legal aspects associated with such
securities, and the extent to which the payment stream on the pool is
adequate to make the payments required by such securities. Fitch ratings
on such securities do not, however, constitute a statement regarding
frequency of prepayments of the assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's")
to securities address the likelihood of the receipt by holders of
securities of all distributions to which such holders of securities are
entitled. Moody's ratings on securities do not represent any assessment
of the likelihood or rate of principal prepayments. The ratings do not
address the possibility that holders of securities might suffer a lower
than anticipated yield as a result of prepayments.
The ratings assigned by Standard & Poor's Ratings Group, a Division
of The McGraw-Hill Companies ("Standard & Poor's"), to securities address
the likelihood of the receipt of all distributions on the assets by the
related holders of securities under the agreements pursuant to which such
securities are issued. Standard & Poor's ratings take into consideration
the credit quality of the related pool, including any credit support
providers, structural and legal aspects associated with such securities,
and the extent to which the payment stream on such pool is adequate to
make payments required by such securities. Standard & Poor's ratings on
such certificates do not, however, constitute a statement regarding
frequency of prepayments on the related assets. The letter "r" attached
to a Standard & Poor's rating highlights derivative, hybrid and certain
other types of securities that Standard & Poor's believes may experience
high volatility or high variability in expected returns due to non-credit
risks. The absence of an "r" symbol in the rating of a class of
securities should not be taken as an indication that such securities will
exhibit no volatility or variability in total return.
<TABLE>
<CAPTION>
<S> <S>
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 THOSE TO WHICH THEY RELATE
OR AN 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 ASSET BACKED CERTIFICATES,
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
FINANCIAL ASSET SECURITIES CORP.
(DEPOSITOR)
Summary of Terms S-3
Risk Factors S-7
The Mortgage Lending Program S-8
Servicing of the Mortgage Loans S-10
Description of the Mortgage Loans S-11 _______________________
Description of the Certificates S-13
Yield, Prepayment and Maturity PROSPECTUS SUPPLEMENT
Considerations S-22 [ , 199 ]
Use of Proceeds S-22 ------------------------
Certain Federal Income Tax Consequences S-22
ERISA Considerations S-23
Underwriting S-25
Legal Matters S-25
Ratings S-25
PROSPECTUS
Prospectus Supplement or Current
Report on Form 8 2 GREENWICH CAPITAL MARKETS, INC.
Incorporation of Certain Document
by Reference 2
Available Information 2
Reports to Securityholder 3
Summary of Terms 4
Risk Factors 12
The Trust Fund 17
Use of Proceeds 22
The Depositor 22
Loan Program 22
Description of the Securities 24
Credit Enhancement 33
Yield and Prepayment Considerations 38
The Agreements 41
Certain Legal Aspects of the Loans 54
Certain Federal Income Tax Considerations 66
State Tax Considerations 85
ERISA Consideration 85
Legal Investment 88
Method of Distribution 89
Legal Matters 90
Financial Information 90
Rating 90
</TABLE>
========================================= =================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 15, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ___________, 1996)
$_____________
FINANCIAL ASSET HOME EQUITY LOAN TRUST 199___
$___________ HOME EQUITY LOAN ASSET BACKED NOTES, SERIES 199_-_
$__________ HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 199_-_
The Financial Asset Home Equity Loan Trust 199__ (the "Trust") will
be formed pursuant to a trust agreement to be dated as of ______, 199_
(the "Trust Agreement") and entered into by Financial Asset Securities
Corp. (the "Depositor"), ________________ and _____________, as owner
trustee (the "Owner Trustee"). The Trust will issue $___________
aggregate principal amount of Home Equity Loan Asset Backed Notes (the
"Notes"). The Notes will be issued pursuant to an indenture to be dated
as of __________ __, 199_ (the "Indenture"), between the Trust and
____________, as indenture trustee (the "Indenture Trustee"). The Trust
will also issue $____________ aggregate principal amount of Home Equity
Loan Asset Backed Certificates, Series 199_-_ (the "Certificates" and,
together with the Notes, the "Securities").
The Trust will consist of certain (adjustable rate) (fixed rate) home
equity revolving credit line loans made or to be made in the future (the
"Mortgage Loans") secured (primarily) by second deeds of trust or
mortgages on residential properties that are primarily one- to four-family
properties, the collections in respect of such Mortgage Loans, and certain
other property relating to such mortgage loans. (In addition, the
Securities will have the benefit of an irrevocable and unconditional
limited financial guaranty insurance policy (the "Policy") issued by
______________ (the "Certificate Insurer") covering (describe).)
Distributions of principal and interest on the Notes will be made on
the _________ day of each month or, if such date is not a Business Day,
then on the succeeding Business Day (each a "Distribution Date"),
commencing on ________, 199_ to the extent described herein. Interest
will accrue on the Notes at a rate (the "Note Rate") equal to ___% per
annum from the Closing Date to the first Distribution Date and at (a
floating rate equal to LIBOR (as defined herein) plus ___% per annum)
(___% per annum) thereafter.
The Certificates will represent fractional undivided interests in the
Trust. Distribution of principal and interest on the Certificates will be
made on each Distribution Date to the extent described herein. Interest
will accrue on the Certificates at a rate (the "Pass-Through Rate") equal
to ___% per annum from the Closing Date to the first Distribution Date and
at (a floating rate equal to LIBOR plus ___% per annum) (___% per annum)
thereafter.
Payments of interest and principal on the Notes will have equal
priority with payments of principal and interest (and will be made pro
rata) on the Certificates.
There is currently no market for the Securities offered hereby and
there can be no assurance that such a market will develop or if it does
develop that it will continue. See "RISK FACTORS" herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
THE SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-10 AND
IN THE PROSPECTUS ON PAGE 11.
____________________
THE SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, OWNER
TRUSTEE, INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT
PROVIDED HEREIN. THE SECURITIES ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Securities offered hereby will be purchased by Greenwich Capital
Markets, Inc. (and ) ((collectively,) the "Underwriter") from the
Depositor and will, in each case, be offered by the Underwriter from time
to time to the public in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. The aggregate proceeds to
the Depositor from the sale of the Notes are expected to be $_____________
and from the sale of the Certificates are expected to be $__________
before deducting expenses payable by the Depositor of $_______.
The Securities are offered subject to prior sale and subject to the
Underwriters' right to reject orders in whole or in part. It is expected
that the Notes will be delivered in book-entry form through the facilities
of The Depository Trust Company, (Cedel, S.A. and the Euroclear System) on
or about _______, 199_. The Securities will be offered in (Europe and)
the United States of America.
____________________
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Securities, whether or not
participating in this distribution, may be required to deliver a
Prospectus Supplement and Prospectus to investors. This is in addition to
the obligation of dealers acting as Underwriters to deliver a Prospectus
Supplement and Prospectus with respect to their unsold allotments or
subscriptions.
____________________
Each Series of Securities offered hereby constitute part of a
separate Series of Asset Backed Securities being offered by Greenwich
Capital Markets, Inc. from time to time pursuant to the Prospectus dated
December __, 1995. This Prospectus Supplement does not contain complete
information about the offering of the Securities. Additional information
is contained in the Prospectus and investors are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Securities
may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
____________________
GREENWICH CAPITAL MARKETS, INC.
_______________, 199_
SUMMARY
The following summary of certain pertinent information 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 herein are defined elsewhere
in the Prospectus Supplement or in the Prospectus.
Trust Financial Asset Home Equity Loan Trust 199_-_ the
"Trust" or the "Issuer"), a Delaware business
trust established pursuant to the Trust Agreement
(as defined herein), dated as of ___, 199_ (the
"Cut-Off Date"). The property of the Trust will
include: a pool of (adjustable) (fixed) rate home
equity loan revolving credit line loans made or
to be made in the future (the "Mortgage Loans"),
under certain home equity revolving credit line
loan agreements (the "Credit Line Agreements")
and secured (primarily) by second (deeds of
trust) (mortgages) on residential properties that
are primarily one- to four-family properties (the
"Mortgaged Properties"); the collections in
respect of the Mortgage Loans received after the
Cut-Off Date; property that secured a Mortgage
Loan which has been acquired by foreclosure or
deed in lieu of foreclosure; (a surety bond or
letter of credit); an assignment of the
Depositor's rights under the Purchase Agreement;
rights under certain hazard insurance policies
covering the Mortgaged Properties; and certain
other property, as described more fully herein.
The Trust will include the unpaid principal
balance of each Mortgage Loan as of the Cut-Off
Date (the "Cut-Off Date Principal Balance") plus
any additions thereto as a result of new advances
made pursuant to the applicable Credit Line
Agreement (the "Additional Balances") during the
life of the Trust. With respect to any date, the
"Pool Balance" will be equal to the aggregate of
the Principal Balances of all Mortgage Loans as
of such date. The "Principal Balance" of a Loan
(other than a Liquidated Loan) on any day is
equal to its Cut-Off
Date Principal Balance, plus (i) any Additional
Balances in respect of such Mortgage Loan, minus
(ii) all collections credited against the
Principal Balance of such Mortgage Loan in
accordance with the related Credit Line Agreement
prior to such day. The Principal Balance of a
Liquidated Loan after the final recovery of
related Liquidation Proceeds shall be zero.
Securities Offered (i) Home Equity Loan Asset Backed Notes, (the
"Notes"); and (ii) Home Equity Loan Asset
Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities").
Each Security represents the right to
receive payments of interest at the variable
rate described below, payable monthly, and
payments of principal at such time and to
the extent provided below.
Depositor Financial Asset Securities Corp., a Delaware
corporation and an indirect limited purpose
finance subsidiary of The Long-Term Credit
Bank of Japan, Limited and an affiliate of
Greenwich Capital Markets, Inc.
Servicer __________ (the "Servicer"). The Servicer will
service the Mortgage Loans pursuant to a
Servicing Agreement dated _________ 1, 199_
between the Issuer and the Servicer.
Indenture The Notes will be issued pursuant to an indenture
dated as of _________, 199_ (the "Indenture")
between the Trust and ________________________
in its capacity as indenture trustee
(the "Indenture Trustee"). The Indenture
Trustee will allocate distributions of
principal and interest to holders of the
Notes (the "Noteholders") in accordance with the
Indenture.
Trust Agreement Pursuant to a trust agreement dated as of
________ 1, 199_ (the "Trust Agreement"),
among the Depositor, ________ and
_________________ in its capacity as owner
trustee (the "Owner Trustee"), the Trust
will issue the Certificates in an initial
aggregate amount of $__________.
The Certificates will represent fractional
undivided interests in the Trust.
The Mortgage Loans The Mortgage Loans are (primarily) secured by
second deeds of trust or mortgages on
Mortgaged Properties. The Mortgage Loans
were originated by ( ) and on or prior to
the Closing Date, ( ) will sell the
Mortgage Loans to the Depositor pursuant to
a purchase agreement (the "Purchase
Agreement"). The aggregate Cut-Off Date
Principal Balance of the Mortgage loans is
$___________ (the "Cut-Off Date Pool
Balance").
The combined loan-to-value ratio of each
Mortgage Loan, computed using the maximum
amount the borrower was permitted to draw
down under the related Credit
Line Agreement (the "Credit Limit") and
taking into account the amounts of any related
senior mortgage loans (the "Combined
Loan-to-Value Ratio") did not
exceed __% as of the Cut-Off Date. The
weighted average Combined Loan-to-Value Ratio
of the Mortgage
Loans was ____% as of the Cut-Off Date. See
"THE HOME EQUITY LENDING PROGRAM --
Underwriting Procedures
Relating to the Mortgage Loans" herein.
Interest on each Mortgage Loan is payable
monthly and computed on the related average
daily outstanding Principal Balance for each
billing cycle at a variable rate per annum (the
"Loan Rate") equal at any time (subject to
minimum and maximum rates, as described herein
under "The Home Equity Lending Program--
Mortgage Loan Terms," and further
subject to applicable usury limitations) to
the sum of (i) (the prime rate published in
the "Money Rates" section of The Wall Street
Journal generally on the Monday of the week in
which such Loan Rate adjusts (or, if no rate is
published on such day, then on the next
succeeding calendar day on which a prime rate
is published), rounded to the nearest 1/8 of 1
percent) and (ii) a margin generally within the
range of ___% to ___%. The Loan Rate is
subject to adjustment ( ). With respect to
each Mortgage Loan, a "billing cycle" is the
calendar month preceding a Due Date. Interest
accrued at such rate will be due on the Due
Date in the month following the close of the
billing cycle. (As to each Mortgage Loan, the
Due Date is the __th day of the month.)
The Cut-Off Date Principal Balances ranged from
$______ to $_______ and averaged $_______.
Credit Limits under the Mortgage Loans as of
the Cut-Off ranged from approximately $_____ to
$______ and averaged $______. Each Mortgage Loan
was originated in the period from _______ to
_________, and, as of the Cut-Off Date, the
weighted average Credit Limit Utilization Rate
(as defined herein) was approximately ___%.
See "THE HOME EQUITY LENDING PROGRAM" and
"DESCRIPTION OF THE MORTGAGE LOANS" herein.
Collections All collections on the Mortgage Loans
will be allocated by the Servicer in accordance
with the Loan Agreements between amounts
collected in respect of interest ("Interest
Collections") and amounts collected in respect of
principal ("Principal Collections" and collectively
with Interest Collections, the "Collections").
The Servicer will generally deposit Collections
distributable to the Holders in an account
established for such purpose under the
Servicing Agreement (the "Collection Account").
See "DESCRIPTION OF THE SERVICING AGREEMENT --
Allocation and Collection" herein and "THE
AGREEMENTS -- Payments on Loans; Deposits to
Security Account" and "-- Collection Procedures"
in the Prospectus.
Description of the Securities
A. Distributions On each Distribution Date, collections on the
Mortgage Loans will be applied in the following
order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and
any overdue accrued interest (with interest
thereon) on the respective Security Principal
Balances of the Notes and the Certificates;
(iii) as principal on the Securities, the excess
of Principal Collections over Additional
Balances created during the preceding
Collection Period, such amount to be
allocated between the Notes and
Certificates, pro rata, based on their
respective Security Principal Balances;
(iv) as principal on the Securities, as payment
for any Liquidation Loss Amounts on the
Mortgage Loans;
(v) as payment for the premium on the Policy;
(vi) to reimburse prior draws made on the Policy;
and
(vii) any remaining amounts to the Depositor.
As to any Distribution Date, the "Collection
Period" is the calendar month preceding the month
of such Distribution Date.
"Liquidation Loss Amount" means with respect to
any Liquidated Mortgage Loan, the
unrecovered Principal Balance thereof at the
end of the related Collection Period in which
such Mortgage Loan became a Liquidated Mortgage
Loan after giving effect to the Net Liquidation
Proceeds in connection therewith.
B. Note Rate Interest will accrue on the unpaid Security
Principal Balance of the Notes at the per annum
rate (the "Note Rate") equal to ___% per annum
from the Closing Date to the first Distribution
Date and thereafter interest will accrue on the
Notes from and including the preceding
Distribution Date to but excluding such
current Distribution Date (each, an "Interest
Accrual Period") at (a floating rate equal to
LIBOR (as defined herein) plus ___%) (___%).
(Interest will be calculated on the basis of the
actual number of days in each Interest Accrual
Period divided by 360.) A failure to pay
interest on any Notes on any Distribution Date
that continues for five days constitutes an
Event of Default under the Indenture.
C. Pass-Through Rate Interest will accrue on the unpaid Principal
Balance of the Certificates at the per
annum rate (the "Pass-Through Rate") equal to
___% per annum from the Closing Date to the
first Distribution Date and thereafter interest
will accrue on the Certificates for each
Interest Accrual Period at (a floating rate equal
to LIBOR (as defined herein) plus ___%) (___%).
(Interest will be calculated on the basis of
the actual number of days in each Interest
Accrual Period divided by 360.) A failure to
pay interest on any Certificates on any
Distribution Date that continues for five days
constitutes an Event of Default under the Trust
Agreement.
D. Distribution Date The ____ day of each month or, if such day is
not a Business Day, the next succeeding
Business Day, commencing with _______, 199_. A
"Business Day" is any day other than a
Saturday or Sunday or another day on which
banking institutions in New York, New York (and
____________) are authorized or obligated by law,
regulations or executive order to be closed.
E. Record Date The last day preceding a Distribution Date or,
if the Securities are no longer Book-Entry
Securities, the last day of the month preceding
a Distribution Date.
F. Final Scheduled
Distribution Dates With respect to the Certificates,
___________________. To the extent not
previously paid, the Security Principal Balance
of the Notes will be due on the
Distribution Date in _______, 199_. Failure
to pay the full principal balance of Notes on
or before the applicable final scheduled
payment dates constitutes an Event of Default
under the Indenture.
G. Form and
Registration The Securities will initially be delivered in
book-entry form ("Book-Entry Securities").
Holders of such Securities may elect to
hold their interests through The
Depository Trust Company ("DTC"), (in the
United States, or Centrale de Livraison
de Valeurs Mobilieres S.A. ("Cedel") or
the Euroclear System ("Euroclear"), in
Europe). Transfers within DTC (, Cedel or
Euroclear, as the case may be,) will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as
the Securities are Book-Entry Securities, such
Securities will be evidenced by one or more
securities registered in the name of Cede &
Co. ("Cede"), as the nominee of DTC (or one of
the relevant depositaries (collectively, t h e
" E u r o p e a n Depositaries")). Cross-market
transfers between persons holding directly
or indirectly through DTC(, on the one
hand, and counterparties holding directly
or indirectly through Cedel or Euroclear, on
the other,) will be effected in DTC
through Citibank N.A. ("Citibank") or
Morgan Guaranty Trust Company of New York
("Morgan"), the relevant depositaries of Cedel
and Euroclear, respectively, and each a
participating member of DTC. The Securities
will initially be registered in the name of
Cede. The interests of such Holders will
be represented by book entries on the records of
DTC and participating members thereof. No
Holder of a Security will be entitled to
receive a definitive note representing such
person's interest, except in the event that
Securities in fully registered, certificated form
("Definitive Securities") are issued under the
limited circumstances described in "DESCRIPTION
OF THE SECURITIES /___/ Book-Entry
Registration of Securities" in the
Prospectus. All references in this
Prospectus Supplement to Securities reflect the
rights of Holders of such Notes only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Securities are held by DTC. See "RISK
FACTORS -- Book-Entry Securities" herein.
H. Denominations The Securities will be issued in minimum
denominations of $(________) and integral
multiples thereof.
(Letter of Credit)
(Surety Bond)
Issuer _________________ (the "(Letter of Credit)
(Surety Bond) Issuer"). See "THE (LETTER OF
CREDIT) (SURETY BOND) ISSUER" herein.
(Letter of Credit)
(Surety Bond) On the Closing Date, the (Letter of Credit)
(Surety Bond) Issuer will issue a (letter of
credit) (surety bond) (the "(Letter of
Credit) (Surety Bond)") in favor of the
Owner Trustee on behalf of the Trust. In
the event that, on any Distribution Date,
available amounts on deposit in the
Collection Account with respect to the
preceding Collection Period are insufficient
to provide for the payment of the amount
required to be distributed to the Holders
and the Servicer on such Distribution Date,
the Trustee will draw on the (Letter of
Credit) (Surety Bond), to the extent of the
(Letter of Credit) (Surety Bond) Amount for
such Distribution Date, in an amount equal
to such deficiency. See "DESCRIPTION OF THE
SECURITIES -- The (Letter of Credit) (Surety
Bond) and "-- Distributions on the
Securities" herein and "CREDIT ENHANCEMENT"
in the Prospectus.
((Letter of Credit)
(Surety Bond)
Amount The amount available under the (Letter of
Credit) (Surety Bond) (the "(Letter of Credit)
(Surety Bond) Amount") for the initial
Distribution Date will be $ . For
each Distribution Date thereafter, the (Letter of
Credit) (Surety Bond) Amount will equal the
lesser of (i) % of the Pool Balance as of the
first day of the preceding Collection Period
(after giving effect to any amounts distributed
with respect to principal of the Mortgage Loans
on the Distribution Date occurring in such
preceding Collection Period) and (ii) the
(Letter of Credit) (Surety Bond) Amount as of
the first day of the preceding Collection
Period, minus any amounts -- --- drawn
under the (Letter of Credit) (Surety Bond)
during such preceding Collection Period, plus any
amounts paid to the (Letter of Credit) (Surety
Bond) ---- Issuer on the
Distribution Date occurring in such preceding
Collection Period up to the amount of any
previous draws on the (Letter of Credit)
(Surety Bond).)
Servicing The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. On the ________ business day, but no
later than the ________ calendar day, of each
month (the "Determination Date"), the Servicer
will calculate, and instruct the Trustee
regarding, the amounts to be paid, as
described herein, with respect to the
related Collection Period to the Holders. See
"DESCRIPTION OF THE SECURITIES -- Distributions
on the Securities" herein. The Servicer will
receive a monthly servicing fee in the amount of
____% per annum (the "Servicing Fee Rate"), of
the related Pool Balance and certain other
amounts, as servicing compensation from the
Trust. See "SERVICING OF THE MORTGAGE LOANS
-- Servicing Compensation and Payment of
Expenses" herein. In certain limited
circumstances, the Servicer may resign or be
removed, in which event either the Trustee or a
third-party servicer will be appointed as
successor Servicer. See "SERVICING OF THE LOANS
-- Certain Matters Regarding the Servicer" and
"THE AGREEMENTS -- Events of Default; Rights Upon
Events of Default" in the Prospectus.
(Final Payment of Principal;
Termination The Trust will terminate on the Distribution Date
following the earlier of (i)
_________________________ and (ii) the final
payment or other liquidation of the last
Mortgage Loan and Private Security in the
Trust. The Mortgage Loans will be subject
to optional repurchase by the Servicer on
any Distribution Date after the Principal
Balance is reduced to an amount less than or
equal to $ ((5)% of the initial
Principal Balance). The repurchase price
will be equal to the sum of the outstanding
Principal Balance and accrued and unpaid
interest thereon at the weighted average of
the Loan Rates through the day preceding the
final Distribution Date. See "DESCRIPTION
OF THE SECURITIES -- Optional Termination"
herein and "THE AGREEMENTS -- Termination;
Optional Termination" in the Prospectus.)
Certain Federal Income Tax
Consequences In the opinion of Tax Counsel (as defined herein),
for federal income tax purposes, the Securities
will be characterized as indebtedness, and the
Trust should be characterized as an owner trust
and will not be characterized as an association
(or publicly traded partnership) taxable as
a corporation. Each holder of a Security, by
the acceptance of a Security, will agree to treat
the Security as indebtedness and the Trust as
an owner trust for federal, state and local
income and franchise tax purposes. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" and "STATE TAX
CONSEQUENCES" herein and "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS" and "STATE TAX CONSIDERATIONS"
in the Prospectus concerning the application
of federal, state and local tax laws.
Legal Investment The Securities will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), because some of the Mortgages
securing the Mortgage Loans are not first
mortgages. Accordingly, many institutions
with legal authority to invest in
comparably rated securities based solely on
first mortgages may not be legally authorized
to invest in the Certificates. See
"LEGAL INVESTMENT CONSIDERATIONS" herein and
"LEGAL INVESTMENT" in the Prospectus.
ERISA Generally, plans that are subject to the
requirements of ERISA and the Code are
permitted to purchase instruments like the
Notes that are debt under applicable state
law and have no "substantial equity features"
without reference to the prohibited
transaction requirements of ERISA and the Code.
In the opinion of ERISA Counsel (as defined
herein), the Notes will be classified as
indebtedness without substantial equity
features for ERISA purposes. However, if
the Notes are deemed to be equity interests
and no statutory, regulatory or
administrative exemption applies, the Trust will
hold plan assets by reason of a Plan's
investment in the Notes. Accordingly, any Plan
fiduciary considering whether to purchase the
Notes on behalf of a Plan should consult
with its counsel regarding the applicability
of the provisions of ERISA and the Code and the
availability of any exemptions. Under current
law the purchase and holding of the Certificates
by or on behalf of any employee benefit plan
(a "Plan") subject to the fiduciary
responsibility provisions of the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), may result in a "prohibited
transaction" within the meaning of ERISA and the
Code or other violation of the fiduciary
responsibility provisions of ERISA and Section
4975 of the Code. (Consequently, Certificates
may not be transferred to a proposed transferee
that is a Plan subject to ERISA or that is
described in Section 4975(e)(1) of the Code, or
a person acting on behalf of any such Plan or
using the assets of such plan unless the Owner
Trustee and the Depositor receive the
opinion of counsel reasonably satisfactory to
the Owner Trustee and the Depositor to the effect
that the purchase and holding of such
Certificate will not result in the assets of the
Trust being deemed to be "plan assets" for ERISA
purposes and will not be a prohibited
transaction under ERISA or Section 4975 of the
Code.) See "ERISA CONSIDERATIONS" herein
and in the Prospectus.
Rating It is a condition to the issuance of the
Securities that they be rated _________ by at
least ____ nationally recognized statistical
rating organizations (each a "Rating Agency").
In general, ratings address credit risk and do
not address the likelihood of prepayments. A
security rating is not a recommendation to buy,
sell or hold securities.
RISK FACTORS
(CASH FLOW CONSIDERATIONS
During the first ( )-year draw down period under the related Credit
Line Agreements for the Mortgage Loans, collections on such Mortgage Loans
may vary because, among other things, borrowers are not required to make
monthly payments of principal. With respect to some of the Mortgage
Loans, during the second ( )-year draw down period, no monthly payments
of principal are required. Collections on the Mortgage Loans may also
vary due to seasonal purchasing and payment habits of borrowers.
General credit risk may also be greater to Holders than to holders of
instruments representing interests in level payment first mortgage loans
since no paymentof principal generally isrequired until after eithera five-
or ten-year interest only period under the related Credit Line
Agreements. Minimum monthly payments will at least equal and may exceed
accrued interest. Even assuming that the Mortgaged Properties provide
adequate security for the Mortgage Loans, substantial delay could be
encountered in connection with the liquidation of Mortgage Loans that are
delinquent and corresponding delays in the receipt of related proceeds by
Holders could occur if the (Letter of Credit) (Surety Bond) provider were
unable to perform on its obligations under the (Letter of Credit) (Surety
Bond). Further, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will reduce the proceeds
payable to Holders and thereby reduce the security for the Mortgage Loans.
In the event any of the Mortgaged Properties fail to provide adequate
security for the related Mortgage Loans, Holders could experience a loss
if the (Letter of Credit) (Surety Bond) provider were unable to perform
its obligations under the (Letter of Credit) (Surety Bond).)
PREPAYMENT CONSIDERATIONS
All of the Mortgage Loans may be prepaid in whole or in part at any
time without penalty. Home equity loans, such as the Mortgage Loans, have
been originated in significant volume only during the past few years and
neither the Depositor nor the Servicer is aware of any publicly available
studies or statistics on the rate of prepayment of such loans. Generally,
home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment
than traditional loans. The Trust's prepayment experience may be affected
by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing and homeowner
mobility. In addition, substantially all of the Mortgage Loans contain
due-on-sale provisions and the Servicer intends to enforce such provisions
unless (i) such enforcement is not permitted by applicable law or (ii) the
Servicer, in a manner consistent with reasonable commercial practice,
permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. To the extent permitted by applicable law, such assumption
will not release the original borrower from its obligation under any such
Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF THE LOANS--'Due-on-Sale'
Clauses" in the Prospectus.
LEGAL CONSIDERATIONS
The Mortgage Loans are secured by deeds of trust or mortgages (which
generally are second mortgages). With respect to Mortgage Loans that are
secured by first mortgages, the Servicer has the power under certain
circumstances to consent to a new mortgage lien on the Mortgaged Property
having priority over such Mortgage Loan. Mortgage Loans secured by second
mortgages are entitled to proceeds that remain from the sale of the
related Mortgage Property after any related senior mortgage loan 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 (and
the (Letter of Credit) (Surety Bond) provider is unable to perform its
obligations under the (Letter of Credit) (Surety Bond) or if the coverage
under the (Letter of Credit) (Surety Bond) is exhausted) the Trust and,
accordingly, the Holders, bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower 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 MORTGAGE LOANS" herein.
The sale of the Mortgage Loans from the Seller to the Depositor
pursuant to the Purchase Agreement will be treated as a sale of the
Mortgage Loans. The Seller will warrant that such transfer is either a
sale of its interest in the Mortgage Loans or a grant of a first priority
perfected security interest therein. In the event of an insolvency of the
Seller, the receiver of the Seller may attempt to recharacterize the sale
of the Mortgage Loans as a borrowing by the Seller secured by a pledge of
the Mortgage Loans. If the receiver decided to challenge such transfer,
delays in payments of the Securities and possible reductions in the amount
thereof could occur. The Depositor will warrant in the Trust Agreement
that the transfer of its interest in the Mortgage Loans to the Trust is a
valid transfer and assignment of such interest.
If a conservator, receiver or trustee were appointed for the Seller,
or if certain other events relating to the bankruptcy or insolvency of the
Seller were to occur, Additional Balances would not be transferred by the
Seller to the Trust pursuant to the Purchase Agreement (as assigned by the
Depositor to the Trust). In such an event, an Event of Default under the
Pooling and Servicing Agreement and Indenture would commence and the Owner
Trustee would attempt to sell the Mortgage Loans (unless Holders holding
Securities evidencing undivided interests aggregating at least 51% of each
of the Security Principal Balance of the Notes and the Certificates
instruct otherwise), thereby causing early payment of the Security
Principal Balance of the Notes and the Certificates.
In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee
or the Holders from appointing a successor Servicer.
SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS
The Servicer may agree to changes in the terms of a Credit Line
Agreement, provided that such changes (i) do not adversely affect the
interest of the Holders, and (ii) are consistent with prudent business
practice. There can be no assurance that changes in applicable law or
the marketplace for home equity loans or prudent business practice
will not result in changes in the terms of the Mortgage Loans.
(DELINQUENT MORTGAGE LOANS
The Trust will include Mortgage Loans which are 89 or fewer days
delinquent. The Cut-Off Date Principal Balance of such delinquent
Mortgage Loans was $______________.)
THE TRUST
GENERAL
The Issuer, Financial Asset Home Equity Loan Trust 199_, is a
business trust formed under the laws of the State of Delaware pursuant to
the Trust Agreement for the transactions described in this Prospectus
Supplement. The Trust Agreement constitutes the "governing instrument"
under the laws of the State of Delaware relating to business trusts.
After its formation, the Issuer will not engage in any activity other than
(i) acquiring, holding and managing the Mortgage Loans and the other
assets of the Trust and proceeds therefrom, (ii) issuing the Notes and the
Certificates, (iii) making payments on the Notes and the Certificates and
(iv) engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The property of the Trust will consist of: (i) each of the Mortgage
Loans that are _________; (ii) collections on the Mortgage Loans received
after the Cut-Off Date; (iii) Mortgaged Properties relating to the
Mortgage Loans that are acquired by foreclosure or deed in lieu of
foreclosure; (iv) the Collection Account and the Distribution Account
(excluding net earnings thereon); (v) the (Letter of Credit) (Surety
Bond); and (vi) an assignment of the Depositor's rights under the Purchase
Agreement, including all rights of the Depositor to purchase Additional
Balances.
The Trust's principal offices are in __________, Delaware, in care of
________________________, as Owner Trustee, at ( ).
THE (LETTER OF CREDIT)(SURETY BOND) ISSUER
The following information with respect to _________ ("_______") has
been furnished by __________.
(Description of Letter of Credit/Surety Issuer)
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning (_______) and its
underwriting policies has been provided by (_______). The Depositor does
not make any representation as to the accuracy or completeness of such
information.
GENERAL
All of the Mortgage Loans were originated by
(_____________________________), (the "Seller" or the "Servicer") under
its home equity lending program. The Seller first offered adjustable rate
home equity revolving credit line loans ("home equity loans") in 19__. As
of (_____________), (____________) owned and serviced approximately
$__________ aggregate principal amount of outstanding home equity loans
secured by properties located in __________ under home equity credit lines
(the "Seller Portfolio").
UNDERWRITING PROCEDURES RELATING TO THE MORTGAGE LOANS
Each home equity loan was originated after a review by the Seller in
accordance with its established underwriting procedures, which were
intended to assess the applicant's ability to assume and repay such home
equity loans and the adequacy of the real property which serves as
collateral for such home equity loans. The maximum Credit Limit for a
home equity loan provided by the Seller was $__________.
Each applicant for a home equity loan was required to complete an
application which listed the applicant's assets, liabilities, income,
credit and employment history and other demographic and personal
information. If information in the loan application demonstrated that
there was sufficient income and equity to justify making a home equity
loan and the Seller (a) received a satisfactory independent credit bureau
report on the credit history of the borrower and (b) obtained, in the case
of all home equity loans originated prior to __________ a drive-by
appraisal of the related Mortgaged Property or for all home equity loans
originated as of __________, a satisfactory appraisal completed on forms
approved by FNMA, and if such information met the Seller's underwriting
standards, the Seller issued a commitment subject to satisfaction of
certain other conditions. These conditions included: (i) obtaining and
reviewing pay stubs, income tax returns or a verification of employment
from the applicant's employer; (ii) obtaining and reviewing a verification
of deposit; and (iii) obtaining and reviewing a verification of the loan
in the first lien position when the home equity loan was to be in a second
lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title policy insuring title
mortgage in accordance with the intended lien position. Regardless of
Combined Loan-to-Value Ratios, it is the Seller's policy not to accept a
position junior to any mortgage lien other than a first mortgage.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio
of __% for loans which the Seller obtained full documentary support and
was __% for loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property
information, the Seller determined whether sufficient unencumbered equity
in the property existed and whether the prospective borrower had
sufficient monthly income available to support the payments of interest at
the current prime rate plus the applicable margin based on the credit
limit in addition to any senior mortgage loan payments (including any
escrows for property taxes and hazard insurance premiums) and other
monthly credit obligations based on the prospective borrower's
debt-to-gross income ratio. The "debt-to-gross income ratio" is the ratio
of (a) certain of the borrower's debt obligations which include: (i) the
monthly first mortgage payment plus taxes; (ii) monthly installment debt
payments with a term of more than ten months; (iii) five percent of the
total revolving obligations; (iv) monthly alimony and child support
obligations; and (v) the payment on the home equity loan calculated at the
Credit Limit and current prime rate plus margin for such home equity loan
to (b) the borrower's gross verifiable monthly income. The debt-to-gross
income ratio generally did not exceed (________%).
When the commitment conditions had been satisfied, the home equity
loan was completed by signing a Credit Line Agreement, rescission
statement, and mortgage which secured the repayment of principal of and
interest on the related home equity loan. The original mortgage was then
recorded in the appropriate county government office.
MORTGAGE LOAN TERMS
A borrower may access a home equity loan by writing a check. On all
home equity loans, there is (a ten-year) draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans
bear interest at a variable rate which may change bi-weekly. Home equity
loans may be subject to a maximum per annum interest rate (the "Maximum
Rate") of ____ % per annum and
in all cases, are subject to applicable usury limitations. See "CERTAIN
LEGAL ASPECTS OF THE LOANS--Applicability of Usury Laws" in the
Prospectus. The daily periodic rate on the home equity loans (the "Loan
Rate") is the sum of the Index Rate plus a spread (the "Margin") which
generally ranges between ____% and ____%, divided by 365 days or 366 days,
as applicable.
The "Index Rate" is based on (the prime rate published in the "Money
Rates" section of The Wall Street Journal generally on the Monday of the
week in which such Loan Rate adjusts (or, if no rate is published on such
day, then on the next succeeding calendar day on which a prime rate is
published), rounded to the nearest 1/8 of 1 percent.) The annual
percentage rate for any bi-weekly period will be based on the Prime Rate
in effect the Monday on which the rate may change. (If a prime rate range
is published in The Wall Street Journal, then the midpoint (average) of
that range will be used.) There are no limitations on increases or
decreases (except for those home equity loans which have Maximum Rates).
Only the home equity loans that have Maximum Rates of ____% also have
annual adjustment caps of __% as to both increases and decreases in their
Loan Rates.
Billing statements are mailed monthly. The statement details all
debits and credits and specifies the minimum payment due and the available
credit line. Notice of changes in the applicable Loan Rate
are provided by the Seller to the Borrower with such statements. All
payments are due by the tenth day after the date the billing statement is
issued.
The Credit Line Agreements and Disclosure Statements further provide
that if publication of the Index Rate is discontinued, the Index Rate will
be changed upon notification in accordance with such Credit Line
Agreements and Disclosure Statements.
The right to obtain additional credit may be suspended or terminated
or the borrower may be required to pay the entire balance due plus all
other accrued but unpaid charges immediately, if the borrower fails to
make any required payment by the due date, if the total outstanding
principal balance including all charges payable exceeds the Credit Limit,
if the borrower made any statement or signature on any document which is
fraudulent or contained a material misrepresentation, if the borrower dies
or becomes incompetent, if the borrower becomes bankrupt or insolvent, if
the borrower becomes subject to any judgment, lien or attachment or
execution is issued against the Mortgaged Property, the borrower fails to
obtain and maintain required property insurance or if the borrower sells
or transfers the Mortgaged Property or does not maintain the property. In
addition, the right to obtain additional credit may be suspended or a
borrower's Credit Limit may be reduced, if the value of the Mortgaged
Property decreases for any reason to less than 80% of the original
appraised value, if the borrower is in default under the home equity loan,
if government action impairs the Seller's lien priority or if a regulatory
agency has notified the Seller that continued advances would constitute an
unsafe and unsound practice.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience
for each of the periods shown for the home equity loans indicated on the
table. The Servicer believes that there have been no material trends or
anomalies in the historical delinquency and loss experience as represented
in the following tables. The data presented in the following tables are
for illustrative purposes only, and there is no assurance that the
delinquency and loss experience of the Mortgage Loans will be similar to
that set forth below.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> As of _________
_________________________________
Number of
<S> Loans Amount
Amount Outstanding at <C> <C>
Period End . . . . . . . . . . . . . . . . .
Delinquency
30-59 Days . . . . . . . . . . . . . . . . . $
60-89 Days . . . . . . . . . . . . . . . . .
90 or More Days . . . . . . . . . . . . . . .
Foreclosures and Bankruptcies . . . . . . . . _________
Total Delinquencies . . . . . . . . . . . . . . $_________
30-59 Days Percentage . . . . . . . . . . . . . %
60-89 Days Percentage . . . . . . . . . . . . . %
90 or More Days Percentage . . . . . . . . . . %
Foreclosures and Bankruptcies . . . . . . . . .
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS
<TABLE>
<CAPTION> For the Year
<S> Ending ________
Average Amount <C>
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Charge-Offs . . . . . . . . . . . . . . . . . . . . . . $
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Losses as a Percentage
of Average Amount Outstanding . . . . . . . . . . . . . . . %
</TABLE>
SERVICING OF THE MORTGAGE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does
not make any representation as to the accuracy or completeness of such
information.
GENERAL
The Servicer will be responsible for servicing the Mortgage Loans as
agent for the Trust in accordance with the Servicer's policies and
procedures for servicing home equity loans and in accordance with the
terms of the Servicing Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after
such loan is 90 days or more delinquent; (ii) if a notice of default on a
senior lien is received by the Servicer; or (iii) if circumstances are
discovered by the Servicer which would indicate that a potential for loss
exists. Foreclosure proceedings may be terminated if the delinquency is
cured. However, under certain circumstances, the Servicer may elect not
to commence foreclosure or stay the foreclosure proceeding if the
borrower's default is due to special circumstances which are temporary and
are not expected to last beyond a specified period. The loans to
borrowers in bankruptcy proceedings will be restructured in accordance
with law and with a view to maximizing recovery of such home equity loans,
including any deficiencies. Additionally, any time during foreclosure, a
forbearance, short sale, deed-in-lieu or a payment plan can be authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, who will liquidate
the Mortgaged Property and charge-off the balance of the home equity loan
balance which was not recovered by the liquidation proceeds. If the
Mortgaged Property was subject to a senior lien position, the Servicer
will either satisfy such lien at the time of foreclosure sale or take
other action as deemed necessary to protect the Servicer's interest in the
Mortgaged Property. If in the judgment of the Servicer, the cost of
maintaining or purchasing the senior lien position exceeds the economic
benefit of such action, the Servicer will generally charge-off the entire
home equity loan, seek a money judgment against the borrower or will not
pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in
the Servicer's real estate secured revolving credit line loans and
applicable laws and regulations, and other considerations.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first
Collection Period, the servicing compensation to be paid to the Servicer
in respect of its servicing activities relating to the Mortgage Loans will
be paid to it from interest collections in respect of the Mortgage Loans
and will be equal to ____% per annum (the "Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage Loans as of the first day of
each such Collection Period (the "Servicing Fee"). With respect to the
first Collection Period, the Servicer will receive from such collections
___ of the amount calculated in the preceding sentence. All assumption
fees, late payment charges and other fees and charges, to the extent
collected from borrowers, will be retained by the Servicer as additional
servicing compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees
and disbursements of the Trustee, any custodian
appointed by the Trustee, the Registrar and any paying agent. In
addition, the Servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with defaulted Mortgage Loans and in
connection with the restoration of Mortgaged Properties related thereto,
such right of reimbursement being prior to the rights of Holders to
receive any related Liquidation Proceeds.
DESCRIPTION OF THE MORTGAGE LOANS
MORTGAGE LOANS
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, most of which are second mortgages or second
deeds of trust, on Mortgage Properties. The Mortgaged Properties securing
the Mortgage Loans consist primarily of residential properties that are
one to four-family properties. ____ of the Mortgaged Properties are owner
occupied. See"--Mortgage Loan Pool Statistics" below.
The Cut-Off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of ______, 199_ (the
"Cut-Off Date"). As of the _______, the Mortgage Loans were not more than
89 days delinquent and had a Loan Rate of at least ____% per annum. The
average Cut-Off Date Principal Balance was $_______, the minimum Mortgage
Cut-Off Date Principal Balance was zero, the maximum Cut-Off Date
Principal Balance was $_________, the minimum Loan Rate and the maximum
Loan Rate on the Cut-Off Date were ____% and ____% per annum,
respectively, and the weighted average Loan Rate on the Cut-Off Date was
____% per annum. As of the Cut-Off Date, the weighted average Credit
Limit Utilization Rate was ____%, the minimum Credit Limit Utilization
Rate was zero and the maximum Credit Limit Utilization Rate was ______%.
The "Credit Limit Utilization Rate" is determined by dividing the Cut-Off
Date Principal Balance of a Mortgage Loan by the Credit Limit of the
related Credit Line Agreement. The weighted average Combined Loan-to-
Value Ratio of the Mortgage Loans was ____% as of the Cut-Off Date.
MORTGAGE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-Off Date with respect to the Mortgage Loans to be included in the
Trust.
(TABULAR INFORMATION)
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Securities, the Depositor will
transfer to the Trust all of its right, title and interest in and to each
Mortgage Loan (including its right to purchase any Additional Balances
arising in the future), related Credit Line Agreements, mortgages and
other related documents (collectively, the "Related Documents"), including
all collections received on or with respect to each such Mortgage Loan on
or after the Cut-Off Date pursuant to
an assignment of the Depositor's rights and obligations under the Purchase
Agreement. The Owner Trustee, concurrently with such transfer, will
deliver the Securities. Each Mortgage Loan transferred to the Owner Trust
will be identified on a schedule (the "Mortgage Loan Schedule") delivered
to the Owner Trustee pursuant to the Purchase Agreement. Such schedule
will include information as to the Cut-Off Date Principal Balance of each
Mortgage Loan, as well as information with respect to the Loan Rate.
The Purchase Agreement will require that, within the time period
specified therein, the Seller deliver to the Owner Trustee (or a
custodian, as the Owner Trustee's agent for such purpose) the Mortgage
Loans endorsed in blank and the Related Documents. In lieu of delivery of
original mortgages, the Seller may deliver trust and correct copies
thereof which have been certified as to authenticity by the appropriate
county recording office where such mortgage is recorded.
Under the terms of the Purchase Agreement, the Seller, acting at the
Depositor's request, will have (__ days after the Closing Date) to prepare
and record assignments of the mortgages related to each Mortgage Loan in
favor of the Owner Trustee (unless opinions of counsel satisfactory to the
Rating Agencies and the Certificate Insurer are delivered to the Owner
Trustee and the Certificate Insurer to the effect that recordation of such
assignments is not required in the relevant jurisdictions to protect the
interests of the Owner Trustee in the Mortgage Loans).
Within 90 days of the Closing Date, the Owner Trustee will review the
Mortgage Loans and the Related Documents and if any Mortgage Loan or
Related Document is found to be defective in any material respect and such
defect is not cured within 90 days following notification thereof to the
Seller and the Depositor by the Owner Trustee, the Seller will be
obligated to repurchase the Mortgage Loan and to deposit the Repurchase
Price into the Collection Account. Upon such retransfer, the Principal
Balance of such Mortgage Loan will be deducted from the Pool Balance. In
lieu of any such repurchase, the Seller may substitute an Eligible
Substitute Mortgage Loan. Any such repurchase or substitution will be
considered a payment in full of such Mortgage Loan. The obligation of the
Seller to accept a transfer of a Defective Mortgage Loan is the sole
remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Owner Trustee or the Holders.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to
the Principal Balance of such Mortgage Loan at the time of any transfer
described above plus accrued and unpaid interest thereon to the date of
repurchase.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Seller for a Defective Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding Principal Balance (or in the
case of a substitution of more than one Mortgage Loan for a Defective
Mortgage Loan, an aggregate Principal Balance), not 5% more or less than
the Principal Balance relating to such Defective Mortgage Loan; (ii) have
a Loan Rate not less than the Loan Rate of the Defective Mortgage Loan and
not more than 1% in excess of the Loan Rate of such Defective Mortgage
Loan; (iii) have a Loan Rate
based on the same Index with adjustments to such Loan Rate made on the
same Interest Rate Adjustment Date as that of the Defective Mortgage Loan;
(iv) have a Margin that is not less than the Margin of the Defective
Mortgage Loan and not more than 100 basis points higher than the Margin
for the Defective Mortgage Loan; (v) have a mortgage of the same or higher
level of priority as the mortgage relating to the Defective Mortgage Loan;
(vi) have a remaining term to maturity not more than six months earlier
and not later than the remaining term to maturity of the Defective
Mortgage Loan; (vii) comply with each representation and warranty as to
the Mortgage Loans set forth in the Purchase Agreement (deemed to be made
as of the date of substitution); and (viii) satisfy certain other
conditions specified in the Purchase Agreement. To the extent the
Principal Balance of an Eligible Substitute Mortgage Loan is less than the
Principal Balance of the related Defective Mortgage Loan, the Seller will
be required to make a deposit to the Collection Account equal to such
difference ("Substitution Adjustment Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Owner Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date
Principal Balance and the Loan Rate). In addition, the Seller will
represent and warrant, on the Closing Date, that, among other things: (i)
at the time of transfer to the Depositor, the Seller has transferred or
assigned all of its right, title and interest in each Mortgage Loan and
the Related Documents, free of any lien (subject to certain exceptions);
and (ii) each Mortgage Loan was generated under a Credit Line Agreement
that complied, at the time of origination, in all material respects with
applicable state and federal laws. Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the
interests of the Holders in the Related Mortgage Loan and Related
Documents, the Seller will have a period of 60 days after discovery or
notice of the breach to effect a cure. If the breach cannot be cured
within the 60-day period, the Seller will be obligated to repurchase or
substitute the Defective Mortgage Loan from the Trust. The same procedure
and limitations that are set forth above for the repurchase or
substitution of Defective Mortgage Loans will apply to the transfer of a
Mortgage Loan that is required to be repurchased or substituted because of
a breach of a representation or warranty in the Purchase Agreement that
materially and adversely affects the interests of the Holders.
Mortgage Loans required to be transferred to the Seller as described
in the preceding paragraphs are referred to as "Defective Mortgage Loans."
DESCRIPTION OF THE SERVICING AGREEMENT
The Servicer shall establish and maintain on behalf of the Owner
Trustee an account (the "Collection Account") for the benefit of the
Holders. The Collection Account will be an Eligible Account (as defined
herein). Subject to the investment provision described in the following
paragraphs, upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing administrative charges,
annual fees, taxes, assessments, credit insurance charges, insurance
proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the
Servicer will deposit such amounts in the Collection Account. Amounts so
deposited may be invested in Eligible Investments (as described in the
Servicing Agreement) maturing no later than one Business Day prior to the
date on which the amount on deposit therein is required to be deposited in
the Distribution Account or on such Distribution Date if approved by the
Rating Agencies. Not later than the fifth Business Day prior to each
Distribution Date (the "Determination Date"), the Servicer will notify the
Owner Trustee and the Indenture Trustee of the amount of such deposit to
be included in funds available for the related Distribution Date.
The Owner Trustee and the Indenture Trustee will establish one or
more accounts (the "Security Account") into which will be deposited
amounts withdrawn from the Collection Account for distribution to Holders
on a Distribution Date. The Security Account will be an Eligible Account.
Amounts on deposit therein will be invested in Eligible Investments
maturing on or before the Business Day prior to the related Distribution
Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies,
(ii) one or more accounts with a depository institution which accounts are
fully insured by either the Savings Association Insurance Fund ("SAIF") or
the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation established by such fund with a minimum long-term unsecured
debt rating of ____, (iii) a segregated trust account maintained with the
Owner Trustee or an Affiliate of the Owner Trustee in its fiduciary
capacity or (iv) otherwise acceptable to each Rating Agency as evidenced
by a letter from each Rating Agency to the Owner Trustee, without
reduction or withdrawal of their then current ratings of the Securities.
Eligible Investments are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then current ratings of the
Securities.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in
respect of interest and amounts collected in respect of principal. As to
any Distribution Date, "Interest Collections" will be equal to the
aggregate of the amounts collected during the related Collection Period,
including Net Liquidation Proceeds (as defined below), allocated to
interest pursuant to the terms of the Credit Line Agreements.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including Net Liquidation Proceeds, and allocated to principal pursuant to
the terms of the Credit Line Agreements and (ii) any Substitution
Adjustment Amounts. "Net Liquidation Proceeds" with respect to a Mortgage
Loan are equal to the aggregate of all amounts received upon liquidation
of such Mortgage Loan, including, without limitation, insurance proceeds,
reduced by related expenses,
but not including the portion, if any, of such amount that exceeds the
Principal Balance of the Mortgage Loan at the end of the Collection Period
immediately preceding the Collection Period in which such Mortgage Loan
became a Liquidated Mortgage Loan plus accrued and unpaid interest thereon
through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date.
The Principal Balance of a Mortgage Loan (other than a Liquidated Mortgage
Loan) on any day is equal to the Cut-Off Date Principal Balance thereof,
plus (i) any Additional Balances in respect of such Mortgage Loan minus
(ii) all collections credited against the Principal Balance of such
Mortgage Loan in accordance with the related Credit Line Agreement prior
to such day. The Principal Balance of a Liquidated Mortgage Loan after
final recovery of related Liquidation Proceeds shall be zero.
HAZARD INSURANCE
The Servicing Agreement provides that the Servicer maintain certain
hazard insurance on the Mortgaged Properties relating to the Mortgage
Loans. While the terms of the related Credit Line Agreements generally
require borrowers to maintain certain hazard insurance, the Servicer will
not monitor the maintenance of such insurance.
The Servicing Agreement requires the Servicer to maintain for any
Mortgaged Property relating to a Mortgage Loan acquired upon foreclosure
of a Mortgage Loan, or by deed in lieu of such foreclosure, hazard
insurance with extended coverage in an amount equal to the lesser of (a)
the maximum insurable value of such Mortgaged Property or (b) the
outstanding balance of such Mortgage Loan plus the outstanding balance on
any mortgage loan senior to such Mortgage Loan at the time of foreclosure
or deed in lieu of foreclosure, plus accrued interest and the Servicer's
good faith estimate of the related liquidation expenses to be incurred in
connection therewith. The Servicing Agreement provides that the Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Mortgaged
Properties. If such blanket policy contains a deductible clause, the
Servicer will be obligated to deposit in the Collection Account the sums
which would have been deposited therein but for such clause. The Servicer
will initially satisfy these requirements by maintaining a blanket policy.
As set forth above, all amounts collected by the Servicer (net of any
reimbursements to the Servicer) under any hazard policy (except for
amounts to be applied to the restoration or repair of the Mortgaged
Property) will ultimately be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the
property by fire, lightning, explosion, smoke, windstorm and hail, and the
like, strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Although the policies relating to the Mortgage
Loans will be underwritten by different insurers and therefore will not
contain identical terms and conditions, the basic terms thereof are
dictated by state laws and most of 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 mudflows), 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 or an exact
description of the insurance policies relating to the Mortgaged
Properties.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when in accordance with applicable servicing procedures under
the Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or
other conversion, the Servicer will follow such practices as it deems
necessary or advisable and as are in keeping with its general subordinate
mortgage servicing activities, provided the Servicer will not be required
to expend its own funds in connection with foreclosure or other
conversion, correction of default on a related senior mortgage loan or
restoration of any property unless, in its sole judgment, such
foreclosure, correction or restoration will increase net Liquidation
Proceeds. The Servicer will be reimbursed out of Liquidation Proceeds for
advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Holders or the
(Transferor)(Seller). "Net Liquidation Proceeds" with respect to a
Mortgage Loan is the amount received upon liquidation of such Mortgage
Loan reduced by related expenses, which may include the amount advanced in
respect of a senior mortgage, up to the unpaid Principal Balance of the
Mortgage Loan plus accrued and unpaid interest thereon.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first
Collection Period, the Servicer will receive from interest collections in
respect of the Mortgage Loan a portion of such interest collections as a
monthly Servicing Fee in the amount equal to ___% per annum ("Servicing
Fee Rate") on the aggregate Principal Balances of the Mortgage Loans as of
the first day of each such Collection Period. All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the Servicer as additional servicing
compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees
and disbursements of the Trustee, any custodian appointed by the Trustee,
the Registrar and any paying agent. In addition, the Servicer will be
entitled to reimbursement for certain expenses incurred by it in
connection with defaulted Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being
prior to the rights of Holders to receive any related Net Liquidation
Proceeds.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of
___________, 199_, between the Trust and _______________, as Indenture
Trustee. The Certificates will be issued pursuant to the Trust Agreement
dated as of ______________, 199_, among the Depositor, __________, and
______________, as Owner Trustee. The following summaries describe
certain provisions of the Securities, Indenture and Trust Agreement. The
summaries do not purport to be complete and are subject to, and qualified
in their entirety by reference to, the provisions of the applicable
agreement. As used herein, "Agreement" shall mean either the Trust
Agreement or the Indenture, as the context requires.
The Securities will be issued in fully registered, certificated form
only. The Securities will be freely transferrable and exchangeable at the
corporate trust office of the Owner Trustee, with respect to the
Certificates or the Indenture Trustee with respect to the Notes.
BOOK-ENTRY SECURITIES
The Senior Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership
interests in the Senior Certificates ("Certificate Owners") will hold
their Certificates through the Depository Trust Company ("DTC") in the
United States(, or CEDEL or Euroclear (in Europe)) if they are
participants of such systems, or indirectly through organizations which
are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate principal
balance of the Certificates 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 will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries").) Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
integral multiples in excess thereof. Except as described below, no
person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until Definitive
Certificates are issued, it is anticipated that the only
"Certificateholder" of the Certificates will be Cede & Co., as nominee of
DTC. Certificate Owners will not be Certificateholders as that term is
used in the Pooling and Servicing Agreement. Certificate Owners are only
permitted to exercise their rights indirectly through Participants and
DTC.
DISTRIBUTIONS
On each Distribution Date, collections on the Mortgage Loans will be
applied in the following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue
accrued interest on the respective Security Principal Balance of the
Notes and the Certificates;
(iii) as principal on the Securities, the excess of
Principal Collections over Additional Balances created during the
preceding Collection Period, such amount to be allocated between the
Notes and Certificates pro rata, based on their respective Security
Principal Balances;
(iv) as principal on the Securities, as payment for any
Liquidation Loss Amounts on the Mortgage Loans;
(v) as payment for the premium for the (Letter of
Credit)(Surety Bond);
(vi) to reimburse prior draws made on the (Letter of
Credit)(Surety Bond); and
(vii) any remaining amounts to the Depositor.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding the month of such Distribution Date.
"Liquidation Loss Amount" means with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance thereof at the end of the
Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan after giving effect to the Net Liquidation Proceeds in connection
therewith.
INTEREST
Note Rate. Interest will accrue on the unpaid Security Principal
---------
Balance of the Notes at the per annum rate (the "Note Rate") equal to
__% per annum from the Closing Date to the first Distribution Date and
thereafter interest will accrue on the Notes from and including
the preceding Distribution Date to but excluding such current
Distribution Date (each, an "Interest Accrual Period") at (a floating
rate equal to LIBOR (as defined herein) plus __%) (__%). (Interest
will be calculated on the basis of the actual number of days in
each Interest Accrual Period by 360.) A failure to pay interest
on any Notes on any Distribution Date that continues for five days
constitutes an Event of Default under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Security
-------------------
Principal Balance of the Certificates at the per annum rate (the "Pass-
Through Rate") equal to __% per annum from the Closing Date to the first
Distribution Date and thereafter interest will accrue on the Certificates
for each Interest Accrual Period at (a floating rate equal to LIBOR (as
defined herein) plus __%) (__%). (Interest will be calculated on the
basis of the actual number of days in each
Interest Accrual Period divided by 360.) A failure to pay interest on
any Certificates on any Distribution Date that continues for five days
constitutes an Event of Default under the Trust Agreement.
OPTIONAL TERMINATION
The Trust will terminate on the Distribution Date following the
earlier of (i) _________________________ and (ii) the final payment or
other liquidation of the last Mortgage Loan in the Trust. The Mortgage
Loans will be subject to optional repurchase by the Servicer on any
Distribution Date after the Principal Balance is reduced to an amount less
than or equal to $ ((5)% of the initial Principal Balance). The
repurchase price will be equal to the sum of the outstanding Principal
Balance and accrued and unpaid interest thereon at the weighted average of
the Loan Rates through the day preceding the final Distribution Date.
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 Mortgage Assets and selling interests
therein or bonds secured thereby. It is an indirect, limited purpose
finance subsidiary of The Long-Term Credit Bank of Japan, Limited and an
affiliate of Greenwich Capital Markets, Inc. The Long-Term Credit Bank of
Japan, Limited is a bank organized under the laws of Japan conducting
commercial banking, corporate finance, capital markets and financial
advisory services on a global basis. 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.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the provisions of the Indenture.
Whenever particular sections or defined terms of the Indenture are
referred to, such sections or defined terms are thereby incorporated
herein by reference. See "DESCRIPTION OF THE NOTES" herein for a summary
of certain additional terms of the Indenture.
REPORTS TO NOTEHOLDERS
The Indenture Trustee will mail to each Noteholder, at such
Noteholder's request, at its address listed on the Note Register
maintained with the Indenture Trustee a report setting forth certain
amounts relating to the Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, "Events of Default" under the Indenture
will consist of: (i) a default for five days or more in the payment of any
interest on any Note; (ii) a default in the payment of
the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or
performance of any covenant or agreement of the Trust made in the
Indenture and the continuation of any such default for a period of 30 days
after notice thereof is given to the Trust by the Indenture Trustee or to
the Trust and the Indenture Trustee by the holders of at least 25% in
principal amount of the Notes then outstanding; (iv) any representation or
warranty made by the Trust in the Indenture or in any certificate
delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not
having been cured within 30 days after notice thereof is given to the
Trust by the Indenture Trustee or to the Trust and the Indenture Trustee
by the holders of at least 25% in principal amount of Notes then
outstanding; or (v) certain events of bankruptcy, insolvency, receivership
or liquidation of the Trust. (The amount of principal required to be paid
to Noteholders under the Indenture will generally be limited to amounts
available to be deposited in the Collection Account. Therefore, the
failure to pay principal on the Notes generally will not result in the
occurrence of an Event of Default until the final scheduled Distribution
Date for such Notes.) If there is an Event of Default with respect to a
Note due to late payment or nonpayment of interest due on a Note,
additional interest will accrue on such unpaid interest at the interest
rate on the Note (to the extent lawful) until such interest is paid. Such
additional interest on unpaid interest shall be due at the time such
interest is paid. If there is an Event of Default due to late payment or
nonpayment of principal on a Note, interest will continue to accrue on
such principal at the interest rate on the Note until such principal is
paid. If an Event of Default should occur and be continuing with respect
to the Notes, the Indenture Trustee or holders of a majority in principal
amount of Notes then outstanding may declare the principal of such Notes
to be immediately due and payable. Such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal
amount of the Notes then outstanding. If the Notes are due and payable
following an Event of Default with respect thereto, the Indenture Trustee
may institute proceedings to collect amounts due or foreclose on Trust
property or exercise remedies as a secured party. If an Event of Default
occurs and is continuing with respect to the Notes, the Indenture Trustee
will 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 the
Notes, if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which
might be incurred by it in complying with such request. Subject to the
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place
of conducting any proceeding or any remedy available to the Indenture
Trustee, and the holders of a majority in principal amount of the Notes
then outstanding 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. No holder of a Note will have the right to institute
any proceeding with respect to the Indenture, unless (i) such holder
previously has given the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than
25% in principal amount of the outstanding Notes have made written request
to the Indenture Trustee to institute such proceeding in its own name as
Indenture Trustee, (iii) such holder or holders have offered the Indenture
Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60 days
failed to institute such proceeding and (v) no direction inconsistent with
such written request has been given to the Indenture Trustee during the
60-day period by the holders of a majority in principal amount of the
Notes. In addition, the Indenture Trustee and the Noteholders, by
accepting the Notes, will covenant that they will not at any time
institute against the Trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law. With
respect to the Trust, neither the Indenture Trustee nor the Owner Trustee
in its individual capacity, nor any holder of a Certificate representing
an ownership interest in the Trust nor any of their respective owners,
beneficiaries, agents, officers, directors, employees, affiliates,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or
interest on the Notes or for the agreements of the Trust contained in the
Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Trust may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving
such consolidation or merger is organized under the laws of the United
States, any state or the District of Columbia, (ii) such entity expressly
assumes the Trust's obligation to make due and punctual payments upon the
Notes and the performance or observance of any agreement and covenant of
the Trust under the Indenture, (iii) no Event of Default shall have
occurred and be continuing immediately after such merger or consolidation,
(iv) the Trust has been advised that the ratings of the Securities then in
effect would not be reduced or withdrawn by any Rating Agency as a result
of such merger or consolidation and (v) the Trust has received an opinion
of counsel to the effect that such consolidation or merger would have no
material adverse tax consequence to the Trust or to any Noteholder or
Certificateholder. The Trust will not, among other things, (i) except as
expressly permitted by the Indenture, sell, transfer, exchange or
otherwise dispose of any of the assets of the Trust, (ii) claim any credit
on or make any deduction from the principal and interest payable in
respect of the Notes (other than amounts withheld under the Code or
applicable state law) or assert any claim against any present or former
holder of Notes because of the payment of taxes levied or assessed upon
the Trust, (iii) dissolve or liquidate in whole or in part, (iv) permit
the validity or effectiveness of the Indenture to be impaired or permit
any person to be released from any covenants or obligations with respect
to the Notes under the Indenture except as may be expressly permitted
thereby or (v) permit any lien, charge excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or otherwise
arise upon or burden the assets of the Trust or any part thereof, or any
interest therein or the proceeds thereof. The Trust may not engage in any
activity other than as specified under "The Trust" herein. The Trust will
not incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the Notes and the Indenture.
ANNUAL COMPLIANCE STATEMENT
The Trust will be required to file annually with the Indenture
Trustee a written statement as to the fulfillment of its obligations under
the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all
Noteholders a report relating to any change in its eligibility and
qualification to continue as Indenture Trustee under the Indenture, any
amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of any indebtedness owing by the Trust to the Indenture
Trustee in its individual capacity, any change in the property and funds
physically held by the Indenture Trustee as such and any action taken by
it that materially affects the Notes and that has not been previously
reported, but if no such changes have occurred, then no report shall be
required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for
cancellation of all the Notes or, with certain limitations, upon deposit
with the Indenture Trustee of funds sufficient for the payment in full of
all the Notes.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority in principal amount of
the Notes then outstanding, the Trust and the Indenture Trustee may
execute a supplemental indenture to add provisions to, change in any
manner or eliminate any provisions of, the Indenture, or modify (except as
provided below) in any manner the rights of the Noteholders. Without the
consent of the holder of each outstanding Note affected thereby, however,
no supplemental indenture will: (i) change the due date of any installment
of principal of or interest on any Note or reduce the principal amount
thereof, the interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin or
currency in which any Note or any interest thereon is payable; (ii) impair
the right to institute suit for the enforcement of certain provisions of
the Indenture regarding payment; (iii) reduce the percentage of the
aggregate amount of the outstanding Notes, the consent of the holders of
which is required for any supplemental indenture or the consent of the
holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the
Trust, the Depositor or an affiliate of any of them; (v) decrease the
percentage of the aggregate principal amount of Notes required to amend
the sections of the Indenture which specify the applicable percentage of
aggregate principal amount of the Notes necessary to amend the Indenture
or certain other related agreements; or (vi) permit the creation of any
lien ranking prior to or on a parity with the lien of the Indenture with
respect to any of the collateral for the Notes or, except as otherwise
permitted or contemplated in the Indenture, terminate the lien of the
Indenture on any such collateral or deprive the
holder of any Note of the security
afforded by the lien of the Indenture. The Trust and the Indenture
Trustee may also enter into supplemental indentures, without obtaining the
consent of the Noteholders, for the purpose of, among other things, adding
any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of
the Noteholders; provided that such action will not materially and
adversely affect the interest of any Noteholder.
VOTING RIGHTS
At all times, the voting rights of Noteholders under the Indenture
will be allocated among the Notes pro rata in accordance with their
outstanding principal balances.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Indenture Trustee nor any director,
officer or employee of the Depositor or the Indenture Trustee will be
under any liability to the Trust or the related Noteholders for any action
taken or for refraining from the taking of any action in good faith
pursuant to the Indenture or for errors in judgment; provided, however,
that none of the Indenture Trustee, the Depositor and any director,
officer or employee thereof will be protected against any liability which
would otherwise be imposed by reason of willful malfeasance, bad faith or
negligence in the performance of duties or by reason of reckless disregard
of obligations and duties under the Indenture. Subject to certain
limitations set forth in the Indenture, the Indenture Trustee and any
director, officer, employee or agent of the Indenture Trustee shall be
indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the
Indenture other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of
its duties under such Indenture or by reason of reckless disregard of its
obligations and duties under the Indenture. Any such indemnification by
the Trust will reduce the amount distributable to the Noteholders. All
persons into which the Indenture Trustee may be merged or with which it
may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Indenture Trustee under each
Indenture.
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement.
The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Trust
Agreement. Whenever particular sections or defined terms of the Trust
Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference. See "DESCRIPTION OF THE SECURITIES"
herein for a summary of certain additional terms of the Trust Agreement.
REPORTS TO HOLDERS
Concurrently with each distribution to the Holders of the
Certificates, the Servicer will forward to the Owner Trustee for mailing
to such Holder a statement setting forth other items:
(i) the amount of interest included in such distribution and
the related Certificate Rate;
(ii) the amount, if any, of overdue accrued interest included
in such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding
Collection Period;
(ix) the number and aggregate Principal Balances of the
Mortgage Loans as to which the minimum monthly payment is delinquent
for 30-59 days, 60-89 days and 90 or more days, respectively, as of
the end of the preceding Collection Period; and
(x) the book value of any real estate which is acquired by
the Trust through foreclosure or grant of deed in lieu of
foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv)
and (v) above, the amounts shall be expressed as a dollar amount per
Security with a $1,000 denomination.
Within 60 days after the end of each calendar year, the Servicer will
be required to forward to the Owner Trustee a statement containing the
information set forth in clauses (iii) and (viii) above aggregated for
such calendar year.
AMENDMENT
The Trust Agreement may be amended by the Depositor and the Owner
Trustee, without consent of the Holders, to cure any ambiguity, to correct
or supplement any provision or for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions thereof or
of modifying in any manner the rights of such Holders; provided, however,
that such action will not, as evidenced
by an opinion of counsel satisfactory to the Owner Trustee, adversely
affect in any material respect the interests of any Holders. The Trust
Agreement may also be amended by the Depositor and the Owner Trustee with
the consent of the holders of Certificates evidencing at least a majority
in principal amount of then outstanding Certificates and Holders owning
Voting Interests (as herein defined) aggregating not less than a majority
of the aggregate Voting Interests for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the
Trust Agreement or modifying in any manner the rights of the Holders.
INSOLVENCY EVENT
"Insolvency Event" means, with respect to any Person, any of the
following events or actions; certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings with
respect to such Person and certain actions by such Person indicating its
insolvency, reorganization pursuant to bankruptcy proceedings or inability
to pay its obligations. Upon termination of the Trust, the Owner Trustee
shall direct the Indenture Trustee promptly to sell the assets of the
Trust (other than the Collection Account) in a commercially reasonable
manner and on commercially reasonable terms. The proceeds from any such
sale, disposition or liquidation of the Mortgage Loans will be treated as
collections on the Mortgage Loans and deposited in the Collection Account.
The Trust Agreement will provide that the Owner Trustee does not have the
power to commence a voluntary proceeding in bankruptcy with respect to the
Trust without the unanimous prior approval of all Holders (including the
Depositor) of the Trust and the delivery to the Owner Trustee by each
Holder (including the Depositor) of a certificate certifying that the
Holder reasonably believes that the Trust is insolvent.
LIABILITY OF THE DEPOSITOR
Under the Trust Agreement, the Depositor will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Noteholder or a
Holder in the capacity of an investor with respect to the Trust) arising
out of or based on the arrangement created by the Trust Agreement.
VOTING INTERESTS
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the voting interest of the Issuer (the "Voting
Interests"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the
Depositor) will be disregarded and deemed not to be outstanding, and
except that, in determining whether the Owner Trustee is protected in
relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Certificates that the Owner Trustee knows to be so
owned will be so disregarded. Certificates so owned that have been
pledged in good faith may be regarded as outstanding if the pledgee
establishes to the satisfaction of the Owner Trustee the pledgor's right
so to act with respect to such Certificates and that the pledgee is not
the Issuer or its affiliates.
CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability
to the Trust or the related Holders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Trust
Agreement or for errors in judgment; provided, however, that none of the
Owner Trustee, the Depositor and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations
and duties under the Trust Agreement. Subject to certain limitations set
forth in the Trust Agreement, the Owner Trustee and any director, officer,
employee or agent of the Owner Trustee shall be indemnified by the Trust
and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Trust Agreement other
than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or gross negligence in the performance of its
duties under such Trust Agreement or by reason of reckless disregard of
its obligations and duties under the Trust Agreement. Any such
indemnification by the Trust will reduce the amount distributable to the
Holders. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under each Trust
Agreement.
ADMINISTRATION AGREEMENT
The _________________, in its capacity as Administrator, will enter
into the Administration Agreement with the Trust and the Owner Trustee
pursuant to which the Administrator will agree, to the extent provided in
such Administration Agreement, to provide notices and perform other
administrative obligations required by the Indenture and the Trust
Agreement.
THE INDENTURE TRUSTEE
( ) is the Indenture Trustee under the Indenture. The mailing
address of the Indenture Trustee is ( ), Attention: Corporate Trust
Department.
THE OWNER TRUSTEE
( ) is the Owner Trustee under the Trust Agreement. The mailing
address of the Owner Trustee is ( ), Attention: Corporate Trust
Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by
the Depositor towards the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
On January 27, 1994, the Internal Revenue Service issued final
regulations ("final OID regulations") relating to original issue discount
("OID"). The discussion under "Certain Federal Income Tax Consequences
/___/ Taxation of Debt Securities" in the Prospectus applies with respect
to the final OID regulations.
Prospective purchasers should see "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus for a discussion of the application of
certain federal income and state tax laws to the Trust Fund and the
Securities.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors
should consider the state income tax consequences of the acquisition,
ownership, and disposition of the Securities offered hereunder. State
income tax law may differ substantially from the corresponding federal tax
law, and this discussion does not purport to describe any aspect of the
income tax laws of any state. Therefore, potential investors should
consult their own tax advisors with respect to the various tax
consequences of investments in the Securities offered hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and Section 4975 of the Code impose certain restrictions on
employee benefit plans subject to ERISA or plans or arrangements subject
to Section 4975 of the Code ("Plans") and on persons who are parties in
interest or disqualified persons ("parties in interest") with respect to
such Plans. Certain employee benefit plans, such as governmental plans
and church plans (if no election has been made under section 410(d) of the
Code), are not subject to the restrictions of ERISA, and assets of such
plans may be invested in the Securities without regard to the ERISA
considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules
set forth in section 503 of the Code. Any Plan fiduciary which proposes
to cause a Plan to acquire any of the Securities should consult with its
counsel with respect to the potential consequences under ERISA, and the
Code, of the Plan's acquisition and ownership of the Securities. See
"ERISA CONSIDERATIONS" in the Prospectus. Investments by Plans are also
subject to ERISA's general fiduciary requirements, including the
requirement of investment prudence and diversification and the requirement
that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a
Plan and its assets unless a statutory or administrative exemption applies
to the transaction. Section 4975 of the Code imposes certain excise taxes
(or, in some cases, a civil penalty may be assessed pursuant to section
502(i) of ERISA) on parties in interest which engage in non-exempt
prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a
Plan for purposes of ERISA and the prohibited transaction provisions of
the Code (the "Plan Asset Regulation"). The Plan Asset Regulation
describes the circumstances under which the assets of an entity in which a
Plan invests will be considered to be "plan assets" such that any person
who exercises control over such assets would be subject to ERISA's
fiduciary standards. Under the Plan Asset Regulation, generally when a
Plan invests in another entity, the Plan's assets do not include, solely
by reason of such investment, any of the underlying assets of the entity.
However, the Plan Asset Regulation provides that, if a Plan acquires an
"equity interest" in an entity that is neither a "publicly-offered
security" (as defined therein) nor a security issued by an investment
company registered under the Investment Company Act of 1940, the assets of
the entity will be treated as assets of the Plan investor unless certain
exceptions apply. If the (Notes/Certificates) were deemed to be equity
interests and no statutory, regulatory or administrative exemption
applies, the Trust could be considered to hold plan assets by reason of a
Plan's investment in the Notes. Such plan assets would include an
undivided interest in any assets held by the Trust. In such an event, the
Trustee and other persons, in providing services with respect to the
Trust's assets, may be parties in interest with respect to such Plans,
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA,
and Section 4975 of the Code with respect to transactions involving the
Trust's assets. (Under the Plan Asset Regulation, the term "equity
interest" is defined as any interest in an entity other than an instrument
that is treated as indebtedness under "applicable local law" and which has
no "substantial equity features." Although the Plan Assets Regulation is
silent with respect to the question of which law constitutes "applicable
local law" for this purpose, Labor has stated that these determinations
should be made under the state law governing interpretation of the
instrument in question. In the preamble to the Plan Assets Regulation,
Labor declined to provide a precise definition of what features are equity
features or the circumstances under which such features would be
considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but
that in making a determination it would be appropriate to take into
account whether the equity features are such that a Plan's investment
would be a practical vehicle for the indirect provision of investment
management services. Brown & Wood ("ERISA Counsel") has rendered its
opinion that the Notes will be classified as
indebtedness without substantial
equity features for ERISA purposes. ERISA Counsel's opinion is based upon
the terms of the Notes, the opinion of Tax Counsel that the Notes will be
classified as debt instruments for federal income tax purposes and the
ratings which have been assigned to the Notes. However, if contrary to
ERISA Counsel's opinion the Notes are deemed to be equity interests in the
Trust and no statutory, regulatory or administrative exemption applies,
the Trust could be considered to hold plan assets by reason of a Plan's
investment in the Notes.)
THE UNDERWRITER'S EXEMPTION
Labor has granted to Greenwich Capital Markets, Inc. (the
"Underwriter") an administrative exemption (Prohibited Transaction
Exemption 90-59 (the "Exemption")) which exempts from the application of
the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code transactions relating to: (i) the
acquisition, sale and holding by Plans of certificates representing an
undivided interest in certain asset backed pass-through trusts with
respect to which the Underwriter or any of its affiliates is the sole
underwriter or the manager or co-manager of the underwriting syndicate;
and (ii) the servicing, operation and management of such asset backed
pass-through trusts, provided that the general conditions and certain
other conditions set forth in the Exemption are satisfied. The Exemption
will apply to the acquisition, holding and resale of the
(Notes/Certificates) by a Plan provided that certain conditions (some of
which are described below) are met.
Among the conditions that must be satisfied for the Exemption to
apply are the following:
(1) the acquisition of the (Notes/Certificates) by a Plan is on
terms (including the price for the (Notes/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
(Notes/Certificates) acquired by the Plan are not subordinated to the
rights and interests evidenced by other (Notes/Certificates) of the
trust;
(3) the (Notes/Certificates) acquired by the Plan have received
a rating at the time of such acquisition that is one of the three
highest generic rating categories from either Standard & Poor's
Corporation, Moody's Investors Service, Inc, Duff & Phelps Inc. or
Fitch Investors Service, Inc.;
(4) the trustee must not be an affiliate of the Underwriter,
the Trustee, any Servicer, any obligor with respect to assets held in
the Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust;
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the
(Notes/Certificates) represents not more than reasonable compensation
for underwriting the (Notes/Certificates); the sum
of all payments made to and retain by the Issuer pursuant to the
assignment of the Mortgage Loans to the Trust Fund represents not
more than the fair market value of such Mortgage Loans; the sum of
all payments made to and retained by the servicer represents not more
than reasonable compensation for such person's services under a
pooling and servicing agreement and reimbursements of such person's
reasonable expenses in connection therewith; and
(6) the Plan investing in the (Notes/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 Underwriter believes that the Exemption will apply to the
acquisition and holding of the (Notes/Certificates) by Plans and that all
conditions of the Exemption other than those within the control of the
investors will be met.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any
(Notes/Certificates) on behalf of a Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment. Among
other things, before purchasing any (Notes/Certificates), a fiduciary of a
Plan should make its own determination as to whether the Trust, as obligor
on the (Notes/Certificates), is a party in interest with respect to the
Plan, the availability of the exemptive relief provided in the Plan Asset
Regulations and the availability of any other prohibited transaction
exemptions. Purchasers should analyze whether the decision may have an
impact with respect to purchases of the (Notes/Certificates).
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various
legal investment restrictions, and thus the ability of investors subject
to these restrictions to purchase Securities, may be subject to
significant interpretive uncertainties. All investors whose investment
authority is subject to legal restrictions should consult their own legal
advisors to determine whether, and to what extent, the Securities will
constitute legal investments for them. The Depositor makes no
representation as to the proper characterization of the Securities for
legal investment or financial institution regulatory purposes, or as to
the ability of particular investors to purchase Securities under
applicable legal investment restrictions. The uncertainties described
above (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the
Securities) may adversely affect the liquidity of the Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to Greenwich Capital Markets,
Inc. (the "Underwriter"), and the Underwriter has agreed to purchase from
the Depositor, the Securities. The Underwriter is obligated to purchase
all the Securities offered hereby if any are purchased. Distribution of
the Securities 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. Proceeds to the Depositor are expected to be
$________________ from the sale of the Notes and $___________ from the
sale of the Certificates, before deducting expenses payable by the
Depositor of $_________. In connection with the purchase and sale of the
Securities, the Underwriter may be deemed to have received compensation
from the Depositor in the form of underwriting discounts, concessions or
commissions.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under
the Securities Act of 1933, or contribute payments the Underwriter may be
required to make in respect thereof. The Depositor is an affiliate of the
Underwriter. The Underwriter is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed
upon for the Depositor by Brown & Wood, New York, New York and for the
Underwriter by Brown & Wood, New York, New York.
RATINGS
It is a condition to issuance that each Class of the Notes be rated
be rated not lower than "_________" by ( ) and _______ by ( ).
It is a condition to issuance that the Certificates be rated at least
"___" by ( ) and "___" by ( ). A securities rating addresses the
likelihood of the receipt by Certificateholders and Noteholders of
distributions on the Mortgage Loans. The rating takes into consideration
the structural, legal and tax aspects associated with the Certificates and
Notes. The ratings on the Securities do not, however, constitute
statements regarding the possibility that Certificateholders or
Noteholders might realize a lower than anticipated yield. 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.
The ratings assigned by Duff & Phelps Credit Rating Co. ("D&P") to
securities address the likelihood of the receipt by the holders of such
securities of all distributions to which they are entitled under the
transaction structure. D&P's ratings reflect its analysis of the
riskiness of the mortgages and its analysis of the structure of the
transaction as set forth in the operative documents. D&P's ratings
do not address the effect on yield on the securities attributable to
prepayments or recoveries on the underlying assets.
The ratings assigned by Fitch Investors Service, L.P. ("Fitch") to
securities address the likelihood of the receipt of all distributions on
the assets by the related holders of securities under the agreements
pursuant to which such securities are issued. Fitch's ratings take into
consideration the credit quality of the related pool, including any credit
support providers, structural and legal aspects associated with such
securities, and the extent to which the payment stream on the pool is
adequate to make the payments required by such securities. Fitch ratings
on such securities do not, however, constitute a statement regarding
frequency of prepayments of the assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's")
to securities address the likelihood of the receipt by holders of
securities of all distributions to which such holders of securities are
entitled. Moody's ratings on securities do not represent any assessment
of the likelihood or rate of principal prepayments. The ratings do not
address the possibility that holders of securities might suffer a lower
than anticipated yield as a result of prepayments.
The ratings assigned by Standard & Poor's Ratings Group, a Division
of The McGraw-Hill Companies ("Standard & Poor's"), to securities address
the likelihood of the receipt of all distributions on the assets by the
related holders of securities under the agreements pursuant to which such
securities are issued. Standard & Poor's ratings take into consideration
the credit quality of the related pool, including any credit support
providers, structural and legal aspects associated with such securities,
and the extent to which the payment stream on such pool is adequate to
make payments required by such securities. Standard & Poor's ratings on
such certificates do not, however, constitute a statement regarding
frequency of prepayments on the related assets. The letter "r" attached
to a Standard & Poor's rating highlights derivative, hybrid and certain
other types of securities that Standard & Poor's believes may experience
high volatility or high variability in expected returns due to non-credit
risks. The absence of an "r" symbol in the rating of a class of
securities should not be taken as an indication that such securities will
exhibit no volatility or variability in total return.
<TABLE>
<CAPTION>
<S> <S>
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 THOSE TO WHICH THEY RELATE
OR AN 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 FINANCIAL ASSET HOME EQUITY LOAN
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY TRUST 199___
SALE MADE HEREUNDER SHALL, UNDER ANY $______ (FIXED) (FLOATING) RATE
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE ASSET BACKED NOTES
INFORMATION CONTAINED HEREIN IS CORRECT AS OF $______ (FIXED) (FLOATING) RATE
ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES. ASSET BACKED CERTIFICATES,
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary S-3
Risk Factors S-11
The Trust S-12
FINANCIAL ASSET SECURITIES CORP.
The (Letter of Credit)(Surety Bond) Issuer S-13 (DEPOSITOR)
The Home Equity Lending Program S-13
Servicing of the Mortgage Loans S-15
Description of the Mortgage Loans S-16
---------------------------
Description of the Servicing Agreement S-18
PROSPECTUS SUPPLEMENT
Description of the Securities S-21
( , 199 )
The Depositor S-22
The Indenture S-22
---------------------------
The Trust Agreement S-25
Administration Agreement S-27
The Indenture Trustee S-28
The Owner Trustee S-28
GREENWICH CAPITAL MARKETS, INC.
Use of Proceeds S-28
Certain Federal Income Tax Consequences S-28
State Tax Consequences S-28
ERISA Considerations S-28
LegalInvestment Considerations S-30
Underwriting S-31
Legal Matters S-31
Ratings S-31
PROSPECTUS
Prospectus Supplement or Current
Report on Form 8-K 2
Incorporation of Certain Document
by Reference 2
Available Information 2
Reports to Securityholder 3
Summary of Terms 4
Risk Factors 12
The Trust Fund 17
Use of Proceeds 22
The Depositor 22
Loan Program 22
Description of the Securities 24
Credit Enhancement 33
Yield and Prepayment Considerations 38
The Agreements 41
Certain Legal Aspects of the Loans 54
Certain Federal Income Tax Considerations 66
State Tax Considerations 85
ERISA Consideration 85
Legal Investment 88
Method of Distribution 89
Legal Matters 90
Financial Information 90
Rating 90
</TABLE>
========================================= ==============================
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 15, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 1996)
HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 199__-__
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
( __________________________ )
TRANSFEROR AND SERVICER
The Home Equity Loan Asset Backed Certificates, Series 199__-__ (the
"Certificates") will evidence in the aggregate the entire beneficial
interest in the Financial Asset Home Equity Loan Trust 199__-__ (the
"Trust") to be formed pursuant to a Pooling and Servicing Agreement among
Financial Asset Securities Corp., as Depositor, ( __________________ ), as
Transferor and Servicer, and (____________________), as Trustee. The
property of the Trust will include (i) certain home equity revolving
credit line loans (the
"Mortgage Loans") secured by (first or)(second) (deeds of trust)
(mortgages) on residential properties that are primarily one- to four-
family properties, the collections in respect of such Mortgage Loans, and
certain other property relating to such Mortgage Loans(, including the
benefit of a (Letter of Credit) (Surety Bond) as described more fully
herein) and (ii) certain pass-through certificates (the "Private
Securities") representing fractional, undivided interests in the Mortgage
Loans. The Servicer will service the Mortgage Loans, and the Transferor
will own the undivided interest in the Trust not represented by the
Certificates.
All of the Mortgage Loans will be acquired by Financial Asset
Securities Corp. (the "Depositor") from ( ). The
aggregate undivided interest in the Trust represented by the Certificates
will initially be equal to $__________, which as of ______, 199_ (the
"Cut-Off Date") is approximately ___% of the outstanding Principal
Balances of the Mortgage Loans.
Distributions of principal and interest on the Certificates will be
made on the ____ day of each month or, if such date is not a Business Day,
on the succeeding Business Day (each, a "Distribution Date"), commencing
_____________. On each Distribution Date holders of the Certificates will
be entitled to receive, from and to the limited extent of funds available
in the Distribution Account (as defined herein), distributions with
respect to interest and principal calculated as set forth herein. The
Certificates are not guaranteed by the Depositor, the Trustee, the
Transferor, the Servicer or any affiliate thereof.
There is currently no market for the Certificates offered hereby and
there can be no assurance that such a market will develop or if it does
develop that it will continue. See "RISK FACTORS" herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
THE SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-10 AND
IN THE PROSPECTUS ON PAGE 11.
----------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SERVICER, THE TRANSFEROR, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH HEREIN. NEITHER THE
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
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.
<TABLE>
<CAPTION> Price to Underwriting Proceeds to
Public(1) Discount(2) the Depositor(3)
<S> <C> <C>
Per Certificate . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
</TABLE>
(1) Plus accrued interest, if any, from _____________________.
(2) The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting expenses, estimated to be $___________.
------------------
The Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the Certificates will be
made in book-entry form through the facilities of The Depository Trust
Company,( Cedel, S.A. and the Euroclear System) on or about ____________,
199__. The Certificates will be offered in (Europe) and the United States
of America.
-----------------
GREENWICH CAPITAL
MARKETS, INC.
____________, 1996
------------------
THE CERTIFICATES WILL CONSTITUTE A SEPARATE SERIES OF CERTIFICATES BEING
OFFERED BY THE DEPOSITOR PURSUANT TO ITS PROSPECTUS DATED (_________,
199__), OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL.
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Certain capitalized terms used in the Summary are defined elsewhere in the
Prospectus Supplement or in the Prospectus. Reference is made to the
Index of Defined Terms herein and the Index of Defined Terms in the
Prospectus for the definitions of certain capitalized terms.
Trust Financial Asset Home Equity Loan Trust 199__-__
(the "Trust") will be formed pursuant to a
pooling and servicing agreement (the "Agreement")
to be dated as of _______, 199__ (the "Cut-Off
Date") among Financial Asset Securities Corp., as
depositor (the "Depositor"), (____________),
as transferor and servicer (together with any
successor in such capacity, the
"Transferor" and "Servicer", respectively), and
(_____________ ), as trustee (the
"Trustee"). The property of the Trust will
include: a pool of
(adjustable-) (fixed-) rate home equity loan
revolving credit line loans
made or to be made in the future (the"Mortgage
Loans"), under certain
home equity revolving credit line loan agreements
(the "Credit Line
Agreements") and secured by (first)(second)
(deeds of trust) (mortgages)
on residential properties that are primarily one-
to four-family
properties (the "Mortgaged Properties"); the
collections in respect of the
Mortgage Loans received after the Cut-Off Date;
property that secured a
Mortgage Loan which has been acquired by
foreclosure or deed in lieu of
foreclosure; (a surety bond or letter of credit);
certain pass-through certificates
(the "Private Securities") representing fractional,
undivided interests in Mortgage Loans; an assignment
of the Depositor's rights under
the Purchase Agreement; rights under certain
hazard insurance policies
covering the Mortgaged Properties; and
certain other property, as described more fully
herein.
The Trust will include the unpaid principal balance
of each Mortgage Loan as of the Cut-Off Date
(the "Cut-Off Date Principal Balance") plus
any additions thereto as a result of new
advances made pursuant to
the applicable Credit Line Agreement (the
"Additional Balances") during the
life of the Trust. With respect
to any date, the "Pool Balance" will be equal
to the aggregate of the Principal Balances of
all Mortgage Loans as of such date. The "Principal
Balance" of a
Loan (other than a Liquidated Loan) on any day is
equal to its Cut-Off Date Principal Balance, plus
(i) any Additional Balances in respect of such
Mortgage Loan, minus (ii) all collections credited
against the Principal Balance of such Mortgage
Loan in accordance with the related Credit Line
Agreement prior to such
day. The Principal Balance of a Liquidated Loan
after the final recovery of related Liquidation
Proceeds shall be zero.
Securities Offered The Home Equity Loan Asset-Backed Certificates,
Series 199__-__ offered hereby (the
"Certificates") represent the right to receive
payments of interest at the (variable) rate
described below (the "Certificate Rate"), payable
monthly, and payments of principal with respect
to the Mortgage Loans, the Private Securities or,
in certain circumstances, draws on the (Letter of
Credit) (Surety Bond) to the extent provided
below. The aggregate undivided interest (the
"Investor Interest") in the Trust represented by
the Certificates as of the Cut-Off Date will
equal $__________ of principal (the "Original
Principal Balance"), which represents
approximately ___% of the aggregate Cut-Off Date
Principal Balance, which will decline as
principal is paid to the Certificateholders
during the Amortization Period, except as
otherwise provided herein. The Transferor will
hold the remaining undivided interest (the
"Transferor Interest") in the Trust not
represented by the Certificates. The Transferor
as of any date shall be the holder of the
Transferor Interest which initially will be the
Depositor. The Depositor intends to convey the
Transferor Interest to ( ) on or about the
Closing Date. The Certificates will be issued
pursuant to the Agreement. The principal amount
of the outstanding Certificates (the "Principal
Balance") on any date is equal to the Original
Principal Balance minus the aggregate of amounts
actually distributed as principal to the
Certificateholders. See "DESCRIPTION OF THE
CERTIFICATES" herein.
The Mortgage Loans The Mortgage Loans are secured by (first)(second)
deeds of trust or mortgages on Mortgaged
Properties. The Mortgage Loans were originated
by ( ) and on or prior to the Closing Date, the
Transferor will sell the Mortgage Loans to the
Depositor pursuant to a purchase agreement (the
"Purchase Agreement"). The aggregate Cut-Off
Date Principal Balance of the Mortgage Loans is
$___________ (the "Cut-Off Date Pool Balance").
The combined loan-to-value ratio of each Mortgage
Loan, computed using the maximum amount the borrower
was permitted to draw down under the related Credit
Line Agreement (the "Credit Limit") and taking into
account the amounts of any related senior mortgage
loans (the "Combined Loan-to-Value Ratio") did not
exceed __% as of the Cut-Off Date. The weighted
average Combined Loan-to-Value Ratio of the Mortgage
Loans was ____% as of the Cut-Off Date. See "THE HOME
EQUITY LENDING PROGRAM -- Underwriting Procedures
Relating to the Mortgage Loans" herein.
Interest on each Mortgage Loan is payable monthly and
computed on the related average
daily outstanding Principal Balance for each billing
cycle at a variable rate per annum (the "Loan Rate")
equal at any time (subject to minimum and maximum
rates, as described herein under "THE HOME EQUITY
LENDING PROGRAM--Mortgage Loan Terms," and further
subject to applicable usury limitations) to the sum of
(i) (the prime rate published in the "Money Rates"
section of The Wall Street Journal generally on the
Monday of the week in which such Loan Rate adjusts
(or, if no rate is published on such day, then on the
next succeeding calendar day on which a prime rate is
published), rounded to the nearest 1/8 of 1 percent) (
) and (ii) a margin generally within the range of
___% to ___%. The Loan Rate is subject to adjustment
( ). With respect to each Mortgage Loan, a
"billing cycle" is the calendar month preceding a Due
Date. Interest accrued at such rate will be due on
the Due Date in the month following the close of the
billing cycle. (As to each Mortgage Loan, the Due
Date is the ____ day of the month.) The Cut-Off Date
Principal Balances ranged from zero to $_______ and
averaged $_______. Credit Limits under the Mortgage
Loans as of the Cut-Off ranged from approximately
$_____ to $______ and averaged $______. Each Mortgage
Loan was originated in the period from _______ to
_________, and, as of the Cut-Off Date, the weighted
average Credit Limit Utilization Rate (as defined
herein) was approximately ___%. See "THE HOME EQUITY
LENDING PROGRAM" and "DESCRIPTION OF THE MORTGAGE
LOANS" herein.
During the term of the Trust, all Additional Balances
will be property of the Trust. The aggregate amount
of the loan balances at any time (the "Pool Balance")
will fluctuate from day to day because the amount of
draws by borrowers and the amount of principal
payments will usually differ on each day. Because the
Transferor Interest represents the interest in the
Trust not represented by the Certificates, the amount
of the Transferor Interest will fluctuate from day to
day as draws are made and principal is paid under the
Mortgage Loans.
The Loan Balance of a Mortgage Loan (other than a
Liquidated Mortgage Loan) on any day is equal to its
principal balance on the Cut-Off Date, plus (i) any
Additional Balances in respect of such Mortgage Loan,
minus (ii) all collections credited against the
principal balance of such Mortgage Loan in accordance
with the related Loan Agreement prior to such day.
The aggregate undivided interest in the Loan Balances
in the Trust evidenced by the Certificates will never
exceed the Security Principal Balance regardless of
the amount of the Pool Balance at any time.
The principal amount of the outstanding Certificates
(the "Security Principal Balance") on any date is
equal to the principal balance of the Certificates on
the Closing Date minus the aggregate of amounts
actually distributed as principal to the
Certificateholders.
Private Securities The Private Securities are pass-through
certificates representing beneficial interests in
Mortgage Loans. (The individual Mortgage Loans
underlying the Private Securities are insured or
guaranteed by the United States or an agency or
instrumentality thereof. The Private Securities
themselves are not so insured or guaranteed.)
Payments on the Private Securities will be
distributed directly to the Trustee as the
registered owner of such Private Securities.
Collections All collections on the Mortgage Loans and the
Private Securities will be allocated by the
Servicer in accordance with the Loan Agreements
between amounts collected in respect of interest
("Interest Collections") and amounts collected in
respect of principal ("Principal Collections" and
collectively with Interest Collections, the
"Collections"). The Servicer will
generally deposit Collections distributable to
the Holders in an account established for such
purpose under the Agreement (the "Collection
Account"). See "DESCRIPTION OF THE CERTIFICATES
-- Payments on Mortgage Loans; Deposits to
Collection Account and Distribution Account"
herein and "AGREEMENTS -- Payments on Loans;
Deposits to Security Accounts" and "-- Collection
Procedures" in the Prospectus.
Denominations The Certificates will be offered for purchase in
denominations of $(___) and integral multiples
thereof. The interest in the Trust evidenced by
a Certificate (the "Percentage Interest") will be
equal to the percentage derived by dividing the
denomination of such Certificate by the Original
Security Principal Balance.
Registration of
Certificates The Certificates will initially be
issued in book-entry form. Persons
acquiring beneficial ownership
interests in the Certificates
("Certificate Owners") will hold such
interests through The Depository Trust
Company ("DTC"), in the United States,
or Centrale de Livraison de Valeurs
Mobilieres S.A. ("CEDEL") or the
Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant
system. So long as the 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 DTC or one of the
relevant depositaries (collectively,
the "European Depositaries").
Cross-market transfers between persons
holding directly or indirectly through
DTC, on the one hand, and
counterparties holding directly or
indirectly through CEDEL or Euroclear,
on the other, will be effected in DTC
through Citibank, N.A. ("Citibank") or
Morgan Guaranty Trust Company of New
York ("Morgan"), the relevant
depositaries of CEDEL or Euroclear,
respectively, and each a participating
member of DTC. The interests of such
Certificateholders will be represented
by book-entries on the records of DTC
and participating members thereof. No
Certificate Owner will be entitled to
receive a definitive certificate
representing such person'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 any
Certificates reflect the rights of
Certificate Owners only as such rights
may be exercised through DTC and its
participating organizations for so long
as such Certificates are held by DTC.
See "RISK FACTORS--Book-Entry
Certificates", "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates"
and "ANNEX I" hereto.
Depositor The Depositor of (the Mortgage Loans) (and the
Private Securities) will be Financial Asset
Securities Corp. The principal executive offices
of the Depositor are located at 600 Steamboat
Road, Greenwich, Connecticut 06830 (telephone
(203) 625-2700). See "THE DEPOSITOR" in the
Prospectus.
Servicer The Servicer of the Mortgage Loans and the Private
Securities will be ( ) (the "Servicer"). The
principal executive offices of the Servicer are
located ____________ (telephone (___) _______). See
"SERVICING OF THE MORTGAGE LOANS" herein.
Certificate Rate The "Certificate Rate" applicable to any
Distribution Date will generally equal the
sum of ((a) the London Interbank offered
rate for one-month Eurodollar deposits
("LIBOR") appearing on the Telerate Screen
Page 3750, as of the second LIBOR Business
Day (as defined herein) prior to the first
day of the related Interest Period (or as of
two LIBOR Business Days prior to the Closing
Date, in the case of the first Interest
Period) and (b) ____%). Notwithstanding the
foregoing, in no event will the amount of
interest required to be distributed in
respect of the Certificates on any
Distribution Date exceed a rate equal to
(____________________). Interest on the
Certificates will accrue as described below.
Interest Interest will be distributed monthly on the __ day of
each month or, if such day is not a business day, on
the next succeeding business day (each, a
"Distribution Date"), commencing on _______, at the
Certificate Rate for the related Interest Accrual
Period (as defined below). The Certificate Rate for a
Distribution Date will equal (the arithmetic mean of
London Interbank offered quotations for one-month
Eurodollar deposits ("LIBOR") determined as specified
herein, as of the
second LIBOR Business Day prior to the immediately
preceding Distribution Date (or as of ___________,
199_, in the case of the first Distribution Date) plus
( ) of 1%, subject to a maximum rate described under
"DESCRIPTION OF THE CERTIFICATES -- Distributions on
the Certificates" herein) (___% per annum). Interest
on the Certificates in respect of any Distribution
Date will accrue from the preceding Distribution Date
(or in the case of the first Distribution Date, from
the date of the initial issuance of the Certificates
(the "Closing Date") through the day preceding such
Distribution Date (each such period, an "Interest
Accrual Period") on the basis of the (actual number of
days in the Interest Period and a 360-day year).
Interest payments will be funded from the portion of
the Interest Collections collected during the
immediately preceding calendar month (or, in the case
of the initial Distribution Date, the period from
_____, 199_ through the last day of the calendar month
immediately preceding such Distribution Date) (the
"Collection Period") allocable to the Investor
Interest( and, if necessary, from draws on the (Letter
of Credit) (Surety Bond)). See "DESCRIPTION OF THE
CERTIFICATES" herein and "RISK FACTORS -- Credit
Enhancement" and "CREDIT ENHANCEMENT" in the
Prospectus.
Revolving Period In order to maintain the Security Principal
Balance at $_______(except in certain limited
circumstances) for a period of approximately
______months from the first day of the month in
which the Certificates are issued or for such
shorter period as may result from the occurrence
of an Early Amortization Event, as described
herein (the "Revolving Period"), Principal
Collections allocable to the Investor Interest
will be paid to the Transferor rather than the
Certificateholders so that the Certificateholders
maintain the same Investor Interest in the Trust.
Unless earlier terminated by the occurrence of an
Early Amortization Event, the Revolving Period
will end on _______. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Principal Payments;
Amortization Period Unless an Early Amortization Event shall
have earlier occurred, during the period
beginning _____________ and ending when the
Security Principal Balance has been reduced
to zero or when the Trust otherwise
terminates (the "Amortization Period"),
Principal Collections allocated to the
Investor Interest will no longer be paid to
the Transferor but instead will be
distributed monthly to the
Certificateholders as provided herein on
each Distribution Date beginning with the
Distribution Date in the month following the
month in which the Amortization Period
commences. See "DESCRIPTION OF THE
CERTIFICATES -- Early Amortization Events"
herein for a discussion of the events which
might lead to the early commencement of the
Amortization Period. During the
Amortization Period, the amount of Principal
Collections allocable to the Investor
Interest (the "Principal Allocation") will
equal the ratio of the Security Principal
Balance to the Pool Balance, in each case as
of the end of the last day of the Revolving
Period (the "Investor Percentage" for such
period) multiplied by the Principal
Collections received during the related
Collection Period.
Allocations based upon the Investor Percentage during
the Amortization Period may result in distributions of
Principal with respect to any Collection Period to
certificateholders in amounts that are greater
relative to the declining balance of the Security
Principal Balance than would be the case if no fixed
Investor Percentage were used to determine the
percentage of Principal Collections distributed in
respect of the
Investor Interest. See "DESCRIPTION OF THE
CERTIFICATES -- Payments on Mortgage Loans; Deposits
to Collection Account and Distribution Account"
herein.
(Letter of Credit)
(Surety Bond)
Issuer _________________ (the "(Letter of Credit) (Surety
Bond) Issuer"). See "THE (LETTER OF CREDIT) (SURETY
BOND) ISSUER" herein.)
((Letter of Credit)
(Surety Bond) On the Closing Date, the (Letter of Credit)
(Surety Bond) Issuer will issue a (letter of
credit) (surety bond) (the "(Letter of
Credit) (Surety Bond)") in favor of the
Trustee on behalf of the Trust. In the
event that, on any Distribution Date,
available amounts on deposit in the
Collection Account with respect to the
preceding Collection Period are insufficient
to provide for the payment of the amount
required to be distributed to the
Certificateholders and the Servicer on such
Distribution Date, the Trustee will draw on
the (Letter of Credit) (Surety Bond), to the
extent of the (Letter of Credit) (Surety
Bond) Amount for such Distribution Date, in
an amount equal to such deficiency. See
"DESCRIPTION OF THE CERTIFICATES -- The
(Letter of Credit) (Surety Bond) and "--
Distributions on the Certificates" herein
and "CREDIT ENHANCEMENT" in the Prospectus.)
((Letter of Credit)
(Surety Bond)
Amount The amount available under the (Letter of Credit)
(Surety Bond) (the "(Letter of Credit) (Surety Bond)
Amount") for the initial Distribution Date will be
$ . For each Distribution Date thereafter, the
(Letter of Credit) (Surety Bond) Amount will equal the
lesser of (i) % of the Pool Balance as of the
first day of the preceding Collection Period (after
giving effect to any amounts distributed with respect
to principal of the Mortgage Loans on the Distribution
Date occurring in such preceding Collection Period) and
(ii) the (Letter of Credit) (Surety Bond) Amount as of
the first day of the preceding Collection Period,
minus any
amounts drawn under the (Letter of Credit) (Surety
Bond) during such preceding Collection Period, plus
any amounts paid to the (Letter of Credit) (Surety Bond)
Issuer on the Distribution Date occurring in such
preceding Collection
Period up to the amount of any previous draws on the
(Letter of Credit) (Surety Bond).)
Record Date The last day (of the month) preceding a
Distribution Date.
Servicing The Servicer will be responsible for servicing,
managing and making collections on the Mortgage Loans.
The Servicer will deposit all collections in respect
of the Mortgage Loans into the Collection Account as
described herein. Not later than the _______ 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 on the
Certificates." With respect to each Collection
Period, other than the first Collection Period, the
Servicer will receive from payments in respect of
interest on the Mortgage Loans, on behalf of itself, a
portion of such payments as a monthly servicing fee
(the "Servicing Fee") in the amount of ____% per annum
(the "Servicing Fee Rate") on the Principal Balance of
each Mortgage Loan as of the first day of each such
Collection Period as to which such a payment was made.
With respect to the first Collection Period, the
Servicer will receive from such collections ______ of
the amount calculated in the preceding sentence. See
"DESCRIPTION OF THE CERTIFICATES--Servicing
Compensation and Payment of Expenses" herein. In
certain limited circumstances, the Servicer may resign
or be removed, in which event either the Trustee or a
third-party servicer will be appointed as a successor
Servicer. See
"DESCRIPTION OF THE CERTIFICATES--Certain Matters
Regarding the Servicer" herein.
Trustee ( ) (the "Trustee"), will act as Trustee on behalf
of the Certificateholders.
Final Payment of
Principal;
Termination The Trust will terminate on the Distribution Date
following the earlier of (i) the reduction of the
Security Principal Balance to zero and after
which there is no unreimbursed Security Principal
Balance Loss Deduction Amount and (ii) the final
payment or other liquidation of the last Mortgage
Loan and Private Security in the Trust. The
Investor Interest will be subject to optional
retransfer to the Transferor on any Distribution
Date after the Security Principal Balance is
reduced to an amount less than or equal to $
__________________ ((___)% of the initial
Security Principal Balance). The retransfer
price will be equal to the sum of the outstanding
Security Principal Balance and accrued and unpaid
interest thereon at the Certificate Rate through
the day preceding the final Distribution Date.
See "DESCRIPTION OF THE CERTIFICATES --
Termination; Retirement of the Certificates"
herein and "THE AGREEMENTS -- Terminations;
Optional Termination" in the Prospectus.
Mandatory
Retransfer
of Certain Mortgage
Loans and
Private Securities The Depositor will make certain
representations and warranties in the
Agreement with respect to the Mortgage Loans
and Private Securities in its capacity as
Depositor. If the Transferor breaches
certain of its representations and
warranties with respect to any Mortgage Loan
or Private Security and such breach,
materially and adversely affects the
interests of the Trust(,) (or) the
Certificateholders (or the (Letter of
Credit) (Surety Bond) Issuer) and is not
cured within the specified period, the
Mortgage Loan or Private Security will be
removed from the Trust after the expiration
of a specified period from the date on which
the Transferor becomes aware or receives
notice of such breach and will be reassigned
to the Transferor. SEE "DESCRIPTION OF THE
CERTIFICATES -- Assignment of Mortgage
Loans" herein.
Certain Federal Tax
Considerations (Special tax counsel to the Transferor is of the
opinion that, under existing law, the
Certificates are properly characterized as debt
of the Transferor for Federal income tax
purposes. Under the Agreement, the Transferor
and the Certificateholders will agree to treat
the Certificates as indebtedness of the
Transferor for Federal, state and local income
and franchise tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" in the Prospectus for
additional information concerning the application
of Federal income tax laws.)
ERISA
Considerations The acquisition of a Certificate by a
pension or other employee benefit plan (a
"Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), could, in some instances, result
in a "prohibited transaction" or other
violation of the fiduciary responsibility
provisions of ERISA and Code Section 4975.
Certain exemptions from the prohibited
transaction rules could be applicable to the
acquisition of such Certificates. Any Plan
fiduciary considering whether to purchase
any Certificate on behalf of a Plan should
consult with its counsel regarding the
applicability of the provisions of ERISA and
the Code. See "ERISA CONSIDERATIONS" herein and
in the Prospectus.
Legal Investment
Considerations The Certificates will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"), because some of the Mortgages securing
the Mortgage Loans are not first mortgages.
Accordingly, many institutions with legal
authority to invest in comparably rated
securities based solely on first mortgages may
not be legally authorized to invest in the
Certificates. See "LEGAL INVESTMENT
CONSIDERATIONS" herein and "LEGAL INVESTMENT" in
the Prospectus.
Certificate Rating It is a condition to the issuance of the
Certificates that they be rated in the
___________ by at least two nationally recognized
statistical rating organizations (each a "Rating
Agency"). In general, ratings address credit
risk and do not address the likelihood of
prepayments. See "RATINGS" herein and "RISK
FACTORS--Rating of the Securities" in the
Prospectus.
RISK FACTORS
PREPAYMENT CONSIDERATIONS
All of the Mortgage Loans may be prepaid in whole or in part at any
time without penalty. Home equity loans, such as the Mortgage Loans, have
been originated in significant volume only during the past few years and
neither the Depositor nor the Servicer is aware of any publicly available
studies or statistics on the rate of prepayment of such loans. Generally,
home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment
than traditional loans. The Trust's prepayment experience may be affected
by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing and homeowner
mobility. In addition, substantially all of the Mortgage Loans contain
due-on-sale provisions and the Servicer intends to enforce such provisions
unless (i) such enforcement is not permitted by applicable law or (ii) the
Servicer, in a manner consistent with reasonable commercial practice,
permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. To the extent permitted by applicable law, such assumption
will not release the original borrower from its obligation under any such
Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF THE LOANS--`Due-on-Sale'
Clauses" in the Prospectus.
(LEGAL CONSIDERATIONS
The Mortgage Loans are secured by first and second mortgages
(representing approximately ____% and ____% of the Pool Balance as of the
Cut-Off Date, respectively). With respect to Mortgage Loans that are
junior in priority to liens having a first priority with respect to the
related Mortgaged Property ("First Liens"), the Servicer has the power
under certain circumstances to consent to a new mortgage lien on such
Mortgaged Property having priority over such Mortgage Loan in connection
with the refinancing of such First Lien. Mortgage Loans secured by second
mortgages are entitled to proceeds that remain from the sale of the
related Mortgaged Property after any related senior mortgage loan 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, the Trust and, accordingly, the Certificateholders, bear (i)
the risk of delay in distributions while a deficiency judgment against the
borrower 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.
The sale of the Mortgage Loans from the Transferor to the Depositor
pursuant to the Purchase Agreement will be treated by the Transferor and
the Depositor as a sale of the Mortgage Loans. The Transferor will
warrant that such transfer is a sale of its interest in the Mortgage Loans
or a grant of a first priority perfected security interest therein. In
the event of an insolvency of the
Transferor, the receiver of the Transferor may attempt to recharacterize
the sale of the Mortgage Loans as a borrowing by the Transferor secured by
a pledge of the Mortgage Loans. If the receiver decided to challenge such
transfer, delays in payments of the Certificates and possible reductions
in the amount thereof could occur. The Depositor will warrant in the
Agreement that the transfer of the Mortgage Loans to the Trust is a valid
transfer and assignment of such interest.)
(SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS
The Servicer may permit an increase in the Credit Limit under a
Mortgage Loan if the new Credit Limit under the Mortgage Loan, plus the
outstanding principal balance of any related senior loans, does not exceed
(i) __% (__% for a condominium, townhouse, duplex, or vacation
condo/house), if the market value of the Mortgaged Property is $ _____ or
less, or __% (__% for a condominium, townhouse, duplex, or vacation
condo/house), and if the market value of the Mortgage Property exceeds $
_________, based upon an appraisal or the tax assessed value of the
Mortgaged Property at the time the increase was requested. An increase in
the Credit Limit under a Mortgage Loan in accordance with the previous
sentence may be made without the consent of the Trustee. Additional
Balances arising under a Mortgage Loan as a result of an increase in the
Credit Limit will be treated the same as Additional Balances arising under
a Mortgage Loan for which there has been no increase in the Credit Limit.
In addition to such changes, the Servicer may agree to other changes in
the terms of a Loan Agreement, provided that such changes (i) do not
materially adversely affect the interest of the Certificateholders, (ii)
are consistent with prudent business practice, (iii) are also being
applied to the comparable segment of home equity credit lines being held
for the Servicer's own account, and (iv) do not change the terms of the
Mortgage Loan so as to change the terms for the amortization of principal.
There can be no assurance that changes in applicable law or the
marketplace for home equity loans or prudent business practice will not
result in changes in the terms of the Credit Line. The Servicer may also
extend the period during which draws under the Mortgage Loans may be
made.)
(DELINQUENT MORTGAGE LOANS
The Trust will include Mortgage Loans which are ___ days or fewer
delinquent. As of the Cut-Off Date, the aggregate Loan Balance of such
delinquent Mortgage Loans was $ ____. (In addition, the Mortgage Loans in
all likelihood include obligations of borrowers who are or are about to
become bankrupt or insolvent.) If there are not sufficient funds from
Interest Collections allocated to the Investor Interest to cover the
Liquidation Loss Amount for any Collection Period and the (Letter of
Credit) (Surety Bond) Amount has been reduced to zero, the Security
Principal Balance will be reduced, which (unless otherwise later
reimbursed) would result in a reduction in the aggregate amount of
principal returned to the Certificateholders and in the amount of Interest
Collections
allocable to the Investor Interest and available to provide protection
against defaults in subsequent Collection Periods.)
(TAXATION
In the opinion of special tax counsel to the Transferor, the
Certificates are properly characterized as debt of the Transferor for
Federal income tax purposes. If the IRS were to contend successfully that
the Certificates were not debt obligations of the Transferor for Federal
income tax purposes, the arrangement among the Transferor and the
Certificateholders might be classified for Federal income tax purposes as
either a partnership or an association taxable as a corporation that owns
the Mortgage Loans. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in
the Prospectus.)
(THE (LETTER OF CREDIT)(SURETY BOND) ISSUER
The following information with respect to _________ ("_______") has
been furnished by __________.
(Description of Letter of Credit/Surety Issuer))
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning (_______) and its
underwriting policies has been provided by (_______). The Depositor does
not make any representation as to the accuracy or completeness of such
information.
GENERAL
All of the Mortgage Loans were originated by
(_____________________________), (the "Transferor" or the "Servicer")
under its home equity lending program. The Transferor first offered
adjustable-rate home equity revolving credit line loans ("home equity
loans") in 19__. As of (_____________), (____________) owned and serviced
approximately $__________ aggregate principal amount of outstanding home
equity loans secured by properties located in __________ under home equity
credit lines (the "Transferor Portfolio").
UNDERWRITING PROCEDURES RELATING TO THE MORTGAGE LOANS
(Each home equity loan was originated after a review by the
Transferor in accordance with its established underwriting procedures,
which were intended to assess the applicant's ability to assume and repay
such home equity loans and the adequacy of the real property which serves
as collateral for such home equity loans. The maximum Credit Limit for a
home equity loan provided by the Transferor was $__________.
Each applicant for a home equity loan was required to complete an
application which listed the applicant's assets, liabilities, income,
credit and employment history and other demographic and personal
information. If information in the loan application demonstrated that
there was sufficient income and equity to justify making a home equity
loan and the Transferor (a) received a satisfactory independent credit
bureau report on the credit history of the borrower and (b) obtained, in
the case of all home equity loans originated prior to __________, a drive-
by appraisal of the related Mortgaged Property, or for all home equity
loans originated as of __________, a satisfactory appraisal completed on
forms approved by FNMA, and if such information met the Transferor's
underwriting standards, the Transferor issued a commitment subject to
satisfaction of certain other conditions. These conditions included: (i)
obtaining and reviewing pay stubs, income tax returns or a verification of
employment from the applicant's employer; (ii) obtaining and reviewing a
verification of deposit; and (iii) obtaining and reviewing a verification
of the loan in the first lien position when the home equity loan was to be
in a second lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Transferor.
It is the Transferor's policy to require a title policy insuring
title mortgage in accordance with the intended lien position. Regardless
of Combined Loan-to-Value Ratios, it is the Transferor's policy not to
accept a position junior to any mortgage lien other than a first mortgage.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio
of __% for loans for which the Transferor obtained full documentary
support and __% for loans for which limited documentary support was
obtained.
After obtaining all applicable employment, credit and property
information, the Transferor determined whether sufficient unencumbered
equity in the property existed and whether the prospective borrower had
sufficient monthly income available to support the payments of interest at
the current prime rate plus the applicable margin based on the credit
limit in addition to any senior mortgage loan payments (including any
escrows for property taxes and hazard insurance premiums) and other
monthly credit obligations based on the prospective borrower's
Debt-to-Gross Income Ratio. The "Debt-to-Gross Income Ratio" is the ratio
of (a) certain of the borrower's debt obligations which include: (i) the
monthly first mortgage payment plus taxes; (ii) monthly installment debt
payments with a term of more than ten months; (iii) five percent of the
total revolving obligations; (iv) monthly alimony and child support
obligations; and (v) the payment on the home equity loan calculated at the
Credit Limit and current prime rate plus margin for such home
equity loan to (b) the borrower's gross verifiable monthly income. The
Debt-to-Gross Income Ratio generally did not exceed (________%).
When the commitment conditions had been satisfied, the home equity
loan was completed by signing a Credit Line Agreement, rescission
statement, and mortgage which secured the repayment of principal of and
interest on the related home equity loan. The original mortgage was then
recorded in the appropriate county government office.
MORTGAGE LOAN TERMS
(A borrower may access a home equity loan by writing a check. On all
home equity loans, there is (a ten-year) draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans
bear interest at a (fixed rate)(variable rate which may change bi-weekly).
Home equity loans may be subject to a maximum per annum interest rate (the
"Maximum Rate") of _____ %
per annum and in all cases, are subject to applicable usury limitations.
See "CERTAIN LEGAL ASPECTS OF LOANS-- Applicability of Usury Laws" in the
Prospectus. The daily periodic rate on the home equity loans (the "Loan
Rate") is the sum of the Index Rate (as defined herein) plus a spread (the
"Margin") which generally ranges between ____% and ____%, divided by 365
days or 366 days, as applicable.
The "Index Rate" is based on (the "prime rate" published in The Wall
Street Journal every second Monday rounded to the nearest one-eighth of
one percent or if not published on any such date, as next published in the
Wall Street Journal) ( ). The annual percentage rate for any
bi-weekly period will be based on
the Prime Rate in effect the Monday on which the rate may change. (If a
prime rate range is published in The Wall Street Journal, then the
midpoint (average) of that range will be used.) There are no limitations
on increases or decreases (except for those home equity loans which have
Maximum Rates). Only the home equity loans that have Maximum Rates of
____% also have annual adjustment caps of __% as to both increases and
decreases in their Loan Rates.
Billing statements are mailed monthly. The statement details all
debits and credits and specifies the minimum payment due and the available
credit line. Notice of changes in the applicable Loan Rate are provided
by the Transferor to the Borrower with such statements. All payments are
due by the ( ) day after the date the billing statement is issued.
The Credit Line Agreements further provide that if publication of the
Index Rate is discontinued, the Index Rate will be changed upon
notification in accordance with such Credit Line Agreements.
The right to obtain additional credit may be suspended or terminated
or the borrower may be required to pay the entire balance due plus all
other accrued but unpaid charges immediately, if the borrower fails to
make any required payment by the due date, if the
total outstanding principal balance including all charges payable exceeds
the Credit Limit, if the borrower made any statement or signature on any
document which is fraudulent or contained a material misrepresentation, if
the borrower dies or becomes incompetent, if the borrower becomes bankrupt
or insolvent, if the borrower becomes subject to any judgment, lien,
attachment or execution which is issued against the Mortgaged Property, if
the borrower fails to obtain and maintain required property insurance or
if the borrower sells or transfers the Mortgaged Property or does not
maintain the Mortgaged Property. In addition, the right to obtain
additional credit may be suspended or a borrower's Credit Limit may be
reduced, if the value of the Mortgaged Property decreases for any reason
to less than 80% of the original appraised value, if the borrower is in
default under the home equity loan, if government action impairs the
Transferor's lien priority or if a regulatory agency has notified the
Transferor that continued advances would constitute an unsafe and unsound
practice.)
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience
for each of the periods shown for the home equity loans indicated on the
table. The Servicer believes that there have been no material trends or
anomalies in the historical delinquency and loss experience as represented
in the following tables. The data presented in the following tables are
for illustrative purposes only, and there is no assurance that the
delinquency and loss experience of the Mortgage Loans will be similar to
that set forth below.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> As of _________
____________________________________
Number of
Loans Amount
<S> <C> <C>
Amount Outstanding at
Period End . . . . . . . . . . . . . . . . .
Delinquency
30-59 Days . . . . . . . . . . . . . . . . . $
60-89 Days . . . . . . . . . . . . . . . . .
90 or More Days . . . . . . . . . . . . . . .
Foreclosures and Bankruptcies . . . . . . . . _________
Total Delinquencies . . . . . . . . . . . . . . $_________
30-59 Days Percentage . . . . . . . . . . . . . %
60-89 Days Percentage . . . . . . . . . . . . . %
90 or More Days Percentage . . . . . . . . . . %
Foreclosures and Bankruptcies . . . . . . . . .
</TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS
<TABLE>
<CAPTION> For the Year
Ending ________
_________________
<S> <C>
Average Amount
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . $
Gross Charge-Offs . . . . . . . . . . . . . . . . . . . . . . $
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Losses as a Percentage
of Average Amount Outstanding . . . . . . . . . . . . . . . %
</TABLE>
SERVICING OF THE MORTGAGE LOANS
The information set forth below concerning the Servicer and its
servicing policies has been provided by the Servicer. The Depositor does
not make any representation as to the accuracy or completeness of such
information.
SERVICING OF MORTGAGE LOANS
The Servicer will be responsible for servicing the Mortgage Loans as
agent for the Trust in accordance with the Servicer's policies and
procedures for servicing home equity loans and in accordance with the
terms of the Agreement.
With respect to real estate secured revolving credit line loans, the
general policy of the Servicer is to initiate foreclosure on the
underlying property (i) after such loan is 90 days or more delinquent;
(ii) if a notice of default on a senior lien is received by the Servicer;
or (iii) if circumstances are discovered by the Servicer which would
indicate that a potential for loss exists. Foreclosure proceedings may be
terminated if the delinquency is cured. However, under certain
circumstances, the Servicer may elect not to commence foreclosure or stay
the foreclosure proceeding if the borrower's default is due to special
circumstances which are temporary and are not expected to last beyond a
specified period. The loans to borrowers in bankruptcy proceedings will
be restructured in accordance with law and with a view to maximizing
recovery of such home equity loans, including any deficiencies.
Additionally, any time during foreclosure, a forbearance, short sale,
deed-in-lieu or a payment plan can be authorized.
After foreclosure, if the home equity loan is secured by a first
mortgage lien, title to the related Mortgaged Property will pass to the
Servicer, or a wholly-owned subsidiary of the Servicer, who will liquidate
the Mortgaged Property and charge-off the balance of the home equity loan
balance which was not recovered by the liquidation proceeds. If the
Mortgaged Property was subject to a senior lien position, the Servicer
will either satisfy such lien at the time of the foreclosure sale or take
other action as deemed necessary to protect the Servicer's interest in the
Mortgaged Property. If in the judgment of the Servicer, the cost of
maintaining or purchasing the senior lien position exceeds the economic
benefit of such action, the Servicer will generally charge-off the entire
home equity loan, seek a money judgment against the borrower or will not
pursue any recovery.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in
the Servicer's real estate secured revolving credit line loans and
applicable laws and regulations, and other considerations.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first
Collection Period, the servicing compensation to be paid to the Servicer
in respect of its servicing activities relating to the Mortgage Loans will
be paid to it from interest collections in respect of the Mortgage Loans
and will be equal to ____% per annum (the "Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage Loans as of the first day of
each such Collection Period
(the "Servicing Fee"). With respect to the first Collection Period, the
Servicer will receive from such collections ___% of the amount calculated
in the preceding sentence. All assumption fees, late payment charges and
other fees and charges, to the extent collected from borrowers, will be
retained by the Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Servicer will be
entitled to reimbursement for certain expenses incurred by it in
connection with defaulted Mortgage Loans and in connection with the
restoration of Mortgaged Properties related thereto, such right of
reimbursement being prior to the rights of Certificateholders to receive
any related Liquidation Proceeds.
DESCRIPTION OF THE MORTGAGE LOANS
MORTGAGE LOANS
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, most of which are second mortgages or second
deeds of trust, on Mortgaged Properties. The Mortgaged Properties
securing the Mortgage Loans consist primarily of residential properties
that are one- to four-family properties. (___ of the Mortgaged Properties
are owner-occupied.) See"--Mortgage Loan Pool Statistics" below.
The Cut-Off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of ______, 199_ (the
"Cut-Off Date"). As of the _______, the Mortgage Loans were not more than
89 days delinquent and had a Loan Rate of at least ____% per annum. The
average Cut-Off Date Principal Balance was $_______, the minimum Mortgage
Cut-Off Date Principal Balance was zero, the maximum Cut-Off Date
Principal Balance was $_________, the minimum Loan Rate and the maximum
Loan Rate on the Cut-Off Date were ____% and ____% per annum,
respectively, and the weighted average Loan Rate on the Cut-Off Date was
____% per annum. As of the Cut-Off Date, the weighted average Credit
Limit Utilization Rate was ____%, the minimum Credit Limit Utilization
Rate was zero and the maximum Credit Limit Utilization Rate was ______%.
The "Credit Limit Utilization Rate" is determined by dividing the Cut-Off
Date Principal Balance of a Mortgage Loan by the Credit Limit of the
related Credit Line Agreement. The weighted average Combined Loan-to-
Value Ratio of the Mortgage Loans was ____% as of the Cut-Off Date.
MORTGAGE LOAN POOL STATISTICS
The Depositor has compiled the following additional information as of
the Cut-Off Date with respect to the Mortgage Loans to be included in the
Trust.
(TABULAR INFORMATION)
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Certificates, the aggregate
amount of distributions on the Certificates and the yield to maturity of
the Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the
Mortgage Loans will in turn be affected by the amortization schedules
(which will change periodically to accommodate adjustments to the Loan
Rates) of the Mortgage Loans and by the rate of principal prepayments
(including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties,
condemnations and repurchases by the Transferor or Servicer). The
Mortgage Loans may be prepaid by the Mortgagors at any time without a
prepayment penalty. See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans
(including any optional purchase by the Servicer of a defaulted Mortgage
Loan and any optional repurchase of the remaining Mortgage Loans in
connection with the termination of the Trust, in each case as described
herein) will result in distributions on the Certificates of principal
amounts which would otherwise be distributed over the remaining terms of
the Mortgage Loans. Since the rate of payment of principal of the
Mortgage 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 extent to which the yield to maturity of a Certificate
may vary from the anticipated yield will depend upon the degree to which
such Certificate is purchased at a discount or premium, and the degree to
which the timing of payments thereon is sensitive to prepayments,
liquidations and purchases of the Mortgage Loans.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Home equity loans such as the Mortgage Loans have been originated in
significant volume only during the past few years and neither the
Depositor nor the Servicer is aware of any publicly available studies or
statistics on the rate of prepayment of such Mortgage Loans. Generally,
home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment
than traditional first mortgage loans. The prepayment experience of the
Trust with respect to the Mortgage Loans may be affected by a wide variety
of factors, including economic conditions, prevailing interest rate
levels, the
availability of alternative financing and homeowner mobility and changes
affecting the deductibility for Federal income tax purposes of interest
payments on home equity loans. Substantially all of the Mortgage Loans
contain "due-on-sale" provisions, and, with respect to the Mortgage Loans,
the Servicer is required by the Agreement to enforce such provisions,
unless such enforcement is not permitted by applicable law. The
enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF
LOANS--`Due-on-Sale' Clauses" in the Prospectus.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of
borrowers will not prepay their Mortgage Loans to any significant degree.
See "DESCRIPTION OF THE CERTIFICATES--Weighted Average Life of the
Certificates" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form
of the Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus Supplement and the Prospectus is a
part. The following summaries describe certain provisions of the
Agreement. The summaries do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the
provisions of the Agreement. Wherever particular sections or defined
terms of the Agreement are referred to, such sections or defined terms are
hereby incorporated herein by reference.
GENERAL
The Certificates will be issued in denominations of $(1,000) and
integral multiples thereof (except that one Certificate may be issued in a
denomination that is not an integral multiple of $1,000) and will evidence
specified undivided interests in the Trust. (Section 6.01) The property
of the Trust will consist of, to the extent provided in the Agreement: a
pool of (adjustable) (fixed) rate home equity loan revolving credit line
loans made or to be made in the future (the "Mortgage Loans"), under
certain home equity revolving credit line loan agreements (the "Credit
Line Agreements") and secured (primarily) by second (deeds of trust)
(mortgages) on residential properties that are primarily one- to four-
family properties (the "Mortgaged Properties"); the collections in respect
of the Mortgage Loans received after the Cut-Off Date; property that
secured a Mortgage Loan which has been acquired by foreclosure or deed in
lieu of foreclosure; (a surety bond or letter of credit); certain pass-
through certificates (the "Private Securities") representing fractional,
undivided interests in the Mortgage Loans, an assignment of the
Depositor's rights under the Purchase Agreement; rights under certain
hazard insurance policies covering the Mortgaged Properties; and certain
other property, as described more fully
herein. The Trust will include the unpaid principal balance of each
Mortgage Loan as of the Cut-Off Date (the "Cut-Off Date Principal
Balance") plus any additions thereto as a result of new advances made
pursuant to the applicable Credit Line Agreement (the "Additional
Balances") during the life of the Trust. Definitive Certificates (as
defined below), if issued, will be transferable and exchangeable at the
corporate trust office of the Trustee, which will initially act as
Certificate Registrar. See "--Book-Entry Certificates" below. No service
charge will be made for any registration of exchange or transfer of
Certificates, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge. (Section 6.02)
The aggregate undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date will equal $__________ of principal
(the "Original Principal Balance"), which represents approximately ___% of
the aggregate Cut-Off Date Principal Balance. The principal amount of the
outstanding Certificates (the "Certificate Principal Balance") on any
Distribution Date is equal to the Original Principal Balance minus the
aggregate of amounts actually distributed as principal to the
Certificateholders. See "--Distributions on the Certificates" below.
Each Certificate represents the right to receive payments of interest at
the Certificate Rate and payments of principal as described below.
The Transferor will own the interest (the "Transferor Interest") not
represented by the Certificates. The Transferor Interest will represent
an undivided interest in the Trust, including the right to receive certain
percentages (the "Transferor Percentages") of Interest Collections and
Principal Collections. The initial amount of the Transferor Interest was
determined, among other factors, to be able to absorb reductions in the
aggregate amount of Loan Balances in the Trust without causing an Early
Amortization Event, which would result in the early commencement of the
Amortization Period. There can be no assurance that the Transferor
Interest will be sufficient for such purpose. While the Transferor is
obligated (subject to certain conditions and limitations) to transfer
Eligible Additional Mortgage Loans (to the extent available) to the Trust,
there can be no assurance that sufficient Eligible Additional Mortgage
Loans will be available.
During the Revolving Period, the Security Principal Balance will
remain constant except in certain limited circumstances. See "--
Distributions on the Certificates" below. The Pool Balance, however, will
vary each day as principal is paid on the Mortgage Loans, liquidation
losses are incurred, Additional Balances are drawn down by borrowers under
the Mortgage Loans, Mortgage Loans are retransferred to the Transferor or
Eligible Additional Mortgage Loans are transferred to the Trust.
Consequently, the amount of the Transferor Interest will fluctuate each
day to reflect the changes in the Pool Balance. During the Amortization
Period, the Security Principal Balance will decline as the Investor
Percentage of Principal Collections is distributed to the
Certificateholders. As
a result, during the Amortization Period, the Transferor Interest may
increase each month to reflect the reductions in the Security Principal
Balance but may change each day to reflect the variations in the Pool
Balance.
The holder of a Certificate is referred to herein as a
"Certificateholder."
BOOK-ENTRY CERTIFICATES
The Senior Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership
interests in the Senior Certificates ("Certificate Owners") will hold
their Certificates through the Depository Trust Company ("DTC") in the
United States(, or CEDEL or Euroclear (in Europe)) if they are
participants of such systems, or indirectly through organizations which
are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate principal
balance of the Certificates 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 will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries").) Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000 and in
integral multiples in excess thereof. Except as described below, no
person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until Definitive
Certificates are issued, it is anticipated that the only
"Certificateholder" of the Certificates will be Cede & Co., as nominee of
DTC. Certificate Owners will not be Certificateholders as that term is
used in the Pooling and Servicing Agreement. Certificate Owners are only
permitted to exercise their rights indirectly through Participants and
DTC.
ASSIGNMENT OF MORTGAGE 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
Mortgage Loan (including Additional Balances arising in the future), the
related mortgage note, mortgages and other related documents
(collectively, the "Related Documents"), including all payments received
on or with respect to each such Mortgage Loan on or after the Cut-Off
Date. (Section 2.01) The Trustee, concurrently with such transfer, will
deliver the Certificates and the Transferor
Interest to the Depositor. (Section 2.07) Each Mortgage Loan transferred
to the Trust will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trustee pursuant to the Agreement. Such
schedule will include information as to the Cut-Off Date Principal Balance
of each Mortgage Loan, as well as information with respect to the Loan
Rate. (Article I).
The Agreement will require that, within the time period specified
therein, the Depositor will deliver or cause to be delivered to the
Trustee (or a custodian, as the Trustee's agent for such purpose) the
Mortgage Loans endorsed to the Trustee and the Related Documents. 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.
Under the terms of the Agreement, the Transferor, acting at the
Depositor's request, will have ____ days after the Closing Date to prepare
and record assignments of the mortgages related to each Mortgage Loan in
favor of the Trustee (unless opinions of counsel satisfactory to the
Rating Agencies and the Certificate Insurer are delivered to the Trustee
and the Certificate Insurer to the effect that recordation of such
assignments is not required in the relevant jurisdictions to protect the
interests of the Trustee in the Mortgage Loans). If the recording
information with respect to any assignment of Mortgage is unavailable
within ____ days of the Closing Date, such assignment will be prepared and
recorded promptly after receipt of such information, but in no event later
than one year after the Closing Date.
Within ____ days of the Closing Date, the Trustee will review the
Mortgage Loans and the Related Documents pursuant to the Agreement and if
any Mortgage Loan or Related Document is found to be defective in any
material respect and such defect is not cured within 90 days following
notification thereof to the Transferor and the Depositor by the Trustee,
the Transferor will be obligated to either (i) substitute for such
Mortgage Loan an Eligible Substitute Mortgage Loan; or (ii) purchase such
Mortgage Loan at a price (the "Purchase Price") equal to the outstanding
Principal Balance of such Mortgage Loan as of the date of purchase, plus
the greater of (i) all accrued and unpaid interest thereon and (ii) 30
days' interest thereon, computed at the Loan Rate, net of the Servicing
Fee if the Transferor is the Servicer, plus the amount of any unreimbursed
Servicing Advances made by the Servicer. The Purchase Price will be
deposited in the Collection Account on or prior to the next succeeding
Determination Date after such obligation arises. The obligation of the
Transferor to repurchase or substitute for a Defective Mortgage Loan is
the sole remedy regarding any defects in the Mortgage Loans and Related
Documents available to the Trustee or the Certificateholders. (Section
2.02)
In connection with the substitution of an Eligible Substitute
Mortgage Loan, the Transferor will be required to deposit in the
Collection Account on or prior to the next succeeding Determination Date
after such obligation arises an amount (the "Substitution Adjustment")
equal to the excess of the Principal Balance of the related Defective
Mortgage Loan, together with the greater of (x) all accrued and unpaid
interest thereon and (y) 30 days' interest thereon, computed at the Loan
Rate, net of the Servicing Fee if the Transferor is the Servicer, plus the
amount of any unreimbursed Servicing Advances made by the Servicer with
respect to such Defective Mortgage Loan, over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Transferor for a Defective Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding Principal Balance (or, in the
case of a substitution of more than one Mortgage Loan for a Defective
Mortgage Loan, an aggregate Principal Balance), not in excess of, and not
more than 5% less than, the Principal Balance of the Defective Mortgage
Loan; (ii) have a Loan Rate not less than the Loan Rate of the Defective
Mortgage Loan and not more than 1% in excess of the Loan Rate of such
Defective Mortgage Loan; (iii) have a Loan Rate based on the Prime Rate
with adjustments to such Loan Rate made on the same Adjustment Date as
that of the Defective Mortgage Loan; (iv) have a Margin that is not less
than the Margin of the Defective Mortgage Loan and not more than 100 basis
points higher than the Margin for the Defective Mortgage Loan; (v) have a
mortgage of the same or higher level of priority as the mortgage relating
to the Defective Mortgage Loan; (vi) have a remaining term to maturity not
more than six months earlier and not later than the remaining term to
maturity of the Defective Mortgage Loan; (vii) comply with each
representation and warranty as to the Mortgage Loans set forth in the
Agreement (deemed to be made as of the date of substitution); and (viii)
satisfy certain other conditions specified in the Agreement.
The Transferor will make certain representations and warranties as to
the accuracy in all material respects of certain information furnished to
the Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date
Principal Balance and the Loan Rate). In addition, the Transferor will
represent and warrant, on the Closing Date, that, among other things: (i)
at the time of transfer to the Depositor, the Transferor has transferred
or assigned all of its right, title and interest in each Mortgage Loan and
the Related Documents, free of any lien (subject to certain exceptions);
and (ii) each Mortgage Loan complied, at the time of origination, in all
material respects with applicable state and federal laws. Upon discovery
of a breach of any such representation and warranty which materially and
adversely affects the interests of the Certificateholders in the related
Mortgage Loan and Related Documents, the Transferor will have a period of
____ days after discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the ____-day period, the Transferor will
be obligated to (i) substitute for such Defective Mortgage Loan an
Eligible Substitute Mortgage Loan or (ii) purchase such Defective Mortgage
Loan from the Trust. The same procedure and
limitations that are set forth above for the substitution or purchase of
Defective Mortgage Loans as a result of deficient documentation relating
thereto will apply to the substitution or purchase of a Defective Mortgage
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. (Section 2.04)
Mortgage Loans required to be transferred to the Transferor as
described in the preceding paragraphs are referred to as "Defective
Mortgage Loans."
Pursuant to the Agreement, the Servicer will service and administer
the Mortgage Loans as more fully set forth above.
(TRANSFERS OF ELIGIBLE ADDITIONAL MORTGAGE LOANS TO THE TRUST
If, for each of ( ) consecutive business days during the Revolving
Period, the Transferor Interest for each such date is less than ( )% of
the Pool Balance, then not later than the ( ) business day of the
calendar month beginning at least ( ) business days after such ( )
business day thereafter the Transferor will be obligated to transfer to
the Trust Eligible Additional Mortgage Loans (but only to the extent
available in the (Transferor's) (Seller's) portfolio), which may be
generated under home equity credit lines in any billing cycle, so that,
after giving effect to such transfer, the Transferor Interest will equal
at least ( )% of the Pool Balance on such date. An "Eligible
Additional Mortgage Loan" is a home equity loan that, as of the date of
notice by the Transferor to the Trustee, the Servicer and the (Letter of
Credit) (Surety Bond) Issuer of its transfer to the Trust (the "Notice
Date"), was an Eligible Mortgage Loan and that, as of the Notice Date,
complies with the representations and warranties described under
"Assignment of Mortgage Loans" above. The Transferor must satisfy the
following conditions, among others, in order to transfer Eligible
Additional Mortgage Loans to the Trust: (i) the Pool Balance, after
giving effect to such transfer, will not exceed $ ; (ii) the Mortgage
Files for such Eligible Additional Mortgage Loans shall have been
delivered to the Trustee (or a custodian on its behalf); and (iii) the
Transferor shall have given notice of the proposed transfer to each Rating
Agency and no Rating Agency has notified the Transferor in writing prior
to the transfer date that such transfer will result in a reduction or
withdrawal of its then-current rating for the Certificates.
In addition, the Transferor may, at its election, transfer Eligible
Additional Mortgage Loans subject to satisfaction of the conditions
described above.)
(OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, the Transferor
may, at its option, require the retransfer of one or more
Mortgage Loans from the Trust to it on the last day of any Collection
Period. The Pool Balance after giving effect to such retransfer must not
be less than the Pool Balance on the Closing Date. The Transferor will be
required to satisfy the following conditions, among others: (i) the
Transferor shall reasonably believe that such retransfer will not cause an
Early Amortization Event to occur; (ii) as of the ( ) business day
prior to the proposed transfer, not more than ( )% (based on Loan
Balances) of the Mortgage Loans (after giving effect to the proposed
transfer) are delinquent more than 30 days and the weighted average
delinquency of all of the Mortgage Loans (before and after giving effect
to the proposed transfer) is not more than 60 days; (iii) the Depositor
shall have represented that no selection procedures reasonably believed by
the Depositor to be adverse to the interests of the Certificateholders or
the (Letter of Credit) (Surety Bond) Issuer were used to select the
Mortgage Loans to be removed; (iv) the Transferor shall have received
evidence satisfactory to it that the reassignment will not, as of the date
thereof, prevent the transfer of the Mortgage Loans (including any
Additional Balances) to the Trust from being recognized as a sale under
generally accepted accounting principles and shall have received no
evidence that such reassignment will, as of the date thereof, prevent such
transfer from being recognized as a sale for regulatory purposes; and (v)
each Rating Agency shall have been notified of the proposed retransfer and
prior to the date of retransfer no Rating Agency has notified the
Depositor in writing that such retransfer would result in a reduction or
withdrawal of its then-current rating of the Certificates.)
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND
DISTRIBUTION ACCOUNT
The Trustee shall establish and maintain on behalf of the Servicer an
account (the "Collection Account") for the benefit of the
Certificateholders. The Collection Account will be an Eligible Account
(as defined herein). Subject to the investment provision described in the
following paragraphs, upon receipt by the Servicer of amounts in respect
of the Mortgage Loans (excluding amounts representing the Servicing Fee,
administrative charges, taxes, assessments, credit insurance charges,
insurance proceeds to be applied to the restoration or repair of a
Mortgaged Property or similar items), the Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested
in Eligible Investments (as described in the Agreement) maturing no later
than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account or on such
Distribution Date if approved by the Rating Agencies and the Certificate
Insurer.
The Trustee will establish an account (the "Security Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Security
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 an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies,
(ii) one or more accounts with a depository institution which accounts are
fully insured by either the Savings Association Insurance Fund ("SAIF") or
the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation with a minimum long-term unsecured debt rating of ( ),
(iii) a segregated trust account maintained with the Trustee or an
affiliate of the Trustee in its fiduciary capacity or (iv) otherwise
acceptable to each Rating Agency as evidenced by a letter from each Rating
Agency to the Trustee, without reduction or withdrawal of their then
current ratings of the Certificates.
Eligible Investments are specified in the Agreement and are limited
to investments which meet the criteria of the Rating Agencies from time to
time as being consistent with their then current ratings of the
Certificates.
Investor Percentage and Transferor Percentage. Pursuant to the
Agreement, the Servicer will allocate between the Investor Interest and
the Transferor Interest all amounts (including any Net Liquidation
Proceeds) collected under the Mortgage Loans on account of interest
("Interest Collections"), all amounts (including Net Liquidation Proceeds)
collected under the Mortgage Loans on account of principal ("Principal
Collections") and the amount of the unrecovered Loan Balance of any
Defaulted Mortgage Loan at the end of the Collection Period in which such
Defaulted Mortgage Loan became a Defaulted Mortgage Loan (the "Liquidation
Loss Amount"). A "Defaulted Mortgage Loan" is a Mortgage Loan that has
been written off as uncollectible by the Servicer. The Collection Period
for a Distribution Date is the calendar month preceding such Distribution
Date or, in the case of the first Distribution Date, the period from the
Cut-Off Date through the last day of the calendar month preceding the
month in which such Distribution Date occurs. The Servicer will make each
allocation by reference to the Investor Percentage and the Transferor
Percentage applicable in each case during a Collection Period.
For convenience, this Prospectus Supplement refers to the Investor
Percentage with respect to Interest Collections, Principal Collections and
Liquidation Loss Amounts as if the Investor Percentage were the same
percentage at all times in each case. The Investor Percentage may be a
different percentage for each Collection Period, and will vary primarily
as a result of changes in the Pool Balance.
The Investor Percentage will be calculated as follows:
Interest Collections and Liquidation Loss Amounts. When used with
respect to Interest Collections and Liquidation Loss Amounts at any time,
"Investor Percentage" means the percentage equivalent of
a fraction the numerator of which is the Security Principal Balance and
the denominator of which is the Pool Balance, in each case as of the end
of the immediately preceding Collection Period (or, in the case of the
first Collection Period, as of the Closing Date).
Principal Collections during the Revolving Period. When used with
respect to Principal Collections during the Revolving Period, "Investor
Percentage" means the percentage equivalent of a fraction the numerator of
which is the amount of the Security Principal Balance and the denominator
of which is the Pool Balance, in each case as of the end of the
immediately preceding Collection Period (or, in the case of the first
Collection Period, as of the Closing Date).
Principal Collections during the Amortization Period. When used with
respect to Principal Collections during the Amortization Period, "Investor
Percentage" means the percentage equivalent of a fraction the numerator of
which is the amount of the Security Principal Balance and the denominator
of which is the Pool Balance, in each case as of the end of the Revolving
Period.
The Transferor Percentage will, in all cases, be equal to 100% minus
the applicable Investor Percentage.
As a result of the calculations described above, Interest Collections
in each Collection Period will be allocated to the Certificateholders
based on the relationship of the Security Principal Balance to the Pool
Balance (which may fluctuate from month to month). As described above,
the Investor Percentage applied when allocating Principal Collections is
expected to vary from month to month during the Revolving Period, because
the Security Principal Balance as a percentage of the Pool Balance will
fluctuate from month to month. During the Amortization Period, however,
the amount of Principal Collections allocated to the Investor Interest
will be determined by reference to a fixed percentage which will be equal
to the Investor Percentage with respect to Principal Collections on the
last day of the Revolving Period.
Deposits in the Collection Account and Payments to the Depositor. On
the Closing Date, the Servicer will deposit in the Collection Account
funds in the amount of the Investor Percentage of Interest Collections on
the Mortgage Loans received during the period from the Cut-Off Date to the
second business day preceding the Closing Date, but not in excess of the
amount needed to distribute the required interest on the Certificates and
the Servicing Fee to be distributed on the initial Distribution Date. On
and after the Closing Date, the Servicer will, subject to the following
paragraph, deposit on a daily basis within two business days following
receipt thereof (i) during each Collection Period in the Revolving Period,
the Investor Percentage of Interest Collections and (ii) during each
Collection Period in the Amortization Period, the Investor Percentage of
all Interest Collections and Principal Collections. The Servicer will pay
to the Transferor within two business days of its receipt
thereof (i) during each Collection Period in the Revolving Period, the
Transferor Percentage of all Interest Collections and, if the Transferor
Interest (after giving effect to any transfers of Additional Balances or
Eligible Additional Mortgage Loans to the Trust on such day) is equal to
or greater than zero, the Transferor Percentage of all Principal
Collections and the Investor Percentage of all Principal Collections and
(ii) during each Collection Period in the Amortization Period, the
Transferor Percentage of Interest Collections and, if the Transferor
Interest (after giving effect to any transfers of Additional Balances or
Eligible Additional Mortgage Loans to the Trust on such day) is greater
than zero, the Transferor Percentage of all Principal Collections.
The Trustee will deposit in the Security Account any amounts drawn on
the (Letter of Credit) (Surety Bond) as described below.
Any Principal Collections not paid to the Transferor because of the
limitations described above ("Unallocated Principal Collections"), will be
deposited and retained in the Collection Account for payment to the
Transferor, during the Revolving Period, if and when the Transferor
Interest is greater than zero and, during the Amortization Period, to the
Certificateholders.
DISTRIBUTIONS ON THE CERTIFICATES
On the (___) day preceding each Distribution Date, the Trustee shall
transfer funds from the Collection Account to the Distribution Account for
the distributions described below. Beginning with the Distribution Date
occurring on ______________ , distributions on the Certificates will be
made by the Trustee
out of amounts on deposit in the Security Account on each Distribution
Date to the persons in whose names such Certificates are registered at the
close of business on the (day prior to each Distribution Date) (the
"Record Date"), except as provided in "Registration of Certificates"
below. The term "Distribution Date" means the ____ day of each month (or
if such ____ day is not
a business day the next succeeding business day). Distributions will be
made by check mailed (or upon the request of a Certificateholder owning
Certificates having denominations aggregating at least $ _________, by wire
transfer or
otherwise) to the address of the person entitled thereto ((which, in the
case of Book-Entry Certificates, will be DTC or its nominee)) as it
appears on the Certificate Register in amounts calculated as described
herein on the
business day (but no later than the _____ calendar day) of the month in
which the related Distribution Date occurs (the "Determination Date").
However, the final distribution in respect of the Certificates will be made
only upon presentation and surrender thereof at the office or the agency of
the Trustee specified in the notice to Certificateholders of such final
distribution.
Distributions of Interest Collections and Required Amounts. On each
Distribution Date, the Trustee, on behalf of the Trust, shall pay the
following amounts in the following order of priority to the following
persons from the Investor Interest of all Interest
Collections collected during the related Collection Period, together with
the Required Amount, if any, drawn on the (Letter of Credit) (Surety Bond)
for such Distribution Date.
((i) to the Certificateholders, interest at the Certificate Rate for
the Interest Accrual Period preceding such Distribution Date on the
Security Principal Balance outstanding immediately prior to such
Distribution Date;
(ii) to the Certificateholders, any interest on the Certificates
accrued in accordance with clause (i) that has not been previously
distributed to Certificateholders plus, to the extent legally permissible,
interest thereon at the Certificate Rate applicable from time to time (an
"Unpaid Interest Shortfall");
(iii) to the Servicer, the Investor Servicing Fee for the related
Interest Accrual Period and all accrued and unpaid Investor Servicing Fees
for previous Interest Periods;
(iv) if such Distribution Date is in the Revolving Period, to the
Transferor, the Investor Percentage of the aggregate of all Liquidation
Loss amounts incurred in the preceding Collection Period; provided that
the Transferor Interest (after giving effect to any transfers of
Additional Balances and Eligible Additional Mortgage Loans on such date
and to the distribution of such Liquidation Loss Amount) is equal to or
greater than zero;
(v) if such Distribution Date is in the Amortization Period, to the
Certificateholders, the Investor Percentage of the aggregate of all
Liquidation Loss Amounts incurred in the preceding Collection Period;
(vi) to the Certificateholders, the aggregate of the amounts
allocable pursuant to clause (v) that were not previously distributed
pursuant to such clause (each such undistributed amount being referred to
herein as a "Security Principal Balance Loss Deduction Amount"); and
(vii) to the Certificateholders, accrued and unpaid interest on each
unreimbursed Security Principal Balance Loss Deduction Amount (such
interest being calculated at the Certificate Rate for each Interest
Accrual Period during which such unreimbursed amount was outstanding.)
A Security Principal Balance Loss Deduction Amount represents a loss
of principal in respect of Defaulted Mortgage Loans allocable to the
Investor Interest and will arise when the Investor Percentage of Interest
Collections and the Required Amount are not sufficient to cover such loss,
in accordance with the priority of distributions described above. As
described under "General" above, any Security Principal Balance Loss
Deduction Amounts which have not been reimbursed, as provided herein, will
reduce the Security Principal Balance.
The Required Amount for each Distribution Date will be the lesser of
(i) the (Letter of Credit) (Surety Bond) Amount and (ii) the amount, if
any, by which (a) the full amount distributable on such Distribution Date
pursuant to clauses (i) through (vii) above exceeds (b) the Investor
Percentage of the Interest Collections for the related Collection Period.
The Required Amount will be drawn on the (Letter of Credit) (Surety Bond).
Distributions of Principal. On each Distribution Date after the
first Collection Period in the Amortization Period, the Trustee will
distribute to the Certificateholders the Investor Percentage of Principal
Collections received in the preceding Collection Period. In addition, the
Trustee will distribute to Certificateholders on any Distribution Date
during the Amortization Period any Retransfer Deposit Amount (or drawn on
the (Letter of Credit) (Surety Bond) in respect thereof) received in the
preceding Collection Period and any Unallocated Principal Collections then
on deposit in the Distribution Account. The aggregate distributions of
principal to the Certificateholders will not exceed the Initial Security
Principal Balance.
CERTIFICATE RATE
(The "Certificate Rate" for a Distribution Date will generally equal
the sum of (a) LIBOR and (b) ____% per annum. Notwithstanding the
foregoing, in no event will the amount of interest required to be
distributed in respect of the Certificates on any Distribution Date exceed
a rate equal to the average of the Loan Rates (net of the Servicing Fee
Rate) as of the first day of the month preceding the month of such
Distribution Date, weighted on the basis of the Principal Balance of each
Mortgage Loan as of such date (adjusted to an effective rate reflecting
accrued interest calculated on the basis of a 360-day year consisting of
twelve 30-day months).)
Interest on the Certificates in respect of any Distribution Date will
accrue on the Principal Balance from the preceding Distribution Date (or
in the case of the first Distribution Date, from the Closing Date) through
the day preceding such Distribution Date (each such period, an "Interest
Accrual Period") on the basis of a 360-day year consisting of twelve
30-day months.
(Calculation of LIBOR. "LIBOR" with respect to any Distribution Date
will be determined by the Trustee and will be equal to the offered rates
for deposits in United States dollars having a maturity of one month (the
"Index Maturity") commencing on the second LIBOR Business Day (as defined
below) prior to the previous Distribution Date, which appear on the
Reuters Screen LIBO Page as of approximately 11:00 A.M., London time, on
such date of calculation. If at least two such offered rates appear on
the Reuters Screen LIBO Page, LIBOR will be the arithmetic mean (rounded
upwards, if necessary, to the nearest one-sixteenth of a percent) of such
offered rates. If fewer than two such quotations appear, LIBOR with
respect
to such Distribution Date will be determined at approximately 11:00 A.M.,
London time, on such determination date on the basis of the rate at which
deposits in United States dollars having the Index Maturity are offered to
prime banks in the London interbank market by four major banks in the
London interbank market selected by the Trustee and in a principal amount
equal to an amount of not less than U.S. $1,000,000 and that is
representative for a single transaction in such market at such time. The
Trustee will request the principal London office of each of such banks to
provide a quotation of its rate. If at least two such quotations are
provided, LIBOR will be the arithmetic mean (rounded upwards as aforesaid)
of such quotations. If fewer than two quotations are provided, LIBOR with
respect to such Distribution Date will be the arithmetic mean (rounded
upwards as aforesaid) of the rates quoted at approximately 11:00 A.M., New
York City time, on such determination date by three major banks in New
York, New York selected by the Trustee for loans in United States dollars
to leading European banks having the Index Maturity and in a principal
amount equal to an amount of not less than U.S. $1,000,000 and that is
representative for a single transaction in such market at such time;
provided, however, that if the banks selected as aforesaid by the Bank are
not quoting as mentioned in this sentence, LIBOR in effect for the
applicable period will be LIBOR in effect for the previous period.)
(For purposes of calculating LIBOR, a "LIBOR Business Day" will be
any Business Day on which dealings in deposits in United States dollars
are transacted in the London interbank market and "Reuters Screen LIBO
Page" will be the display designated as page "LIBO" on the Reuters Monitor
Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates
of major banks).)
THE (LETTER OF CREDIT) (SURETY BOND)
On the Closing Date, the (Letter of Credit) (Surety Bond) Issuer will
issue the (Letter of Credit) (Surety Bond) in favor of the Trustee on
behalf of the Trust to support payments on the Certificates. On each
Determination Date, the Servicer will determine the amounts required to be
drawn on the (Letter of Credit) (Surety Bond), up to the (Letter of
Credit) (Surety Bond) Amount, on the related Distribution Date. See
"Distributions on Certificates" above.
The amount available under the (Letter of Credit) (Surety Bond) (the
"(Letter of Credit) (Surety Bond) Amount") for the initial Distribution
Date will be $__________. For each Distribution Date thereafter, the
(Letter of Credit) (Surety Bond) Amount will equal the lesser of (i) ___%
of the Pool Balance as of the first day of the preceding Collection Period
(after giving effect to any amounts distributed with respect to principal
of the Mortgage Loans on the Distribution Date occurring in such preceding
Collection Period) and (ii) the (Letter of Credit) (Surety Bond) Amount as
of the first day of the preceding Collection Period, minus any amounts
drawn under the
(Letter of Credit) (Surety Bond) during such preceding Collection Period,
plus any amounts paid to the (Letter of Credit) (Surety Bond) Issuer on
the Distribution Date occurring in such preceding Collection Period up to
the amount of any previous draws on the (Letter of Credit) (Surety Bond).
EARLY AMORTIZATION EVENTS
As described above, the Revolving Period will continue until the
close of business on the last day of __________ unless an Early
Amortization Event occurs prior thereto. The term "Early Amortization
Event" refers to any of the following events:
((a) failure on the part of the Servicer or the Depositor (i)
to make any payment or deposit on the date required under the
Agreement within five business days after such payment or deposit is
required to be made, (ii) to observe or perform in any material
respect certain covenants of the Servicer or the Depositor or (iii)
to observe or perform in any material respect any other covenants or
agreements of the Servicer or the Depositor set forth in the
Agreement, which failure, in each case, materially and adversely
affects the interests of the Certificateholders and which, in the
case of clause (iii), continues unremedied for a period of 60 days
after written notice and continues to materially and adversely affect
the interests of the Certificateholders for such period;
(b) any representation or warranty made by the Servicer or the
Depositor in the Agreement proves to have been incorrect in any
material respect when made, as a result of which the interests of the
Certificateholders are materially and adversely affected, which
continues to be incorrect in any material respect for a period of 60
days after written notice and which continues to materially and
adversely affect the interests of the Certificateholders for such
period; provided, however, that an Early Amortization Event shall not
be deemed to occur thereunder if the Depositor has accepted
retransfer of the related Mortgage Loan or all such Mortgage Loans,
if applicable, during such period (or such longer period (not to
exceed an additional 60 days) as the Trustee may specify) in
accordance with the provisions of the Agreement;
(c) the Trust becomes subject to registration as an investment
company under the Investment Company Act of 1940, as amended;
(d) if the Depositor fails to transfer to the Trust Eligible
Additional Mortgage Loans by the time it is required to do so;
(e) an Event of Default under the Agreement (as described in
the Prospectus under "THE AGREEMENTS--Events of Default") occurs;
(f) the (Letter of Credit) (Surety Bond) Amount is less than
% of the Security Principal Balance; or
(g) if the average of the Investor Percentage of Interest
Collections for any three consecutive Collection Periods is less than
the amounts to be distributed to Certificateholders as set forth in
subsections (i) through (vii) under "Distributions on the
Certificates--Distributions of Interest Collections and Required
Amounts" above for the three Distribution Dates relating to such
Collection Periods.)
(In the case of any event described in clauses (a) or (b), an Early
Amortization Event will be deemed to have occurred only if, after the
expiration of the applicable grace period, if any, described in such
clauses, either the Trustee or holders of Certificates evidencing
Percentage Interests aggregating more than 51% or the (Letter of Credit)
(Surety Bond) Issuer (but only if the (Letter of Credit) (Surety Bond) is
outstanding or the (Letter of Credit) (Surety Bond) Issuer has not been
fully reimbursed for all amounts paid to the Trust by the (Letter of
Credit) (Surety Bond) Issuer), by written notice to the Depositor and the
Servicer (and to the Trustee if given by the Certificateholders or the
(Letter of Credit) (Surety Bond) Issuer) declare that an Early
Amortization Event has occurred as of the date of such notice. In the
case of any event described in clauses (c), (d), (e) or (f), an Early
Amortization Event will be deemed to have occurred without any notice or
other action on the part of the Trustee or the Certificateholders or the
(Letter of Credit) (Surety Bond) Issuer immediately upon the occurrence of
such event. On the date on which an Early Amortization Event is deemed to
have occurred, the Amortization Period will commence. In such event,
distributions of principal to the Certificateholders will begin on the
first Distribution Date following the month in which the Early
Amortization Event occurs. If, because of the occurrence of an Early
Amortization Event, the Amortization Period begins earlier than
__________, the date on which the Amortization Period is scheduled to
commence, Certificateholders will begin receiving distributions of
principal earlier than they would otherwise have under the Agreement,
which may shorten the final maturity of the Certificates.)
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the
Trustee will forward to each Certificateholder a statement setting forth
among other items:
(i) the amount of interest included in such distribution and
the related Certificate Rate;
(ii) the amount, if any, of overdue accrued interest included
in such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding
Collection Period;
(ix) the number and aggregate Principal Balances of the
Mortgage Loans as to which the minimum monthly payment is delinquent
for 30-59 days, 60-89 days and 90 or more days, respectively, as of
the end of the preceding Collection Period; and
(x) the book value of any real estate which is acquired by
the Trust through foreclosure or grant of deed in lieu of
foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv)
and (v) above, the amounts shall be expressed as a dollar amount per
Security with a $1,000 denomination. Within 60 days after the end of each
calendar year, the Trustee will forward to each Person, if requested in
writing by such Person, who was a Certificateholder during the prior
calendar year
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the
Agreement, follow such collection procedures as it follows from time to
time with respect to the home equity loans in its servicing portfolio
comparable to the Mortgage Loans. Consistent with the above, the Servicer
may in its discretion waive any late payment charge or any assumption or
other fee or charge that may be collected in the ordinary course of
servicing the Mortgage Loans. (Section 3.02)
With respect to the Mortgage Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the
Servicer's policies with respect to the home equity mortgage loans it owns
or services. With respect to Mortgage Loans that are
junior in priority to a First Lien on a Mortgaged Property, the Servicer
has the power under certain circumstances to consent to a new mortgage
lien on such Mortgaged Property having priority over such Mortgage Loan in
connection with the refinancing of such First Lien.
HAZARD INSURANCE
The Servicer will cause to be maintained fire and hazard insurance
with extended coverage customary in the area where the Mortgaged Property
is located, in an amount which is at least equal to the lesser of (i) the
outstanding Principal Balance on the Mortgage Loan and any related senior
lien(s), (ii) the full insurable value of the premises securing the
Mortgage Loan and (iii) the minimum amount required to compensate for
damage or loss on a replacement cost basis in each case in an amount not
less than such amount as is necessary to avoid the application of any
co-insurance clause contained in the related hazard insurance policy.
Generally, if the Mortgaged Property is in an area identified in the
Federal Register by the Flood Emergency Management Agency as FLOOD ZONE
"A", such flood insurance has been made available and the Servicer
determines that such insurance is necessary in accordance with accepted
second mortgage servicing practices of prudent lending institutions, the
Servicer will cause to be purchased a flood insurance policy with a
generally acceptable insurance carrier, in an amount representing coverage
not less than the least of (a) the outstanding Principal Balance of the
Mortgage Loan and the first lien, (b) the full insurable value of the
Mortgaged Property, or (c) the maximum amount of insurance available under
the National Flood Insurance Act of 1968, as amended. The Servicer will
also maintain on REO Property, to the extent such insurance is available,
fire and hazard insurance in the applicable amounts described above,
liability insurance and, to the extent required and available under the
National Flood Insurance Act of 1968, as amended, and the Servicer
determines that such insurance is necessary in accordance with accepted
second mortgage servicing practices of prudent lending institutions, flood
insurance in an amount equal to that required above. Any amounts
collected by the Servicer under any such policies (other than amounts to
be applied to the restoration or repair of the Mortgaged Property, or to
be released to the Mortgagor in accordance with customary second mortgage
servicing procedures) will be deposited in the Collection Account, subject
to retention by the Servicer to the extent such amounts constitute
servicing compensation or to withdrawal pursuant to the Agreement.
In the event that the Servicer obtains and maintains a blanket policy
as provided in the Agreement insuring against fire and hazards of extended
coverage on all of the Mortgage Loans, then, to the extent such policy
names the Servicer as loss payee and provides coverage in an amount equal
to the aggregate unpaid principal balance of the Mortgage Loans without
coinsurance; and otherwise complies with the requirements of the first
paragraph of this subsection, the
Servicer will be deemed conclusively to have satisfied its obligations
with respect to fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when, in accordance with applicable servicing procedures
under the Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or
other conversion, the Servicer will follow such practices as it deems
necessary or advisable and as are in keeping with its general subordinate
mortgage servicing activities, provided the Servicer will not be required
to expend its own funds in connection with foreclosure or other
conversion, correction of default on a related senior mortgage loan or
restoration of any property unless, in its sole judgment, such
foreclosure, correction or restoration will increase Net Liquidation
Proceeds. (Section 3.06) The Servicer will be reimbursed out of
Liquidation Proceeds for advances of its own funds as liquidation expenses
before any Net Liquidation Proceeds are distributed to Certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, other than the first Due Period, the
Servicer will receive from interest payments in respect of the Mortgage
Loans a portion of such interest payments as a monthly Servicing Fee in
the amount equal to ____% per annum ("Servicing Fee Rate") on the
Principal Balance of each Mortgage Loan as of the first day of each such
Due Period as to which such payment was made. All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the Servicer as additional servicing
compensation.
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Certificate Registrar and any paying agent.
The Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Mortgage Loan,
including Liquidation Proceeds, released mortgaged property proceeds,
Insurance Proceeds and such other amounts as may be collected by the
Servicer from the related Mortgagor or otherwise relating to the Mortgage
Loan in respect of which such unreimbursed amounts are owed. The
Servicer's right to reimbursement for unreimbursed Monthly Advances shall
be limited to late collections of interest on any Mortgage Loan and to
Liquidation Proceeds and Insurance Proceeds on the related Mortgage Loan.
The Servicer's right to such reimbursements is prior to the rights of
Certificateholders.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before the last day of the
fifth month following the end of the Servicer's fiscal year, beginning in
199_, to the Trustee, the Certificate Insurer and the Rating Agencies of
an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its material obligations under the
Agreement throughout the preceding fiscal year, except as specified in
such statement. (Section 3.10)
On or before the last day of the fifth month following the end of the
Servicer's fiscal year, beginning in 199_, the Servicer will furnish a
report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to the Servicer or the
Depositor) to the Trustee, the Certificate Insurer and the Rating Agencies
to the effect that such firm has examined certain documents and the
records relating to servicing of the Mortgage Loans under the Uniform
Single Audit Program for Mortgage Bankers and such firm's conclusion with
respect thereto. (Section 3.11)
The Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in material conflict by
reason of applicable law with any other activities of a type and nature
presently carried on by it or its affiliate or (ii) upon the satisfaction
of the following conditions: (a) the Servicer has proposed a successor
servicer to the Trustee in writing and such proposed successor servicer is
reasonably acceptable to the Trustee; (b) the Rating Agencies have
confirmed to the Trustee that the appointment of such proposed successor
servicer as the Servicer will not result in the reduction or withdrawal of
the then current rating of the Certificates; and (c) such proposed
successor servicer is reasonably acceptable to the Certificate Insurer.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the
Agreement. (Section 7.04)
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be
affiliates of the Servicer. Notwithstanding any such arrangement, the
Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if
the Servicer itself were performing such duties and obligations. (Section
7.05)
The Agreement provides that the Servicer will indemnify the Trust
Fund and the Trustee from and against any loss, liability, expense, damage
or injury suffered or sustained as a result of the Servicer's actions or
omissions in connection with the servicing and administration of the
Mortgage Loans which are not in accordance with the provisions of the
Agreement. The Agreement provides that neither the Depositor nor the
Servicer nor their directors, officers, employees or agents will be under
any other liability to the Trust, the Trustee, the Certificateholders or
any other person for any action taken or for refraining from taking any
action pursuant to the Agreement. However, neither the Depositor nor the
Servicer will be protected against any liability which would otherwise be
imposed by reason of willful misconduct, bad faith or gross negligence of
the Depositor or the Servicer in the performance of its duties under the
Agreement or by reason of reckless disregard of its obligations
thereunder. In addition, the Agreement provides that the Servicer will
not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its servicing responsibilities under the
Agreement. The Servicer may, in its sole discretion, undertake any such
legal action which it may deem necessary or desirable with respect to the
Agreement and the rights and duties of the parties thereto and the
interest of the Certificateholders thereunder. (Sections 7.03, 7.05, 7.06
and 8.02)
Any corporation into which the Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Servicer shall be a party, or any corporation
succeeding to the business of the Servicer shall be the successor of the
Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the
Agreement to the contrary notwithstanding. (Section 7.02)
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) (A) any
failure by the Servicer to make any required Monthly Advance or (B) any
other failure of the Servicer to deposit in the Collection Account any
deposit required to be made under the Agreement, which failure continues
unremedied for one Business Day after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee
by the Certificateholders evidencing an aggregate, undivided interest in
the Trust Fund of at least 25% of the Certificate Principal Balance; (ii)
any failure by the Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Agreement which,
in each case, materially and adversely affects the interests of the
Certificateholders and continues unremedied for 60 days after the giving
of written notice of such failure to the Servicer by the Trustee, or to
the Servicer and the Trustee by the Certificateholders evidencing an
aggregate, undivided interest in the Trust of at least 25% of the
Certificate Principal Balance; (iii) any failure by the Servicer to make
any required Servicing Advance, which failure
continues unremedied for a period of 30 days after the giving of written
notice of such failure to the Servicer by the Trustee, or to the Servicer
and the Trustee by the Certificateholders evidencing an aggregate,
undivided interest in the Trust of at least 25% of the Certificate
Principal Balance; or (iv) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings
relating to the Servicer and certain actions by the Servicer indicating
insolvency, reorganization or inability to pay its obligations (an
"Insolvency Event").
Upon the occurrence and continuation beyond the applicable grace
period of the event described in clause (i) (A) above, if any Monthly
Advance is not made by 12:00 Noon New York Time on the second Business Day
prior to the applicable Distribution Date, the Trustee or a successor
Servicer will immediately assume the duties of the Servicer.
Upon removal or resignation of the Servicer, the Trustee will be the
Successor Servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Monthly Advances and Servicing
Advances and certain other advances unless it determines reasonably and in
good faith that such advances would not be recoverable. If, however, the
Trustee is unwilling or unable to act as Successor Servicer, or if the
majority of Certificateholders so requests, the Trustee may appoint, or
petition a court of competent jurisdiction to appoint any established
mortgage loan servicing institution having a net worth of not less than
$15,000,000 as the Successor Servicer in the assumption of all or any part
of the responsibilities, duties or liabilities of the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or
referred to under clause (ii) above for a period of 30 Business Days,
shall not constitute an Event of Servicing Termination if such delay or
failure could not be prevented by the exercise of reasonable diligence by
the Servicer and such delay or failure was caused by an act of God or
other similar occurrence. Upon the occurrence of any such event the
Servicer shall not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of the
Agreement and the Servicer shall provide the Trustee, the Depositor, and
the Certificateholders prompt notice of such failure or delay by it,
together with a description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied,
either the Trustee, or Certificateholders evidencing an aggregate,
undivided interest in the Trust of at least 51 % of the Certificate
Principal Balance may terminate all of the rights and obligations of the
Servicer under the Agreement and in and to the Mortgage Loans, whereupon
the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Agreement and will
be entitled to similar compensation arrangements. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or
unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a housing and home finance
institution or other mortgage loan or home equity loan servicer with all
licenses and permits required to perform its obligations under the
Agreement and having a net worth of at least $25,000,000 to act as
successor to the Servicer under the Agreement. Pending such appointment,
the Trustee will be obligated to act in such capacity unless prohibited by
law. Such successor will be entitled to receive the same compensation
that the Servicer would otherwise have received (or such lesser
compensation as the Trustee and such successor may agree). (Sections 8.01
and 8.02) A receiver or conservator for the Servicer may be empowered to
prevent the termination and replacement of the Servicer if the only Event
of Servicing Termination that has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Transferor, the
Servicer, the Depositor and the Trustee, but without the consent of the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein which may be inconsistent with any other provisions of
the Agreement, to add to the duties of the Depositor or the Servicer to
comply with any requirements imposed by the Internal Revenue Code or any
regulation thereunder, or to add or amend any provisions of the Agreement
as required by the Rating Agencies in order to maintain or improve any
rating of the Certificates (it being understood that, after obtaining the
ratings in effect on the Closing Date, neither the Depositor, the Trustee
nor the Servicer is obligated to obtain, maintain, or improve any such
rating) or to add any other provisions with respect to matters or
questions arising under the Agreement which shall not be inconsistent with
the provisions of the Agreement, provided that such action will not, as
evidenced by an opinion of counsel, materially and adversely affect the
interests of any Certificateholder; provided, that any such amendment will
not be deemed to materially and adversely affect the Certificateholders
and no such opinion will be required to be delivered if the person
requesting such amendment obtains a letter from each Rating Agency stating
that such amendment would not result in a downgrading of the then current
rating of the Certificates. The Agreement may also be amended from time
to time by the Transferor, the Servicer, the Depositor, and the Trustee,
with the consent of Certificateholders evidencing an aggregate, undivided
interest in the Trust of at least 51% of the Certificate Principal Balance
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any
manner the rights of the Certificateholders, provided that no such
amendment will (i) reduce in any manner the amount of, or delay the timing
of, collections of payments on the Certificates or distributions or
payments under the Policy which are required to be made on any Certificate
without the consent of the Certificateholder or (ii) reduce the aforesaid
percentage required
to consent to any such amendment, without the consent of the holders of
all Certificates then outstanding. (Section 11.01)
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 and
(B) the earliest of (i) the Distribution Date on which the Security
Principal Balance has been reduced to zero, (ii) the final payment or
other liquidation of the last Mortgage Loan in the Trust, (iii) the
optional transfer to the Servicer of the Mortgage Loans, as described
below and (iv) the Distribution Date in (____________), on which date the
Policy will be available to pay the outstanding Class A Principal Balance.
The Servicer will have the right to repurchase all remaining Mortgage
Loans and REO Properties in the Trust and thereby effect early retirement
of the Certificates, subject to the Pool Balance of such Mortgage Loans
and REO Properties at the time of repurchase being less than or equal to
(5%) of the Pool Balance as of the Cut-Off Date. In the event the
Servicer exercises such option, the purchase price distributed with
respect to each Certificate will be 100% of its then outstanding principal
balance (subject to reduction as provided in the Agreement if the purchase
price is based in part on the appraised value of any REO Properties and
such appraised value is less than the Principal Balance of the related
Mortgage Loans plus (y) the greater of (i) the aggregate amount of accrued
and unpaid interest on the Mortgage Loans through the related Due Period
and (ii) 30 days' accrued interest thereon at the Loan Rate, in each case
net of the Servicing Fee plus (z) any unreimbursed amounts due to the
Certificate Insurer under the Agreement and I and I Payments.
The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations and the status of the Trust
as a REMIC.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Any affiliate of the Transferor has the option to purchase from the
Trust Fund any Mortgage Loan 90 days or more delinquent at a purchase
price equal to the outstanding principal balance of such Mortgage Loan as
of the date of purchase, plus the greater of (i) all accrued and unpaid
interest on such principal balance and (ii) 30 days' interest on such
principal balance, computed at the Loan Rate.
Notwithstanding the foregoing, any such affiliate of the Transferor
may only exercise its option with respect to the Mortgage Loan or Mortgage
Loans that have been delinquent for the longest period at the time of such
repurchase.
THE TRUSTEE
( ) with its principal place of business in ( )
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 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 (Letter
of Credit) (Surety Bond) Provider). 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 (Letter of Credit) (Surety Bond) Provider).
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. (Section 9.07)
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the
Trust of at least 51% of the Certificate Principal Balance have made
written requests 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. (Section 11.03) The Trustee will be under
no obligation to exercise any of the trusts or powers vested in it by the
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation
thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities which may be incurred therein or thereby. (Sections 9.01 and
9.02)
CERTAIN ACTIVITIES
The Trust Fund will not: (i) borrow money; (ii) make loans; (iii)
invest in securities for the purpose of exercising control; (iv)
underwrite securities; (v) except as provided in the Agreement, engage in
the purchase and sale (or turnover) of investments; (vi) offer securities
in exchange for property (except Certificates for the Mortgage Loans); or
(vii) repurchase or otherwise reacquire its securities. See "--Evidence
as to Compliance" above for information regarding reports as to the
compliance by the Servicer with the terms of the Agreement.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor
will be purchased by the Depositor from __________________________________
(the "Transferor") pursuant to the Purchase Agreement to be entered into
between the Depositor, as purchaser of the Mortgage Loans, and the
Transferor, as seller of the Mortgage Loans. Under the Purchase
Agreement, the Transferor will agree to transfer the Mortgage Loans to the
Depositor. Pursuant to the Agreement, the Mortgage Loans will be
immediately transferred by the Depositor to the Trust, and the Depositor
will assign its rights in, to and under the Purchase Agreement, to the
Trust. The following summary describes certain terms of the form of the
Purchase Agreement and is qualified in its entirety by reference to the
form of Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Transferor will transfer and
assign to the Depositor all of its right, title and interest in and to the
Mortgage Loans and the Related Documents. The purchase price of the
Mortgage Loans is a specified percentage of the face amount thereof as of
the time of transfer and is payable by the Depositor, as applicable, in
cash.
REPRESENTATIONS AND WARRANTIES
The Transferor will represent and warrant to the Depositor that,
among other things, as of the Closing Date, it is duly organized and in
good standing and that it has the authority to consummate the transactions
contemplated by the Purchase Agreement.
The Transferor will also represent and warrant to the Depositor,
that, among other things, (a) the information with respect to the
applicable Mortgage Loan set forth in the schedule attached to the
Purchase Agreement is true and correct in all material respects and (b)
immediately prior to the sale of the Mortgage Loans to the Depositor, the
Transferor was the sole owner and holder of the Mortgage Loans free and
clear of any and all liens and security interests. The Transferor will
make similar representations and warranties in the Agreement. The
Transferor will also represent and warrant to the Depositor, that, among
other things, as of the Closing Date, the Purchase Agreement constitutes a
legal, valid and binding obligation of the Transferor. In the event of a
breach of any such representations and warranties which has a material
adverse effect on the interests of the Certificateholders or the
Certificate Insurer, the Transferor will repurchase or substitute for the
Mortgage Loans as described herein under "DESCRIPTION OF THE CERTIFICATES-
-Assignment of Mortgage Loans."
The Transferor has also agreed to indemnify the Depositor and the
Trust from and against certain losses, liabilities and expenses
(including reasonable attorneys' fees) suffered or sustained pursuant to
the Purchase Agreement.
ASSIGNMENT TO THE TRUST
The Transferor expressly acknowledges and consents to the Depositor's
transfer of its rights relating to the Mortgage Loans under the Purchase
Agreement to the Trust. The Transferor also agrees to perform its
obligations under the Purchase Agreement for the benefit of the Trust.
TERMINATION
The Purchase Agreement will terminate upon the termination of the
Trust.
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 (Mortgage
Loans) (Private Securities). The (Mortgage Loans) (Private Securities)
will have been acquired by the Depositor from the Transferor.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal
income tax aspects of the purchase, ownership and disposition of the
Certificates, is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury Regulations thereunder, and
published rulings and court decisions in effect as of the date hereof, all
of which are subject to change, possibly retroactively. This discussion
does not address every aspect of the U.S. federal income tax laws which
may be relevant to Certificate Owners in light of their personal
investment circumstances or to certain types of Certificate Owners subject
to special treatment under the U.S. federal income tax laws (for example,
banks and life insurance companies). Accordingly, investors should
consult their tax advisors regarding U.S. federal, state, local, foreign
and any other tax consequences to them of investing in the Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in
the Agreement and other relevant documents and assuming compliance with
the terms of the Agreement as in effect on the date of issuance of the
Certificates, Brown & Wood, special tax counsel to the Depositor ("Tax
Counsel"), is of the opinion that the Certificates will be treated as debt
instruments for Federal income
tax purposes as of such date. Accordingly, upon issuance, the
Certificates will be treated as "Debt Securities" as described in the
Prospectus. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the
Prospectus.
The Transferor and the Certificateholders express in the Agreement
their intent that, for applicable tax purposes, the Certificates will be
indebtedness secured by the Mortgage Loans. The Transferor, the Depositor
and the Certificateholders, by accepting the Certificates, and each
Certificate Owner by its acquisition of a beneficial interest in a
Certificate, have agreed to treat the Certificates as indebtedness for
U.S. federal income tax purposes. However, because different criteria are
used to determine the non-tax accounting characterization of the
transaction, the Transferor intends to treat this transaction as a sale of
an interest in the Asset Balances of the Mortgage Loans for financial
accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a
transaction constitutes a sale of property or a loan, the repayment of
which is secured by property, is a question of fact, the resolution of
which is based upon the economic substance of the transaction rather than
its form or the manner in which it is labeled. While the Internal Revenue
Service (the "IRS") and the courts have set forth several factors to be
taken into account in determining whether the substance of a transaction
is a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or
other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Tax Counsel has analyzed and relied on
several factors in reaching its opinion that the weight of the benefits
and burdens of ownership of the Mortgage Loans has been retained by the
Transferor and has not been transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of
the transaction does not accord with its form. Tax Counsel has advised
that the rationale of those cases will not apply to this transaction,
because the form of the transaction as reflected in the operative
provisions of the documents either accords with the characterization of
the Certificates as debt or otherwise makes the rationale of those cases
inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations
for U.S. federal income tax purposes, the Certificates generally will be
taxable as Debt Securities. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" in the Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations
(the "OID Regulations") it is possible that the Certificates could
nevertheless be deemed to have been issued with original issue discount
("OID") if the interest were not treated as "unconditionally payable"
under the OID Regulations. If such regulations were to apply, all of the
taxable income to be recognized with respect to the Certificates would be
includible in income of Certificate Owners as OID, but would not be
includible again when the interest is actually received. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS/___/Taxation of Debt Securities;
Interest and Acquisition Discount" in the Prospectus for a discussion of
the application of the OID rules if the Certificates are in fact issued at
a greater than de minimis discount or are treated as having been issued
with OID under the OID Regulations. For purposes of calculating OID, it
is likely that the Certificates will be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE CERTIFICATES AS A PARTNERSHIP OR
ASSOCIATION TAXABLE AS A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for purposes of the Code,
the transaction contemplated by this Prospectus with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest
therein) to the Certificate Owners and that the proper classification of
the legal relationship between the Transferor and the Certificate Owners
resulting from this transaction is that of a partnership (including a
publicly traded partnership), a publicly traded partnership treated as a
corporation, or an association taxable as a corporation. Since Tax
Counsel has advised that the Certificates will be treated as indebtedness
in the hands of the Certificateholders for U.S. federal income tax
purposes, the Transferor will not attempt to comply with U.S. federal
income tax reporting requirements applicable to partnerships or
corporations as such requirements would apply if the Certificates were
treated as indebtedness.
If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership
taxable as a corporation), the Trust would be subject to U.S. federal
income tax at corporate income tax rates on the income it derives from the
Mortgage Loans, which would reduce the amounts available for distribution
to the Certificate Owners. Cash distributions to the Certificate Owners
generally would be treated as dividends for tax purposes to the extent of
such corporation's earnings and profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as
a publicly traded partnership taxable as a corporation); rather, the
Transferor and each Certificate Owner would be taxed individually on their
respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and
deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any
entity (or a portion of an entity) that is a "taxable mortgage pool" will
be classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation.
Subject to a grandfather provision for existing entities, any entity (or a
portion of any entity) will be a taxable mortgage pool if (i)
substantially all of its assets consist of debt instruments, more than 50%
of which are real estate mortgages, (ii) the entity is the obligor under
debt obligations with two or more maturities, and (iii) under the terms of
the entity's debt obligations (or an underlying arrangement), payments on
such debt obligations bear a relationship to the debt instruments held by
the entity.
Assuming that all of the provisions of the Agreement, as in effect on
the date of issuance, are complied with, Tax Counsel is of the opinion
that the arrangement created by the Agreement will not be a taxable
mortgage pool under Section 7701(i) of the Code because only one class of
indebtedness secured by the Mortgage Loan is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts.
If the IRS were to contend successfully (or future regulations were to
provide) that the arrangement created by the Agreement is a taxable
mortgage pool, such arrangement would be subject to U.S. federal corporate
income tax rate on its taxable income generated by ownership of the
Mortgage Loans. Such a tax might reduce amounts available for
distributions to Certificate Owners. The amount of such tax would depend
upon whether distributions to Certificate Owners would be deductible as
interest expense in computing the taxable income of such an arrangement as
a taxable mortgage pool.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID)
paid on a Certificate to a nonresident alien individual, foreign
corporation or other non-United States person is not subject to U.S.
federal income tax, provided that such interest is not effectively
connected with a trade or business of the recipient in the United States
and the Certificate Owner provides the required foreign person information
certification. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS/___/Tax
Treatment of Foreign Investors" in the Prospectus.
If the interests of the Certificate Owners were deemed to be
partnership interests, the partnership would be required, on a quarterly
basis, to pay withholding tax equal to the product, for
each foreign partner, of such foreign partner's distributive share of
"effectively connected" income of the partnership multiplied by the
highest rate of tax applicable to that foreign partner. In addition, such
foreign partner would be subject to branch profits tax. Each non-foreign
partner would be required to certify to the partnership that it is not a
foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an
applicable tax treaty.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at
the rate of 31% with respect to interest paid on the Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or his
broker with his taxpayer identification number, furnish an incorrect
taxpayer identification number, fail to report interest, dividends, or
other "reportable payments" (as defined in the Code) properly, or, under
certain circumstances, fail to provide the Trustee or his broker with a
certified statement, under penalty of perjury, that he is not subject to
backup withholding.
The Trustee will be required to report annually to the IRS, and to
each Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Certificates (and the amount of interest withheld
for U.S. federal income taxes, if any) for each calendar year, except as
to exempt holders (generally, holders that are corporations, certain tax-
exempt organizations or nonresident aliens who provide certification as to
their status as nonresidents). As long as the only "Certificateholder" of
record is Cede, as nominee for DTC, Certificate Owners and the IRS will
receive tax and other information including the amount of interest paid on
the Certificates owned from Participants and Indirect Participants rather
than from the Trustee. (The Trustee, however, will respond to requests
for necessary information to enable Participants, Indirect Participants
and certain other persons to complete their reports.) Each non-exempt
Certificate Owner will be required to provide, under penalty of perjury, a
certificate on IRS Form W-9 containing his or her name, address, correct
Federal taxpayer identification number and a statement that he or she is
not subject to backup withholding. Should a non-exempt Certificate Owner
fail to provide the required certification, the Participants or Indirect
Participants will be required to withhold 31% of the interest (and
principal) otherwise payable to the holder, and remit the withheld amount
to the IRS as a credit against the holder's Federal income tax liability.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the 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 CERTIFICATES.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and the Code, of the Plans acquisition and
ownership of such Certificates. See "ERISA Considerations" in the
Prospectus.
The U.S. Department of Labor has granted to Greenwich Capital
Markets, Inc. ("GCM") Prohibited Transaction Exemption 90-59 (the
"Exemption") which exempts from the application of the prohibited
transaction rules transactions relating to (1) the acquisition, sale and
holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to
which GCM or any of its affiliates is the sole underwriter or the manager
or co-manager of the underwriting syndicate; and (2) the servicing,
operation and management of such asset-backed pass-through trusts,
provided that the general conditions and certain other conditions set
forth in the Exemption are satisfied. The Exemption will apply to the
acquisition, holding and resale of the Certificates by a Plan provided
that certain conditions (certain of which are described below) are met.
Among the conditions which 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 such Certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three
highest generic rating categories from either Standard &
Poor's Ratings Group, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. or Fitch Investors Service, L.P.;
(4) The sum of all payments made to and retained by the
Underwriter in connection with the distribution of the Certificates
represents not more than reasonable compensation for underwriting
such Certificates; the sum of all payments made to and retained by
the Transferors pursuant to the sale of the Mortgage Loans to the
Trust represents not more than the fair market value of such Mortgage
Loans; the sum of all payments made to and retained by the Servicer
represent not more than reasonable compensation for the Servicers'
services under the Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of the Underwriter, the
Transferor, the Servicer, the (Letter of Credit) (Surety Bond)
provider, any borrower whose obligations under one or more Mortgage
Loans constitute more than 5% of the aggregate unamortized principal
balance of the assets in the Trust, or any of their respective
affiliates (the "Restricted Group"); 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,
as amended.
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Certificates by Plans and that all
conditions of the Exemption other than those within the control of the
investors will be met.
Any Plan fiduciary considering whether to purchase any Certificates
on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Among other things,
before purchasing any Certificates, a fiduciary of a Plan subject to the
fiduciary responsibility provisions of ERISA or an employee benefit plan
subject to the prohibited transaction provisions of the Code should make
its own determination as to the availability of the exemptive relief
provided in the Exemption, and also consider the availability of any other
prohibited transaction exemptions.
Prospective institutional purchasers of the Certificates should
consult with their counsel regarding ERISA considerations associated with
such a purchase. Purchasers should analyze whether the decision may have
an impact with respect to purchases of the Certificates.
LEGAL INVESTMENT CONSIDERATIONS
(Although, as a condition to their issuance, the Certificates will be
rated in the highest rating category of each Rating Agency,) the
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 Mortgage 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 Certificates, which because
they evidence interests in a pool that includes junior mortgage loans are
not "mortgage related securities" under SMMEA. See "LEGAL INVESTMENT" in
the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated _________, 199_ (the "Underwriting Agreement"), among the
Depositor and Greenwich Capital Markets, Inc. (the "Underwriter"), the
Depositor has agreed to sell to the Underwriter and the Underwriter has
agreed to purchase from the Depositor all of the Certificates.
The Depositor has been advised by the Underwriter that it proposes to
initially offer the Certificates to the public at the offering price set
forth herein and to certain dealers at such price less a discount not in
excess of _____% of the Certificate denominations. The Underwriter may
allow and such dealers may reallow a discount not in excess of _____% of
the Certificate denominations to certain other dealers. After the initial
public offering, the public offering price, such concessions and such
discounts may be changed.
The Depositor is an affiliate of the Underwriter.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain civil liabilities, including liabilities
under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor by Brown & Wood, New York, New York and for the
Underwriters by Brown & Wood, New York, New York.
RATINGS
It is a condition to issuance that the Certificates be rated at least
( ) by at least two nationally recognized statistical rating
organizations.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating
takes into consideration the characteristics of the Mortgage Loans and the
structural, legal and tax aspects associated with the Certificates. The
ratings on the Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Mortgage Loans
or the possibility that Certificateholders might realize a lower than
anticipated yield.
(The ratings assigned to the Certificates will depend primarily upon
the creditworthiness of the (Letter of Credit) (Surety Bond) provider.
Any reduction in a rating assigned to the claims-paying ability of the
(Letter of Credit) (Surety Bond) provider below the ratings initially
assigned to the Certificates may result in a reduction of one or more of
the ratings assigned to the Certificates.)
The ratings assigned by Duff & Phelps Credit Rating Co. ("D&P") to
securities address the likelihood of the receipt by the certificateholders
of all distributions to which they are entitled under the transaction
structure. D&P's ratings reflect its analysis of the riskiness of the
assets and its analysis of the structure of the transaction as set forth
in the operative documents. D&P's ratings do not address the effect on
yield on the certificates attributable to prepayments or recoveries on the
underlying assets.
The ratings assigned by Fitch Investors Service, L.P. ("Fitch") to
certificates address the likelihood of the receipt of all distributions on
the mortgage loans by the related certificateholders under the agreements
pursuant to which such certificates are issued. Fitch's ratings take into
consideration the credit quality of the related pool, including any credit
support providers, structural and legal aspects associated with such
certificates, and the extent to which the payment stream on the pool is
adequate to make the payments required by such certificates. Fitch
ratings on such certificates do not, however, constitute a statement
regarding frequency of prepayments of the assets.
The ratings assigned by Moody's Investors Service, Inc. ("Moody's")
to certificates address the likelihood of the receipt by
certificateholders of all distributions to which such certificateholders
are entitled. Moody's ratings on certificates do not represent any
assessment of the likelihood or rate of principal prepayments. The
ratings do not address the possibility that certificateholders might
suffer a lower than anticipated yield as a result of prepayments.
The ratings assigned by Standard & Poor's Ratings Group, a Division
of The McGraw-Hill Companies ("Standard & Poor's"), to certificates
address the likelihood of the receipt of all distributions on the assets
by the related certificateholders under the agreements pursuant to which
such certificates are issued.
Standard & Poor's ratings take into consideration the credit quality of
the related pool, including any credit support providers, structural and
legal aspects associated with such certificates, and the extent to which
the payment stream on such mortgage pool is adequate to make payments
required by such certificates. Standard & Poor's ratings on such
certificates do not, however, constitute a statement regarding frequency
of prepayments on the related assets. The letter "r" attached to a
Standard & Poor's rating highlights derivative, hybrid and certain other
types of certificates that Standard & Poor's believes may experience high
volatility or high variability in expected returns due to non-credit
risks. The absence of an "r" symbol in the rating of a class of
certificates should not be taken as an indication that such certificates
will exhibit no volatility or variability in total return.
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.
INDEX OF DEFINED TERMS
---------------------
Terms Page
----- ----
Accredited investor . . . . . . . . . . . . . . . . . . . . . . . . . S-34
accredited investor . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Additional Balances . . . . . . . . . . . . . . . . . . . . . . S-3, S-17
Adjustment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Amortization Period . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Assignment of Mortgage Loans . . . . . . . . . . . . . . . . . . . . S-21
Beneficial owner . . . . . . . . . . . . . . . . . . . . . . . S-14, S-18
BIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17, S-22
Billing cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Book-Entry Certificates . . . . . . . . . . . . . . . . . . . . S-14, S-17
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
CEDEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
CEDEL Participants . . . . . . . . . . . . . . . . . . . . . . S-15, S-19
Certificate Owners . . . . . . . . . . . . . . . . . . . S-14, S-5, S-17
Certificate Principal Balance Loss Deduction Amount . . . . . . . . . S-24
Certificate Rate . . . . . . . . . . . . . . . . . . . . . S-3, S-6, S-25
Certificateholder . . . . . . . . . . . . . . . . . . . . S-14, S-17, S-18
Certificates . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-24
Citibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Collection Account . . . . . . . . . . . . . . . . . . . S-16, S-5, S-22
Collection Period . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . S-4
Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . S-15, S-19
Credit Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Credit Limit Utilization Rate . . . . . . . . . . . . . . . . . . . . S-16
Credit Line Agreements . . . . . . . . . . . . . . . . . S-3, S-15, S-17
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-15
Cut-Off Date Pool Balance . . . . . . . . . . . . . . . . . . . . . . S-4
Cut-Off Date Principal Balance . . . . . . . . . . . . . . . . S-3, S-17
Debt-to-Gross Income Ratio . . . . . . . . . . . . . . . . . . . . . S-13
Defaulted Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . S-23
Defective Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . S-21
Definitive Certificate . . . . . . . . . . . . . . . . . . . . S-14, S-18
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3
Depositor Interest . . . . . . . . . . . . . . . . . . . . . . S-3, S-17
Determination Date . . . . . . . . . . . . . . . . . . . . . . S-8, S-24
Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . S-17
Distribution Date . . . . . . . . . . . . . . . . . . . . . S-1, S-6, S-24
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-5, S-17
Due-on-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Early Amortization Event . . . . . . . . . . . . . . . . . . . . . . S-26
Eligible Account . . . . . . . . . . . . . . . . . . . . . . . S-17, S-22
Eligible Additional Mortgage Loan . . . . . . . . . . . . . . . . . . S-21
Eligible Substitute Mortgage Loan . . . . . . . . . . . . . . . . . . S-21
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-33
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Euroclear Operator . . . . . . . . . . . . . . . . . . . . . . S-15, S-19
Euroclear Participants . . . . . . . . . . . . . . . . . . . . S-15, S-19
European Depositaries . . . . . . . . . . . . . . . . . . S-14, S-5, S-18
Events of Servicing Termination . . . . . . . . . . . . . . . . . . . S-30
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Financial Intermediary . . . . . . . . . . . . . . . . . . . . S-14, S-18
First Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
Home equity loans . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Index Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Index Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Insolvency Event . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
Interest Collections . . . . . . . . . . . . . . . . . . . . . S-5, S-23
Interest Period . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-25
Investor Interest . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Investor Percentage . . . . . . . . . . . . . . . . . . . . . . S-7, S-23
LIBO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-25
LIBOR Business Day . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Liquidation Loss Amount . . . . . . . . . . . . . . . . . . . . . . . S-23
Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-13
Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Maximum Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Money Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Morgan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . . . . . S-20
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-17
Mortgage related securities . . . . . . . . . . . . . . . . . . S-9, S-34
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . S-3, S-17
Notice Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Original Principal Balance . . . . . . . . . . . . . . . . . . S-3, S-17
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Pool Balance . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-4
Prime rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Principal Allocation . . . . . . . . . . . . . . . . . . . . . . . . S-7
Principal Balance . . . . . . . . . . . . . . . . . . . . . S-3, S-4, S-17
Principal Collections . . . . . . . . . . . . . . . . . . . . . S-5, S-23
Private Securities . . . . . . . . . . . . . . . . . . . . S-1, S-3, S-17
Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Registration of Certificates . . . . . . . . . . . . . . . . . . . . S-24
Related Documents . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Relevant Depositary . . . . . . . . . . . . . . . . . . . . . . S-14, S-18
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Reuters Screen LIBO Page . . . . . . . . . . . . . . . . . . . . . . S-25
Revolving Period . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-18
SAIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17, S-22
Seller . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-12, S-32
Seller Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-6, S-12
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-15
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . S-8, S-15, S-28
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-34
Substitution Adjustment . . . . . . . . . . . . . . . . . . . . . . . S-21
Successor Servicer . . . . . . . . . . . . . . . . . . . . . . . . . S-30
The Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-3
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-8
Unallocated Principal Collections . . . . . . . . . . . . . . . . . . S-24
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . S-34
Unpaid Interest Shortfall . . . . . . . . . . . . . . . . . . . . . . S-24
(Letter of Credit) (Surety Bond) . . . . . . . . . . . . . . . . . . S-7
(Letter of Credit) (Surety Bond) Amount . . . . . . . . . . . . S-8, S-26
(Letter of Credit) (Surety Bond) Issuer . . . . . . . . . . . . . . . S-7
ANNEX I
<TABLE>
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<S> <S>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN $(_____________)
AUTHORIZED BY THE UNDERWRITER. NEITHER THE (APPROXIMATE)
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE HOME EQUITY LOAN
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE ASSET BACKED
SINCE THE DATE HEREOF. THIS PROSPECTUS CERTIFICATES, SERIES 199__-__
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO
DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH SOLICITATION.
_______________
TABLE OF CONTENTS
FINANCIAL ASSET SECURITIES CORP.
PROSPECTUS SUPPLEMENT DEPOSITOR
PAGE
Summary S-3 (______________________)
Risk Factors S-12 TRANSFEROR AND SERVICER
The Home Equity Lending Program S-13
Servicing of the Mortgage Loans S-16
Description of the Mortgage Loans S-18
Prepayment and Yield Considerations S-18
Description of the Certificates S-19
Description of the Purchase Agreement S-36
Use of Proceeds S-37
ERISA Considerations S-37
Legal Investment Considerations S-42
_________________________________
Underwriting S-42
Legal Matters S-42 PROSPECTUS SUPPLEMENT
Ratings S-42 (_________, 199_)
_________________
_________________________________
PROSPECTUS
Prospectus Supplement or Current
Report on Form 8-K 2 GREENWICH CAPITAL MARKETS, INC.
Incorporation of Certain Document
by Reference 2
Available Information 2
Reports to Securityholder 3
Summary of Terms 4
Risk Factors 12
The Trust Fund 17
Use of Proceeds 22
The Depositor 22
Loan Program 22
Description of the Securities 24
Credit Enhancement 33
Yield and Prepayment Considerations 38
The Agreements 41
Certain Legal Aspects of the Loans 54
Certain Federal Income Tax Considerations 66
State Tax Considerations 85
ERISA Consideration 85
Legal Investment 88
Method of Distribution 89
Legal Matters 90
Financial Information 90
Rating 90
</TABLE>
<PAGE>
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 15, 1996
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 subordinate liens 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 REPRE-
SENTATION 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.
- -------------, 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, an indirect limited purpose finance
subsidiary of The Long-Term Credit Bank of
Japan, Limited 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, re-
investment 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 Improve-
ment 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 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 Supple-
ment, 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 pre-
payment 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 likeli-
hood of regular receipt by holders of Senior
Securities of the full amount of monthly payments
of principal and interest due them. The pro-
tection 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 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 upfront 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.
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.
- -------------
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.
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 nonresidential 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 The Long-Term Credit Bank of Japan, Limited and an affiliate of Greenwich
Capital Markets, Inc. The Long-Term Credit Bank of Japan, Limited is a bank
organized under the laws of Japan conducting commercial banking, corporate
finance, capital markets and financial advisory services on a global basis.
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
Securities 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. 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 or 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 Security-
holders.
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 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 lender may be held liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a prior owner or operator. CERCLA imposes liability on any and all
"responsible parties" (which includes, inter alia, the property owner and
operator) for the cost of clean-up of releases of hazardous substances.
However, CERCLA excludes from the definition of "owner or operator" secured
creditors who hold indicia of ownership for the purpose of protecting their
security interest, but "without participating in the management of the
facility". That exclusion was substantially narrowed by a May 1990 decision
of the United States Court of Appeals for the Eleventh Circuit in United
States v. Fleet Factors Corp., which held that a lender need not have
involved itself in the day-to-day operations of the facility or participated
in decisions relating to hazardous waste management in order to be liable;
rather, liability could attach to the lender if its involvement with the
management of the facility is broad enough to support the inference that the
lender could affect hazardous waste management practices if it so chose.
The court added that a lender's capacity to influence such decisions could be
inferred from the extent of its involvement in the facility's financial
management. In response to Fleet Factors, EPA promulgated regulations
designed to clarify the range of activities a lender may engage in without
losing the benefit of the statutory exclusion. Under the regulations, which
took effect in April 1992, a lender is permitted to monitor the borrower's
environmental practices in order to determine if the facility is in
compliance with applicable law, and to require the borrower to take
measures necessary to achieve or maintain compliance or conduct
necessary clean-ups. The lender may not, however, exercise control over or
assume responsibility for the borrower's environmental practices. Such
actions would be considered "participation in the management of the
facility". Also, if the lender takes title to or possession of the
property, it might be deemed to have obviated the security interest
exclusion and to be liable for clean-up costs pursuant to CERCLA.
The EPA regulations allow lenders to take certain actions with respect to
foreclosure without losing the benefit of the statutory exclusion.
Essentially, the regulations allow the lender to take actions consistent with
protecting its security interest, but not actions which demonstrate an intent
to exercise long-term ownership interest in the property. While the EPA
regulations offer some protection to lenders, it must be noted that such
protection may not be available under applicable state law. Furthermore, the
regulations are binding only on EPA with respect to EPA's enforcement powers
and cost recovery rights. It has not yet been determined whether the federal
courts will apply the regulations in cost recovery actions brought against
lenders by other responsible parties, although the regulations may well be
considered persuasive by the courts. (Two judicial challenges have been
brought against the EPA regulations in the United States Court of Appeals for
the District of Columbia Circuit. The challenges both allege that the
regulations are inconsistent with the statutory requirements of CERCLA and,
therefore, should be invalidated. The challenges were filed on July 28, 1992
and are still pending.) 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.
However, such persons or entities may be bankrupt or otherwise judgment proof
and the costs associated with environmental clean-up may be substantial.
Therefore, it is conceivable that such remedial costs arising from the
circumstances set forth above would become a liability of the Trust Fund and
occasion a loss to Securityholders.
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.
The Agreement will provide that the Master Servicer, acting on behalf
of the Trust Fund, may not acquire title to a multifamily residential
property or mixed residential/commercial property underlying a Loan or take
over its operation unless the Master Servicer has previously determined,
based upon a report prepared by a person who regularly conducts environmental
audits, that the Property is in compliance with applicable environmental laws
and regulations or that such acquisition would not be more detrimental than
beneficial to the value of the Properties and the interests therein of the
Securityholders.
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." Regulations provide that a Residual Interest Security has
significant value only if (i) the aggregate issue price of the
Residual Interest Security is at least 2% of the aggregate of the
issue prices of all Regular Interest Securities and Residual Interest
Securities in the REMIC and (ii) the anticipated weighted average life of the
Residual Interest Securities is at least 20% of the weighted average life of
the REMIC.
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.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Securities being registered under this
Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee............................. $ 344,828
Printing and Engraving Fees...................... $ 250,000
Legal Fees and Expenses.......................... $ 1,000,000
Trustee Fees and Expenses........................ $ 100,000
Accounting Fees and Expenses..................... $ 250,000
Rating Agency Fees............................... $ 400,000
Miscellaneous.................................... $ 200,000
------------
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Total............................................ $ 2,544,828
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------------
____________
* All amounts except the SEC Registration Fee are estimates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation provides for
indemnification of directors and officers of the Registrant to the full
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents
in connection with actions, suits or proceedings brought against them by a
third party or in the right of the corporation, by reason of the fact that
they were or are such directors, officers, employees or agents, against
expenses incurred in any such action, suit or proceeding. The Delaware
General Corporation Law also provides that the Registrant may purchase
insurance on behalf of any such director, officer, employee or agent.
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Forms of Pooling and Servicing Agreement.*
4.2 Form of Trust Agreement.*
4.3 Form of Indenture.*
5.1 Opinion of Brown & Wood LLP as to legality of the Certificates.
8.1 Opinion of Brown & Wood LLP as to certain tax matters.
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1
hereof).
24.1 Power of Attorney (included on signature page).
__________________________
*Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant undertakes that, for purposes of determining
any liability under the Act, each filing of the Trust's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 that is incorporated by reference in this Registration Statement shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance on Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939 in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Greenwich, Connecticut, on the
15th day of August, 1996.
FINANCIAL ASSET SECURITIES CORP.
By /s/ Charles A. Forbes, Jr.
----------------------------
Name: Charles A. Forbes, Jr.
Title: Vice President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Stephen M. Peet, Charles A. Forbes,
Jr., Kari Skilbred, Peter McMullin and John C. Anderson, or any of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and his name, place and stead,
in any and all capacities, to sign any or all amendments (including
post-effective amendments) to the Registration Statement, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and purposes as
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Konrad R. Kruger President (Principal Executive August 15, 1996
- ------------------------ Officer, Principal Financial
Konrad R. Kruger Officer) Director
/s/ Kevin C. Piccoli Controller (Principal Accounting August 15, 1996
- ----------------------- Officer)
Kevin C. Piccoli
/s/ Stephen M. Peet Director August 15, 1996
- -----------------------
Stephen M. Peet
/s/ Kensaku Higashi Director August 15, 1996
- -----------------------
Kensaku Higashi
/s/ David Jones Director August 15, 1996
- -----------------------
David Jones
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NUMBER
- ------- ---------------------- ----------
1.1 -- Form of Underwriting Agreement.*
3.1 -- Certificate of Incorporation of the
Registrant.*
3.2 -- By-laws of the Registrant.*
4.1 -- Form of Pooling and Servicing Agreement.*
4.2 -- Form of Trust Agreement.*
4.3 -- Form of Indenture.*
5.1 -- Opinion of Brown & Wood LLP as to
legality of the Certificates.
8.1 -- Opinion of Brown & Wood LLP as to
certain tax matters.
10.1 -- Form of Mortgage Loan Purchase
Agreement.*
23.1 -- Consent of Brown & Wood LLP (included in
Exhibits 5.1 and 8.1).
24.1 -- Power of Attorney (included on
signature page).*
- --------------------
*Previously filed.
<PAGE>
EXHIBIT 5.1
(LETTERHEAD OF BROWN & WOOD LLP)
August 15, 1996
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
Re: Financial Asset Securities Corp.
Registration Statement on Form S-3
-----------------------------------
Ladies and Gentlemen:
We have acted as counsel for Financial Asset Securities Corp., a
Delaware corporation (the "Company"), in connection with the preparation of
the registration statement on Form S-3 (the "Registration Statement")
relating to the Securities (defined below) and with the authorization and
issuance from time to time in one or more series (each, a "Series") of up to
$1,000,,000,000 aggregate principal amount of asset-backed securities (the
"Securities"). As set forth in the Registration Statement, each Series of
Securities will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement, master pooling and servicing agreement,
pooling agreement, trust agreement or indenture (each, an "Agreement") among
the Company, a trustee (the "Trustee") and, where appropriate, a servicer
(the "Servicer"), each to be identified in the prospectus supplement for such
Series of Securities.
We have examined copies of the Company's Certificate of Incorporation,
the Company's By-laws and forms of each Agreement, as filed or incorporated
by reference as exhibits to the Registration Statement, and the forms of
Securities included in any Agreement so filed or incorporated by reference
in the Registration Statement and such other records, documents and statutes
as we have deemed necessary for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. When any Agreement relating to a Series of Securities has been duly
and validly authorized by all necessary action on the part of the Company and
has been duly executed and delivered by the Company, the Servicer, if any,
the Trustee and any other party thereto, such Agreement will constitute a
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as enforcement thereof may be
limited by bankruptcy, insolvency or other laws relating to or affecting
creditors' rights generally or by general equity principles.
2. When a Series of Securities has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly
executed and authenticated by the Trustee for such Series in accordance with
the terms of the related Agreement and issued and delivered against payment
therefor as described in the Registration Statement, such Series of
Securities will be legally and validly issued, fully paid and nonassessable,
and the holders thereof will be entitled to the benefits of the related
Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein) and the federal laws of the
United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in each Prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
Securities Act of 1933, as amended, or the Rules and Regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
EXHIBIT 8.1
(LETTERHEAD OF BROWN & WOOD LLP)
August 15, 1996
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
Re: Financial Asset Securities Corp.
Registration Statement on Form S-3
-----------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel for Financial Asset Securities
Corp., a Delaware corporation (the "Company"), in connection with the
preparation of the registration statement on Form S-3 (the "Registration
Statement") relating to the Securities (defined below) and with the
authorization and issuance from time to time in one or more series (each, a
"Series") of up to $1,000,000,000 aggregate principal amount of asset-backed
securities (the "Securities"). The Registration Statement is being filed
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended. As set forth in the Registration Statement, each Series of
Securities will be issued under and pursuant to the conditions of a separate
pooling and servicing agreement, master pooling and servicing agreement,
pooling agreement, trust agreement or indenture (each an "Agreement") among
the Company, a trustee (the "Trustee") and, where appropriate, a servicer
(the "Servicer"), each to be identified in the prospectus supplement for such
Series of Securities.
We have examined the prospectus and forms of prospectus supplement
related thereto contained in the Registration Statement (each, a
"Prospectus") and such other documents, records and instruments as we have
deemed necessary for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the
part of the Company, the Trustee, the Servicer (where applicable) and any
other party thereto for such Series of Securities and will be duly executed
and delivered by the Company, the Trustee, the Servicer and any other party
thereto substantially in the applicable form filed or incorporated by
reference as an exhibit to the Registration Statement, that each Series of
Securities will be duly executed and delivered in substantially the forms set
forth in the related Agreement filed or incorporated by reference as an
exhibit to the Registration Statement, and that Securities will be sold as
described in the Registration Statement.
As special tax counsel to the Company, we have advised the Company with
respect to certain material federal income tax aspects of the proposed
issuance of each Series of Securities pursuant to the related Agreement.
Such advice has formed the basis for the description of selected federal
income tax consequences for holders of such Securities that appear under the
heading "Certain Material Federal Income Tax Considerations" in each
Prospectus forming a part of the Registration Statement. Such description
does not purport to discuss all possible federal income tax ramifications of
the proposed issuance of the Securities, but with respect to those federal
income tax consequences described therein, such description is accurate in
all material respects.
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our
opinion as to the matters set forth herein could change with respect to a
particular Series of Securities as a result of changes in fact or
circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. Because the Prospectuses
contemplate Series of Securities with numerous different characteristics, you
should be aware that the particular characteristics of each Series of
Securities must be considered in determining the applicability of this
opinion to a particular Series of Securities.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Certain Material Federal Income Tax Considerations" in each Prospectus
forming a part of the Registration Statement, without admitting that we are
"experts" within the meaning of the 1933 Act or the Rules and Regulations of
the Commission issued thereunder, with respect to any part of the
Registration Statement, including this exhibit.
Very truly yours
/s/ Brown & Wood LLP
