PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 20, 1996)
CITYSCAPE HOME EQUITY LOAN TRUST, SERIES 1996-3
$60,800,000 (APPROXIMATE) CLASS A-1A, 6.70% PASS-THROUGH RATE
$76,000,000 (APPROXIMATE) CLASS A-1B, VARIABLE PASS-THROUGH RATE
$21,000,000 (APPROXIMATE) CLASS A-2, 6.65% PASS-THROUGH RATE
$59,000,000 (APPROXIMATE) CLASS A-3, 6.85% PASS-THROUGH RATE
$50,000,000 (APPROXIMATE) CLASS A-4, 6.80% PASS-THROUGH RATE
$14,000,000 (APPROXIMATE) CLASS A-5, 7.05% PASS-THROUGH RATE
$52,300,000 (APPROXIMATE) CLASS A-6, 7.15% PASS-THROUGH RATE
$31,700,000 (APPROXIMATE) CLASS A-7, 7.50% PASS-THROUGH RATE
$31,644,000 (APPROXIMATE) CLASS A-8, 7.65% PASS-THROUGH RATE*
CLASS A-IO, 1.00% PASS-THROUGH RATE
Home Equity Loan Pass-Through Certificates
Distributions payable on the 25th day of each month, commencing in September
1996
FINANCIAL ASSET SECURITIES CORP.
Depositor
The Cityscape Home Equity Loan Trust, Series 1996-3 Certificates will
consist of the Class A-1A Certificates, Class A-1B Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5
Certificates, Class A-6 Certificates, Class A-7 Certificates, Class A-8
Certificates and the Class A-IO Certificates (collectively, the "Offered
Certificates") and the Class R Certificates (the "Residual Certificates").
The Offered Certificates and the Residual Certificates are collectively
referred to herein as the "Certificates." Only the Offered Certificates are
offered hereby.
Financial Asset Securities Corp. (the "Depositor") has caused Financial
Guaranty Insurance Company (the "Certificate Insurer") to issue a certificate
guaranty insurance policy (the "Certificate Insurance Policy") for the
benefit of holders of the Offered Certificates pursuant to which the
Certificate Insurer will guarantee certain payments to the holders of the
Offered Certificates as described herein.
(Bond Insurer logo)
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 August 23, 1996 (the "Cut-Off Date"), among
the Depositor, Cityscape Corp. ("Cityscape"), as seller and servicer (in such
capacities, the "Seller" and the "Servicer," respectively), and Harris Trust
and Savings Bank, as trustee (the "Trustee"). The Trust Fund will consist of
a pool of mortgage loans (the "Mortgage Loans") secured by first and second
liens on one- to four-family residential and small mixed-use properties (the
"Mortgaged Properties"), as described herein under "The Mortgage Pool." As
of August 23, 1996, Mortgage Loans (the "Initial Mortgage Loans") having an
aggregate unpaid principal balance of approximately $301,871,024.38 have been
designated for inclusion in the Mortgage Pool. On or prior to October 30,
1996, the Trust Fund may purchase additional mortgage loans (the "Subsequent
Mortgage Loans") having an aggregate unpaid principal balance of up to
$98,779,670.81 with amounts on deposit in an account (the "Pre-Funding
Account") established for such purpose on the Closing Date.
The Class A-1A, Class A-1B, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7 and Class A-8 Certificates will have aggregate original
principal balances of approximately $60,800,000, $76,000,000, $21,000,000,
$59,000,000, $50,000,000, $14,000,000, $52,300,000, $31,700,000 and
$31,644,000, respectively (each, an "Original Certificate Principal Balance,"
and as such balance is reduced from time to time, the "Certificate Principal
Balance"), and the Class A-IO Certificates will have an original aggregate
notional balance of approximately $301,871,024.38 (the "Original Notional
Amount," and as such amount is reduced or in the case of the Funding Period,
increased from time to time, the "Notional Amount"). The Class A-IO
Certificates will not have a principal balance and will not be entitled to
distributions of principal but will be entitled to distributions of interest
as described herein. The Offered Certificates will evidence a senior
beneficial ownership interest in the Trust Fund, with the remaining
beneficial ownership interest in the Trust Fund being evidenced by the
Residual Certificates. Distributions to holders of the Offered Certificates
will be made on the 25th day of each month or, if such 25th day is not a
Business Day, on the first Business Day thereafter (each, a "Distribution
Date"), commencing in September 1996.
The Offered Certificates are being offered by the Underwriter from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Gross proceeds to the Depositor with respect
to the Offered Certificates (except for the Class A-IO Certificates) are
expected to be approximately $396,235,635, plus accrued interest from
August 23, 1996 to, but not including, the Closing Date, before deducting
issuance expenses payable by the Depositor.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel. It is expected that
delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company on or about August 30,
1996.
The Trust Fund is subject to optional termination under the limited
circumstances described herein. Any such optional termination will result in
an early retirement of the Offered Certificates.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-10 HEREIN
AND IN THE PROSPECTUS ON PAGE 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
_________
* Subject to certain limitations described herein.
GREENWICH CAPITAL
M A R K E T S, I N C.
August 28, 1996
THE YIELDS TO MATURITY OF THE OFFERED CERTIFICATES MAY VARY FROM THE
ANTICIPATED YIELDS TO THE EXTENT SUCH CERTIFICATES ARE PURCHASED AT A
DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS THEREON
ARE SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE MORTGAGE LOANS. THE YIELD TO INVESTORS ON THE CLASS A-1B
CERTIFICATES ALSO WILL BE SENSITIVE TO, AMONG OTHER THINGS, THE LEVEL OF THE
LONDON INTERBANK OFFERED RATE FOR ONE-MONTH UNITED STATES DOLLAR DEPOSITS
("ONE-MONTH LIBOR"). THE YIELD TO MATURITY OF THE CLASS A-IO CERTIFICATES
WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS. CERTIFICATEHOLDERS SHOULD
CONSIDER, IN THE CASE OF ANY OFFERED 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 OFFERED 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. HOLDERS OF THE CLASS A-IO
CERTIFICATES SHOULD CAREFULLY CONSIDER THE RISK THAT A RAPID RATE OF
PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS WILL HAVE A NEGATIVE EFFECT ON THE
YIELD THEREON AND COULD RESULT IN THE FAILURE OF SUCH HOLDERS TO RECOVER
THEIR INITIAL INVESTMENTS.
The interests of the owners of the Offered Certificates will be
represented by book-entries on the records of The Depository Trust Company
(the "Depository") and participating members thereof. No person acquiring a
beneficial interest in an Offered Certificate will be entitled to receive a
physical certificate representing such Certificate, except in the limited
circumstances described herein. See "Description of the Certificates--Book-
Entry Certificates" herein.
Except for certain representations and warranties relating to the
Mortgage Loans, Cityscape's obligations with respect to the Certificates are
limited to its contractual servicing obligations. The Offered Certificates
evidence interests in the Trust Fund only and are payable solely from amounts
received with respect thereto. The Offered Certificates do not constitute an
obligation of or an interest in the Depositor, the Trustee, the Certificate
Insurer or Cityscape, or any of their respective affiliates, and will not be
insured or guaranteed by any governmental agency. An election will be made
to treat the 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 Offered Certificates but has no obligation to do so.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that such a market will develop or, if it does develop,
that it will continue.
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is contained
in the Prospectus dated August 20, 1996 (the "Prospectus") which accompanies
this Prospectus Supplement and purchasers are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Offered
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus.
Upon written request, Cityscape will make available its most recent
audited financial statements. Requests should be directed to Cityscape
Corp., 565 Taxter Road, Elmsford, New York 10523, Attention: Cheryl P. Carl,
Secretary.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus Supplement and the Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Securities and Exchange Commission (the "Commission")
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended, on or subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Offered
Certificates. The Depositor will provide without charge to each person to
whom this Prospectus Supplement and Prospectus are delivered, on request of
such person, a copy of any or all of the documents incorporated herein by
reference other than the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests should
be made to Mr. Peter McMullin in writing at 600 Steamboat Road, Greenwich,
Connecticut 06830.
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 Cityscape Home Equity Loan Trust, Series
1996-3, Home Equity Loan Pass-Through
Certificates (the "Certificates"), consisting
of (i) the Class A-1A Certificates, Class A-1B
Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates, Class A-5
Certificates, Class A-6 Certificates, Class A-7
Certificates, Class A-8 Certificates and Class
A-IO Certificates (collectively, the "Offered
Certificates") and (ii) the Class R
Certificates (the "Residual Certificates").
Only the Offered Certificates are offered
hereby.
The Depositor Financial Asset Securities Corp. (the
"Depositor"), a Delaware corporation that 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 "Underwriter"). See "The
Depositor" in the Prospectus and "Method of
Distribution" herein. National Westminster Bank
Plc has entered into an agreement to acquire
the direct parent company of the Depositor.
Completion of that acquisition is subject to
receipt of regulatory approval and is expected
to occur in late 1996. None of the Depositor,
The Long-Term Credit Bank of Japan, Limited or
any of their respective affiliates or any other
person or entity will insure or guarantee or
otherwise be obligated with respect to the
Certificates. Servicer Cityscape Corp.
("Cityscape") will serve as the servicer (in
such capacity, the "Servicer"). See "Servicing
of Mortgage Loans--The Servicer" herein.
The Mortgage Loans were originated or purchased
by Cityscape (in such capacity, the "Seller").
Trustee Harris Trust and Savings Bank, an Illinois
banking corporation, not in its individual
capacity but solely as trustee on behalf
of the holders of the Certificates and the
Certificate Insurer (the "Trustee").
Certificate Insurer Financial Guaranty Insurance Company (the
"Certificate Insurer" or "FGIC"). See The
Certificate Insurer herein.
Cut-Off Date With respect to each Initial Mortgage Loan,
the close of business on August 23, 1996.
With respect to any Subsequent Mortgage Loan,
the close of business on the date identified in
the Subsequent Transfer Agreement.
Closing Date On or about August 30, 1996.
Description of Certificates
A. General The Certificates will be issued pursuant to a
Pooling and Servicing Agreement, dated as of
August 23, 1996 (the "Pooling and Servicing
Agreement"), among the Depositor, the Servicer,
the Seller and the Trustee.
The Offered Certificates and the Residual
Certificates will represent the entire
beneficial ownership interest in a trust fund
(the "Trust Fund"), which will consist of a
pool (the "Mortgage Pool") of closed-end, fixed-
rate mortgage loans (the "Mortgage Loans")
secured by first and second liens on one-to four-
family residential and small mixed-use properties
(the "Mortgaged Properties"). The Mortgage Loans
that have been designated for inclusion in the
Mortgage Pool as of August 23, 1996 are referred
to herein as the "Initial Mortgage Loans" and
those Mortgage Loans acquired by the Trust Fund
subsequent to the Closing Date and on or before
October 30, 1996 are referred to herein as the
"Subsequent Mortgage Loans".
B. Form of Certificates The Offered Certificates will be issued in
book-entry form. So long as such
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 nominee of The
Depository Trust Company (the
"Depository"). No person acquiring a
beneficial ownership interest in the
Offered Certificates will be entitled to
receive a Definitive Certificate (as
defined herein) representing such person's
interest, except in the event Definitive
Certificates are issued under the limited
circumstances described herein.
C. Distributions Distributions on the Offered Certificates
will be made on the 25th day of each month
or, if such day is not a Business Day, on
the first Business Day thereafter,
commencing in September 1996 (each, a
"Distribution Date"). Distributions on
each Distribution Date will be made to
holders of the Certificates 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 an Offered
Certificate will be made only upon
presentation and surrender of such Offered
Certificate 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.
1. Interest On each Distribution Date, to the extent
funds (including Insured Payments (as
defined herein)) are available therefor,
the holders of each class of the Offered
Certificates will be entitled to receive
interest in an amount equal to the sum of
(i) interest accrued during the related
Accrual Period (as defined herein) at the
related Pass-Through Rate (as defined
herein) on the Certificate Principal
Balance or Notional Amount, as the case
may be, of such class, (ii) that portion
of the Class A Carry-Forward Amount (as
defined herein) representing interest and
allocable to such class and (iii) that
portion of any Preference Amount (as
defined herein) representing interest and
allocable to such class. See "Description
of the Certificates--Allocation of
Available Funds" herein.
2. Principal Amounts distributable as principal of the
Offered Certificates (other than the Class
A-IO Certificates) will be allocated to
the class or classes of Offered
Certificates then entitled to receive
distributions of principal as described in
"Description of the Certificates--
Allocation of Available Funds" herein. On
each Distribution Date, to the extent
funds (including Insured Payments) are
available therefor after distributions of
interest on the Offered Certificates,
holders of the Offered Certificates then
entitled to receive principal
distributions will receive as principal
(a) the sum (without duplication) of (i)
all scheduled installments of Mortgage
Loan principal and all unscheduled
collections and recoveries of principal,
in each case to the extent actually
received by the Servicer during such Due
Period, (ii) any Subordination Deficit (as
defined herein) for such Distribution
Date, (iii) that portion of any Class A
Carry-Forward Amount that relates to a
shortfall in a distribution of a
Subordination Deficit and (iv) an amount
necessary to increase the Subordinated
Amount (as defined herein) to the Required
Subordinated Amount (as defined herein),
less (b) the Subordination Reduction
Amount (as defined herein), if any, for
such Distribution Date (the "Principal
Distribution Amount"). See "Description of
the Certificates--Allocation of Available
Funds" herein. In addition, on the third
Distribution Date, the holders of the
Offered Certificates then entitled to
receive payments of principal will receive
a principal prepayment in an amount equal
to that amount of the Pre-Funded Amount
which has not been utilized to purchase
Subsequent Mortgage Loans.
Pass-Through Rate The Pass-Through Rate for all classes of
Offered Certificates (other than the Class
A-1B Certificates) will be as set forth on
the cover page hereof. The Pass-Through
Rate for the Class A-1B Certificates for a
particular Distribution Date is equal to
the lesser of (a) the sum of (i) One-Month
LIBOR and (ii) the Class A-1B Pass-Through
Margin and (b) the Class A-1B Available
Funds Cap. The Class A-1B Pass-Through
Margin will be equal to 0.12% (12 basis
points) per annum. As to any Distribution
Date, the "Class A-1B Available Funds Cap"
is a per annum rate equal to the weighted
average of the rates on the Mortgage Loans
which were outstanding as of the first day
of the related Due Period, net of the
Class A-IO Pass-Through Rate for such
Distribution Date, the Servicing Fee Rate,
the rate at which the Trustee Fee is
determined and the Insurance Premium Rate.
The initial Pass-Through Rate for the
Class A-1B Certificates for the
Distribution Date in September 1996 is
expected to be approximately 5.53% per
annum.
Credit Enhancement The credit enhancement provided for the
benefit of the holders of the Offered
Certificates consists solely of (a) any
overcollateralization resulting from the
internal cash flows of the Trust Fund and
(b) the Certificate Insurance Policy (as
defined below).
Overcollateralization. The Pooling and
Servicing Agreement provides for a limited
acceleration of principal distributions on
the Offered Certificates (other than the
Class A-IO Certificates) relative to the
amortization of the Mortgage Loans. This
acceleration of principal distributions on
the Offered Certificates is achieved by
the application of Net Monthly Excess
Cashflow as a payment of principal to the
Offered Certificates then entitled to
receive principal distributions thereby
creating overcollateralization to the
extent the aggregate of the Stated
Principal Balances of the Mortgage Loans
(the "Pool Stated Principal Balance")
exceeds the aggregate Certificate
Principal Balance of the Offered
Certificates. Once the required level of
overcollateralization is reached, and
subject to the provisions described in the
next paragraph, further application of the
acceleration feature will cease, unless
necessary to maintain the required level
of overcollateralization.
The Pooling and Servicing Agreement
provides that, subject to certain trigger
tests, the required level of
overcollateralization may increase or
decrease. An increase would result in a
temporary period of accelerated
amortization of the Offered Certificates
(other than the Class A-IO Certificates)
relative to the Mortgage Pool to increase
the actual level of overcollateralization
to its required level; a decrease would
result in a temporary period of
decelerated amortization to reduce the
actual level of overcollateralization to
its required level. See "Description of
the Certificates--Credit Enhancement"
herein.
The Certificate Insurance Policy. Holders
of the Offered Certificates will have the
benefit of a certificate guaranty
insurance policy (the "Certificate
Insurance Policy") to be issued by the
Certificate Insurer. The Certificate
Insurance Policy is being issued as a
means of providing additional credit
enhancement to the Offered Certificates.
Under the Certificate Insurance Policy,
the Certificate Insurer will pay to the
Trustee, for the benefit of holders of the
Offered Certificates, as further described
herein, an amount that will insure the
payment of (a) on each Distribution Date,
an amount equal to the sum of (i) the
Interest Distribution Amount (as defined
herein) and (ii) any Subordination Deficit
and (b) any unpaid Preference Amount. A
payment by the Certificate Insurer under
the Certificate Insurance Policy is
referred to herein as an "Insured
Payment." See "Description of the
Certificates--Credit Enhancement--The
Certificate Insurance Policy" herein.
The Mortgage Pool The Trust Fund will consist of the
Mortgage Loans, each of which is evidenced
by a promissory note (a "Mortgage Note")
and secured by a mortgage, deed of trust
or other similar security instrument
creating a first or second lien on a one-
to four-family residential or small mixed-
use property. The Initial Mortgage Loans
consist of 4,702 Mortgage Loans relating
to Mortgaged Properties located in 36
states and the District of Columbia.
Subsequent Mortgage Loans having an
aggregate principal balance of up to
$98,779,670.81 may also be included in the
Trust Fund on or before October 30, 1996.
Mortgage Loans representing approximately
0.53% of the aggregate of the principal
balances of the Initial Mortgage Loans as
of the Cut-Off Date (the "Preliminary Pool
Balance") are secured by mortgages on
small mixed-use Mortgaged Properties.
Initial Mortgage Loans representing
approximately 93.34% of the Preliminary
Pool Balance are secured by mortgages
which are first liens. The remainder of
the Initial Mortgage Loans included in the
Mortgage Pool are second in lien priority
(together with any Subsequent Mortgage
Loan that is second in lien priority, the
"Second Mortgage Loans") to mortgage loans
secured by senior liens on the related
Mortgaged Properties and not included in
the Trust Fund (any such senior lien, a
"First Lien").
The lowest and highest Combined Loan-to-
Value Ratios, at origination, of the
Initial Mortgage Loans were approximately
12.60% and 93.91%, respectively. The
weighted average Combined Loan-to-Value
Ratio of the Initial Mortgage Loans at
origination was approximately 74.20%.
"Combined Loan-to-Value Ratio" means, with
respect to any Mortgage Loan, the
fraction, expressed as a percentage, the
numerator of which is the principal
balance of such Mortgage Loan at
origination plus, in the case of a Second
Mortgage Loan, the outstanding principal
balance of the related First Lien on the
date of origination of such Mortgage Loan,
and the denominator of which is the
appraised value of the related Mortgaged
Property at the time of origination of
such Mortgage Loan or, in the case of a
purchase money Mortgage Loan, the lesser
of the purchase price or the appraised
value.
Initial Mortgage Loans representing
approximately 72.76% of the Preliminary
Pool Balance require monthly payments of
principal based on amortization schedules
significantly longer than the respective
original terms of such Mortgage Loans
(each, a "Balloon Mortgage Loan"), in each
case leaving a substantial portion of the
original principal amount due and payable
on the maturity date (each such payment,
together with accrued interest on the
related Balloon Mortgage Loan for the one-
month period ending on the day preceding
its stated maturity date, a "Balloon
Payment"). Each Mortgage Loan that is not
a Balloon Mortgage Loan will provide for a
schedule of equal monthly payments which
are sufficient to amortize fully the
principal balance of the Mortgage Loan
over its original term. See "Risk
Factors--Balloon Mortgage Loans".
The Initial Mortgage Loans bear interest
at fixed rates (the "Mortgage Rates")
which range from 7.99% to 21.00% per
annum. The weighted average Mortgage Rate
of the Initial Mortgage Loans was
approximately 12.02% per annum as of the
Cut-Off Date. The principal balances of
the Initial Mortgage Loans as of the Cut-
Off Date ranged from approximately $6,000
to $480,000. The average Cut-Off Date
Principal Balance of the Initial Mortgage
Loans was approximately $64,201. The
weighted average original term to stated
maturity of the Initial Mortgage Loans as
of the Cut-Off Date was approximately 199
months. The weighted average remaining
term to stated maturity of the Initial
Mortgage Loans as of the Cut-Off Date was
approximately 197 months. As of the Cut-
Off Date, the weighted average number of
months that had elapsed since origination
of the Initial Mortgage Loans was
approximately 2 months.
All weighted averages specified herein are
weighted based on the Cut-Off Date
Principal Balances of the Initial Mortgage
Loans.
Following the Closing Date and prior to
October 30, 1996, the Depositor is
expected to purchase from the Seller,
subject to the availability thereof,
Subsequent Mortgage Loans that will have
been originated or purchased on or before
such date by the Seller. The maximum
aggregate principal amount of Subsequent
Mortgage Loans that may be acquired by the
Depositor for inclusion in the Trust Fund
is $98,779,670.81. See "The Mortgage
Pool".
The Mortgage Loans are not insured or
guaranteed by any governmental entity,
private mortgage insurer or by any other
person or entity. See "The Mortgage
Pool".
Pre-Funding Account On the Closing Date, $98,779,670.81 (the
"Pre-Funded Amount") will be deposited in
an account (the "Pre-Funding Account"),
which account shall be in the name of and
maintained by the Trustee and shall be
part of the Trust Fund and will be used to
acquire Subsequent Mortgage Loans. The
Pre-Funding Account shall not be an asset
of the REMIC. During the period beginning
on the Closing Date and terminating on
October 30, 1996 (the "Funding Period"),
the Pre-Funded Amount will be maintained
in the Pre-Funding Account. The Pre-
Funded Amount will be reduced during the
Funding Period by the amount thereof used
to purchase Subsequent Mortgage Loans in
accordance with the Pooling and Servicing
Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period
will be distributed to holders of the
classes of Offered Certificates entitled
to receive principal on the Distribution
Date in November 1996 in reduction of the
related Certificate Principal Balances,
thus resulting in a partial principal
prepayment of the related Offered
Certificates on such date.
Capitalized Interest
Account On the Closing Date there will be
deposited in an account (the "Capitalized
Interest Account") maintained with and in
the name of the Trustee on behalf of the
Trust Fund a portion of the proceeds of
the sale of the Offered Certificates. The
amount deposited therein will be used by
the Trustee on the Distribution Dates in
September 1996, October 1996 and November
1996 to cover shortfalls in interest on
the Offered Certificates that may arise as
a result of the utilization of the Pre-
Funding Account for the purchase by the
Trust Fund of Subsequent Mortgage Loans
after the Closing Date. Any amounts
remaining in the Capitalized Interest
Account at the end of the Funding Period
are required to be paid directly to the
Seller. The Capitalized Interest Account
shall not be an asset of the REMIC.
Underwriting Standards As described herein, the Seller's
underwriting standards generally are less
stringent than those of FNMA or FHLMC with
respect to a borrower's credit history and
in certain other respects. A borrower's
tarnished credit history may not preclude
the Seller from making a loan. As a
result of this approach to underwriting,
the Mortgage Loans in the Mortgage Pool
may experience higher rates of
delinquencies, defaults and foreclosures
than mortgage loans underwritten in a more
traditional manner. See "The Seller's
Portfolio of Mortgage Loans--Underwriting
Guidelines of the Seller" herein.
Servicing Cityscape 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 Stated
Principal Balance thereof multiplied by
one-twelfth of the Servicing Fee Rate
(such product, the "Servicing Fee"). See
"The Pooling and Servicing Agreement--
Servicing Compensation and Payment of
Expenses" herein.
The Servicer is obligated to make advances
("Advances") with respect to delinquent
payments of 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 "The Pooling and Servicing
Agreement--Advances" herein.
Payments to Cover
Prepayment Interest
Shortfalls The Servicer will be required to fund in
respect of each Distribution Date, without
any right of reimbursement, an amount
equal to the lesser of (a) the aggregate,
for each Mortgage Loan, of the excess, if
any, of a full month's interest on the
amount of each Principal Prepayment at a
per annum rate equal to the related
Mortgage Rate (or such lower rate as may
be in effect for a Mortgage Loan because
of application of the Civil Relief Act)
minus the Servicing Fee Rate (the "Net
Mortgage Rate") over the amount of
interest actually paid by the Mortgagor in
connection with such Principal Prepayment
during the related Due Period less the
Servicing Fee for the related Mortgage
Loan for such month (a "Prepayment
Interest Shortfall") and (b) the aggregate
Servicing Fee received by the Servicer in
the related Due Period. See "The Pooling
and Servicing Agreement--Adjustment to
Servicing Fee in Connection with Certain
Prepaid Mortgage Loans".
Optional Termination On any Distribution Date for which the
Pool Stated Principal Balance is less than
or equal to 10% of the sum of the
Preliminary Pool Balance and the original
Pre-Funded Amount, the holders of the
Residual Certificates will have the option
(but not the obligation) to purchase, in
whole, the Mortgage Loans and the REO
Property, if any, remaining in the Trust
Fund and thereby effect the early
retirement of all Certificates. The
Servicer (and, if Cityscape is removed as
Servicer, the Certificate Insurer) will
have a similar purchase option on any
Distribution Date on which the Pool Stated
Principal Balance is less than or equal to
5% of the sum of the Preliminary Pool
Balance and the original Pre-Funded
Amount. See "Description of the
Certificates--Optional Termination" herein.
Certain Federal Income Tax
Considerations An election will be made to treat the
Trust Fund (other than the Pre-Funding
Account and the Capitalized Interest
Account) as a "real estate mortgage
investment conduit" (the "REMIC") for
federal income tax purposes. The Offered
Certificates will constitute "regular
interests" in the REMIC and the Residual
Certificates will constitute the sole
class of "residual interests" in the
REMIC. The Offered Certificates may be
issued with original issue discount for
federal income tax purposes. For purposes
of determining the amount and rate of
accrual of original issue discount and
market discount, the Depositor intends to
assume that there will be Principal
Prepayments on the Mortgage Loans at 100%
of the Prepayment Assumption (as defined
herein). No representation is made as to
whether the Mortgage Loans will prepay at
that rate or any other rate. See "Certain
Material Federal Income Tax Consequences"
herein and "Certain Material Federal
Income Tax Consequences" in the
Prospectus.
ERISA Considerations The acquisition of an Offered Certificate
by an employee benefit plan subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or a plan or
arrangement subject to Section 4975 of the
Code (as defined herein) (each of the
foregoing, a "Plan") could, in some
instances, result in a "prohibited
transaction" or other violation of the
fiduciary responsibility provisions of
ERISA and Code Section 4975.
Any Plan fiduciary considering whether to
purchase any Offered Certificates on
behalf of a Plan should consult with its
counsel regarding the applicability of the
provisions of ERISA and the Code. See
"ERISA Considerations" herein and in the
Prospectus.
Legal Investment The Offered Certificates will not
constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
because the Mortgage Pool contains second
liens. Accordingly, certain institutions
with legal authority to invest in
comparably rated securities based on first
mortgage loans may not be legally
authorized to invest in the Offered
Certificates. See "Legal Investment" in
the Prospectus.
Ratings It is a condition of the issuance of the
Offered Certificates (other than the Class
A-IO Certificates) that they be rated AAA
by Standard & Poor's, a division of The
McGraw-Hill Companies ("S&P"), and Aaa by
Moody's Investors Service, Inc. ("Moody's"
and, together with S&P, the "Rating
Agencies"). It is a condition to the
issuance of the Class A-IO Certificates
that they be rated AAAr by S&P and Aaa by
Moody's. The security ratings of the
Offered Certificates should be evaluated
independently from similar ratings on
other types of securities. A security
rating is not a recommendation to buy,
sell or hold securities and may be subject
to revision or withdrawal at any time by
the Rating Agencies. See "Ratings" herein.
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
Yield Generally. The yields to maturity of the Offered Certificates may
vary from the anticipated yields to the extent such Certificates are
purchased at a discount or premium and to the extent the rate and timing of
payments thereon are sensitive to the rate and timing of principal payments
(including prepayments) of the Mortgage Loans. Certificateholders should
consider, in the case of any Offered 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 Offered Certificates purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield that is lower than the anticipated yield. In addition, the timing of
changes in the rate of Principal Prepayments (as defined herein) on the
Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of Principal Prepayments is consistent
with such investor's expectation. In general, the earlier a Principal
Prepayment on the Mortgage Loans occurs, the greater the effect of such
Principal Prepayment on an investor's yield to maturity. The effect on an
investor's yield of Principal Prepayments occurring at a rate higher (or
lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of Principal Prepayments.
Because amounts distributable to the holders of the Class A-IO
Certificates consist entirely of interest, the yield to maturity of the Class
A-IO Certificates will be extremely sensitive to the repurchase, prepayment
and default experience of the Mortgage Loans and prospective investors should
fully consider the associated risks, including the risk that such investors
may not fully recover their initial investment. In addition, investors in
the Class A-IO Certificates should be aware that the holders of the Residual
Certificates may cause a termination of the Trust Fund when the aggregate
principal balance of the Mortgage Loans has declined to 10% or less than the
sum of the Preliminary Pool Balance and the original Pre-Funded Amount and
that the Servicer and, in certain circumstances, the Certificate Insurer have
a similar option if such aggregate principal balance declines to 5% or less
of the sum of the Preliminary Pool Balance and the original Pre-Funded
Amount.
Prepayment Considerations and Risks. The rates of principal
distributions on the Offered Certificates (other than the Class A-IO
Certificates), the aggregate amounts of distributions thereon and the yields
to maturity of the Offered Certificates will be related to, among other
things, 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 of the Mortgage Loans and by the rate of
Principal Prepayments thereon (including for this purpose, prepayments
resulting from (i) refinancing, (ii) liquidations of the Mortgage Loans due
to defaults, casualties and condemnations and (iii) repurchases by Cityscape
or the Servicer). In addition, as described herein, Initial Mortgage Loans
representing approximately 72.76% of the Preliminary Pool Balance are Balloon
Loans that generally provide for scheduled amortization over 30 years from
their respective dates of origination and a single lump-sum payment at the
end of the fifteenth year. The Mortgage Loans may be prepaid by the
mortgagors (each, a "Mortgagor") at any time; however, with respect to
certain Mortgage Loans, a prepayment charge may apply to full and partial
prepayments by Mortgagors during the first five years after origination under
the limited circumstances described below under "The Mortgage Pool--General."
Any such prepayment charge will be retained by the Servicer as additional
servicing compensation. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein. Prepayments, liquidations and purchases of the
Mortgage Loans (including any optional purchase by Cityscape or the Servicer
of a defaulted Mortgage Loan or any purchase by the holders of the Residual
Certificates or the Servicer (or, in some cases, the Certificate Insurer) of
the remaining Mortgage Loans and REO Property in connection with the optional
termination of the Trust Fund) will, subject to certain conditions, result in
distributions to holders of the Offered Certificates then entitled to receive
principal distributions of principal that would otherwise be distributed over
the remaining terms of the Mortgage Loans. In addition, the
overcollateralization provisions of the Trust Fund will result in a limited
acceleration of principal payments to the holders of the Offered Certificates
(other than the Class A-IO Certificates). See "Description of the
Certificates" herein. Since the rate of payment of principal on 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 weighted average life of a pool of loans (as with the Mortgage Loans
included in the Trust Fund) is the average amount of time that will elapse
from the date such pool is formed until each dollar of principal is scheduled
to be repaid to the investors in such pool. Because it is expected that
there will be prepayments and defaults on the Mortgage Loans, the actual
weighted average life of the Mortgage Loans is expected to vary substantially
from the weighted average remaining term to stated maturity of the Mortgage
Loans as set forth herein under "The Mortgage Pool--General".
Defaults and Delinquent Payments. The yields to maturity of the Offered
Certificates will be sensitive to defaults and delinquent payments on the
Mortgage Loans. The Servicer will not be required to advance amounts in
respect of delinquent payments of principal of the Mortgage Loans. If a
purchaser of an Offered Certificate calculates its anticipated yield based on
an assumed rate of default and amount of losses that is lower than the
default rate and amount of losses actually incurred and not covered by the
Certificate Insurance Policy, its actual yield to maturity will be lower than
that so calculated and could, in the event of substantial losses, be
negative. The timing of Realized Losses that are not covered by the
Certificate Insurance Policy will also affect an investor's actual yield to
maturity even if the rate of defaults and severity of such losses are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There
can be no assurance as to the delinquency, foreclosure or loss experience
with respect to the Mortgage Loans.
Payment Delay. Under the Pooling and Servicing Agreement, payments of
principal and interest on the Mortgage Loans in respect of any Due Period
generally will not be passed through to the holders of the Offered
Certificates until the Distribution Date in the following calendar month. As
a result, the monthly distributions to the holders of the Offered
Certificates generally will reflect Mortgagor payments during the prior
calendar month. Each Distribution Date will be on the 25th day of each month
(or the next succeeding business day), commencing in September 1996. Thus,
the effective yield to the holders of all Offered Certificates (except the
Class A-1B Certificates) will be below that otherwise produced by the related
Pass-Through Rate and the price paid for the Offered Certificates by such
holders because distributions on the Offered Certificates in respect of any
given month will not be made until on or about the 25th day of the following
month and will not bear interest during such delay.
BALLOON MORTGAGE LOANS
Initial Mortgage Loans representing approximately 72.76% of the
Preliminary Pool Balance are Balloon Mortgage Loans, which generally have an
original term of 15 years and provide for monthly payments based on a 30 year
amortization schedule and a final monthly payment substantially greater than
the preceding monthly payments. The existence of a Balloon Payment generally
will require the related Mortgagor to refinance the Mortgage Loan or to sell
the Mortgaged Property on or prior to the stated maturity date. The ability
of a Mortgagor 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 Mortgagor's equity in the related Mortgaged
Property, the financial condition of the Mortgagor, tax laws and prevailing
general economic conditions. None of the Seller, the Servicer, the Depositor
or the Trustee is obligated to refinance any Mortgage Loan. The Certificate
Insurer only insures receipt of the full amount of the principal portion of a
Balloon Payment with respect to a defaulted Balloon Mortgage Loan if the
failure to pay such amount to the holders of the Offered Certificates would
create a Subordination Deficit after such Balloon Mortgage Loan is
liquidated.
SUBSEQUENT MORTGAGE LOANS
The ability of the Seller to purchase mortgage loans subsequent to the
date hereof and on or prior to October 30, 1996 from an identified group of
mortgage loans that meet the requirements for transfer during the Funding
Period under the Pooling and Servicing Agreement is affected by a variety of
factors, including interest rates, unemployment levels, the rate of inflation
and consumer perception of economic conditions generally. On the
Distribution Date in November 1996, a principal prepayment will be made to
the holders of the Offered Certificates in the amount which represents the
excess of the original Pre-Funded Amount over the Stated Principal Balance of
all Subsequent Mortgage Loans as of the related Cut-Off Date (i.e., the
balance on deposit in the Pre-Funding Account on such date (net of investment
earnings)). Although no assurances can be given, the Depositor intends that
no material principal prepayment will be required to be made to the holders
of the Offered Certificates on the Distribution Date in November 1996.
SECOND MORTGAGE LOANS
Initial Mortgage Loans representing 93.34% of the Preliminary Pool
Balance are secured by first liens, with the remaining Initial Mortgage Loans
(representing approximately 6.66% of the Preliminary Pool Balance) being
Second Mortgage Loans. The First Liens related to such Second Mortgage Loans
will not be included in the Mortgage Pool.
The primary risk to holders of mortgage loans secured by second
mortgages is that the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance
of a mortgage loan only to the extent that the claims of the first mortgage
have been satisfied in full, including any related foreclosure costs. In
addition, a mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage, in which case it
must either pay the entire amount due on the first mortgage at or prior to
the foreclosure sale or undertake the obligation to make payments on the
first mortgage. In servicing second mortgages in its portfolio, the Servicer
may satisfy the first mortgage at or prior to the foreclosure sale. The
Servicer may also advance funds to keep the first mortgage current until such
time as the first mortgage is satisfied. The Trust Fund will have no source
of funds (and may not be permitted under the REMIC provisions of the Code) to
satisfy any First Lien or to make payments due to the First Lien mortgagee.
The Servicer will be required to advance such amounts in accordance with the
Pooling and Servicing Agreement. See "The Pooling and Servicing Agreement"
herein.
An overall decline in the residential real estate market, the general
condition of a Mortgaged Property, or other factors, could adversely affect
the values of the Mortgaged Properties such that the outstanding balances of
the Second Mortgage Loans, together with any First Liens on the Mortgaged
Properties, equal or exceed the values of the Mortgaged Properties. Such a
decline could extinguish the interest of the Trust Fund in a Mortgaged
Property before having any effect on the interest of the related First Lien
mortgagee. In a period of such decline, the rates of delinquencies,
foreclosures and losses on the Second Mortgage Loans could be higher than
those heretofore experienced by the Seller or in the home equity mortgage
lending industry in general. 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 (including Balloon
Payments) on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Pool.
Information is provided under "The Mortgage Pool--General" with respect
to the Combined Loan-to-Value Ratios of the Initial Mortgage Loans. As
discussed above, the value of the Mortgaged Properties could be adversely
affected by a number of factors. As a result, despite the amortization of
the Mortgage Loans and any First Liens on such Mortgaged Properties, there
can be no assurance that the Combined Loan-to-Value Ratios of such Mortgage
Loans, determined as of a date subsequent to the origination date, will be
the same or lower than the Combined Loan-to-Value Ratios for such Mortgage
Loans, determined as of the origination date.
Initial Mortgage Loans secured by investor-owned Mortgaged Properties
represent (based solely upon statements made by the borrowers at the time of
origination of the related Mortgage Loan) approximately 12.99% of the
Preliminary Pool Balance. It is possible that the rate of delinquencies,
foreclosures and losses on Second Mortgage Loans secured by non-owner
occupied Mortgaged Properties could be higher than for loans secured by the
primary residence of the borrower.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
As described herein, Cityscape's underwriting standards generally are
less stringent than those of the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") with respect
to a borrower's credit history and in certain other respects. A borrower's
tarnished credit history may not preclude Cityscape from making a loan. As a
result of this approach to underwriting, the Mortgage Loans in the Mortgage
Pool may experience higher rates of delinquencies, defaults and foreclosures
than mortgage loans underwritten in a manner which is more similar to the
FNMA and FHLMC guidelines.
Cityscape commenced servicing portfolios of mortgage loans in 1994.
Accordingly, Cityscape does not have sufficient historical delinquency,
bankruptcy, foreclosure or default information on which to rely for purposes
of estimating the future delinquency and loss experience of the Mortgage
Loans.
GEOGRAPHIC CONCENTRATION
Initial Mortgage Loans representing approximately 16.55%, 12.70%, 9.73%
and 13.64% of the Preliminary Pool Balance are secured by Mortgaged
Properties located in New York, New Jersey, Illinois and Florida,
respectively. If these residential real estate markets should experience an
overall decline in property values after the dates of origination of the
Initial Mortgage Loans, the rates of delinquencies, foreclosures,
bankruptcies and losses on the Initial Mortgage Loans may increase
substantially. Changes in the values of Mortgaged Properties may have an
effect on the delinquency, foreclosure, bankruptcy and loss experience of the
Initial Mortgage Loans. No assurance can be given that the values of the
Mortgaged Properties have remained or will remain at the levels in effect on
the dates of origination of the related Mortgage Loans.
SMALL MIXED-USE PROPERTIES
Initial Mortgage Loans representing approximately 0.53% of the
Preliminary Pool Balance are secured by small mixed-use properties. These
are properties which have up to four residential units and space used for
retail, professional or other commercial uses. The Servicer has only
recently commenced servicing mortgages secured by small mixed-use properties
and, accordingly, has no representative historical delinquency, bankruptcy,
foreclosure or default experience applicable to the Mortgage Loans secured by
such properties. Due to the limited market for such properties, in the event
of a foreclosure, it is expected that the time it takes to recover
liquidation proceeds will be longer than with the single family properties.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers and Sailors' Civil Relief Act
of 1940, as amended (the "Civil Relief Act"), a Mortgagor who enters military
service after the origination of such Mortgagor's Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at
the time of the origination of the Mortgage Loan and is later called to
active duty) may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such Mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. It
is possible that such action could have an effect, for an indeterminate
period of time, on the ability of the Servicer to collect full amounts of
interest on certain of the Mortgage Loans. Any such interest shortfalls
could result in losses to the holders of the Offered Certificates. In
addition, the Civil Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the related Mortgaged Property in a timely
fashion. See "Certain Legal Aspects of the Loans--Soldiers' and Sailors'
Civil Relief Act" in the Prospectus.
PURCHASED MORTGAGE LOANS
Substantially all of the Mortgage Loans will have been either originated
by or on behalf of the Seller or purchased and re-underwritten by the Seller
in accordance with the Seller's customary loan purchase program. Although
Initial Mortgage Loans representing approximately 19.65% of the Preliminary
Pool Balance were purchased by the Seller from a single third-party
originator, no more than 7.81% of the Mortgage Loans (by Cut-Off Date
Principal Balance) will have been purchased from any other single third-party
originator. As described herein, the Seller will make certain
representations and warranties regarding all of the Mortgage Loans and, in
the event of a breach of any such representation or warranty that materially
and adversely affects the Certificateholders, the Seller will be required
either to cure such breach or repurchase the related Mortgage Loan or Loans.
Upon the purchase of mortgage loans from third-party originators, Cityscape
must have the servicing of such mortgage loans transferred to it. During the
time of such transfer, it is possible that delays in the receipt of
collections on such mortgage loans could occur resulting in a higher level of
delinquencies during such period.
LEGAL CONSIDERATIONS
The transfer of the Mortgage Loans from the Seller to the Depositor will
be treated by the Seller and the Depositor as a sale of the Mortgage Loans.
The Seller will warrant that such transfer is a sale of its interest in the
Mortgage Loans. In the event of an insolvency of the Seller, the receiver or
bankruptcy trustee 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 or bankruptcy trustee decided to challenge
such transfer, delays in payments on the Certificates and possible reductions
in the amount thereof could occur. The Depositor will warrant in the
Agreement that the transfer of the Mortgage Loans to the Trust Fund is a
valid transfer of all of the Depositor's right, title and interest in the
Mortgage Loans to the Trust Fund.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE MORTGAGE LOANS
Applicable federal and state laws regulate interest rates and other
charges and require certain disclosures. In addition, other laws, public
policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the Mortgage Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability to collect all or part of the principal of or interest on
the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the owner of the Mortgage
Loans to damages and administrative enforcement. See "Risk Factors-Certain
Other Legal Considerations Regarding the Loans" in the Prospectus.
THE SELLER'S PORTFOLIO OF MORTGAGE LOANS
UNDERWRITING GUIDELINES OF THE SELLER
The following is a description of the underwriting guidelines
customarily and currently employed by the Seller with respect to home equity
loans which it originates or purchases from others. The Seller revises such
guidelines from time to time in connection with changing economic and market
conditions.
The Seller's business consists primarily of originating, purchasing and
servicing home equity loans. The Seller specializes in home equity loans
(such term as used herein includes both refinancings and purchase money
loans) that do not conform to the underwriting standards of FNMA, FHLMC,
banks and other primary lending institutions, particularly as such standards
relate to a prospective borrower's credit history. In analyzing loan
applications, the Seller analyzes both the borrower's credit and the value of
underlying property which will secure the loan, including the characteristics
of the underlying First Lien, if any.
The Seller considers factors pertaining to the borrower's current
employment, stability of employment and income, financial resources, and
analysis of credit, reflecting not only the ability to pay, but also the
willingness to repay contractual obligations. The property's age, condition,
location, value and continued marketability are additional factors considered
in each risk analysis.
The Seller's underwriting standards are designed to provide a program
for all qualified applicants in an amount and for a period of time consistent
with their ability to repay. All of the Seller's underwriting determinations
are made without regard to sex, marital status, race, color, religion, age or
national origin. Each application is evaluated on its individual merits,
applying the guidelines set forth below, to ensure that each application is
considered on an equitable basis.
The Seller originates home equity loans with different credit
characteristics depending on the credit profiles of individual borrowers.
Except for Balloon Mortgage Loans, the home equity loans originated by the
Seller generally have amortization schedules ranging from 15 years to 30
years, bear interest at fixed rates and require equal monthly payments which
are due as of a scheduled day of each month which is fixed at the time of
origination. The Seller also originates Balloon Mortgage Loans, which
generally provide for scheduled amortization over 30 years with a due date
and a Balloon Payment at the end of the fifteenth year. The principal amount
of the loans purchased or originated by the Seller generally range from a
minimum of $8,500 to a maximum of $450,000. Under current policy, the
majority of the home equity loans the Seller acquires or originates have
Combined Loan-to-Value Ratios which do not exceed 85%, except that in some
instances, on an exception basis, the Seller may accept a loan with a
Combined Loan-to-Value Ratio up to 94%. The collateral securing loans
acquired or originated by the Seller are generally one- to four-family
residences, including condominiums, manufactured housing and townhomes and
such properties may or may not be occupied by the owner. It is the Seller's
policy not to accept mobile or commercial properties (other than mixed-use
properties) or unimproved land as collateral. However, the Seller will
accept small multi-family properties which consist of more than four
residential units (although none of the Mortgage Loans are secured by such
multi-family properties).
The Seller's home equity loan program includes a full documentation
program and a non-income verification program. Under the full documentation
program, the borrower's total monthly debt obligations (which include
principal and interest on the new loan and all other mortgages, loans, charge
accounts and scheduled indebtedness) generally cannot exceed 50% of the
borrower's monthly gross income. Loans to borrowers who are salaried
employees must be supported by current employment information in addition to
employment history. This information for full documentation programs is
generally verified based on written confirmation from employers, one or more
pay-stubs, recent W-2 tax forms, recent tax returns or telephone confirmation
from the employer. For the Seller's non-income verification program, proof
of employment or self-employment is required.
The Seller requires that a full appraisal of the property used as
collateral for any loan that it acquires or originates be performed in
connection with the origination of the loan. All appraisals are performed by
third party, fee-based appraisers and generally conform to current FNMA/FHLMC
secondary market requirements for residential property appraisals. Each such
appraisal includes, among other things, an inspection of the exterior and
interior of the subject property and, where available, data from sales within
the preceding 12 months of similar properties within the same general
location as the subject property.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's complete credit history is
required. The credit report typically contains information reflecting
delinquencies, repossessions, judgments, foreclosures, bankruptcies and
similar instances of adverse credit that can be discovered by a search of
public records. An applicant's recent credit performance weighs heavily in
the evaluation of risk by the Seller. The credit report is used to evaluate
the borrower's record and must be current at the time of application. A lack
of credit history will not necessarily preclude a loan if the borrower has
sufficient equity in the property. Slow payments on the borrower's credit
report must be satisfactorily explained and will normally reduce the amount
of the loan for which the applicant can be approved.
The Seller requires title insurance coverage issued by an approved ALTA
title insurance company on all property securing home equity loans it
originates or purchases. The loan originator and its assignees are generally
named as the insured. Title insurance policies indicate the lien position of
the mortgage loan and protect the Seller against loss if the title or lien
position is not as indicated. The applicant is also required to secure
hazard and, in certain instances, flood insurance in an amount sufficient to
cover the lesser of (a) the new loan and any senior mortgage and (b) an
amount sufficient to cover replacement costs of the Mortgaged Property.
The Seller has established classifications with respect to the credit
profiles of loans based on certain of the borrower's characteristics. Each
loan applicant is placed into one of four letter ratings ("A" through "D",
with subratings within those categories), depending upon a number of factors
including the applicant's credit history, based on credit bureau reports and
employment status. Terms of loans made by the Seller, as well as the maximum
loan-to-value ratio and debt service to income coverage (calculated by
dividing fixed monthly debt payments by gross monthly income), vary depending
upon the classification of the borrower. Borrowers with lower credit ratings
generally pay higher interest rates and loan origination fees. The criteria
currently used by the Seller in classifying loan applicants can be
generalized as follows:
"A" Risk. Under the "A" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
- Existing mortgage loans: required to be current at the
time the application is submitted, with a maximum of one
(or two on a case-by-case basis) 30-day late payment(s)
within the last 12 months being acceptable.
- Non-mortgage credit: minor derogatory items are allowed,
but a letter of explanation is required; any recent open
collection accounts or open charge-offs, judgments or
liens would generally disqualify a loan applicant from
this category.
- Bankruptcy filings: must have been discharged more than
four years prior to closing with credit re-established.
- Maximum loan-to-value ratio: up to 80% (or 90% on an
exception basis) is permitted for a loan secured by an
owner-occupied one-to-four family residence; 75% (or up
to 80% on an exception basis) for a loan secured by an
owner-occupied condominium; and 70% (or up to 80% on an
exception basis) for a loan secured by a non-owner-
occupied one-to-four family residence.
- Debt service-to-income ratio: generally 45% or less.
"B" Risk. Under the "B" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
- Existing mortgage loans: required to be current at the
time the application is submitted, with a maximum of
three (or four on a case-by-case basis) 30-day late
payments within the last 12 months being acceptable.
- Non-mortgage credit: some prior defaults may have
occurred, but major credit paid or installment debt paid
as agreed may offset some delinquency; any open charge-
offs, judgments or liens would generally disqualify a
loan applicant from this category.
- Bankruptcy filings: must have been discharged more than
two years prior to closing with credit re-established.
- Maximum loan-to-value ratio: up to 80% (or 90% on an
exception basis) is permitted for a loan secured by an
owner-occupied one-to-four family residence; and 70% (or
80% on an exception basis) for a loan secured by a non-
owner-occupied one-to-four family residence.
- Debt service-to-income ratio: generally 50% or less (45%
or less for 90% loan-to-value ratios).
"C" Risk. Under the "C" risk category, a loan applicant may have
experienced significant credit problems in the past.
- Existing mortgage loans: not required to be current at
the time the application is submitted; applicant is
allowed a maximum of five 30-day late payments and two
60-day late payment within the last 12 months.
- Non-mortgage credit: significant prior delinquencies may
have occurred, but major credit paid or installment debt
paid as agreed may offset some delinquency; all
delinquent credit must be current or paid off.
- Bankruptcy filings: must have been discharged, and a
minimum one year of re-established credit is required.
- Maximum loan-to-value ratio: up to 75% (or 80% on an
exception basis for first liens only) is permitted for a
loan secured by an owner-occupied one-to-four family
residence; 65% for a loan secured by an owner-occupied
condominium; and 70% for a non-owner-occupied one-to-four
family residence.
- Debt service-to-income ratio: generally 50% or less.
"D" Risk. Under the "D" risk category a loan applicant may have
experienced significant credit problems in the past.
- Existing mortgage loans: must be brought current from
loan proceeds and no more than 150 days delinquent at
closing; an explanation for such delinquency is required.
- Non-mortgage credit: significant prior defaults may have
occurred, but the applicant must be able to demonstrate
regularity in payment of some credit obligations; all
charge-offs, judgments, liens or collection accounts must
be paid off.
- Bankruptcy filings: open Chapter 13 bankruptcies will be
considered with evidence that the plan is being paid
according to terms; outstanding balance must be paid in
full and discharged from loan proceeds.
- Maximum loan-to-value ratio: up to 70% is permitted for
a loan secured by an owner-occupied one-to-four family
residence; 60% for a loan secured by an owner-occupied
condominium; and 65% for a non-owner-occupied one-to-four
family residence.
- Debt service-to-income ratio: generally 50% or less.
Exceptions. As described above, the Seller uses the foregoing
categories and characteristics only as guidelines. On a case-by-case
basis, the Seller may determine that the prospective mortgagor warrants
a risk category upgrade, a debt service-to-income ratio exception, a
pricing exception, a loan-to-value exception or an exception from
certain requirements of a particular risk category (collectively called
an "upgrade" or an "exception"). An upgrade or exception may generally
be allowed if the application reflects certain compensating factors,
among others: low loan-to-value ratio; pride of ownership; stable
employment or length of occupancy at the applicant's current residence.
An upgrade or exception may also be allowed if the applicant places a
down payment in escrow equal to at least 20% of the purchase price of
the mortgaged property, or if the new loan reduces the applicant's
monthly aggregate debt load. Accordingly, the Seller may classify in a
more favorable risk category certain mortgage loans that, in the absence
of such compensating factors, would satisfy only the criteria of a less
favorable risk category.
Underwriting Guidelines for Small Mixed-Use Properties. The Seller
originates mortgage loans secured by residential properties consisting of
more than four units as well as mortgage loans secured by mixed-use
properties. A potential mortgagor of such a property must have established
credit and any charge-offs, judgment liens or bankruptcies generally would
disqualify the application. If a potential mortgagor is attempting to obtain
a mortgage on a small mixed-use property with two to four units, then such
small mixed-use property should have net income at least equal to debt
service. The maximum Loan-to-Value Ratio the Seller allows for a small
mixed-use property is usually no greater than 68%. The Seller may require a
Phase I Environmental Report for mortgage loans secured by properties with
seven or more units depending on the location, the use of the subject
property and any indication in the related appraisal of a potential
environmental problem. None of the Mortgage Loans is secured by a Mortgaged
Property having more than four residential units.
THE SELLER AND THE SERVICER
GENERAL
The Seller and Servicer, Cityscape Corp., a New York corporation and a
wholly-owned subsidiary of Cityscape Financial Corp., a publicly-traded
Delaware corporation, is a full service mortgage banker engaged in the
business of originating, purchasing, selling and servicing mortgage loans
primarily secured by one- to four-family residential properties and small
multi-family or mixed-use properties, with an emphasis on non-conforming
first and second mortgages. The Seller and Servicer was incorporated in New
York in 1985 and currently is licensed as a mortgage banker or registered, as
required, in 37 states (including New York, Illinois, Maryland, New Jersey,
Indiana, Pennsylvania, Massachusetts, Connecticut and Virginia) and the
District of Columbia.
The Seller and Servicer has its principal offices at 565 Taxter Road,
Elmsford, New York 10523 (telephone number (914) 592-6677). It currently has
481 employees including professionals and support staff. For the years ended
December 31, 1994 and 1995, the Seller and Servicer originated or purchased
approximately $154 million and approximately $418 million of loans,
respectively. The Seller's net worth as of December 31, 1991, 1992, 1993,
1994 and 1995 was $1,993,330, $2,083,076, $2,398,279, $3,176,738 and
approximately $57,099,000, respectively.
As of June 30, 1996, the Servicer was servicing a loan portfolio
(including loans it has retained for its own account) of approximately
$701,613,310. This loan portfolio consisted of 10,933 loans with an average
principal balance of approximately $64,174.
As a publicly-traded company, Cityscape Financial Corp. is required to
file periodic reports with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, as amended. Cityscape Financial Corp.
will furnish without charge to each person to whom this Prospectus Supplement
is delivered, upon written or oral request, a copy of the most recent
periodic filings made with the Securities and Exchange Commission. Requests
should be directed to Cheryl P. Carl, Secretary, Cityscape Financial Corp.,
565 Taxter Road, Elmsford, New York 10523 (telephone number (914) 592-6677).
The Certificate Insurer may remove the Servicer under certain
circumstances. The Servicer may resign only in accordance with the terms of
the Pooling and Servicing Agreement. No removal or resignation will become
effective until the Trustee or a successor servicer has assumed the
Servicer's responsibilities and obligations in accordance therewith.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement unless it first obtains the written consent of the
Certificate Insurer and the Trustee; provided, however, that any assignee
must meet the eligibility requirements for a successor servicer set forth in
the Pooling and Servicing Agreement. Notwithstanding anything in the
preceding sentence to the contrary, the Servicer may delegate certain of its
obligations to a sub-servicer pursuant to a sub-servicing agreement, provided
that the Servicer obtains the written consent of the Certificate Insurer with
respect to the terms of any sub-servicing agreement. A sub-servicer must
meet certain eligibility requirements, as set forth in the Pooling and
Servicing Agreement, and each sub-servicing agreement shall require servicing
of the Mortgage Loans consistent with the terms of the Pooling and Servicing
Agreement (see "The Pooling and Servicing Agreement -- Sub-Servicing").
Cityscape intends to apply the proceeds of the sale of the Mortgage
Loans to satisfy certain obligations arising from ongoing financing
arrangements between Cityscape and an affiliate of the Depositor and
Underwriter.
DELINQUENCY AND CHARGE-OFF EXPERIENCE
The following tables set forth information relating to the delinquency
and foreclosure and loan charge-off experience of the Seller for its
servicing portfolio of home equity loans (including home equity loans
serviced for others) as of the dates or for the periods indicated.
<TABLE>
DELINQUENCY AND FORECLOSURE EXPERIENCEELINQUENCY AND FORECLOSURE EXPERIENCE
<CAPTION>
At December 31, 1995 At June 30, 1996
Number Number
of Loans Amount of Loans Amount
<S> <C> <C> <C> <C>
Servicing portfolio . . 5,043 $ 327,273,085 10,933 $701,613,310
Past due loans(1):
30-59 days . . . . 91 $ 6,019,360 261 $16,064,247
60-89 days . . . . 24 $ 1,659,761 99 $ 6,423,368
90 days or more . . 42 $ 2,489,565 73 $ 5,244,746
Total past due loans . 157 $ 10,168,686 433 $27,732,355
Foreclosures pending(2)
49 4,050,186 154 12,666,384
REO Properties(3) . . . 3 224,086 9 548,000
Total past due loans,
foreclosures pending
and REO Properties(3) . 209 $ 14,442,958 596 $40,946,739
Total past due loans,
foreclosures pending,
REO properties as a
percentage of servicing
portfolio . . . . . . . 4.1% 4.4% 5.5% 5.8%
</TABLE>
(1) The past due period is based on the actual number of days that a payment
is contractually past due. A loan as to which a monthly payment was due
30-59 days prior to the reporting period is considered 30-59 days past
due, etc.
(2) Includes bankruptcies which preclude foreclosure.
(3) An "REO Property" is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
<TABLE>
LOAN CHARGE-OFF EXPERIENCE
<CAPTION>
At December 31, At June 30,
1995 1996
<S> <C> <C>
Servicing portfolio at period end . . . . . . . . $ 327,273,085 $ 701,613,310
Average outstanding(1) . . . . . . . . . . . . . $ 64,897 $ 64,174
Number of loans outstanding . . . . . . . . . . 5,043 10,933
Gross losses(2) . . . . . . . . . . . . . . . . $ 0 $ 0
Loan recoveries . . . . . . . . . . . . . . . . $ 0 $ 0
Net loan charge-offs . . . . . . . . . . . . . $ 51,816 $ 32,000
Net loan charge-offs as a percentage of average
outstanding . . . . . . . . . . . . . . . . . . . 0% 0%
Net loan charge-offs as a percentage of
servicing portfolio at
period end . . . . . . . . . . . . . . . . . . 0% 0%
</TABLE>
(1) "Average outstanding" for each period presented is the arithmetic
average of the principal balances of the loans in the Seller's
servicing portfolio outstanding at the close of business on the final
business day of such period. With respect to REO Properties, the Seller
generally will obtain an updated appraisal of the property, and the fair
market value (as determined by such new appraisal) will be the principal
balance used in such calculation.
(2) "Gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans.
The Servicer commenced servicing portfolios of mortgage loans in 1994.
Accordingly, neither the Seller nor the Servicer has representative
historical delinquency, bankruptcy, foreclosure or default experience that
may be referred to for purposes of estimating the future delinquency and loss
experience of the Mortgage Loans.
While the above delinquency and foreclosure and loan charge-off
experiences are typical of the Seller's experiences at the date for the
period indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experiences on the Mortgage Loans will be
similar. Accordingly, the information should not necessarily be considered
to reflect the credit quality of the Mortgage Loans included in the Trust
Fund, or as a basis of assessing the likelihood, amount or severity of losses
on the Mortgage Loans. The statistical data in the tables is based on all of
the loans in the Seller's servicing portfolio. The Mortgage Loans, in
general, are likely to have characteristics which distinguish them from the
majority of the loans in the Seller's servicing portfolio.
The Offered Certificates will not represent an interest in or obligation
of, nor are the Mortgage Loans guaranteed by, the Seller or any of its
affiliates, nor will they be insured or guaranteed by the Federal Deposit
Insurance Corporation (the "FDIC") or any other governmental agency or
instrumentality.
THE MORTGAGE POOL
GENERAL
The Initial Mortgage Loans to be acquired by the Trust Fund on the
Closing Date will include 4,702 fixed-rate, closed-end, mortgage loans
evidenced by Mortgage Notes secured by first or second lien mortgages or
deeds of trust on Mortgaged Properties located in 36 states and the District
of Columbia. Additional Mortgage Loans (the "Subsequent Mortgage Loans") are
expected to be acquired by the Trust Fund on or prior to October 30, 1996.
This subsection describes generally the characteristics of the Initial
Mortgage Loans. Initial Mortgage Loans representing approximately 93.34% of
the Preliminary Pool Balance are secured by first liens on the related
Mortgaged Properties with the remainder being secured by second liens. The
Mortgaged Properties generally consist of one- to four-family residential
properties, except that Initial Mortgage Loans representing approximately
0.53% of the Preliminary Pool Balance are secured by small mixed-use
properties, which generally consist of two to four residential units and
space used for retail, professional or other commercial uses. The Mortgaged
Properties consist of owner-occupied (which includes vacation and second
homes) and non-owner occupied investment properties. The Mortgaged
Properties do not include mobile home or commercial properties (other than
small mixed-use properties) or unimproved land. With respect to each
Mortgage Loan, the "Cut-Off Date Principal Balance" is the unpaid principal
balance of such Mortgage Loan on its applicable Cut-Off Date.
Mortgage Loans in the Seller's portfolio have been selected for
inclusion in the Mortgage Pool with a view to satisfying various standards
prevailing in the mortgage-backed securities market, including Mortgage
Rates, Combined Loan-to-Value Ratios, and terms to maturity. As described
herein, Initial Mortgage Loans representing approximately 19.65% of the
Preliminary Pool Balance were purchased by the Seller from a single third-
party originator; however, no more than 7.81% of the Mortgage Loans (by Cut-
Off Date Principal Balance) will have been purchased from any other single
third-party originator. Pursuant to the Pooling and Servicing Agreement, the
Seller will make various representations and warranties regarding the
Mortgage Loans. See "--Assignment of the Mortgage Loans."
All weighted averages specified herein are weighted based on the Cut-Off
Date Principal Balances of the Initial Mortgage Loans.
The lowest and highest Combined Loan-to-Value Ratios of the Mortgage
Loans are approximately 12.60% and 93.91%, respectively. The weighted
average Combined Loan-to-Value Ratio of the Initial Mortgage Loans as of the
Cut-Off Date was approximately 74.20%. The weighted average Combined Loan-
to-Value Ratio of the Initial Mortgage Loans that are Second Mortgage Loans
was approximately 73.29% as of the Cut-Off Date.
The Initial Mortgage Loans bear interest at fixed Mortgage Rates which
range from 7.99% to 21.00% per annum as of the Cut-Off Date. The weighted
average Mortgage Rate for the Initial Mortgage Loans was approximately 12.02%
per annum as of the Cut-Off Date. The lowest Cut-Off Date Principal Balance
of any Initial Mortgage Loan was approximately $6,000 and the highest was
approximately $480,000. The average Cut-Off Date Principal Balance of the
Initial Mortgage Loans was approximately $64,201. The weighted average
remaining term to stated maturity of the Initial Mortgage Loans as of the
Cut-Off Date was approximately 197 months. As of the Cut-Off Date, the
weighted average number of months that have elapsed since origination of the
Initial Mortgage Loans was approximately 2 months.
Initial Mortgage Loans representing 27.24% of the Preliminary Pool
Balance are fully amortizing Initial Mortgage Loans having original stated
maturities of not more than 30 years. The remaining Mortgage Loans,
representing 72.76% of the Preliminary Pool Balance, consist of Balloon
Mortgage Loans that generally provide for scheduled amortization over 30
years from their respective dates of origination and a balloon payment at the
end of the fifteenth year. No Initial Mortgage Loan, including any Balloon
Mortgage Loan, is scheduled to mature later than September 1, 2026.
As of the Cut-Off Date, approximately 2.93% of the Mortgage loans were
contractually delinquent between 30 and 59 days.
A substantial majority of the Mortgage Loans originated in connection
with refinancings have "equity take out" features, whereby all or a portion
of the proceeds of each such Mortgage Loan may be used by the borrower for
debt consolidation, home improvement, tuition or other purposes.
Combined Loan-to-Value Ratios of the Initial Mortgage Loans as of the
Cut-Off Date were distributed as follows (the sum of the percentages in the
following table may not equal the total due to rounding):
<TABLE>
<CAPTION>
Combined Number of Aggregate
Loan-to-Value Mortgage Cut-Off Date Percent of
Ratio (%) Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
12.60 - 15.00 4 $ 53,873.08 0.02%
15.01 - 20.00 21 580,961.06 0.19
20.01 - 25.00 19 457,211.91 0.15
25.01 - 30.00 35 1,243,027.11 0.41
30.01 - 35.00 49 1,985,491.61 0.66
35.01 - 40.00 57 2,096,128.13 0.69
40.01 - 45.00 81 3,306,960.17 1.10
45.01 - 50.00 138 5,957,015.90 1.97
50.01 - 55.00 127 6,685,964.86 2.21
55.01 - 60.00 271 12,576,397.52 4.17
60.01 - 65.00 489 27,318,284.93 9.05
65.01 - 70.00 730 42,172,464.61 13.97
70.01 - 75.00 773 49,321,756.53 16.34
75.01 - 80.00 991 72,137,820.02 23.90
80.01 - 85.00 523 36,989,936.50 12.25
85.01 - 90.00 386 38,256,540.04 12.67
90.01 - 95.00 8 731,190.40 0.24
TOTAL 4,702 $301,871,024.38 100.00%
</TABLE>
Mortgage Rates of the Initial Mortgage Loans as of the Cut-Off Date were
distributed as follows (the sum of the percentages in the following table may
not equal the total due to rounding):
<TABLE>
<CAPTION>
Number of Aggregate
Mortgage Mortgage Cut-Off Date Percent of
Rates Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
7.99 - 8.00% 2 $ 229,835.52 0.08%
8.26 - 8.50 15 1,460,214.91 0.48
8.51 - 8.75 9 1,118,314.43 0.37
8.76 - 9.00 15 1,110,023.31 0.37
9.01 - 9.25 18 1,347,623.38 0.45
9.26 - 9.50 36 2,937,704.27 0.97
9.51 - 9.75 52 3,414,800.63 1.13
9.76 - 10.00 115 9,044,061.14 3.00
10.01 - 10.25 73 5,841,964.45 1.94
10.26 - 10.50 192 13,236,648.68 4.38
10.51 - 10.75 194 13,606,881.38 4.51
10.76 - 11.00 370 27,200,081.06 9.01
11.01 - 11.25 191 12,107,107.28 4.01
11.26 - 11.50 399 30,045,369.98 9.95
11.51 - 11.75 269 16,905,610.72 5.60
11.76 - 12.00 486 33,504,976.13 11.10
12.01 - 12.25 221 13,764,847.56 4.56
12.26 - 12.50 324 21,985,721.22 7.28
12.51 - 12.75 230 14,729,924.15 4.88
12.76 - 13.00 376 22,091,838.61 7.32
13.01 - 13.25 120 6,735,890.34 2.23
13.26 - 13.50 177 9,975,102.25 3.30
13.51 - 13.75 102 5,026,705.06 1.67
13.76 - 14.00 161 8,923,859.03 2.96
14.01 - 14.25 98 4,217,237.76 1.40
14.26 - 14.50 83 4,528,311.38 1.50
14.51 - 14.75 80 3,554,366.61 1.18
14.76 - 15.00 90 4,405,963.98 1.46
15.01 - 15.25 69 3,646,470.14 1.21
15.26 - 15.50 36 1,505,183.48 0.50
15.51 - 15.75 17 848,469.50 0.28
15.76 - 16.00 31 1,368,768.34 0.45
16.01 - 16.25 15 470,302.26 0.16
16.26 - 16.50 10 299,910.19 0.10
16.51 - 16.75 5 157,386.37 0.05
16.76 - 17.00 5 214,872.94 0.07
17.01 - 17.25 1 21,547.85 0.01
17.26 - 17.50 5 122,677.64 0.04
17.51 - 17.75 1 20,000.00 0.01
17.76 - 18.00 3 59,971.15 0.02
18.01 - 18.25 1 11,400.00 0.00
18.26 - 18.50 1 12,979.30 0.00
18.51 - 18.75 3 52,400.00 0.02
20.76 - 21.00 1 7,700.00 0.00
TOTAL . 4,702 $301,871,024.38 100.00%
</TABLE>
The remaining terms to maturity of the Initial Mortgage Loans as of the
Cut-Off Date were distributed as follows (the sum of the percentages in the
following table may not equal the total due to rounding):
<TABLE>
<CAPTION> Aggregate
Remaining Term to Number of Cut-Off Date Percent of
Maturity (months) Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
50 - 60 14 $ 245,565.33 0.08%
73 - 84 2 71,837.78 0.02
109 - 120 74 1,840,970.39 0.61
157 - 168 8 516,740.91 0.17
169 - 180 3,819 247,333,784.10 81.93
217 - 228 1 81,386.45 0.03
229 - 240 495 28,462,485.55 9.43
289 - 300 1 39,970.13 0.01
337 - 348 1 80,692.13 0.03
349 - 360 287 23,197,591.61 7.68
TOTAL . . . 4,702 $301,871,024.38 100.00%
</TABLE>
The Cut-Off Date Principal Balances of the Initial Mortgage Loans as of
the Cut-Off Date were distributed as follows (the sum of the percentages in
the following table may not equal the total due to rounding):
<TABLE>
<CAPTION> Aggregate
Cut-Off Date Number of Cut-Off Date Percent of
Principal Balance Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
$ 6,000.00 - 10,000.00 22 $ 206,051.53 0.07%
10,000.01 - 20,000.00 358 5,807,093.49 1.92
20,000.01 - 30,000.00 689 17,619,429.16 5.84
30,000.01 - 40,000.00 720 25,459,158.62 8.43
40,000.01 - 50,000.00 605 27,454,764.21 9.09
50,000.01 - 60,000.00 491 27,097,380.96 8.98
60,000.01 - 70,000.00 339 22,074,644.03 7.31
70,000.01 - 80,000.00 262 19,665,823.05 6.51
80,000.01 - 90,000.00 233 19,894,768.63 6.59
90,000.01 - 100,000.00 179 17,145,402.45 5.68
100,000.01 - 110,000.00 150 15,833,852.47 5.25
110,000.01 - 120,000.00 142 16,361,069.24 5.42
120,000.01 - 130,000.00 118 14,738,035.01 4.88
130,000.01 - 140,000.00 82 11,064,079.59 3.67
140,000.01 - 150,000.00 47 6,858,806.75 2.27
150,000.01 - 160,000.00 45 6,980,501.04 2.31
160,000.01 - 170,000.00 38 6,271,272.71 2.08
170,000.01 - 180,000.00 30 5,273,898.18 1.75
180,000.01 - 190,000.00 22 4,089,705.74 1.35
190,000.01 - 200,000.00 28 5,476,314.80 1.81
200,000.01 - 250,000.00 58 12,832,799.13 4.25
250,000.01 - 300,000.00 24 6,467,434.34 2.14
300,000.01 - 350,000.00 13 4,201,080.37 1.39
350,000.01 - 400,000.00 2 742,841.96 0.25
400,000.01 - 450,000.00 2 824,647.76 0.27
450,000.01 - 480,000.00 3 1,430,169.16 0.47
TOTAL . . . . . . . . . 4,702 $301,871,024.38 100.00%
</TABLE>
As of the Cut-Off Date, the geographic distribution of the Initial
Mortgage Loans was as follows (the sum of the percentages in the following
table may not equal the total due to rounding):
<TABLE>
<CAPTION> Aggregate
Geographic Number of Cut-Off Date Percent of
Distribution Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
Arizona . . . . . 3 $ 167,261.58 0.06%
California . . . 17 1,096,266.63 0.36
Colorado . . . . 6 294,441.97 0.10
Connecticut . . . 47 3,990.494.56 1.32
Delaware . . . . 24 1,469,961.55 0.49
District of
Columbia . . . . 43 2,952,406.84 0.98
Florida . . . . . 670 41,179,944.49 13.64
Georgia . . . . . 250 16,330,842.72 5.41
Illinois . . . . 378 29,385,642.64 9.73
Indiana . . . . . 333 14,932,390.69 4.95
Kentucky . . . . 39 1,543,188.97 0.51
Louisiana . . . . 1 53,520.00 0.02
Maine . . . . . . 7 399,880.58 0.13
Maryland . . . . 275 17,416,526.06 5.77
Massachusetts . . 78 6,249,929.31 2.07
Michigan . . . . 471 21,220,481.64 7.03
Minnesota . . . . 6 190,787.16 0.06
Mississippi . . . 3 86,302.78 0.03
Missouri . . . . 48 2,035,406.25 0.67
Nebraska . . . . 1 29,993.88 0.01
Nevada . . . . . 1 100,748.00 0.03
New Hampshire . . 6 309,094.32 0.10
New Jersey . . . 394 38,352,549.92 12.70
New York . . . . 615 49,944,636.26 16.55
North Carolina . 76 4,439,763.55 1.47
Ohio . . . . . . 425 20,717,567.44 6.86
Oklahoma . . . . 7 229,692.61 0.08
Pennsylvania . . 156 8,557,330.45 2.83
Rhode Island . . 9 576,479.72 0.19
South Carolina . 127 6,838,116.09 2.27
Tennessee . . . . 49 2,887,356.39 0.96
Texas . . . . . . 6 480,435.79 0.16
Utah . . . . . . 1 26,000.00 0.01
Vermont . . . . . 2 284,900.00 0.09
Virginia . . . . 40 2,777,264.67 0.92
West Virginia . . 39 1,903,318.80 0.63
Wisconsin . . . . 49 2,420,100.07 0.80
TOTAL . . . 4,702 $301,871,024.38 100.00%
</TABLE>
As of the Cut-Off Date, the distribution of the mortgaged property types
of the Initial Mortgage Loans was as follows (the sum of the percentages in
the following table may not equal the total due to rounding):
<TABLE>
<CAPTION> Aggregate
Number of Cut-Off Date Percent of
Mortgaged Property Type Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
Single Family . . . . . 4,000 $250,701,329.03 83.05%
2-4 Units . . . . . . . 579 43,416,579.61 14.38
Condominium/PUD . . . . 107 6,145,741.78 2.04
Small Mixed-Use . . . . 16 1,607,373.96 0.53
TOTAL . . . . . . 4,702 $301,871,024.38 100.00%
</TABLE>
As of the Cut-Off Date, the distribution of the occupancy status of the
Mortgaged Properties relating to the Initial Mortgage Loans was as follows
(the sum of the percentages in the following table may not equal the total
due to rounding):
<TABLE>
<CAPTION> Aggregate
Number of Cut-Off Date Percent of
Occupancy Status Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <S> <C>
Owner Occupied . . 3,949 $262,668,957.75 87.01%
Non-owner Occupied 753 39,202,066.63 12.99
TOTAL . . . . 4,702 $301,871,024.38 100.00%
</TABLE>
As of the Cut-Off Date, the distribution of the lien priority of the
Mortgages relating to the Initial Mortgage Loans was as follows (the sum of
the percentages in the following table may not equal the total due to
rounding):
<TABLE>
<CAPTION> Aggregate
Number of Cut-Off Date Percent of
Lien Priority Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
First Lien . . 4,126 $281,751,939.78 93.34%
Second Lien . . 576 20,119,084.60 6.66
TOTAL . . 4,702 $301,871,024.38 100.00%
</TABLE>
As of the Cut-Off Date, the distribution of the Mortgage Loan purposes
of the Initial Mortgage Loans was as follows (the sum of the percentages in
the following table may not equal the total due to rounding):
<TABLE>
<CAPTION> Aggregate
Number of Cut-Off Date Percent of
Purpose Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
Refinance . . . 3,789 $227,921,132.88 75.50%
Purchase . . . 913 73,949,891.50 24.50
Total . . 4,702 $301,871,024.38 100.00%
</TABLE>
As of the Cut-Off Date, the distribution of the months since origination
of the Initial Mortgage Loans was as follows (the sum of the percentages in
the following table may not equal the total due to rounding):
<TABLE>
<CAPTION> Aggregate
Months Since Number of Cut-Off Date Percent of
Origination Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
0 1,224 $ 76,326,833.07 25.28%
1 1,435 92,311,144.34 30.58
2 1,176 73,877,395.79 24.47
3 340 23,013,339.16 7.62
4 160 10,830,451.90 3.59
5 165 10,993,045.36 3.64
6 77 3,752,102.09 1.24
7 40 3,091,002.72 1.02
8 28 2,453,307.55 0.81
9 24 2,224,275.37 0.74
10 12 1,150,501.82 0.38
11 11 1,168,805.72 0.39
12 7 515,973.59 0.17
13 1 24,171.74 0.01
14 1 102,826.13 0.03
15 1 35,848.03 0.01
TOTAL . . 4,702 $301,871,024.38 100.00%
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Pooling and Servicing Agreement permits the Trust Fund to purchase
from the Seller, from an identified group of mortgage loans, subsequent to
the date hereof and prior to October 30, 1996, Subsequent Mortgage Loans in
an amount not to exceed approximately $98,779,670.81 in aggregate principal
balance for inclusion in the Trust Fund. Accordingly, the statistical
characteristics of the Mortgage Pool set forth above are based exclusively on
the Initial Mortgage Loans and the statistical characteristics of the
Mortgage Pool after giving effect to the acquisition of any Subsequent
Mortgage Loans will likely differ from the information specified herein. The
date on which the Seller transfers a Subsequent Mortgage Loan to the Trust
Fund shall be referred to herein as the "Subsequent Transfer Date."
The inclusion of Subsequent Mortgage Loans in the Trust Fund on or prior
to October 30, 1996 is subject to receipt of the consent of the Certificate
Insurer, which consent will not be unreasonably withheld. In any event, the
inclusion of any Subsequent Mortgage Loans will be subject to, among other
things, the following requirements: (i) no Subsequent Mortgage Loan may be
30 or more days contractually delinquent as of the applicable Cut-Off Date;
(ii) no Subsequent Mortgage Loan may have a remaining term to maturity in
excess of 30 years; (iii) no Subsequent Mortgage Loan may have a Mortgage
Rate less than 8.00%; and (iv) following the purchase of such Subsequent
Mortgage Loans by the Trust Fund, the Mortgage Loans (a) will have a weighted
average Mortgage Rate of at least 11.95%; (b) will have a weighted average
Combined Loan-to-Value Ratio of not more than 74.50%; (c) will not include
Balloon Loans representing more than 75.00% by aggregate principal balance of
the Pool Balance; (d) will not have a weighted average remaining term to
stated maturity of more than 360 months; and (e) will, in each case, have a
principal balance in excess of $6,000 as of the Cut-Off Date.
PAYMENTS ON THE MORTGAGE LOANS
The Mortgage Loans provide for the amortization of the amount financed
under the Mortgage Loan over a series of substantially equal monthly
payments, except for Balloon Mortgage Loans for which the amortization
schedule extends beyond the stated maturity date and which provide for a
payment at maturity that is substantially larger than prior scheduled
payments.
THE POOLING AND SERVICING AGREEMENT
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date or the Subsequent Transfer Date, as applicable, the
Seller will transfer ownership of the Mortgage Loans to the Depositor.
Immediately after such transfer, pursuant to the Pooling and Servicing
Agreement, the Depositor on the Closing Date or the Subsequent Transfer Date,
as applicable, will sell, transfer, assign, set over and otherwise convey
without recourse to the Trustee in trust for the benefit of the holders of
the Certificates and the Certificate Insurer all right, title and interest of
the Depositor in and to each Mortgage Loan and all right, title and interest
in and to all other assets included in the Trust Fund, including all
principal and interest received by the Servicer with respect to the Mortgage
Loans after the related Cut-Off Date (to the extent not applied in computing
the Cut-Off Date Principal Balance).
In connection with such transfer and assignment, the Depositor will
deliver or cause to be delivered on the Closing Date or the Subsequent
Transfer Date, as applicable, the following documents (collectively
constituting the "Trustee's Mortgage File") with respect to each Mortgage
Loan: (i) the original Mortgage Note, endorsed in blank or to the order of
the Trustee, with all prior and intervening endorsements showing a complete
chain of endorsement from origination of the Mortgage Loan to the Seller;
(ii) the original Mortgage with evidence of recording thereon (or, if the
original Mortgage has not been returned from the applicable public recording
office or is not otherwise available, a copy of the Mortgage certified by a
Responsible Officer of the Seller or by the prior owner of such Mortgage or
by the closing attorney or by an officer of the title insurer or agent of the
title insurer which issued the related title insurance policy or commitment
therefor); (iii) the original executed assignment of the Mortgage, acceptable
for recording except with respect to any currently unavailable information;
(iv) the original assignment and any intervening assignments of the Mortgage
showing a complete chain of assignment from the originator of the Mortgage
Loan to the Trustee (or, if any such assignment has not been returned from
the applicable public recording office or is not otherwise available, a copy
of such assignment certified by a Responsible Officer of the Seller or by the
closing attorney or by an officer of the title insurer or agent of the title
insurer which issued the related title insurance policy or commitment
therefor); (v) the original, or a copy certified by the Servicer to be a true
and correct copy of the original, of each assumption, modification, written
assurance or substitution agreement, if any; (vi) an original, or a copy
certified by the Servicer to be a true and correct copy of the original, of a
lender's title insurance policy, or if a lender's title policy has not been
issued as of the Closing Date a marked up commitment (binder) (including any
marked additions thereto or deletions therefrom) to issue such policy; (vii)
either a hazard insurance policy, a certificate of insurance issued by the
related insurer or its agent as to such policy or an officer's certificate of
the Seller certifying that a hazard insurance policy is in effect as to the
Mortgaged Property (in which case such officer's certificate shall be
accompanied by a copy of such hazard insurance policy); and (viii) if
required, either a flood insurance policy or a certificate of insurance
issued by the related insurer or its agent as to such policy.
The Trustee will review the Mortgage Loan documents on or prior to the
Closing Date or the Subsequent Transfer Date, as applicable, and will hold
such documents in trust for the benefit of the holders of the Certificates
and the Certificate Insurer. After the Closing Date, if any document is found
to be missing or defective in any material respect, the Trustee is required
to notify the Servicer, Cityscape and the Certificate Insurer in writing. If
Cityscape cannot or does not cure such omission or defect within 60 days of
its receipt of notice from the Trustee, Cityscape is required to repurchase
the related Mortgage Loan from the Trust Fund at a price (the "Purchase
Price") equal to 100% of the Stated Principal Balance thereof plus accrued
and unpaid interest thereon, at a rate equal to the difference between the
Mortgage Rate and the Servicing Fee Rate (the "Net Mortgage Rate") (or, if
Cityscape is no longer the Servicer, at the applicable Mortgage Rate) to the
first day of the month in which the Purchase Price is to be distributed.
Rather than repurchase the Mortgage Loan as provided above, Cityscape may
remove such Mortgage Loan (a "Deleted Mortgage Loan") from the Trust Fund and
substitute in its place another Mortgage Loan of like kind (a "Replacement
Mortgage Loan"); however, such substitution is only permitted within two
years after the Closing Date, and may not be made unless an opinion of
counsel is provided to the effect that such substitution would not disqualify
the Trust Fund as a REMIC or result in a prohibited transaction tax under the
Code. Any Replacement Mortgage Loan generally will, on the date of
substitution, among other characteristics set forth in the Pooling and
Servicing Agreement, (i) have a Stated Principal Balance, after deduction of
the principal portion of the scheduled payment due in the month of
substitution, not in excess of, and not less than ninety percent (90%) of,
the Stated Principal Balance of the Deleted Mortgage Loan (the amount of any
shortfall to be deposited by Cityscape in the Collection Account not later
than the succeeding Determination Date and held for distribution to the
holders of the Certificates on the related Distribution Date), (ii) have a
Mortgage Rate not less than (and not more than two percentage points greater
than) the Mortgage Rate of the Deleted Mortgage Loan, (iii) have a Combined
Loan-to-Value Ratio not higher than that of the Deleted Mortgage Loan, (iv)
have a remaining term to maturity not greater than (and not more than one
year less than) that of the Deleted Mortgage Loan, (v) have the same or lower
credit risk, as measured by credit risk category under Cityscape underwriting
guidelines and (vi) comply with all of the representations and warranties set
forth in the Pooling and Servicing Agreement as of the date of substitution.
This cure, repurchase or substitution obligation constitutes the sole remedy
available to the holders of the Offered Certificates or the Trustee for
omission of, or a material defect in, a Mortgage Loan document.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan (as well as from any liquidation proceeds from
a Liquidated Mortgage Loan that are applied to accrued and unpaid interest)
equal to one-twelfth of the Stated Principal Balance thereof multiplied by
the Servicing Fee Rate (such product, the "Servicing Fee"). The Servicing Fee
Rate for each Mortgage Loan will equal 0.50% per annum. The amount of the
monthly Servicing Fee is subject to adjustment with respect to prepaid
Mortgage Loans, as described herein under "--Adjustment to Servicing Fee in
Connection with Certain Prepaid Mortgage Loans." The Servicer is also
entitled to receive, as additional servicing compensation, amounts in respect
of all late payment fees, assumption fees, prepayment penalties and other
similar charges and all reinvestment income earned on amounts on deposit in
the Collection Account, the Certificate Account and the Distribution Account.
The Servicer is obligated to pay certain ongoing expenses associated with the
Mortgage Loans and incurred by the Trustee in connection with its
responsibilities under the Pooling and Servicing Agreement.
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS
When a borrower prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the borrower pays interest on
the amount prepaid only to the date of prepayment. In order to mitigate the
effect of any such shortfall in interest distributions to holders of the
Offered Certificates on any Distribution Date (a "Prepayment Interest
Shortfall"), the amount of the Servicing Fee otherwise payable to the
Servicer for such month shall, to the extent of such shortfall, be deposited
by the Servicer in the Collection Account for distribution to holders of the
Offered Certificates on such Distribution Date. However, any such reduction
in the Servicing Fee will be made only to the extent of the Servicing Fee
otherwise payable to the Servicer with respect to payments on the Mortgage
Loans received during the Due Period to which such Distribution Date relates.
Any such deposit by the Servicer will be reflected in the distributions to
holders of the Offered Certificates made on the Distribution Date on which
the Principal Prepayment received would be distributed. See "Description of
the Certificates--Example of Distributions" herein.
ADVANCES
Subject to the following limitations, on the fifth business day prior to
each Distribution Date (such fifth business day, the "the Servicer Remittance
Date ") will be required to advance its own funds, or funds in the Collection
Account that constitute amounts held for future distribution, in an amount
equal to, with respect to each Mortgage Loan for which the interest payment
due during the related Due Period was not received as of the day preceding
the Servicer Remittance Date, such interest payment to be calculated at the
applicable Net Mortgage Rate on the Stated Principal Balance, together with
an amount equivalent to interest (adjusted to the applicable Net Mortgage
Rate) deemed due on Mortgage Loans as to which the related Mortgaged Property
has been acquired by the Servicer through foreclosure or deed-in-lieu of
foreclosure in connection with a defaulted Mortgage Loan ("REO Property")
(any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest
payments on the Certificates rather than to guarantee or insure against
losses. The Servicer is obligated to make Advances with respect to delinquent
payments of interest on each Mortgage Loan (with such payments of interest
adjusted to the related Net Mortgage Rate) to the extent that such Advances
are, in its judgment, reasonably recoverable from future payments and
collections or insurance payments or proceeds of liquidation of the related
Mortgage Loan. If the Servicer determines on any Determination Date to make
an Advance, such Advance will be included with the distribution to holders of
the Offered Certificates on the related Distribution Date. Any failure by the
Servicer to make an Advance as required under the Pooling and Servicing
Agreement with respect to the Certificates will constitute an Event of
Default thereunder, in which case the Trustee, as successor servicer, or such
other entity as may be appointed as successor servicer will be obligated to
make any such Advance, in accordance with the terms of the Pooling and
Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued pursuant to a Pooling and
Servicing Agreement, dated as of August 23, 1996 (the "Pooling and Servicing
Agreement"), among the Depositor, the Seller, the Servicer and the Trustee.
Set forth below are summaries of the specific terms and provisions pursuant
to which the Offered 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.
Cityscape Home Equity Loan Trust, Series 1996-3 will consist of the
Class A-1A Certificates, Class A-1B Certificates, Class A-2 Certificates,
Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates, Class
A-6 Certificates, Class A-7 Certificates, Class A-8 Certificates and the
Class A-IO Certificates (collectively, the "Offered Certificates") and the
Class R Certificates (the "Residual Certificates"). The Offered Certificates
and the Residual Certificates are collectively referred to herein as the
"Certificates." Only the Offered Certificates are offered hereby.
The Class A-1A, Class A-1B, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7 and Class A-8 Certificates will have Original
Certificate Principal Balances of approximately $60,800,000, $76,000,000,
$21,000,000, $59,000,000, $50,000,000, $14,000,000, $52,300,000, $31,700,000
and $31,644,000, respectively, and the Class A-IO Certificates will have an
Original Notional Amount of approximately $301,871,024.38, and together they
will evidence a senior beneficial ownership interest in the Trust Fund. The
remaining beneficial ownership interest in the Trust Fund will be evidenced
by the Residual Certificates, which do not have a principal balance and will
evidence a residual interest in the Trust Fund. The aggregate of the
Original Certificate Principal Balances of the Offered Certificates (other
than the Class A-IO Certificates) (the "Original Class A Certificate
Principal Balance") will be approximately $396,444,000.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar
denominations of $1,000 and integral multiples thereof (except that one
certificate of each class may be issued in a denomination which is not an
integral multiple thereof). The assumed final maturity date for each class of
the Offered Certificates is the applicable Distribution Date set forth in the
table below:
<TABLE>
<CAPTION>
Class Assumed Final Maturity Date
<S> <C>
Class A-1A . . . June 25, 2011
Class A-1B . . . June 25, 2011
Class A-2 . . . June 25, 2011
Class A-3 . . . June 25, 2011
Class A-4 . . . June 25, 2011
Class A-5 . . . June 25, 2011
Class A-6 . . . August 25, 2011
Class A-7 . . . April 25, 2014
Class A-8 . . . September 25, 2025
Class A-IO . . . October 25, 2026
</TABLE>
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates. The Offered
Certificates will be issued in one or more certificates, the original
aggregate principal balances of which will equal the Original Certificate
Principal Balance of each class and will be held by a nominee of The
Depository Trust Company (together with any successor depository selected by
the Depositor, the "Depository"). Beneficial interests in the Offered
Certificates will be indirectly held by investors through the book-entry
facilities of the Depository, as described herein. The Depositor has been
informed by the Depository that its nominee will be CEDE & Co. ("CEDE").
Accordingly, CEDE is expected to be the holder of record of the Offered
Certificates. Except as described below, no person acquiring an Offered
Certificate (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Certificate (a "Definitive
Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of the Depository (or of a participating firm that
acts as agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of the Depository, if the beneficial owner's
Financial Intermediary is not a Depository participant). Therefore, the
beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of an Offered Certificate. Beneficial ownership of an
Offered Certificate may be transferred only in compliance with the procedures
of such Financial Intermediaries and Depository participants.
The Depository, which is a New York-chartered limited purpose trust
company, performs services for its participants, some of which (and/or
their representatives) own the Depository. In accordance with its
normal procedures, the Depository is expected to record the positions
held by each Depository participant in the Offered Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of the Offered Certificates will be subject to
the rules, regulations and procedures governing the Depository and
Depository participants as in effect from time to time.
Distributions on the Offered Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing
such payments to the beneficial owners of the Offered Certificates that it
represents and to each Financial Intermediary for which it acts as agent.
Each such Financial Intermediary will be responsible for disbursing funds to
the beneficial owners of the Offered Certificates that it represents.
Under a book-entry format, beneficial owners of the Offered Certificates
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to CEDE. None of the Depositor, Cityscape
or the Trustee is responsible or liable for such delays in the application of
such payments to such beneficial owners. Because the Depository can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Offered Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of the Offered
Certificates, may be limited due to the absence of physical certificates for
the Offered Certificates. In addition, issuance of the Offered Certificates
in book-entry form may reduce the liquidity of such Certificates in the
secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Offered Certificates within the
meaning of the Pooling and Servicing Agreement will be CEDE, as nominee of
the Depository. Beneficial owners of the Offered Certificates will not be
"Certificateholders", as that term is used in the Pooling and Servicing
Agreement. Beneficial owners are only permitted to exercise the rights of
Certificateholders indirectly through Financial Intermediaries and the
Depository. Reports on the Trust Fund provided by the Servicer to CEDE, as
nominee of the Depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
Depository accounts the Offered Certificates of such beneficial owners are
credited.
The Depository has advised the Depositor and the Trustee that, unless
and until Definitive Certificates are issued, the Depository will take any
action permitted to be taken by the holders of the Offered Certificates under
the Pooling and Servicing Agreement only at the direction of one or more
Financial Intermediaries to whose Depository accounts the Offered
Certificates are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Offered
Certificates.
Definitive Certificates will be issued to beneficial owners of the
Offered Certificates, or their nominees, rather than to the Depository, only
if (a) the Depositor advises the Trustee in writing that the Depository is no
longer willing, qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the Offered Certificates and the
Depositor or the Trustee is unable to locate a qualified successor; (b) the
Depositor, at its sole option, advises the Trustee that it elects to
terminate a book-entry system through the Depository; or (c) with the consent
of the Certificate Insurer after the occurrence of an Event of Default (as
described below), beneficial owners of the Offered Certificates having not
less than 51% of the Voting Rights evidenced by the Offered Certificates
advise the Trustee and the Depository through the Financial Intermediaries in
writing that the continuation of a book-entry system with respect to such
Book-Entry Certificates through the Depository (or a successor thereto) is no
longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the Offered Certificates through the Depository of the occurrence
of such event and the availability of Definitive Certificates. Upon surrender
by the Depository of the global certificate or certificates representing the
Offered Certificates and instructions for reregistration, the Trustee will
issue the Definitive Certificates, and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the
25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing on September 25, 1996 (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 Certificate
Register or, in the case of any holder of Offered Certificates evidencing a
Percentage Interest aggregating at least 10% and that 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 holders
of Offered Certificates at a bank or other depository institution having
appropriate wire transfer facilities; provided, however, that the final
distribution in retirement of the Offered Certificates will be made only upon
presentation and surrender of such Certificates at the Corporate Trust Office
of the Trustee. On each Distribution Date, a Holder of an Offered Certificate
will receive such Holder's Percentage Interest of the amounts required to be
distributed with respect to the Offered Certificates of the related class.
The "Percentage Interest" evidenced by an Offered Certificate will equal the
percentage derived by dividing the denomination of such Offered Certificate
by the aggregate denominations of all Offered Certificates of the same class.
DEPOSITS TO THE COLLECTION ACCOUNT
The Trustee shall establish and, initially, maintain an account (the
"Collection Account") on behalf of the holders of the Certificates. Within
two business days of receipt (or, if applicable, on or prior to such other
date as may be specified in the Pooling and Servicing Agreement), the
Servicer shall remit to the Trustee (or, in the event the Collection Account
is maintained with another institution pursuant to the Pooling and Servicing
Agreement, to such institution) for deposit into the Collection Account the
following payments and collections received or made by it subsequent to the
applicable Cut-Off Date (to the extent not applied in computing the
Preliminary Pool Balance):
(i) all payments on account of principal, including Principal
Prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans
that are due subsequent to the applicable Cut-Off Date;
(iii) all proceeds of any 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 Servicer's normal servicing
procedures) ("Insurance Proceeds"), and all other cash amounts received
through foreclosure, eminent domain, condemnation or otherwise, in
connection with the liquidation of defaulted Mortgage Loans, together
with the net proceeds on a monthly basis with respect to any properties
acquired by the Servicer by foreclosure, deed in lieu of foreclosure or
otherwise (together with Insurance Proceeds, "Liquidation Proceeds");
(iv) all payments made by the Servicer in respect of Prepayment
Interest Shortfalls;
(v) any amount required to be deposited by the Servicer in
connection with any losses on investment of funds in the Collection
Account;
(vi) any amounts required to be deposited by the Servicer with
respect to any deductible clause in any blanket hazard insurance policy
maintained by the Servicer in lieu of requiring each mortgagor to
maintain a primary hazard insurance policy;
(vii) all proceeds of any Mortgage Loans or property acquired in
respect of Mortgage Loans through foreclosure purchased by Cityscape or
the Servicer and all amounts required to be deposited in connection with
shortfalls in the principal amount of Replacement Mortgage Loans;
(viii) the amount of any Advances to be deposited to the Collection
Account pursuant to the Pooling and Servicing Agreement; and
(ix) all amounts required to be deposited therein in respect of
repurchases of Mortgage Loans.
WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Trustee will withdraw funds from the Collection Account for the
following purposes:
(i) to pay to the Servicer the Servicing Fee (subject to reduction
as described above under "--Adjustment to Servicing Fee in Connection
with Prepaid Mortgage Loans") and, as additional servicing compensation,
any earnings on or investment income with respect to funds in the
Collection Account credited thereto;
(ii) to reimburse the Servicer for Advances, such right of
reimbursement with respect to any Mortgage Loan being limited to amounts
received that represent late recoveries of payments of interest on the
Mortgage Loan (or Insurance Proceeds or Liquidation Proceeds with
respect thereto) with respect to which such Advance was made;
(iii) to reimburse the Servicer for any Advances previously
made that the Servicer has determined to be nonrecoverable;
(iv) to reimburse the Servicer from Insurance Proceeds for expenses
incurred by the Servicer and covered by the related insurance policies;
(v) to pay to the Seller or the Servicer, with respect to each
Mortgage Loan or property acquired in respect thereof that has been
purchased by the Seller or the Servicer from the Trust Fund pursuant to
the Pooling and Servicing Agreement, all amounts received thereon and
not taken into account in determining the related Stated Principal
Balance of such purchased Mortgage Loan;
(vi) to reimburse the Servicer for expenses incurred and
reimbursable pursuant to the Pooling and Servicing Agreement;
(vii) to withdraw any amount deposited in the Collection
Account and not required to be deposited therein; and
(viii) to clear and terminate the Collection Account upon
termination of the Pooling and Servicing Agreement.
In addition, on or prior to 12:00 noon New York City time on the fifth
Business Day preceding the related Distribution Date, the Trustee will
withdraw from the Collection Account the Interest Remittance Amount and the
Principal Remittance Amount (each as defined herein) and deposit such amounts
into the Certificate Account, as described below;
DEPOSITS TO THE CERTIFICATE ACCOUNT
The Trustee shall maintain a certificate account (the "Certificate
Account") on behalf of the holders of the Certificates. The Trustee shall,
promptly upon receipt, deposit in the Certificate Account and retain therein
the following:
(i) the Interest Remittance Amount (as defined herein) and the
Principal Remittance Amount (as defined herein) for such Distribution
Date;
(ii) any amount received by the Trustee in connection with a
termination of the Trust Fund in accordance with the Pooling and
Servicing Agreement;
(iii) any amount received from the Servicer and required to be
deposited therein in respect of losses on investment of funds in the
Certificate Account; and
(iv) the amount, if any, required to be withdrawn from either the
Pre-Funding Account or the Capitalized Interest Account in respect of
such Distribution Date.
WITHDRAWALS FROM THE CERTIFICATE ACCOUNT
The Trustee will withdraw funds from the Certificate Account and apply
them not later than 1:00 p.m. on each Distribution Date as follows:
(i) first, to the Certificate Insurer, the Premium Amount for such
Distribution Date;
(ii) second, to the Trustee, the Trustee Fee for such Distribution
Date;
(iii) third, to the Distribution Account, the Interest
Distribution Amount for such Distribution Date;
(iv) fourth, to the Certificate Insurer, any Reimbursement Amount
due and owing to the Certificate Insurer;
(v) fifth, to the Distribution Account, the Principal Distribution
Amount for such Distribution Date;
(vi) sixth, to the Trustee, as reimbursement for certain expenses
as set forth in the Pooling and Servicing Agreement;
(vii) seventh, to the Servicer, any reimbursement for any
indemnity payment made by it pursuant to the Pooling and Servicing
Agreement; and
(viii) eighth, to the holders of the Residual Certificates, pro
rata, the amount remaining, if any, in the Certificate Account after
making the distributions in clauses (i) through (vii) above.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
The Trustee shall maintain a distribution account (the "Distribution
Account") on behalf of the holders of the Offered Certificates. The Trustee
shall, promptly upon receipt, deposit in the Distribution Account and retain
therein the following:
(i) the aggregate amount withdrawn by it from the Certificate
Account as described in clauses (iii) and (v) under "Withdrawals from
the Certificate Account" above;
(ii) any amount required to be deposited by the Servicer in
connection with any losses on investment of funds in the Distribution
Account; and
(iii) any Insured Payment made by the Certificate Insurer.
PRE-FUNDING ACCOUNT
On the Closing Date, $98,779,670.81 (the "Pre-Funded Amount") will be
deposited in an account (the "Pre-Funding Account"), which account shall be
in the name of and maintained by the Trustee and shall be part of the Trust
Fund and will be used to acquire Subsequent Mortgage Loans. During the
period beginning on the Closing Date and terminating on October 30, 1996 (the
"Funding Period"), the Pre-Funded Amount will be reduced by the amount
thereof used to purchase Subsequent Mortgage Loans in accordance with the
Pooling and Servicing Agreement. Any Pre-Funded Amount remaining at the end
of the Funding Period will be distributed to holders of the classes of
Offered Certificates (other than the Class A-IO Certificates) entitled to
receive principal on the Distribution Date in November 1996 in reduction of
the related Certificate Principal Balances, thus resulting in a partial
principal prepayment of the related Offered Certificates (other than the
Class A-IO Certificates) on such date.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on
amounts on deposit in the Pre-Funding Account will be deposited in the
Capitalized Interest Account. The Pre-Funding Account will not be an asset
of the REMIC.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date there will be deposited in an account (the
"Capitalized Interest Account") maintained with and in the name of the
Trustee on behalf of the Trust Fund a portion of the proceeds of the sale of
the Offered Certificates. The amount deposited therein will be used by the
Trustee on the Distribution Dates in September 1996, October 1996 and
November 1996 to cover shortfalls in interest on the Offered Certificates
that may arise as a result of the utilization of the Pre-Funding Account for
the purchase by the Trust Fund of Subsequent Mortgage Loans after the Closing
Date. Any amounts remaining in the Capitalized Interest Account at the end
of the Funding Period which are not needed to cover shortfalls on the
Distribution Date in November 1996 are required to be paid directly to the
Seller. The Capitalized Interest Account will not be an asset of the REMIC.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of the Certificates 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 aggregate amount on
deposit in the Distribution Account after 1:00 p.m. on such Distribution Date
(excluding the portion thereof, if any, consisting of any Insured Payment and
any reinvestment earnings).
On each Distribution Date, the Trustee will withdraw from the
Distribution Account (a) all Available Funds then on deposit and (b) the
amount of any Insured Payment and will distribute the same in the following
order of priority:
(i) to the holders of each class of Offered Certificates, their pro
rata share (based on the amount of interest each such class is entitled
to receive) of the Interest Distribution Amount for such Distribution
Date; and
(ii) to the holders of the Offered Certificates, an amount equal
to the Principal Distribution Amount in the following order of priority:
first, concurrently, to the Class A-1A, Class A-1B and Class A-4
-----
Certificates, in the proportions of 37.810945274%, 47.263681592%
and 14.925373134%, respectively, until the Certificate Principal
Balances of the Class A-1A and Class A-1B Certificates are reduced
to zero;
second, concurrently, to the Class A-2 and Class A-4 Certificates,
------
in the proportions of 90.128755365% and 9.871244635%, respectively,
until the Certificate Principal Balance of the Class A-2 Certificates
is reduced to zero;
third, concurrently, to the Class A-3 and Class A-4 Certificates,
-----
in the proportions of 71.342200726% and 28.657799274%, respectively,
until the Certificate Principal Balances thereof are reduced to zero;
fourth, to the Class A-5 Certificates, until the Certificate
------
Principal Balance thereof is reduced to zero;
fifth, to the Class A-6 Certificates, until the Certificate
-----
Principal Balance thereof is reduced to zero;
sixth, to the Class A-7 Certificates, until the Certificate
-----
Principal Balance thereof is reduced to zero; and
seventh, to the Class A-8 Certificates, until the Certificate
-------
Principal Balance thereof is reduced to zero.
Notwithstanding the foregoing, in the event a Subordination Deficit
exists on any Distribution Date and the aggregate amount distributable as
principal (including any draws made under the Certificate Insurance Policy)
on the Offered Certificates is not sufficient to reduce such Subordination
Deficit to zero, then all amounts distributable as principal of the Offered
Certificates (other than the Class A-IO Certificates) on such Distribution
Date will be allocated concurrently to the outstanding Classes of Offered
Certificates (other than the Class A-IO Certificates), pro rata, on the basis
on their respective Certificate Principal Balances.
CREDIT ENHANCEMENT
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement provides for a limited acceleration of principal
distributions on the Offered Certificates relative to the amortization of the
Mortgage Loans. This acceleration of principal distributions on the Offered
Certificates (other than the Class A-IO Certificates) is achieved by the
application of the Net Monthly Excess Cashflow as a payment of principal to
the Offered Certificates then entitled to receive principal distributions
thereby creating overcollateralization to the extent the aggregate of the
Stated Principal Balances of the Mortgage Loans (the "Pool Stated Principal
Balance") exceeds the aggregate Certificate Principal Balance of the Offered
Certificates (other than the Class A-IO Certificates). Once the required
level of overcollateralization is reached, and subject to the provisions
described in the next paragraph, further application of the acceleration
feature will cease, unless necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides that in the event of a
permitted reduction in the Required Subordinated Amount, a portion of the
amount that would otherwise be distributed as principal to holders of the
Offered Certificates on such date shall instead be distributed to the holders
of the Residual Certificates. This application of principal has the effect of
decelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all unscheduled collections on account of principal (other than any
such amounts applied to the payment of a Subordination Reduction Amount)
during the related Due Period are to be distributed to the holders of the
Offered Certificates (other than the Class A-IO Certificates) as set forth in
the Pooling and Servicing Agreement on such Distribution Date. If any
Mortgage Loan became a Liquidated Loan during such Due Period, a Realized
Loss could result. The Pooling and Servicing Agreement does not contain any
provision that requires the amount of any Realized Loss to be distributed to
the holders of the Offered Certificates on the Distribution Date immediately
following the event of loss; i.e., the Pooling and Servicing Agreement does
not require the current recovery of losses. However, the occurrence of a
Realized Loss would reduce the Subordinated Amount, which, to the extent that
such reduction caused the Subordinated Amount to be less than the Required
Subordinated Amount for such Distribution Date, would require the payment of
a Subordination Increase Amount on such Distribution Date (or, in the event
of insufficient Available Funds on such Distribution Date, on subsequent
Distribution Dates, until the Subordinated Amount equaled the applicable
Required Subordinated Amount). The effect of the foregoing is to allocate
losses to the holders of the Residual Certificates by reducing, or
eliminating entirely, payments of Net Monthly Excess Cashflow and of
Subordination Reduction Amounts that such holders would otherwise receive.
The Certificate Insurance Policy. On or before the Closing Date, the
Policy will be issued by the Certificate Insurer pursuant to the provisions
of the Insurance Agreement (the "Insurance Agreement") dated as of August 23,
1996 among the Seller, the Servicer, the Trustee, the Depositor and the
Certificate Insurer. The Policy unconditionally and irrevocably guarantees
to any holder that an amount equal to each full and complete Insured Payment
will be received by the Trustee, on behalf of the holders, for distribution
to each holder of such holder's proportionate share of the Insured Payment.
The Certificate Insurer's obligation under the Policy with respect to a
particular Insured Payment shall be discharged to the extent funds equal to
the applicable Insured Payment are transferred to the Trustee as provided in
the Policy, whether or not such funds are properly applied by the Trustee.
Notwithstanding the foregoing paragraph, the Policy does not cover the
liability of the Trust Fund, the REMIC or the Trustee for withholding taxes,
if any (including interest and penalties in respect of any such liability).
Payment of claims on the Policy made in respect of an Insured Payment
will be made by the Certificate Insurer following Receipt by the Certificate
Insurer of the appropriate notice for payment on the later to occur of (i)
12:00 noon New York City time, on the second Business Day following Receipt
of such notice for payment and (ii) 12:00 noon New York City time, on the
date on which such payment was due on the related Offered Certificates.
If payment of any amount guaranteed by the Certificate Insurer pursuant
to the Policy is avoided as a preference payment (such amount, the
"Preference Amount") under applicable bankruptcy, insolvency, receivership or
similar law, the Certificate Insurer will pay such amount out of the funds of
the Certificate Insurer on the later of (a) the date when due to be paid
pursuant to the Order referred to below or (b) the first to occur of (i) the
fourth Business Day following Receipt by the Certificate Insurer from the
Trustee of (A) a certified copy of a final order (the "Order") of a court
having competent jurisdiction to the effect that the holder of an Offered
Certificate is required to return the Preference Amount during the term of
the Policy because such distributions were avoidable preference payments
under the U.S. Bankruptcy Code, (B) with respect to which Order the appeal
period has expired without an appeal having been filed, an assignment duly
executed and delivered by the holder of the Offered Certificate, in such form
as is reasonably required by the Certificate Insurer and provided to the
holder of the Offered Certificate by the Certificate Insurer, irrevocably
assigning to the Certificate Insurer all rights and claims of the holder of
the Offered Certificate relating to or arising under the related Offered
Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment and (C) a notice as to the
foregoing, as provided in the Policy, or (ii) the date of Receipt by the
Certificate Insurer from the Trustee of the items referred to in clauses (A),
(B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Certificate Insurer shall have received written notice from the
Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trustee or any holder of an Offered Certificate directly
(unless a holder of the Offered Certificate has previously paid such amount
to the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the Order in which case such payment shall be disbursed to the
Trustee for distribution to such holder of the Offered Certificate upon proof
of such payment reasonably satisfactory to the Certificate Insurer). In no
event shall the Certificate Insurer pay more than one Insured Payment in
respect of any Preference Amount.
The terms "Receipt" and "Received," with respect to the Policy, mean
actual delivery to the Certificate Insurer and to its fiscal agent appointed
by the Certificate Insurer at its option, if any, prior to 12:00 noon, New
York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 noon, New York City time, shall be deemed to be
Received on the next succeeding Business Day. If any notice or certificate
given under each Certificate Insurance Policy by the Trustee is not in proper
form or is not properly completed, executed or delivered, it shall be deemed
not to have been Received, and the Certificate Insurer or the fiscal agent
shall promptly so advise the Trustee and the Trustee may submit an amended
notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in Illinois, New York
or any other location of any successor servicer or successor Trustee are
authorized or obligated by law, executive order or governmental decree to be
closed.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Certificates to the extent of any payment
by the Certificate Insurer under the Policy. To the extent the Certificate
Insurer makes Insured Payments either directly or indirectly (as by paying
through the Trustee) to the Certificateholders, the Certificate Insurer will
be subrogated to the rights of the Certificateholders, as applicable, with
respect to such Insured Payments, shall be deemed to the extent of the
payments so made to be a registered Certificateholder for purposes of payment
and shall receive all future Reimbursement Amounts until the Certificate
Insurer has been fully reimbursed in accordance with the Insurance Agreement.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution
of the Depositor. The Policy by its terms may not be cancelled or revoked.
The Policy is governed by the laws of the State of New York.
The Policy is not covered by the Property/Casualty Insurance Security
fund specified in Article 76 of the New York Insurance Law.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer default exists, the Certificate Insurer shall be deemed
to be the holder of the Certificates for certain purposes (other than with
respect to payment on the Certificates), and will be entitled to exercise all
rights of the Certificateholders thereunder without the consent of such
holders. (Certificateholders may exercise such rights only with the prior
written consent of the Certificate Insurer). In addition, the Certificate
Insurer will have certain additional rights as third party beneficiary to the
Agreement.
The policy does not guarantee any specified rate of prepayments of
principal of the Mortgage Loans or any specified return.
In the absence of payments under the Policy, Certificateholders will
bear directly the credit and other risks associated with their undivided
interest in the Trust Fund.
RIGHTS OF THE CERTIFICATE INSURER
The Pooling and Servicing Agreement provides that the Trustee will
receive any Insured Payments as attorney-in-fact for the holders of the
Offered Certificates, and disburse such Insured Payments in accordance with
the provisions of the Pooling and Servicing Agreement.
In the event an Insured Payment is made, the Certificate Insurer, until
all such Insured Payments have been fully reimbursed, will be entitled to
receive the Reimbursement Amount. However, the Certificate Insurer will not
be entitled to reimbursement on any Distribution Date unless on such
Distribution Date the Certificate Insurer shall have paid all amounts
required to have been paid by it under the Policy on or prior to such
Distribution Date.
Provided no Certificate Insurer Default (as defined in the Pooling and
Servicing Agreement) has occurred and is continuing, the Certificate Insurer
shall have the right to take certain actions (such as removal of the Trustee)
and to direct certain actions of the Servicer and Trustee.
The Policy does not guarantee to the holders of the Offered Certificates
any specified rate of Principal Prepayments.
DEFINITIONS
The "Accrual Period" for the Offered Certificates (other than the Class
A-1B Certificates) for a given Distribution Date will be the calendar month
preceding the month of such Distribution Date and will be calculated based on
a 360-day year consisting of twelve 30-day months, provided that the initial
Accrual Period for the Offered Certificates (other than the Class A-1B
Certificates) will be the eight-day period ending on August 30, 1996
(inclusive of August 30, 1996). The "Accrual Period" for the Class A-1B
Certificates for a given Distribution Date will be the actual number of days
included in the period commencing on the immediately preceding Distribution
Date and ending on the day immediately preceding such Distribution Date
and will be calculated based on a 360-day year, provided that the initial
Accrual Period for the Class A-1B Certificates will be the actual number of
days included in the period commencing on the Closing Date and ending on
September 24, 1996.
A "Certificate Insurer Default" occurs when the Certificate Insurer
fails to make payments under the Policy in accordance with the terms and
conditions thereof.
The "Certificate Principal Balance" of each Offered Certificate, as of
any Distribution Date, will be equal to the Certificate Principal Balance of
such class on the Closing Date (the "Original Certificate Principal Balance")
minus all distributions in respect of principal allocated to such class on
previous Distribution Dates.
The "Class A-1B Available Funds Cap" as of any Distribution Date is a
per annum rate equal to the weighted average of the rates on the Mortgage
Loans which were outstanding as of the first day of the related Due Period,
net of the Class A-IO Pass-Through Rate, the Servicing Fee Rate, the rate at
which the Trustee Fee is calculated and the Insurance Premium Rate.
The "Class A Carry-Forward Amount" as of any Distribution Date equals
the sum of the amount, if any, by which (a) the Insured Distribution Amount
for the immediately preceding Distribution Date exceeded (b) the amount
actually distributed to the holders of the related class of Offered
Certificates on such Distribution Date in respect of such Insured
Distribution Amount (including, without limitation, any Insured Payments (as
defined herein)).
The "Class A-1B Pass-Through Margin" will equal 0.12% (12 basis points)
per annum.
The "Class A-IO Pass-Through Rate" will equal 1.00% per annum.
A "Due Period" with respect to any Distribution Date is the period
beginning on the first day of the calendar month preceding the calendar month
in which such Distribution Date occurs (except for the first Due Period,
which shall begin on August 24, 1996) and ending on the last day of such
month.
The "Excess Subordinated Amount" with respect to any Distribution Date
is the amount, if any, by which (i) the Subordinated Amount that would apply
on such Distribution Date after taking into account all distributions to be
made on such Distribution Date (without giving effect to any reductions in
such Subordination Amount attributable to Subordination Reduction Amounts on
such Distribution Date) exceeds (ii) the Required Subordinated Amount for
such Distribution Date, provided that the Excess Subordinated Amount will be
subject to the additional limitations set forth in the Pooling and Servicing
Agreement with respect to the period from September 1998 to March 1999.
The "Insurance Premium Rate" will equal a per annum rate set forth in
the Policy.
The "Insured Distribution Amount" for any Distribution Date is the sum
of the Interest Distribution Amount for the Offered Certificates and the
Subordination Deficit, in each case with respect to such Distribution Date.
An "Insured Payment" is any payment by the Certificate Insurer under the
Certificate Insurance Policy.
The "Interest Distribution Amount" for any Distribution Date and each
class of Offered Certificates equals the sum of (i) interest accrued during
the related Accrual Period on the Certificate Principal Balance or the
Notional Amount, as applicable, of such class at the related Pass-Through
Rate and (ii) the pro rata share allocable to such class (based on the amount
of interest they would otherwise be entitled to receive) of the portion of
the Class A Carry-Forward Amount representing interest.
The "Interest Remittance Amount" for any Distribution Date is (a) the
product of (x) the aggregate of the Stated Principal Balances of all Mortgage
Loans at the beginning of the calendar month preceding the month in which
such Distribution Date occurs (or as of the Cut-Off Date, in the case of the
first Distribution Date) and (y) one-twelfth (or 8/360, in the case of the
first Distribution Date) of the weighted average Net Mortgage Rate at the
beginning of the calendar month preceding the month in which such Distribution
Date occurs (or at the Cut-Off Date, in the case of the first Distribution
Date), less (b) the excess, if any, of the Prepayment Interest Shortfalls for
the related Due Period over the Servicing Fee for such Due Period.
The "Late Payment Rate" shall be a per annum rate set forth in the
Insurance Agreement.
The "Net Monthly Excess Cashflow" for any Distribution Date equals the
amount, if any, by which (i) the funds on deposit in the Certificate Account
(net of any related Premium Amount, Servicing Fees and Trustee Fees) for such
Distribution Date exceeds (ii) the sum of (a) the Interest Distribution
Amount plus the Principal Distribution Amount (calculated for this purpose
without regard to any Subordination Increase Amount or portion thereof
included therein) and (b) any Reimbursement Amount owed to the Certificate
Insurer.
The "Notional Amount" of the Class A-IO Certificates for any
Distribution Date is the aggregate of the Stated Principal Balances of the
Mortgage Loans.
The "Pass-Through Rate" for any Distribution Date and class of Offered
Certificates shall be as follows:
Class A-1A 6.70% per annum
Class A-1B *
Class A-2 6.65% per annum
Class A-3 6.85% per annum
Class A-4 6.80% per annum
Class A-5 7.05% per annum
Class A-6 7.15% per annum
Class A-7 7.50% per annum
Class A-8 7.65%**
Class A-IO 1.00% per annum
_______________
*The "Pass-Through Rate" as to the Class A-1B Certificates for any
Distribution Date equals the lesser of (a) One-Month LIBOR (as defined in "--
Calculation of One-Month LIBOR" below) plus the Class A-1B Pass-Through
Margin and (b) the Class A-1B Available Funds Cap.
**The "Pass-Through Rate" as to the Class A-8 Certificates for any
Distribution Date equals the lesser of (a) 7.65% and (b) the weighted average
of the rates on the Mortgage Loans which were outstanding as of the first day
of the related Due Period, net of the Class A-IO Pass-Through Rate, the
Servicing Fee Rate, the rate at which the Trustee Fee is calculated and the
Insurance Premium Rate.
The "Preference Amount," with respect to any Distribution Date, is any
amount previously distributed to a holder of an Offered Certificate that is
recovered as a voidable preference by a trustee in bankruptcy under the
United States Bankruptcy Code in accordance with a final nonappealable order
of a court having competent jurisdiction.
The "Premium Amount" payable to the Certificate Insurer on any
Distribution Date equals one-twelfth (or 8/360, in the case of the first
Distribution Date) of the product of the Insurance Premium Rate and the
Certificate Principal Balance of the Offered Certificates; provided, however,
that for any Distribution Date on which a Certificate Insurer Default has
occurred and is continuing, the Premium Amount will be equal to zero.
The "Principal Distribution Amount" for any Distribution Date equals the
lesser of (I)(a) the sum of (i) the Available Funds and (ii) any Insured
Payment for such Distribution Date relating to the Interest Distribution
Amount or a Subordination Deficit less (b) the sum of (i) the Interest
Distribution Amount for such Distribution Date and (ii) the Reimbursement
Amount due and owing on such Distribution Date, and (II)(a) the sum, without
duplication, of (i) all scheduled installments of Mortgage Loan principal and
all unscheduled collections and recoveries of principal on the Mortgage
Loans, in each case to the extent actually received by the Servicer during
the related Due Period, (ii) the amount of any Subordination Deficit for such
Distribution Date, (iii) that portion of any Class A Carry-Forward Amount
that relates to a shortfall in a distribution of a Subordination Deficit,
(iv) the amount of any Subordination Increase Amount for such Distribution
Date and (v) the proceeds received by the Trustee from any termination of the
Trust Fund, to the extent such proceeds relate to principal less (b) the
amount of any Subordination Reduction Amount for such Distribution Date. In
no event will the Principal Distribution Amount with respect to any
Distribution Date be less than zero or greater than the then outstanding
aggregate Certificate Principal Balance of the Offered Certificates.
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 representing scheduled interest due on any date or dates in any month
or months subsequent to the month of prepayment.
The "Principal Remittance Amount" for any Distribution Date is (a) the
sum of the amounts specified in clause (i), clause (iii) (net of certain
expenses and reimbursement obligations to the extent applied to Mortgage Loan
principal), clause (v), clause (vi), clause (vii) and clause (ix) under
"Deposits to the Collection Account" herein, in each case to the extent such
amounts relate to principal and are actually received in the related Due
Period, less (b) with respect to each Mortgage Loan that has previously been
purchased or replaced by the Servicer or the Seller, all amounts received
thereon in any month subsequent to the month of such purchase or
substitution, as the case may be, to the extent such amounts relate to
principal and have been withdrawn from the Collection Account.
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 Stated Principal Balance remaining unpaid 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.
The "Reimbursement Amount" as of any Distribution Date is the amount of
all Insured Payments made by the Certificate Insurer pursuant to the
Certificate Insurance Policy and other amounts owed to the Certificate
Insurer pursuant to the Insurance Agreement (together with interest thereon
at the Late Payment Rate) that have not been previously repaid as of such
Distribution Date.
The "Required Subordinated Amount" as of any Distribution Date will
equal a percentage, specified in the Pooling and Servicing Agreement, of the
Pool Stated Principal Balance. The Pooling and Servicing Agreement generally
provides that the Required Subordinated Amount may, over time, decrease or
increase, subject to certain floors, caps and triggers.
The "Stated Principal Balance" of any Mortgage Loan or related REO
Property equals (i) as of the applicable Cut-Off Date, the Cut-Off Date
Principal Balance thereof, and (ii) as of any Distribution Date, such 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 immediately preceding Distribution
Date to the extent actually received by the Servicer as of the close of
business on the last day of the related Due Period, (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, that were
received by the Servicer as of the close of business on the last day of the
Due Period related to the immediately preceding Distribution Date, and (c)
any Realized Loss with respect thereto applied prior to the close of business
on the last day of the Due Period relating to the immediately preceding
Distribution Date; provided, however, that the Stated Principal Balance of
any Mortgage Loan that becomes a Liquidated Loan will be zero immediately
following the Distribution Date that follows the Due Period in which such
Mortgage Loan becomes a Liquidated Loan.
The "Subordinated Amount" as of any Distribution Date is the amount, if
any, by which (i) the Pool Stated Principal Balance on the last day of the
immediately preceding Due Period exceeds (ii) the aggregate Certificate
Principal Balance of the Offered Certificates as of such Distribution Date
after giving effect to distributions to be made on such Certificates on such
Distribution Date.
A "Subordination Deficit" with respect to any Distribution Date is the
amount, if any, by which (i) the aggregate Certificate Principal Balance of
the Offered Certificates as of such Distribution Date, after giving effect to
distributions to be made on such Certificates on such Distribution Date
(except for any payment to be made as to principal constituting an Insured
Payment), exceeds (ii) the Pool Stated Principal Balance on the first day of
the month in which such Distribution Date occurs.
A "Subordination Increase Amount" with respect to any Distribution Date
equals that portion of Net Monthly Excess Cashflow for such Distribution Date
that is actually applied as an accelerated payment of principal to the
holders of the Offered Certificates on such Distribution Date.
The "Subordination Reduction Amount" as of any Distribution Date equals
the lesser of (i) the Excess Subordinated Amount for such Distribution Date
and (ii) the aggregate amount of all Mortgage Loan principal received by the
Servicer during the related Due Period.
The "Trustee Fee" as of any Distribution Date shall be determined in
accordance with the rate agreed upon in writing between the Trustee and the
Seller on the Closing Date.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period (each such date, an "Interest
Determination Date"), the Trustee will determine the London interbank offered
rate for one-month United States dollar deposits ("One-Month LIBOR") for such
Accrual Period for the Class A-1B Certificates on the basis of the offered
rates of the Reference Banks for one-month United States dollar deposits, as
such rates appear on the Telerate Page 3750, as of 11:00 a.m. (London time)
on such Interest Determination Date. As used in this section, "LIBOR
Business Day" means a day on which banks are open for dealing in foreign
currency and exchange in London and New York City; "Telerate Page 3750" means
the display page currently so designated on the Dow Jones Telerate Service
(or such other page as may replace that page on that service for the purpose
of displaying comparable rates or prices; and "Reference Banks" means leading
banks selected by the Trustee and engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (i) with an established
place of business in London, (ii) whose quotations appear on the Telerate
Page 3750 on the Interest Determination Date in question, (iii) which have
been designated as such by the Trustee and (iv) not controlling, controlled
by, or under common control with, the Depositor, Cityscape or any successor
Servicer.
On each Interest Determination Date, One-Month LIBOR for the related
Accrual Period for the Class A-1B Certificates will be established by the
Trustee as follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Accrual Period will be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, One-Month LIBOR for the
related Accrual Period will be the higher of (x) One-Month LIBOR as
determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" will be the rate per
annum that the Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%)
of the one-month United States dollar lending rates which New York City
banks selected by the Trustee are quoting on the relevant Interest
Determination Date to the principal London offices of leading banks in
the London interbank market or, in the event that the Trustee can
determine no such arithmetic mean, (ii) the lowest one-month United
States dollar lending rate which New York City banks selected by the
Trustee are quoting on such Interest Determination Date to leading
European banks.
The establishment of One-Month LIBOR on each Interest Determination Date
by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Class A-1B Certificates for the related Accrual Period will
(in the absence of manifest error) be final and binding.
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:
August 23, 1996 Cut-Off Date for Initial Mortgage Loans.
August 24 to August 31, 1996 (A) Initial Due Period. The Servicer
receives (x) scheduled payments of
principal and interest and (y)
Principal Prepayments and interest
thereon to the date of such
prepayment. For succeeding
Distribution Dates, the Due Period
will commence on the first day of the
preceding calendar month and end on
the last day of such month.
August 30, 1996 (B) Record Date (the last Business Day of
the month preceding the month of the
related Distribution Date).
September 14, 1996 (C) Determination Date (the fourteenth day
of the month of such Distribution Date
or, if such fourteenth day is not a
Business Day, the preceding Business
Day).
September 18, 1996 (D) Servicer Remittance Date.
September 25, 1996 (E) Distribution Date.
Succeeding monthly periods follow the pattern of (A) through (E).
________________
(A) Principal Prepayments received during this period will be distributed to
holders of the Certificates on September 25, 1996 (to the extent not
applied in computing the Cut-Off Date Principal Balance). When a
Mortgage Loan is prepaid in full, interest on the amount prepaid is
collected only from the last Due Date as to which the most recent
scheduled payment was made by the borrower to the date of prepayment.
(B) Distributions of principal and interest on September 25, 1996 will be
made to holders of the Certificates of record as of the close of
business on the Record Date.
(C) Determination Date.
(D) No later than each Servicer Remittance Date, the Trustee will determine,
as of the related Determination Date, 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 holders of the Certificates.
(E) The Trustee will make distributions to holders of the Certificates on
the 25th day of the month following the month in which the related Due
Period ends, or if such day is not a Business Day, on the next Business
Day.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of Principal Prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of Principal Prepayments is consistent
with such investor's expectation. In general, the earlier a Principal
Prepayment on the Mortgage Loans occurs, the greater the effect of such
Principal Prepayment on an investor's yield to maturity. The effect on an
investor's yield of Principal Prepayments occurring at a rate higher (or
lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates may not be
offset by a subsequent like decrease (or increase) in the rate of Principal
Prepayments.
The projected weighted average life of the Offered Certificates is the
average amount of time that will elapse from the Closing Date until each
dollar of principal is scheduled to be repaid to the investors in the Offered
Certificates. Because it is expected that there will be prepayments and
defaults on the Mortgage Loans, the actual weighted average life of the
Offered Certificates is expected to vary substantially from the weighted
average remaining term to stated maturity of the Mortgage Loans as set forth
herein under "The Mortgage Pool--General."
The model used in this Prospectus Supplement with respect to the
Mortgage Loans is the prepayment assumption (the "Prepayment Assumption")
which represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans for the life
of such mortgage loans. With respect to the Mortgage Loans, a 100%
Prepayment Assumption assumes conditional prepayment rates of 4.8% per annum
of the then outstanding principal balance of the Mortgage Loans in the first
month of the life of the Mortgage Loans and an additional 1.745% (i.e., 19.2%
divided by 11) per annum in each month thereafter until the twelfth month.
Beginning in the twelfth month and in each month thereafter during the life
of the Mortgage Loans, 100% Prepayment Assumption assumes a conditional
prepayment rate of 24% per annum. As used in the table below, 0% Prepayment
Assumption assumes prepayment rates equal to 0% of the Prepayment Assumption
i.e., no prepayments. Correspondingly, 150% Prepayment Assumption assumes
prepayment rates equal to 150% of the Prepayment Assumption, and so forth.
The Prepayment Assumption does not purport to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans. The Depositor
believes that no existing statistics of which it is aware provide a reliable
basis for holders of the Offered Certificates to predict the amount or the
timing of receipt of prepayments on the Mortgage Loans.
The tables on pages S-49, S-50, S-51, S-52 and S-58 were prepared on the
basis of the assumptions in the following paragraph. There are certain
differences between the loan characteristics included in such assumptions and
the characteristics of the actual Mortgage Loans. Any such discrepancy may
have an effect upon the percentages of Original Certificate Principal
Balances outstanding and weighted average lives of the Offered Certificates
set forth in the tables. In addition, since the actual Mortgage Loans in the
Trust Fund have characteristics that differ from those assumed in preparing
the tables set forth below, the distributions of principal of the Offered
Certificates may be made earlier or later than indicated in the tables.
The percentages and weighted average lives in the following tables were
determined assuming that: (i) the Mortgage Loans consist of eleven pools of
loans with Cut-Off Date Principal Balances, Mortgage Rates, original and
remaining terms to maturity, and original amortization terms as set forth
below under "Assumed Mortgage Loan Characteristics," (ii) the Closing Date
for the Offered Certificates occurs on August 30, 1996, (iii) distributions
on the Offered Certificates are made on the 25th day of each month regardless
of the day on which the Distribution Date actually occurs, commencing in
September 1996, in accordance with the priorities described herein, (iv) the
Pass-Through Rate for each class of Offered Certificates is as set forth on
the cover hereof, (v) the Accrual Period for all Offered Certificates (other
than the Class A-1B Certificates) for each related Distribution Date will be
based on a 360-day year consisting of twelve 30-day months, except that the
first Accrual Period will consist of 8 days, (vi) the Accrual Period for the
Class A-1B Certificates will be based on the actual number of days over 360
days except that the first Accrual Period will consist of 26 days, (vii) the
Mortgage Loans' prepayment rates are a multiple of the applicable Prepayment
Assumption, (viii) prepayments include thirty days' interest thereon, (ix)
the Seller is not required to substitute or repurchase any or all of the
Mortgage Loans pursuant to the Pooling and Servicing Agreement and no
optional termination is exercised, (x) the Required Subordination Amount is
set initially as specified in the Pooling and Servicing Agreement and
thereafter decreases in accordance with the provisions of the Pooling and
Servicing Agreement, (xi) scheduled payments for all Mortgage Loans are
received on the first day of each month (commencing in the calendar month
following the Closing Date) and the principal portion of such payments is
computed prior to giving effect to prepayments received in the prior month,
(xii) all Mortgage Loans prepay at the same rate and all such payments are
treated as prepayments in full of individual Mortgage Loans, with no
shortfalls in collection of interest, (xiii) such prepayments are received on
the last day of each month commencing in the month of the Closing Date, (xiv)
the Class A-IO Certificates are purchased on the Closing Date at the Assumed
Purchase Prices presented in the related table (which include accrued
interest), (xv) One-Month LIBOR and the Pass-Through Rate for the Class A-1B
Certificates are at all times equal to 5.41016% and 5.53016%, respectively,
and (xvi) Pools 9, 10 and 11 are transferred to the Trust Fund in September
1996 with principal payments on such Mortgage Loans being received by the
Servicer in October and passed through to holders of the Offered Certificates
on the Distribution Date in November 1996. No representation is made that
the Mortgage Loans will not experience delinquencies or losses.
<TABLE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
CAPTION>
Remaining Original Original
Term to Term to Amortization
Cut-Off Date Mortgage Maturity Maturity Term
Pool Principal Balance Rate (Months) (Months) (Months)
<S> <C> <C> <C> <C> <C>
1 $219,649,663.80 12.1627% 178 180 360
2 245,565.33 11.6065 58 60 60
3 71,837.78 10.1308 84 84 84
4 1,840,970.39 12.3181 118 120 120
5 28,200,861.21 11.9120 178 180 180
6 28,543,872.00 11.4194 238 240 240
7 39,970.13 14.0000 298 300 300
8 23,278,283.74 11.5759 358 360 360
9 71,054,813.91 11.9232 178 180 360
10 10,651,770.46 11.9288 173 175 175
11 17,073,086.44 11.9109 293 295 295
$400,650,695.19
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each class of Offered Certificates, and
set forth the percentages of the Original Certificate Principal Balance of
each such class that would be outstanding after each of the dates shown, at
the indicated multiples of the Prepayment Assumption.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCES OUTSTANDING*
<CAPTION>
Class A-1A and Class A-1B Class A-2
Prepayment Assumption Prepayment Assumption
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Date 50% 75% 100% 150% 200% 50% 75% 100% 150% 200%
- ----------------- ----- ---- ---- ---- ---- --- ---- ---- ---- ----
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
August 25, 1997 . . 79 59 49 28 7 100 100 100 100 100
August 25, 1998 . . 39 17 0 0 0 100 100 73 0 0
August 25, 1999 . . 13 0 0 0 0 100 0 0 0 0
August 25, 2000 . . 0 0 0 0 0 38 0 0 0 0
August 25, 2001 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2002 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2003 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2004 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2005 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2006 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2007 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2008 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2009 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2010 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2011 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2012 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2013 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2014 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2015 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2016 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2017 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2018 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2019 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2020 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2021 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2022 . . 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life
(years) . . . . . . 1.73 1.26 1.02 0.78 0.64 3.95 2.74 2.10 1.46 1.16
</TABLE>
__________
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCES OUTSTANDING*
(continued)
<CAPTION>
Class A-3 Class A-4
Prepayment Assumption Prepayment Assumption
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Date 50% 75% 100% 150% 200% 50% 75% 100% 150% 200%
- ------------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
August 25, 1997 . . 100 100 100 100 100 85 81 76 66 55
August 25, 1998 . . 100 100 100 47 0 71 60 51 22 0
August 25, 1999 . . 100 97 47 0 0 58 46 22 0 0
August 25, 2000 . . 100 46 0 0 0 49 22 0 0 0
August 25, 2001 . . 73 7 0 0 0 34 4 0 0 0
August 25, 2002 . . 41 0 0 0 0 20 0 0 0 0
August 25, 2003 . . 15 0 0 0 0 7 0 0 0 0
August 25, 2004 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2005 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2006 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2007 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2008 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2009 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2010 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2011 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2012 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2013 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2014 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2015 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2016 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2017 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2018 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2019 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2020 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2021 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2022 . . 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life 5.81 3.99 3.03 2.03 1.52 3.77 2.63 2.02 1.40 1.08
(years) . . . . . .
</TABLE>
__________
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCES OUTSTANDING*
(continued)
<CAPTION>
Class A-5 Class A-6
Prepayment Assumption Prepayment Assumption
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Date 50% 75% 100% 150% 200% 50% 75% 100% 150% 200%
- ------------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
August 25, 1997 . . 100 100 100 100 10 100 100 100 100 100
August 25, 1998 . . 100 100 100 100 0 100 100 100 100 99
August 25, 1999 . . 100 100 100 0 0 100 100 100 84 0
August 25, 2000 . . 100 100 81 0 0 100 100 100 9 0
August 25, 2001 . . 100 100 0 0 0 100 100 61 0 0
August 25, 2002 . . 100 0 0 0 0 100 89 16 0 0
August 25, 2003 . . 100 0 0 0 0 100 49 0 0 0
August 25, 2004 . . 51 0 0 0 0 100 16 0 0 0
August 25, 2005 . . 0 0 0 0 0 81 0 0 0 0
August 25, 2006 . . 0 0 0 0 0 53 0 0 0 0
August 25, 2007 . . 0 0 0 0 0 28 0 0 0 0
August 25, 2008 . . 0 0 0 0 0 7 0 0 0 0
August 25, 2009 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2010 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2011 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2012 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2013 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2014 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2015 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2016 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2017 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2018 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2019 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2020 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2021 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2022 . . 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life 8.04 5.51 4.15 2.74 1.94 10.23 7.05 5.30 3.46 2.48
(years) . . . . . .
</TABLE>
__________
* Rounded to the nearest whole percentage.
<TABLE>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCES OUTSTANDING*
(continued)
<CAPTION>
Class A-7 Class A-8
Prepayment Assumption Prepayment Assumption
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Date 50% 75% 100% 150% 200% 50% 75% 100% 150% 200%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
August 25, 1997 . . 100 100 100 100 100 100 100 100 100 100
August 25, 1998 . . 100 100 100 100 100 100 100 100 100 100
August 25, 1999 . . 100 100 100 100 98 100 100 100 100 100
August 25, 2000 . . 100 100 100 100 2 100 100 100 100 100
August 25, 2001 . . 100 100 100 36 0 100 100 100 100 52
August 25, 2002 . . 100 100 100 0 0 100 100 100 86 24
August 25, 2003 . . 100 100 69 0 0 100 100 100 54 9
August 25, 2004 . . 100 100 26 0 0 100 100 100 32 2
August 25, 2005 . . 100 81 0 0 0 100 100 94 17 0
August 25, 2006 . . 100 45 0 0 0 100 100 70 9 0
August 25, 2007 . . 100 16 0 0 0 100 100 51 3 0
August 25, 2008 . . 100 0 0 0 0 100 93 36 0 0
August 25, 2009 . . 79 0 0 0 0 100 73 25 0 0
August 25, 2010 . . 52 0 0 0 0 100 58 17 0 0
August 25, 2011 . . 0 0 0 0 0 16 1 0 0 0
August 25, 2012 . . 0 0 0 0 0 12 0 0 0 0
August 25, 2013 . . 0 0 0 0 0 8 0 0 0 0
August 25, 2014 . . 0 0 0 0 0 5 0 0 0 0
August 25, 2015 . . 0 0 0 0 0 2 0 0 0 0
August 25, 2016 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2017 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2018 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2019 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2020 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2021 . . 0 0 0 0 0 0 0 0 0 0
August 25, 2022 . . 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life
(years) . . . . . . 13.94 9.97 7.50 4.85 3.47 15.24 13.94 11.49 7.55 5.34
</TABLE>
__________
* Rounded to the nearest whole percentage.
REPORTS TO HOLDERS OF THE CERTIFICATES
On each Distribution Date, the Trustee will forward to each holder of a
Certificate and the Certificate Insurer a statement generally setting forth:
(i) the amount of the distributions, separately identified, with
respect to each class of Certificates;
(ii) the amount of such distributions allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
or other unscheduled recoveries of principal included therein and
separately identifying any Subordination Increase Amounts;
(iii) the amount of such distributions allocable to interest and
the calculation thereof;
(iv) the Class A Carry-Forward Amount;
(v) the amount of any Insured Payment included in the amounts
distributed to the holders of the Offered Certificates on such
Distribution Date;
(vi) the Required Subordinated Amount and the Subordinated Amount
as of the end of the related Due Period;
(vii) the Certificate Principal Balance of each class of Offered
Certificates (other than the Class A-IO Certificates) and the Notional
Amount of the Class A-IO Certificates after giving effect to the
distribution of principal on such Distribution Date;
(viii) the Pool Stated Principal Balance at the end of the related
Due Period;
(ix) the related amount of the Servicing Fee paid to or retained by
the Servicer;
(x) the amount of the Trustee Fee paid to the Trustee;
(xi) the Premium Amount paid to the Certificate Insurer;
(xii) the amount of Advances for the related Due Period;
(xiii) the number and aggregate Stated Principal Balance of
Mortgage Loans (A) delinquent (exclusive of Mortgage Loans in
foreclosure) (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more
days, (B) in foreclosure and delinquent (1) 30 to 59 days, (2) 60 to 89
days and (3) 90 or more days and (C) in bankruptcy as of the close of
business on the last day of the calendar month preceding such
Distribution Date;
(xiv) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number, the
Stated Principal Balance of such Mortgage Loan as of the close of
business on the last day of the related Due Period and the date of
acquisition thereof;
(xv) the total number and principal balance of any REO
Properties as of the close of business on the last day of the preceding
Due Period;
(xvi) the aggregate amount of Realized Losses incurred during the
preceding calendar month;
(xvii) the cumulative amount of Realized Losses;
(xviii) any Subordination Deficit after giving effect to the
distribution of principal on such Distribution Date;
(xiv) the Reimbursement Amount, if any, for such Distribution
Date;
(xv) the Class A-1B Pass-Through Rate for such Distribution
Date; and
(xvi) the amount of deposit in each of the Pre-Funding Account
and the Capitalized Interest Account.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement
containing information necessary to enable holders of the Certificates 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 the holders of the
Certificates but only with the consent of the Certificate Insurer, 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 Certificate Insurer and the holders of a Majority in Interest of each
class of 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 holders of the Certificates; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
distributions required to be made on any Certificate without the consent of
the holder of such Certificate; (ii) adversely affect in any material respect
the interests of the holders of any class of Certificates in a manner other
than as described in clause (i) above, without the consent of the holders of
Certificates of such class evidencing, as to such class, Percentage Interests
aggregating 66%; or (iii) reduce the aforesaid percentage of aggregate
outstanding principal amounts of Certificates of each class, the holders of
which are required to consent to any such amendment, without the consent of
the holders of all Certificates of such class.
OPTIONAL TERMINATION
Holders of the Residual Certificates 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
Stated Principal Balance at the time of repurchase being less than or equal
to 10% of the sum of the Preliminary Pool Balance and the Pre-Funded Amount.
The Servicer (and, if Cityscape is removed as Servicer, the Certificate
Insurer) will have a similar purchase option on any Distribution Date on
which the Pool Stated Principal Balance is less than or equal to 5% of the
sum of the Preliminary Pool Balance and the Pre-Funded Amount. In the event
that either option is exercised, the repurchase will be made at a price equal
to the sum of (i) 100% of the Stated Principal Balance of each Mortgage Loan
(other than in respect of REO Property) plus accrued interest thereon at the
applicable Mortgage Rate (or, if such option is exercised by the Servicer, at
the applicable Net Mortgage Rate), (ii) the appraised value of any REO
Property (up to the Stated Principal Balance of the related Mortgage Loan)
and (iii) any unreimbursed out-of-pocket costs and expenses previously
incurred by the Servicer in the performance of its servicing obligations.
Proceeds from such repurchase will be included in Available Funds and will be
distributed to the holders of the Certificates. Any repurchase of the
Mortgage Loans and REO Properties will result in an early retirement of the
Certificates.
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 Stated Principal Balance thereof
plus accrued interest thereon at the applicable Net Mortgage Rate from the
date through which interest was last paid by the related mortgagor or
advanced to the last day of the Due Period prior to the month in which such
amount is to be distributed; provided, however, that the total amount of such
Mortgage Loans that may be purchased by the Servicer described in this
paragraph (not including Mortgage Loans repurchased due to a breach of a
representation or warranty under the Pooling and Servicing Agreement) may not
exceed 10% of the Cut-Off Date Principal Balance.
EVENTS OF DEFAULT; SERVICER TERMINATION TRIGGER EVENT
Events of Default will consist, among other things, of: (i) any failure
by the Servicer to deposit in the Certificate Account the required amounts or
remit to the Trustee any payment (including an Advance required to be made
under the terms of the Pooling and Servicing Agreement) which continues
unremedied for two Business Days; (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 45
days after the giving of written notice of such failure to the Servicer by
the Trustee, the Certificate Insurer or the Depositor, or to the Servicer and
the Trustee by the holders of Certificates evidencing not less than a
majority 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 (iv) any
failure of the Servicer to maintain the net worth set forth in the Pooling
and Servicing Agreement. A "Servicer Termination Trigger Event" will occur if
certain loss or delinquency amounts are exceeded with respect to the Mortgage
Loans, as described in the Pooling and Servicing Agreement. As of any date of
determination, 99% of the Voting Rights will be allocated among holders of
the Offered Certificates (other than the Class A-IO Certificates), pro rata,
on the basis of the respective Certificate Principal Balances thereof and 1%
of the Voting Rights will be allocated to the Class A-IO Certificates.
Voting Rights will be allocated among the Certificates of each such class in
accordance with the respective Percentage Interests.
RIGHTS UPON EVENT OF DEFAULT OR SERVICER TERMINATION TRIGGER EVENT
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee shall, but only upon the receipt of
instructions from the Certificate Insurer or the holders of Certificates
having not less than a majority of the Voting Rights evidenced by the
Certificates (with the prior written consent of the Certificate Insurer),
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 and duties of the
Servicer under the Pooling and Servicing Agreement, including the obligation
to make Advances. If a Servicer Termination Trigger Event occurs, the Trustee
shall, but only upon receipt of instructions from the Certificate Insurer,
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 assurance can be given that termination of the rights
and obligations of the Servicer under the Pooling and Servicing Agreement
would not adversely affect the servicing of the Mortgage Loans, including the
delinquency experience of the Mortgage Loans.
No holder of a Certificate, solely by virtue of such holder's status as
a holder of a Certificate, will have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect thereto, unless
such holder previously has given to the Trustee written notice of default and
unless the holders of Certificates having not less than a majority of the
Voting Rights evidenced by the Offered 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, the
Certificate Insurer shall have consented thereto and the Trustee for 60 days
has neglected or refused to institute any such proceeding.
THE TRUSTEE
Harris Trust and Savings Bank will be the Trustee under the Pooling and
Servicing Agreement. The Depositor and Cityscape may maintain other banking
relationships in the ordinary course of business with the Trustee. Offered
Certificates may be surrendered for final payment at the Corporate Trust
Office of the Trustee located at 311 West Monroe Street, 12th Floor, Chicago,
Illinois 60606, Attention: Indenture Trust Administration or at such other
addresses as the Trustee may designate from time to time.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided by
the Certificate Insurer. Accordingly, neither the Depositor nor Cityscape
makes any representation as to the accuracy and completeness of such
information.
GENERAL
Financial Guaranty Insurance Company (the "Certificate Insurer"), a New
York stock insurance corporation, is a monoline financial guaranty insurance
company which, since January 1984, has been a leading insurer of bonds issued
by municipal governmental subdivisions and agencies thereof. The Certificate
Insurer also insures a variety of non-municipal structured debt obligations
and pass-through securities. The Certificate Insurer is authorized to write
insurance in all 50 states and the District of Columbia and is also
authorized to carry on general insurance business in the United Kingdom and
to write credit and guaranty insurance in France. The Certificate Insurer is
subject to regulation by the State of New York Insurance Department.
The Certificate Insurer is a wholly-owned subsidiary of FGIC
Corporation, a Delaware holding company. FGIC Corporation is a subsidiary of
General Electric Capital Corporation ("GE Capital"). Neither FGIC
Corporation nor GE Capital is obligated to pay the debts or any of the claims
against the Certificate Insurer.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer
only insures securities that it considers to be of investment grade quality.
With respect to each category of obligations considered for insurance, the
Certificate Insurer has established and maintains its own underwriting
standards that are based on those aspects of credit quality that the
Certificate Insurer deems important for the category and that take into
account criteria established for the category typically used by rating
agencies. Credit criteria for evaluating securities include economic and
social trends, debt management, financial management and legal and
administrative factors, the adequacy of anticipated cash flows, including the
historical and expected performance of assets pledged for payment of
securities under varying economic scenarios, underlying levels of protection
such as insurance or overcollateralization, and, particularly in the case of
long-term municipal securities, the importance of the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of debt service on the insured debt securities and timely interest
and ultimate principal payments due in respect of pass-through securities.
If the issuer of a security insured by the Certificate Insurer defaults on
its obligations to pay such debt service or, in the case of a pass-through
security, available funds are insufficient to pay the insured amounts, the
Certificate Insurer will make scheduled insured payments, without regard to
any acceleration of the securities which may have occurred, and will be
subrogated to the rights of security holders to the extent of its payments.
The claim paying ability of the Certificate Insurer is rated Aaa, AAA and AAA
by Moody's, Standard & Poor's and Fitch Investors Service, Inc.,
respectively.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the
policy or on an annual, semi-annual or monthly basis. The premium rates
charged depend principally on the credit strength of the securities as judged
by the Certificate Insurer according to its internal credit rating system and
the type of issue.
The Certificate Insurer is subject to regulation by the State of New
York Insurance Department and by each other jurisdiction in which the
Certificate Insurer is licensed to write insurance. These regulations vary
from jurisdiction to jurisdiction, but generally require insurance holding
companies and their insurance subsidiaries to register and file certain
reports, including information concerning their capital structure, ownership
and financial condition and require prior approval by the insurance
department of their state of domicile of changes in control, of certain
dividends and other intercorporate transfers of assets and of transactions
between insurance companies, their parents and affiliates. The Certificate
Insurer is required to file quarterly and annual statutory financial
statements and is subject to statutory restrictions concerning the types and
quality of investments, the use of policy forms, premium rates and the size
of risk that it may insure, subject to reinsurance. Additionally, the
Certificate Insurer is subject to triennial audits by the State of New York
Insurance Department.
As of June 30, 1996, December 31, 1995 and December 31, 1994, the
Certificate Insurer had written directly, or assumed through reinsurance,
guarantees of approximately $190.7 billion, $180.0 billion and $160.2 billion
par value of securities, respectively (of which approximately 87 percent, 88
percent and 89 percent, respectively, constituted guarantees of municipal
bonds), for which it had collected gross premiums of approximately $1.99
billion, $1.95 billion and $1.78 billion, respectively. As of June 30, 1996,
the Certificate Insurer had reinsured approximately 18 percent of the risks
it had written, 36 percent through quota share reinsurance and 64 percent
through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1994, December 31, 1995 and June 30, 1996,
respectively, on the basis of generally accepted accounting principles. No
material adverse change in the capitalization of the Certificate Insurer has
occurred since June 30, 1996.
<TABLE>
<CAPTION> (unaudited)
December 31, 1994 December 31, 1995 June 30, 1996
(in millions) (in millions) (in millions)
<S> <C> <C> <C>
Unearned Premiums . . . . . . $ 757 $ 728 $ 698
Other Liabilities . . . . . . 261 304 276
Stockholder's Equity
Common Stock . . . . . . . 15 15 15
Additional Paid-in Capital 334 334 334
Unrealized Gains (Losses) . (42) 64 (6)
Foreign Currency
Translation
Adjustment . . . . . . . (1) (2) (2)
974 1,137 1,229
Retained Earnings . . . . .
Total Stockholder's
1,280 1,548 1,570
Equity . . . . . . . . . . .
Total Liabilities and
Stockholder's Equity $2,298 $2,580 $2,544
</TABLE>
For further financial information concerning the Certificate Insurer,
see the audited financial statements of the Certificate Insurer included as
Appendix A and the unaudited interim financial statements of the Certificate
Insurer included as Appendix B of this Prospectus Supplement.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to Financial Guaranty Insurance
Company, 115 Broadway, New York, New York 10006, Attention: Corporate
Communications Department. The Certificate Insurer's telephone number is
(212) 312-3000.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of information regarding the Certificate Insurer and the Policy
set forth under the headings "Description of the Certificates--Credit
Enhancement--The Certificate Insurance Policy" and "The Certificate Insurer"
and in Appendix A and Appendix B of this Prospectus Supplement.
SENSITIVITY OF THE CLASS A-IO CERTIFICATES
The yield to maturity of the Class A-IO Certificates will be highly
sensitive to the principal prepayment, repurchase and default experience of
the Mortgage Loans. Investors should carefully consider the associated
risks, including the risk that a rapid rate of principal prepayments on the
Mortgage Loans or repurchases of Mortgage Loans could result in the failure
of investors in the Class A-IO Certificates to recover their initial
investments. The yield to holders of the Class A-IO Certificates would also
be adversely affected in the event that the holders of the Residual
Certificates or the Servicer (or, under certain circumstances, the
Certificate Insurer) exercise the right under the Pooling and Servicing
Agreement to repurchase all remaining Mortgage Loans and REO Properties in
the Trust Fund and thereby effect the early retirement of the Certificates,
as described in "Description of the Certificates--Optional Termination."
The following table (the "Yield Table") demonstrates the sensitivity of
the pre-tax yields on the Class A-IO Certificates to various constant rates
of prepayment by projecting the aggregate payments of interest on such
Certificates and the corresponding pre-tax yields on a corporate bond
equivalent ("CBE") basis, assuming distributions on the Mortgage Loans are
made as set forth in the Pooling and Servicing Agreement. The Yield Table is
also based on the assumptions set forth above under "Description of the
Certificates--Weighted Average Lives."
<TABLE>
PRE-TAX YIELDS ON THE CLASS A-IO CERTIFICATES
<CAPTION>
Assumed Percentages of Prepayment Assumption
Purchase -----------------------------------------------------
Price 50% 75% 100% 150% 200%
----- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
$10,617,263 25.534% 18.806% 11.845% (2.882)% (18.928)%
$10,867,670 24.572 17.853 10.901 (3.809) (19.839)
$11,118,077 23.653 16.943 10.000 (4.693) (20.707)
$11,368,484 22.775 16.073 9.139 (5.537) (21.537)
</TABLE>
The pre-tax yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class A-IO Certificates, would cause
the discounted present value of such assumed stream of cash flows to the
Closing Date to equal the assumed purchase prices (which include accrued
interest), and converting such monthly rates to CBE rates. Such calculation
does not take into account the interest rates at which funds received by
holders of the Class A-IO Certificates may be reinvested and consequently
does not purport to reflect the return on any investment in the Class A-IO
Certificates when such reinvestment rates are considered.
It is highly unlikely that the Mortgage Loans will prepay at the same
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate or time. As a result of these factors, the pre-tax yield on the Class
A-IO Certificates is likely to differ from those shown in such tables, even
if all of the Mortgage Loans prepay at the indicated percentages of the
Prepayment Assumption. No representation is made as to the actual rate of
principal payments on the Mortgage Loans (or the Mortgage Rates thereon) for
any period or over the life of the Class A-IO Certificates or as to the yield
on the Class A-IO Certificates. Investors must make their own decisions as
to the appropriate prepayment assumptions to be used in deciding whether
to purchase the Class A-IO Certificates.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund (other than the Pre-
Funding Account and the Capitalized Interest Account) as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. In
the opinion of Brown & Wood LLP, special tax counsel to the Depositor, the
Offered 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 Offered Certificates may be issued with original issue discount for
federal income tax purposes. For purposes of determining the amount and rate
of accrual of original issue discount and market discount, the Depositor
intends to assume that there will be prepayments on the Mortgage Loans at
100% of the Prepayment Assumption. 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 Material Federal
Income Tax Consequences" in the Prospectus.
The Offered Certificates may be treated as being issued at a premium. In
such case, the holders of the Offered Certificates may elect under Section
171 of the Internal Revenue Code of 1986, as amended (the "Code"), to
amortize such premium under the constant yield method and to treat such
amortizable premium as an offset to interest income on the Offered
Certificates. Such election, however, would apply to all the
Certificateholder's debt instruments acquired on or after the first taxable
year in which the election is first made, and should only be made after
consulting with a tax adviser.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
holder of a Certificate, such holder will be permitted to offset such amounts
only against the respective future income, if any, from such Certificate.
Although the tax treatment is uncertain, a holder of a Certificate may be
permitted to deduct a loss to the extent that such holder's respective
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such holder is entitled, assuming no further Principal
Prepayments of the Mortgage Loans are received. Although the matter is not
free from doubt, any such loss might be treated as a capital loss.
SPECIAL TAX ATTRIBUTES OF THE OFFERED CERTIFICATES
As is described more fully under "Certain Material Federal Income Tax
Consequences" in the Prospectus, the Offered Certificates will represent
qualifying assets under Sections 593(d), 856(c)(5)(A) and 7701(a)(19)(C)(v)
of the Code, and net interest income attributable to the Offered Certificates
will be "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, to the extent the
assets of the Trust Fund are assets described in such sections. The Offered
Certificates will represent qualifying assets under Section 860G(a)(3) if
acquired by a REMIC within the prescribed time periods of the Code.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a 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.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Material Federal Income
Tax Consequences--REMIC Certificates" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Certificates
should consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an
employee benefit plan subject to ERISA and/or a plan or other arrangement
subject to the excise tax provisions set forth under Section 4975 of the Code
(each of the foregoing, a "Plan") from engaging in certain transactions
involving such Plan and its assets unless a statutory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes
certain excise taxes on prohibited transactions involving plans described
under that Section; ERISA authorizes the imposition of civil penalties for
prohibited transactions involving plans not covered under Section 4975 of the
Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Offered Certificates should consult with its counsel with respect to the
potential consequences under ERISA and the Code of the Plan's acquisition and
ownership of such Certificates. See "ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a)
of the Code may nonetheless be subject to the prohibited transaction rules
set forth in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. A fiduciary which
decides to invest the assets of a Plan in the Offered Certificates should
consider, among other factors, the extreme sensitivity of the investments to
the rate of principal payments (including prepayments) on the 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, a division of the McGraw-Hill
Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff &
Phelps Credit Rating Co. ("DCR") or Fitch Investors Service, L.P.
("Fitch");
(4) the trustee must not be an affiliate of any other member of
the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the seller
pursuant to the assignment of the loans to the trust fund represents not
more than the fair market value of such loans; the sum of all payments
made to and retained by the servicer and any other servicer represents
not more than reasonable compensation for such person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of S&P, Moody's,
Fitch or D&P for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/
conflict of interest prohibited transactions that may occur when the Plan
fiduciary causes a Plan to acquire certificates in a trust as to which the
fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent (50%) of each class of certificates in which Plans have
invested is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five percent
(5%) or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not
exceed twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of the Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Underwriter, the Trustee, the Servicer, any obligor with respect to
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 Offered 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 five percent (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 Offered
Certificates. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment prudence and diversification,
an investment in the Offered 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Offered
Certificates. Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the
sale of the Offered Certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but has no obligation to do so.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue.
The Depositor 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 in connection with the issuance of the
Certificates will be passed upon for the Depositor and for the Underwriter by
Brown & Wood LLP, New York, New York, and for Cityscape by Dewey Ballantine,
New York, New York.
RATINGS
It is a condition of the issuance of the Offered Certificates (other
than the Class A-IO Certificates) that they be rated AAA and Aaa by S&P and
Moody's, respectively (Moody's, together with S&P, the "Rating Agencies").
It is a condition to the issuance of the Class A-IO Certificates that they be
rated AAAr by S&P and Aaa by Moody's.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the Rating Agencies.
The ratings assigned by S&P to mortgage pass-through 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. S&P's ratings take into consideration the
credit quality of the related mortgage 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. S&P's ratings on such
certificates do not, however, constitute a statement regarding frequency of
prepayments on the related mortgage loans. The "r" symbol is appended to the
rating by S&P of those Certificates that S&P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
The absence of an "r" symbol in the ratings of the other Offered Certificates
should not be taken as an indication that such Certificates will exhibit no
volatility or variability in total return.
The ratings assigned by Moody's to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all
distributions to which such certificateholders are entitled. Moody's ratings
on mortgage pass-through 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 Depositor has not requested a rating of the Offered Certificates by
any rating agency other than S&P and Moody's. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates or, if it does, what ratings would be assigned by such other
rating agency. The ratings assigned by such other rating agency to the
Offered Certificates could be lower than the respective ratings assigned by
the Rating Agencies.
EXPERTS
The financial statements of Financial Guaranty Insurance Company
included in this Prospectus Supplement in Appendix A and in the related
registration statement, as of December 31, 1995 and 1994 and for each of the
years in the three year period ended December 31, 1995, have been included in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing in Appendix A and in the related registration
statement, upon the authority of such firm as experts in accounting and
auditing.
The report of KPMG Peat Marwick LLP refers to changes in 1993, in
accounting methods for multiple-year retrospectively rated reinsurance
contracts, and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
<CAPTION>
- ------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
ASSETS DECEMBER 31, DECEMBER 31,
1995 1994
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995 and $2,141,584 $1,889,910
$1,954,777 in 1994)
Short-term investments, at cost, which 91,032 75,674
approximates market
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated
depreciation 6,314 7,912
($12,861 in 1995 and $10,512 in 1994)
Receivable for securities sold 26,572 -
Prepaid expenses and other assets 12,627 12,243
------ ------
Total assets $2,580,302 $2,298,210
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
------ ------
Total liabilities $1,032,421 $1,018,487
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares $ 15,00 $ 15,000
authorized, issued and outstanding
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed 63,785 (41,773)
maturity securities
available-for-sale, net of tax
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
--------- -------
Total stockholder's equity 1,547,881 1,279,723
--------- ---------
Total liabilities and
stockholder's equity $2,580,302 $2,298,210
---------- ----------
See accompanying notes to financial statements.
</TABLE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
<CAPTION>
- ------------------------------------------------------------------------------
($ in Thousands)
FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Gross premiums written $ 97,288 $161,940 $291,052
Ceded premiums (19,319) (46,477) (49,914)
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned premiums 27,309 53,364 (74,902)
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
Total revenues $256,438 $284,553 $301,595
EXPENSES:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy (3,940) 3,709 2,658
acquisition costs
Other underwriting expenses (19,100) 21,182 21,878
Total expenses 19,806 43,597 87,022
Income before provision for Federal income 236,632 240,956 214,573
taxes
Federal income tax expenses (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
Total Federal income tax expense 48,754 51,225 52,221
Net income before cumulative effect of
change in accounting principle 187,878 189,731 162,352
Net cumulative effect of change in
accounting principle - - 3,008
------ ------- -------
Net income $187,878 $189,731 $165,360
-------- -------- --------
See accompanying notes to financial statements.
</TABLE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
($ in Thousands) NET UNREALIZED
GAINS (LOSSES) ON
ADDITIONAL FIXED MATURITY FOREIGN
COMMON PAID-IN SECURITIES AVAILABLE- CURRENCY RETAINED
STOCK CAPITAL FOR-SALE, NET OF TAX ADJUSTMENT EARNINGS
----- ------- -------------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 2,500 $324,639 $7,267 $(1,597) $618,615
Net income - - - - 165,360
Capital contribution - 21,872 - - -
Adjustment to common stock par value 12,500 (12,500) - - -
Unrealized gains on fixed maturity securities - - (1,325) - -
previously
held at market, net of tax of ($713)
Implementation of change in accounting for - - 84,766 - -
adoption of
SFAS 115, net of tax of $45,643
Foreign currency translation adjustment - - - (668) -
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income - - - - 189,731
Unrealized losses on fixed maturity securities - - (132,481) - -
available-
for-sale, net of tax of ($71,336)
Foreign currency translation adjustment - - - 1,044 -
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income - - - - 187,878
Dividend paid - - - - (25,000
-
Unrealized gains on fixed maturity securities - - 105,558 - -
available-
for-sale, net of tax of $56,839
Foreign currency translation adjustment - - - (278) -
Balance, December 31, 1995 $15,000 $334,011 $63,785 $(1,499) $1,136,584
See accompanying notes to financial statements.
</TABLE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
<CAPTION>
- -------------------------------------------------------------------------------------------------------
($ in Thousands) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 187,878 $ 189,731 $ 165,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle, net - - (3,008)
of tax
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment expenses reserves (20,938) 2,648 51,264
Depreciation of property and equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance premiums 2,581 (7,437) (15,527)
Change in foreign currency translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition costs 12,279 22,015 22,250
Change in accrued investment income and prepaid
expenses and other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity securities 1,922 5,112 8,976
Change in current income taxes payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
Net cash provided by operating activities 94,546 184,489 277,448
INVESTING ACTIVITIES:
Sales and maturities of fixed maturity securities 836,103 550,534 789,036
Purchases of fixed maturity securities (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of short-term (15,358) (11,486) 4,164
investments, net
Purchases of property and equipment, net (750) (1,290) (985)
Net cash used in investing activities (71,113) (184,150) (298,335)
FINANCING ACTIVITIES:
Dividends paid (25,000) - -
Capital contribution - - 21,872
Net cash provided by financing activities (25,000) 21,872
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
Cash at end of year $ 199 $ 1,766 $ 1,427
----------- ----------- ----------
See accompying notes to financial statements.
</TABLE>
Financial Guaranty Insurance
Company Notes to Financial Statements
- -------------------------------------------------------------------------
(1) Business
--------
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides
financial guaranty insurance on newly issued municipal bonds and municipal
bonds trading in the secondary market, the latter including bonds held by
unit investment trusts and mutual funds. The Company also insures
structured debt issues outside the municipal market. Approximately 88% of
the business written since inception by the Company has been municipal
bond insurance.
The Company insures only those securities that, in its judgment, are
of investment grade quality. Municipal bond insurance written by the
Company insures the full and timely payment of principal and interest when
due on scheduled maturity, sinking fund or other mandatory redemption and
interest payment dates to the holders of municipal securities. The
Company's insurance policies do not provide for accelerated payment of the
principal of, or interest on, the bond insured in the case of a payment
default. If the issuer of a Company-insured bond defaults on its
obligation to pay debt service, the Company will make scheduled interest
and principal payments as due and is subrogated to the rights of
bondholders to the extent of payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The accompanying financial statements have been prepared on the basis
of generally accepted accounting principles ("GAAP") which differ in
certain respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 3). The prior years financial statements
have been reclassified to conform to the 1995 presentation. Significant
accounting policies are as follows:
Investments
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Statement defines three
categories for classification of debt securities and the related
accounting treatment for each respective category. The Company has
determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's equity,
net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair
value. Bond discounts and premiums are amortized over the remaining terms
of the securities. Realized gains or losses on the sale of investments
are determined on the basis of specific identification.
Premium Revenue Recognition
Premiums are earned over the period at risk in proportion to the
amount of coverage provided which, for financial guaranty insurance
policies, generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related
unearned premiums, net of premium credits allowed against the premiums
charged for insurance of refunding issues and applicable acquisition
costs, are earned immediately. Unearned premiums represent the portion of
premiums written related to coverage yet to be provided on policies
in force.
Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate
directly to premium production. Such costs include compensation of
employees involved in underwriting, marketing and policy issuance
functions, rating agency fees, state premium taxes and certain other
underwriting expenses, offset by ceding commission income on premiums
ceded to reinsurers (see Note 6). Net acquisition costs are deferred and
amortized over the period in which the related premiums are earned.
Anticipated loss and loss adjustment expenses are considered in
determining the recoverability of acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses is made in an amount
equal to the present value of unpaid principal and interest and other
payments due under insured risks at the balance sheet date for which, in
management's judgment, the likelihood of default is probable. Such
reserves amounted to $77.8 million and $98.7 million at December 31, 1995
and 1994, respectively. As of December 31, 1995 and 1994, such reserves
included $28.8 million and $71.0 million, respectively, established based
on an evaluation of the insured portfolio in light of current economic
conditions and other relevant factors. Loss and loss adjustment expenses
include amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in
1994. The reserve for loss and loss adjustment expenses is necessarily
based upon estimates, however, in management s opinion the reserves for
loss and loss adjustment expenses is adequate. However, actual results
will likely differ from those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred
compensation. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date. Financial guaranty insurance companies are permitted to deduct from
taxable income, subject to certain limitations, amounts added to statutory
contingency reserves (see Note 3). The amounts deducted must be
included in taxable income upon their release from the reserves or
upon earlier release of such amounts from such reserves to cover excess
losses as permitted by insurance regulators. The amounts deducted are
allowed as deductions from taxable income only to the extent that U.S.
government non-interest bearing tax and loss bonds are purchased and held
in an amount equal to the tax benefit attributable to such deductions.
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to
income over their estimated service lives. Office furniture and equipment
are depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the lease,
whichever is shorter. Computer equipment and software are depreciated
over three years. Maintenance and repairs are charged to expense as
incurred.
Foreign Currency Translation
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches
are local currencies. Accordingly, the assets and liabilities of these
foreign branches are translated into U.S. dollars at the rates of exchange
existing at December 31, 1995 and 1994 and revenues and expenses are
translated at average monthly exchange rates. The cumulative translation
loss at December 31, 1995 and 1994 was $1.5 million and $1.2 million,
respectively, net of tax, and is reported as a separate component of
stockholder's equity.
(3) Statutory Accounting Practices
------------------------------
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory-basis accounting practices differ
from GAAP:
(a) premiums are earned in proportion to the reduction of the
related risk rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of whether
loss contingencies actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are
charged directly against surplus but are reflected as assets under GAAP,
if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the financial
reporting and the tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal income tax payments;
and
(g) all fixed income investments are carried at amortized cost
rather than at fair value for securities classified as available-for-sale
under GAAP.
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ----- _____
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
------- -------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $187,878 $1,547,881 $189,731 $1,279,723 $165,360 $1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve - (386,564) - (328,073) - (252,542)
Non-admitted assets - (5,731) - (7,566) - (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of tax - (63,785) - 41,773 - (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for authorized reinsurance - - - (266) - -
Contingency reserve tax deduction (see Note 2) - 78,196 - 55,496 - 45,402
637 19,290 (63) 9,653 - 9,716
Allocation of tax benefits due to Parent's net ------- --------- ------ ------- ------ -------
operating loss to the Company (Note 5)
Statutory-basis amount $166,906 $1,001,521 $179,348 $893,734 $185,145 $777,097
======= ========= ====== =======
</TABLE>
(4) INVESTMENTS
-----------
Investments in fixed maturity securities carried at fair value of
$3.2 million and $3.0 million as of December 31, 1995 and 1994,
respectively, were on deposit with various regulatory authorities as
required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale
are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HANDLING
1995 COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
---------------------------------------------------------------------
U.S. treasury securities and obligations of U.S. $ 71,182 $ 1,696 - $
government corporations and agencies
Obligations of states and political subdivisions 1,942,001 98,458 $ 1,625 2,038,834
Debt securities issued by foreign governments 30,270 152 550 29,872
--------- ------- ----- ---------
Investments available-for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 - - 91,032
--------- ------- ----- ---------
Total $2,134,485 $100,306 $2,175 $2,232,616
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1995, by contractual maturity date, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1995 AMORTIZED FAIR
- ---- COST VALUE
---------- _________
<S> <C> <C>
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
__________ ___________
$2,134,485 $ 2,232,616
Total ========== ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HANDLING
1994 COST GAINS LOSSES FAIR VALUE
- ---- -------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities and
obligations of U.S. government $ 10,945 $ 8 $ (519) $ 10,434
corporations and agencies
Obligations of states and political 1,839,566 25,809 (85,200) 1,780,175
subdivisions
Debt securities issued by foreign 103,666 400 (4,765) 99,301
governments
---------- ---------- ---------- ----------
Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 - - 75,674
---------- ---------- ---------- ----------
Total $2,029,851 $ 26,217 $(90,484) $1,965,584
========== ========== ========== ==========
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed
maturity securities available-for-sale carried at fair value were $836.1
million, $550.5 million, and $789.0 million, respectively. For 1995, 1994
and 1993 gross gains of $36.3 million, $18.2 million and $36.1 million
respectively, and gross losses of $5.5 million, $12.3 million and $1.0
million respectively, were realized on such sales.
Net investment income of the Company is derived from the following
sources (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income from fixed maturity securities $112,684 $108,519 $97,121
Income from short-term investments 8,450 2,479 3,914
------- ------- -------
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
------- ------- -------
Net investment income $120,398 $109,828 $99,920
======= ======= =======
</TABLE>
As of December 31, 1995, the Company did not have more than 10% of
its investment portfolio concentrated in a single issuer or industry.
(5) INCOME TAXES
------------
The Company files a federal tax return as part of the consolidated
return of General Electric Capital Corporation ("GE Capital"). Under a
tax sharing agreement with GE Capital, taxes are allocated to the Company
and the Parent based upon their respective contributions to consolidated
net income. The Company's effective federal corporate tax rate (20.6
percent in 1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less
than the corporate tax rate on ordinary income of 35 percent in 1995, 1994
and 1993.
Federal income tax expense (benefit) relating to operations of the
Company for 1995, 1994 and 1993 is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
_______________________
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current tax expense $28,913 $43,484 $59,505
Deferred tax expense 19,841 7,741 (7,284)
------ ------ -------
Federal income tax expense $48,754 $51,225 $52,221
====== ====== =======
</TABLE>
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income taxes computed on income
before provision for federal income
taxes, at the statutory rate $82,821 $84,334 $75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305)
------- ------- -------
Provision for income taxes $48,754 $51,225 $52,221
------- ------- -------
------- ------- -------
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax liabilities at December 31,
1995 and 1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
----- ------
<S> <C> <C>
Deferred tax assets:
Unrealized losses on fixed maturity securities,
available-for-sale - $22,493
Loss reserves $ 8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
Total gross deferred tax assets $18,434 $52,439
----- ------
Deferred tax liabilities:
Unrealized gains on fixed maturity securities,
available-for-sale 34,346 -
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and loss bonds 9,454 9,454
Other 7,810 9,126
Total gross deferred tax liabilities 117,605 75,079
Net deferred tax liability $99,171 $22,640
===== ======
</TABLE>
Based upon the level of historical taxable income, projections of
future taxable income over the periods in which the deferred tax assets
are deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it will
realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1995 and 1994. The
company anticipates that the related deferred tax asset will be realized.
Total federal income tax payments during 1995, 1994 and 1993 were
$59.8 million, $10.1 million, and $29.4 million, respectively.
(6) REINSURANCE
-----------
The Company reinsures portions of its risk with other insurance
companies through quota share reinsurance treaties and, where warranted,
on a facultative basis. This process serves to limit the Company's
exposure on risks underwritten. In the event that any or all of the
reinsuring companies were unable to meet their obligations, the Company
would be liable for such defaulted amounts. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from activities or economic characteristics of
the reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies. The Company holds collateral under reinsurance
agreements in the form of letters of credit and trust agreements in
various amounts with various reinsurers totaling $33.7 million that can
be drawn on in the event of default.
Effective January 1, 1993, the Company adopted the Emerging Issues
Task Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent a
payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To
reflect the adoption of EITF 93-6 in the accompanying financial
statements, an initial adjustment of $4.6 million, before applicable
income taxes, has been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of
$21.9 million, $39.0 million and $34.4 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Loss and loss adjustment
expenses incurred are presented net of ceded losses of $1.1 million, $0.3
million and $9.1 million for the years ended December 31, 1995, 1994 and
1993, respectively.
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
---------------------------------
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Balance at January 1, $98,746 $96,098 $44,834
Less reinsurance recoverable 14,472 14,168 5,128
Net Balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 -
Prior years (1,207) (437) (756)
Portfolio years (33,900) (11,050) 43,650
------- -------- ------
Total Incurred (8,426) 3,646 42,894
Paid related to:
Current year (197) (382) -
Prior years (5,515) (920) (670)
------- -------- ------
Total Paid (5,712) (1,302) (670)
------- -------- ------
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
------- -------- ------
Balance at December 31, $77,808 $98,746 $96,098
======= ======== ======
</TABLE>
The changes in incurred portfolio reserves principally relate to
business written in prior years. The changes are based upon an evaluation
of the insured portfolio in light of current economic conditions and other
relevant factors.
(8) RELATED PARTY TRANSACTIONS
--------------------------
The Company has various agreements with subsidiaries of General
Electric Company ("GE") and GE Capital. These business transactions
include appraisal fees and due diligence costs associated with
underwriting structured finance mortgage-backed security business; payroll
and office expenses incurred by the Company's international branch offices
but processed by a GE subsidiary; investment fees pertaining to the
management of the Company's investment portfolio; and telecommunication
service charges. Approximately $3.2 million, $3.2 million and $1.0
million in expenses were incurred in 1995, 1994 and 1993, respectively,
related to such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of
the underlying assets. For some of these issues, GE Capital also provides
first loss protection in the event of default. Gross premiums written on
these issues amounted to $1.3 million in 1995, $2.5 million in 1994,
and $3.3 million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written in 1995 and 1994 and 2 percent in 1993).
(9) COMPENSATION PLANS
------------------
Officers and other key employees of the Company participate in the
Parent's incentive compensation, deferred compensation and profit sharing
plans. Expenses incurred by the Company under compensation plans and
bonuses amounted to $7.5 million, $12.2 million and $16.7 million in 1995,
1994 and 1993, respectively, before deduction for related tax benefits.
(10) DIVIDENDS
---------
Under New York insurance law, the Company may pay a dividend only
from earned surplus subject to the following limitations: (a) statutory
surplus after such dividend may not be less than the minimum required
paid-in capital, which was $2.1 million in 1995 and 1994, and (b)
dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined by New York
insurance law, for the 12 month period ending on the preceding December
31, without the prior approval of the Superintendent of the New York State
Insurance Department. At December 31, 1995 and 1994, the amount of the
Company's surplus available for dividends was approximately $100.2 million
and $89.3 million, respectively.
During 1995, the company paid dividends of $25 million. No dividends
were paid during 1994 or 1993.
(11) FINANCIAL INSTRUMENTS
---------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities
are based on quoted market prices, if available. If a quoted market
price is not available, fair values is estimated using quoted market
prices for similar securities. Fair value disclosure for fixed maturity
securities is included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their
fair values.
The estimated fair values of the Company s financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
FAIR CARRYING FAIR CARRYING
Carrying AMOUNT VALUE AMOUNT VALUE
------- -------- ------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand $ 199 $ 199 $ 1,766 $ 1,766
accounts
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,141,584 2,141,584 1,889,910 1,889,910
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves.
Estimated fair values of these guaranties are based on amounts currently
charged to enter into similar agreements (net of applicable ceding
commissions), discounted cash flows considering contractual revenues to be
received adjusted for expected prepayments, the present value of future
obligations and estimated losses, and current interest rates. The
estimated fair values of such financial guaranties range between $412.8
million and $456.2 million compared to a carrying value of $540.6 million
as of December 31, 1995 and between $518.1 million and $565.9 million
compared to a carrying value of $585.1 million as of December 31, 1994.
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only
those securities that, in its judgment, are of investment grade quality.
The Company has established and maintains its own underwriting standards
that are based on those aspects of credit that the Company deems important
for the particular category of obligations considered for insurance.
Credit criteria include economic and social trends, debt management,
financial management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged for payment of securities under varying economic
scenarios and underlying levels of protection such as insurance or
overcollateralization.
In connection with underwriting new issues, the Company sometimes
requires, as a condition to insuring an issue, that collateral be pledged
or, in some instances, that a third-party guarantee be provided for a term
of the obligation insured by a party of acceptable credit quality
obligated to make payment prior to any payment by the Company. The types
and extent of collateral pledged varies, but may include residential
and commercial mortgages, corporate debt, government debt and consumer
receivables.
As of December 31, 1995, the Company's total insured principal
exposure to credit loss in the event of default by bond issuers was $98.7
billion, net of reinsurance of $20.7 billion. The Company's insured
portfolio as of December 31, 1995 was broadly diversified by geography and
bond market sector with no single debt issuer representing more than 1% of
the Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1995, the composition of principal exposure by
type of issue, net of reinsurance, was as follows (in millions):
<TABLE>
<CAPTION> NET PRINCIPAL
OUTSTANDING
-------------
<S> <C>
Municipal:
General obligation $ 43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
Total $98,660.3
</TABLE>
The Company is authorized to do business in 50 states, the District
of Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1995 by state, net of reinsurance, was as follows
(in millions):
<TABLE>
<CAPTION>
NET PRINCIPAL
OUTSTANDING
-------------
<S> <C>
California $10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
--------
Sub-total 59,518.2
other states and 39,142.1
International
Total $98,660.3
========
</TABLE>
(12) COMMITMENTS
-----------
Total rent expense was $2.2 million, $2.6 million and $2.4 million in
1995, 1994 and 1993, respectively. For each of the next five years and in
the aggregate as of December 31, 1995, the minimum future rental payments
under noncancellable operating leases having remaining terms in excess of one
year approximate (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- -------
<S> <C>
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
-------
Total minimum future rental payments $16,844
=======
</TABLE>
FINANCIAL GUARANTY INSURANCE COMPANY
==============================================================================
Audited Financial Statements
December 31, 1995
Report of Independent Auditors ..........................................1
Balance Sheets...........................................................2
Statements of Income.....................................................3
Statements of Stockholder's Equity.......................................4
Statements of Cash Flows.................................................5
Notes to Financial Statements............................................6
FINANCIAL GUARANTY INSURANCE COMPANY
====================================
Unaudited Interim Financial Statements
June 30, 1996
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Unaudited Interim Financial Statements . . . . . . . . . . . . . . 4
Financial Guaranty Insurance
Company Balance Sheets
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Fixed maturity securities, available for sale,
at fair value (amortized cost of $2,066,231 $2,057,812 $2,141,584
in 1996 and $2,043,453 in 1995)
Short-term investments, at cost, which 133,832 91,032
approximates market
Cash 1,294 199
Accrued investment income 37,753 37,347
Reinsurance receivable 7,358 7,672
Deferred policy acquisition costs 93,100 94,868
Property, plant and equipment net of
accumulated depreciation 5,573 6,314
of $14,094 in 1996 and $12,861 in 1955
Prepaid reinsurance premiums 156,055 162,088
Prepaid expenses and other assets 50,908 39,198
--------- ---------
Total assets $2,543,685 $2,580,302
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums 698,149 727,535
Losses and loss adjustment expenses 71,034 77,808
Ceded reinsurance payable 2,777 1,942
Accounts payable and accrued expenses 38,035 32,811
Due to parent 267 1,647
Current federal income taxes payable 67,077 51,296
Deferred federal income taxes payable 63,850 99,171
Payable for securities purchased 32,186 40,211
--------- ---------
Total liabilities $973,375 $1,032,421
--------- ---------
Stockholder's Equity:
Common stock, par value $1,500 per share at
June 30, 1996 and at December 31, 1995:
10,000 shares authorized, issued 15,000 15,000
and outstanding
Additional paid-in capital 334,011 334,011
Net unrealized (losses) gains on fixed maturity
securities available for sale, (5,472) 63,785
net of tax
Foreign currency translation adjustment (2,296) (1,499)
Retained earnings 1,229,067 1,136,584
--------- ---------
Total stockholder's equity 1,570,310 1,547,881
--------- ---------
ASSETS
Total liabilities and stockholder's $2,543,685 $2,580,302
equity ========= =========
</TABLE>
See accompanying notes to interim financial statements
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Gross Premiums written $ 45,481 $ 42,773
Ceded Premiums (6,643) (5,965)
------- -------
Net premiums written 38,838 36,808
Decrease in net unearned premiums 23,353 18,136
------- -------
Net premiums earned 62,191 54,944
Net investment income 61,513 59,327
Net realized gains 8,348 17,446
------- -------
Total revenues 132,052 131,717
------- -------
EXPENSES:
Losses and loss adjustment expenses (2,702) 815
Policy acquisition costs 9,637 5,308
Other underwriting expenses 7,561 8,662
------- -------
Total expenses 14,496 14,785
------- -------
Income before provision for 117,556 116,932
federal income taxes ------- -------
Provision for federal income taxes 25,071 25,066
------- -------
Net income $92,485 $91,866
======= =======
</TABLE>
See accompanying notes to interim financial statements
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOW
- ------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 92,485 $ 91,866
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred income taxes 2,400 11,991
Amortization for fixed maturity securities 398 1,096
Policy acquisition costs deferred (8,565) (10,254)
Amortization of deferred policy acquisition costs 10,333 5,308
Depreciation of fixed assets 1,233 1,167
Change in reinsurance receivable 314 4,569
Change in prepaid reinsurance premiums 6,033 5,877
Foreign currency translation adjustment (1,226) 972
Change in accrued investment income, prepaid
expenses and other assets (12,116) (3,483)
Change in unearned premiums (29,386) (24,013)
Change in losses and loss adjustment expense (6,774) (4,617)
reserves
Change in other liabilities 4,678 (11,076)
Change in current income taxes payable 15,781 (9,625)
Net realized gains on investments (8,348) (17,446)
------ -------
Net cash provided by operating activities 67,240 42,332
------ -------
Investing activities:
Sales or maturities of fixed maturity 406,676 478,328
securities
Purchases of fixed maturity securities (429,529) (413,181)
Sales or maturities (purchases) of short-term (42,800) (102,414)
investments, net
Purchases of property and equipment, net (492) (354)
------ -------
Net cash used for investing activities 66,145 (37,621)
------ -------
Increase (decrease) in cash 1,095 4,711
Cash at beginning of period 199 1,766
------ -------
Cash at end of period $ 1,294 $ 477
====== =======
</TABLE>
See accompanying notes to interim financial statements
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1996 and 1995
(Unaudited)
(1) Basis of Presentation
---------------------
The interim financial statements of Financial Guaranty Insurance
Company (the Company) in this report reflect all adjustments
necessary, in the opinion of management, for a fair statement of (a)
results of operations for the six months ended June 30, 1996 and
1995, (b) the financial position at June 30, 1996 and December 31,
1995, and (c) cash flows for the six months ended June 30, 1996
and 1995.
These interim financial statements should be read in conjunction
with the financial statements and related notes included in the 1995
audited financial statements. The 1995 financial statements have
been reclassified to conform to the 1996 presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(2) STATUTORY ACCOUNTING PRACTICES
------------------------------
The financial statements are prepared on the basis of GAAP,
which differs in certain respects from accounting practices
prescribed or permitted by state insurance regulatory authorities.
The following are the significant ways in which statutory basis
accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of the
related risk rather than in proportion to the coverage
provided;
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless
of whether loss contingencies actually exist, whereas under
GAAP, a reserve is established based on an ultimate estimate
of exposure;
(d) certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as assets
under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently payable,
while under GAAP taxes are also provided for differences
between the financial reporting and tax bases of assets and
liabilities;
(f) purchases of tax and loss bonds are reflected as admitted
assets, while under GAAP they are recorded as federal income
tax payments; and
(g) all fixed income investments are carried at amortized cost,
rather than at fair value for securities classified as
"Available for Sale" under GAAP.
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following is a reconciliation of the net income and stockholder's equity
of Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION> SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
1996 1995
----------------------- --------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
---------- ------------- -------- ---------------
<S> <C> <C> <C> <C>
GAAP basis amount $92,485 $1,570,310 $ 91,866 $1,441,820
Premium revenue recognition (4,061) (170,988) (9,905) (154,322)
Deferral of acquisition costs 1,768 (93,100) (4,946) (95,874)
Contingency reserve - (415,603) - (357,817)
Non-admitted assets - (4,837) - (6,579)
Case-basis losses incurred and salvage recoverable (3,394) (3,446) 6,631 2,531
Portfolio loss reserves - 24,000 (10,900) 35,200
Deferral of income tax 2,400 66,796 11,991 57,466
Unrealized gains on fixed maturity securities held at
fair value, net of taxes - 5,472 - (27,827)
Profit commission 1,273 (4,471) 4,909 (3,931)
Contingency reserve tax deduction - 85,176 - 78,196
Provision for unauthorized reinsurance - - - (266)
Allocation of tax benefits due to Parent's net operating
loss to the Company (4) 10,287 244 9,898
Statutory basis amount $90,467 $1,069,596 $89,845 $978,495
</TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1996 and 1995
(Unaudited)
(3) DIVIDENDS
---------
Under New York Insurance Law, the Company may pay a dividend
only from earned surplus subject to the following limitations:
- Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $2,100,000 in 1996.
- Dividends may not exceed the lesser of 10 percent of its
surplus or 100 percent of adjusted net investment income, as defined therein,
for the twelve month period ending on the preceding December 31, without the
prior approval of the Superintendent of the New York State Insurance
Department.
The amount of the Company's surplus available for dividends
during 1996 is approximately $106.2 million.
(4) INCOME TAXES
------------
The Company's effective Federal corporate tax rate (21.3 percent
and 21.4 percent for the six months ended June 30, 1996 and 1995,
respectively) is less than the statutory corporate tax rate (35 percent in
1996 and 1995) on ordinary income due to permanent differences between
financial and taxable income, principally tax-exempt interest.
(5) REINSURANCE
-----------
In accordance with Statement of Financial Accounting Standards
No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-
Duration and Long-Duration Contracts", adopted in 1993, the Company reports
assets and liabilities relating to reinsured contracts gross of the effects
of reinsurance. Net premiums earned are shown net of premiums
ceded of $12.7 million and $11.6 million, respectively, for the six months
ended June 30, 1996 and 1995.
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
This Prospectus relates to the issuance of Asset Backed Certificates
(the "Certificates") and the Asset Backed Notes (the "Notes" and, together
with the Certificates, the "Securities"), which may be sold from time to
time in one or more series (each, a "Series") by Financial Asset Securities
Corp. (the "Depositor") on terms determined at the time of sale and
described in this Prospectus and the related Prospectus Supplement. The
Securities of a Series will evidence beneficial ownership of a trust fund (a
"Trust Fund"). As specified in the related Prospectus Supplement, the Trust
Fund for a Series of Securities will include certain assets (the "Trust Fund
Assets") which will primarily consist of (i) closed-end and/or revolving
home equity loans (the "Home Equity Loans") secured primarily by 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 REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Securities of
any Series and there can be no assurance that a secondary market for any
Securities will develop, or if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of Securities of any Series
unless accompanied by a Prospectus Supplement. Offers of the Securities may
be made through one or more different methods, including offerings through
underwriters, as more fully described under "Method of Distribution" herein
and in the related Prospectus Supplement. All Securities will be
distributed by, or sold by underwriters managed by:
GREENWICH CAPITAL
MARKETS, INC.
August 20, 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, reinvestment income, guaranties, letters
of credit or other assets to the extent described in the related Prospectus
Supplement. See "Credit Enhancement". In addition, if the related
Prospectus Supplement so provides, the related Trust Funds' assets will
include the funds on deposit in an account (a "Pre-Funding Account") which
will be used to purchase additional Loans during the period specified in the
related Prospectus Supplement. See "The Agreements--Pre-Funding Accounts".
A. Loans
The Loans will consist of (i) closed-end loans (the
"Closed-End Loans") and/or revolving home equity loans or certain balances
therein (the "Revolving Credit Line Loans", together with the Closed-End
Loans, the "Home Equity Loans"), and (ii) home improvement installment sales
contracts and installment loan agreements (the "Home Improvement
Contracts"). The Home Equity Loans and the Home Improvement Contracts are
collectively referred to herein as the "Loans". All Loans will have been
purchased by the Depositor, either directly or through an affiliate, from one
or more Sellers.
As specified in the related Prospectus Supplement,
the Home Equity Loans will, and the Home Improvement Contracts may, be
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on a mortgaged property (the "Mortgaged Property"), which may
be subordinated to one or more senior liens on the Mortgaged Property,
as described in the related Prospectus Supplement. As specified in the
related Prospectus Supplement, Home Improvement Contracts may be unsecured
or secured by purchase money security interests in the Home Improvements
financed thereby. The Mortgaged Properties and the Home Improvements are
collectively referred to herein as the "Properties".
B. Private Asset-
Backed Securities
Private Asset Backed Securities may include (a)
pass-through certificates representing beneficial interests in certain loans
and/or (b) collateralized obligations secured by such loans. Private Asset
Backed Securities may include stripped securities representing an undivided
interest in all or a part of either the principal distributions (but not the
interest distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain loans. Although
individual loans underlying a Private Asset Backed Security may be
insured or guaranteed by the United States or an agency or instrumentality
thereof, they need not be, and the Private Asset Backed Securities themselves
will not be so insured or guaranteed. Payments on the Private Asset Backed
Securities will be distributed directly to the Trustee as registered owner of
such Private Asset Backed Securities. See "The Trust
Fund--Private Asset Backed Securities".
Description of
the Securities
Each Security will represent a beneficial ownership
interest in a Trust Fund created by the Depositor pursuant to an Agreement
among the Depositor, the Master Servicer and the Trustee for the related
Series. The Securities of any Series may be issued in one or more classes
as specified in the related Prospectus Supplement. A Series of Securities
may include one or more classes of senior Securities (collectively, the
"Senior Securities") and one or more classes of subordinate Securities
(collectively, the "Subordinated Securities"). Certain Series or classes of
Securities may be covered by insurance policies or other forms of credit
enhancement, in each case as described herein and in the related Prospectus
Supplement.
One or more classes of Securities of each Series
(i) may be entitled to receive distributions allocable only to principal,
only to interest or to any combination thereof; (ii) may be entitled to
receive distributions only of prepayments of principal throughout the lives
of the Securities or during specified periods; (iii) may be subordinated in
the right to receive distributions of scheduled payments of principal,
prepayments of principal, interest or any combination thereof to one or more
other classes of Securities of such Series throughout the lives of the
Securities or during specified periods; (iv) may be entitled to receive such
distributions only after the occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to receive distributions in
accordance with a schedule or formula or on the basis of collections from
designated portions of the assets in the related Trust Fund; (vi) as to
Securities entitled to distributions allocable to interest, may be entitled
to receive interest at a fixed rate or a rate that is subject to change from
time to time; and (vii) as to Securities entitled to distributions allocable
to interest, may be entitled to distributions allocable to interest only
after the occurrence of events specified in the related Prospectus Supplement
and may accrue interest until such events occur, in each case as
specified in the related Prospectus Supplement. The timing and amounts of
such distributions may vary among classes, over time, or otherwise as
specified in the related Prospectus Supplement.
Distributions on
the Securities
Distributions on the Securities entitled thereto
will be made monthly or at such other intervals and on the dates specified
in the related Prospectus Supplement (each, a "Distribution Date") out of the
payments received in respect of the assets of the related Trust Fund or
Funds or other assets pledged for the benefit of the Securities as specified
in the related Prospectus Supplement. The amount allocable to payments of
principal and interest on any Distribution Date will be determined as
specified in the related Prospectus Supplement. Allocations of distributions
among Securityholders of a single class shall be set forth in
the related Prospectus Supplement.
Unless otherwise specified in the related
Prospectus Supplement, the aggregate original principal balance of the
Securities will not exceed the aggregate distributions allocable to principal
that such Securities will be entitled to receive. If specified in
the related Prospectus Supplement, the Securities will have an aggregate
original principal balance equal to the aggregate unpaid principal balance
of the Trust Fund Assets as of the first day of the month of creation of the
Trust Fund and will bear interest in the aggregate at a rate equal to the
interest rate borne by the underlying Loans (the "Loan Rate") and/or Private
Asset Backed Securities, net of the aggregate servicing fees and any
other amounts specified in the related Prospectus Supplement (the
"Pass-Through Rate"). If specified in the related Prospectus Supplement, the
aggregate original principal balance of the Securities and interest
rates on the classes of Securities will be determined based on the cash flow
on the Trust Fund Assets.
The rate at which interest will be passed through
to holders of each class of Securities entitled thereto may be a fixed rate
or a rate that is subject to change from time to time from the time and for
the periods, in each case as specified in the related Prospectus Supplement.
Any such rate may be calculated on a loan-by-loan, weighted average, notional
amount or other basis, in each case as described in the related Prospectus
Supplement.
Compensating
Interest
If so specified in the related Prospectus
Supplement, the Master Servicer will be required to remit to the Trustee,
with respect to each Loan in the related Trust Fund as to which a principal
prepayment in full or a principal payment which is in excess of the scheduled
monthly payment and is not intended to cure a delinquency was received during
any Due Period, an amount, from and to the extent of amounts
otherwise payable to the Master Servicer as servicing compensation, equal to
(i) the excess, if any, of (a) 30 days' interest on the principal balance of
the related Loan at the Loan Rate net of the per annum rate at which the
Master Servicer's servicing fee accrues, over (b) the amount of interest
actually received on such Loan during such Due Period, net of the Master
Servicer's servicing fee or (ii) such other amount as described in the
related Prospectus Supplement. See "Description of the Securities--
Compensating Interest".
Credit Enhancement
The assets in a Trust Fund or the Securities of one
or more classes in the related Series may have the benefit of one or more
types of credit enhancement as described in the related Prospectus
Supplement. The protection against losses afforded by any such credit
support may be limited. The type, characteristics and amount of credit
enhancement will be determined based on the characteristics of the Loans
and/or Private Asset Backed Securities underlying or comprising the Trust
Fund Assets and other factors and will be established on the basis of
requirements of each Rating Agency rating the Securities of such Series. See
"Credit Enhancement."
A. Subordination
The rights of the holders of the Subordinated
Securities of a Series to receive distributions with respect to the assets
in the related Trust Fund will be subordinated to such rights of the holders
of the Senior Securities of the same Series to the extent described in the
related Prospectus Supplement. This subordination is intended to enhance the
likelihood of regular receipt by holders of Senior Securities of the full
amount of monthly payments of principal and interest due them. The
protection afforded to the holders of Senior Securities of a Series by means
of the subordination feature will be accomplished by (i) the preferential
right of such holders to receive, prior to any distribution being made in
respect of the related Subordinated Securities, the amounts of interest
and/or principal due them on each Distribution Date out of the funds
available for distribution on such date in the related Security Account and,
to the extent described in the related Prospectus Supplement, by the right
of such holders to receive future distributions on the assets in the related
Trust Fund that would otherwise have been payable to the holders of
Subordinated Securities; (ii) reducing the ownership interest of the related
Subordinated Securities; (iii) a combination of clauses (i) and (ii) above;
or (iv) as otherwise described in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, subordination may apply only
in the event of certain types of losses not covered by other forms of credit
support, such as hazard losses not covered by standard hazard insurance
policies, losses due to the bankruptcy or fraud of the borrower. The related
Prospectus Supplement will set forth information concerning, among
other things, the amount of subordination of a class or classes of
Subordinated Securities in a Series, the circumstances in which such
subordination will be applicable, and the manner, if any, in which the
amount of subordination will decrease over time.
B. Reserve Account
One or more reserve accounts (each, a "Reserve
Account") may be established and maintained for each Series. The related
Prospectus Supplement will specify whether or not such Reserve Accounts will
be included in the corpus of the Trust Fund for such Series and will also
specify the manner of funding the related Reserve Accounts and the
conditions under which the amounts in any such Reserve Accounts will be used
to make distributions to holders of Securities of a particular class or
released from the related Reserve Account.
C. Special Hazard Insurance
Policy
Certain classes of Securities may have the benefit
of a Special Hazard Insurance Policy. Certain physical risks that are not
otherwise insured against by standard hazard insurance policies may be
covered by a Special Hazard Insurance Policy or Policies. Each Special
Hazard Insurance Policy will be limited in scope and will cover losses
pursuant to the provisions of each such Special Hazard Insurance Policy as
described in the related Prospectus Supplement.
D. Bankruptcy Bond
One or more bankruptcy bonds (each a "Bankruptcy
Bond") may be obtained covering certain losses resulting from action which
may be taken by a bankruptcy court in connection with a Loan. The level of
coverage and the limitations in scope of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
E. Loan Pool
Insurance Policy
A mortgage pool insurance policy or policies may be
obtained and maintained for Loans relating to any Series, which shall be
limited in scope, covering defaults on the related Loans in an initial amount
equal to a specified percentage of the aggregate principal balance of
all Loans included in the Pool as of the Cut-off Date.
F. FHA Insurance
If specified in the related Prospectus Supplement,
(i) all or a portion of the Loans in a Pool may be insured by the Federal
Housing Administration (the "FHA") and/or (ii) all or a portion of the Loans
may be partially guaranteed by the Department of Veterans' Affairs (the
"VA"). See "Certain Legal Considerations--Title I Program".
G. Cross-Support
If specified in the related Prospectus Supplement,
the beneficial ownership of separate groups of assets included in a Trust
Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Securities evidencing a beneficial ownership
interest in other asset groups within the same Trust Fund.
If specified in the related Prospectus Supplement,
the coverage provided by one or more forms of credit support may apply
concurrently to two or more separate Trust Funds. If applicable, the
related Prospectus Supplement will identify the Trust Funds to which such
credit support relates and the manner of determining the amount of the
coverage provided thereby and of the application of such coverage to the
identified Trust Funds.
H. Other Arrangements
Other arrangements as described in the related
Prospectus Supplement including, but not limited to, one or more letters of
credit, surety bonds, other insurance or third-party guarantees may be used
to provide coverage for certain risks of defaults or various types of losses.
Advances
The Master Servicer and, if applicable, each
mortgage servicing institution that services a Loan in a Pool on behalf of
the Master Servicer (a "Sub-Servicer") may be obligated to advance amounts
(each, an "Advance") corresponding to delinquent interest and/or principal
payments on such Loan until the date, as specified in the related Prospectus
Supplement, following the date on which the related Property is sold at a
foreclosure sale or the related Loan is otherwise liquidated. Any
obligation to make Advances may be subject to limitations as specified in the
related Prospectus Supplement. If so specified in the related
Prospectus Supplement, Advances may be drawn from a cash account available
for such purpose as described in such Prospectus Supplement.
Any such obligation of the Master Servicer or a
Sub-Servicer to make Advances may be supported by the delivery to the Trustee
of a support letter from an affiliate of the Master Servicer or such
Sub-Servicer or an unaffiliated third party (a "Support Servicer")
guaranteeing the payment of such Advances by the Master Servicer or
Sub-Servicer, as the case may be, as specified in the related Prospectus
Supplement.
In the event the Master Servicer, Support Servicer
or Sub-Servicer fails to make a required Advance, the Trustee may be
obligated to advance such amounts otherwise required to be advanced by the
Master Servicer, Support Servicer or Sub-Servicer. See "Description of the
Securities--Advances."
Optional Termination
The Master Servicer or the party specified in the
related Prospectus Supplement, including the holder of the residual interest
in a REMIC, may have the option to effect early retirement of a Series of
Securities through the purchase of the Trust Fund Assets and other assets in
the related Trust Fund under the circumstances and in the manner described
in "The Agreements--Termination; Optional Termination" herein and in the
related Prospectus Supplement.
Legal Investment
The Prospectus Supplement for each series of
Securities will specify which, if any, of the classes of Securities offered
thereby constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Classes of
Securities that qualify as "mortgage related securities" will be legal
investments for certain types of institutional investors to the extent
provided in SMMEA, subject, in any case, to any other regulations which may
govern investments by such institutional investors. Institutions whose
investment activities are subject to review by federal or state authorities
should consult with their counsel or the applicable authorities to determine
whether an investment in a particular class of Securities (whether or not
such class constitutes a "mortgage related security") complies with
applicable guidelines, policy statements or restrictions. See "Legal
Investment."
Certain Material
Federal Income Tax
Consequences
The material federal income tax consequences to
Securityholders will vary depending on whether one or more elections are made
to treat the Trust Fund or specified portions thereof as a real estate
mortgage investment conduit ("REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). The Prospectus Supplement
for each Series of Securities will specify whether such an election will be
made. See "Certain Material Federal Income Tax Consequences".
ERISA Considerations A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or the Code should carefully
review with its legal advisors whether the purchase or holding of Securities
could give rise to a transaction prohibited or not otherwise permissible
under ERISA or the Code. See "ERISA Considerations". Certain classes of
Securities may not be transferred unless the Trustee and the Depositor are
furnished with a letter of representation or an opinion of counsel to the
effect that such transfer will not result in a violation of the prohibited
transaction provisions of ERISA and the Code and will not subject the
Trustee, the Depositor or the Master Servicer to additional obligations. See
"Description of the Securities-General" and "ERISA Considerations".
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of
such Series.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any
significant assets. Unless otherwise specified in the related Prospectus
Supplement, the Securities of a Series will be payable solely from the Trust
Fund for such Securities and will not have any claim against or security
interest in the Trust Fund for any other Series. There will be no recourse
to the Depositor or any other person for any failure to receive
distributions on the Securities. Further, at the times set forth in the
related Prospectus Supplement, certain Trust Fund Assets and/or any balance
remaining in the Security Account immediately after making all payments due
on the Securities of such Series, after making adequate provision for future
payments on certain classes of Securities and after making any other
payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Depositor, the Servicer, any credit enhancement
provider or any other person entitled thereto and will no longer be
available for making payments to Securityholders. Consequently, holders of
Securities of each Series must rely solely upon payments with respect to the
Trust Fund Assets and the other assets constituting the Trust Fund for a
Series of Securities, including, if applicable, any amounts available
pursuant to any credit enhancement for such Series, for the payment of
principal of and interest on the Securities of such Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The
only obligations, if any, of the Depositor with respect to the Trust Fund
Assets or the Securities of any Series will be pursuant to certain
representations and warranties. The Depositor does not have, and is not
expected in the future to have, any significant assets with which to meet
any obligation to repurchase Trust Fund Assets with respect to which there
has been a breach of any representation or warranty. If, for example, the
Depositor were required to repurchase a Loan, its only sources of funds to
make such repurchase would be from funds obtained (i) from the enforcement
of a corresponding obligation, if any, on the part of the Seller or
originator of such Loan, or (ii) from a Reserve Account or similar credit
enhancement established to provide funds for such repurchases. The Master
Servicer's servicing obligations under the related Agreement may include its
limited obligation to make certain advances in the event of delinquencies on
the Loans, but only to the extent deemed recoverable. To the extent
described in the related Prospectus Supplement, the Depositor or Master
Servicer will be obligated under certain limited circumstances to purchase
or act as a remarketing agent with respect to a convertible Loan upon
conversion to a fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of
delinquent payments or losses to holders of Securities entitled to the
benefit thereof, the amount of such credit enhancement will be limited, as
set forth in the related Prospectus Supplement, and may decline and could be
depleted under certain circumstances prior to the payment in full of the
related Series of Securities, and as a result Securityholders may suffer
losses. Moreover, such credit enhancement may not cover all potential
losses or risks. For example, credit enhancement may or may not cover fraud
or negligence by a loan originator or other parties. See "Credit
Enhancement".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans and, in the case of Private Asset Backed
Securities, the underlying loans related thereto, comprising the Trust Fund,
which prepayments may be influenced by a variety of factors, (ii) the manner
of allocating principal and/or payments among the classes of Securities of
a Series as specified in the related Prospectus Supplement, (iii) the
exercise by the party entitled thereto of any right of optional termination
and (iv) the rate and timing of payment defaults and losses incurred with
respect to the Trust Fund Assets. Prepayments of principal may also result
from repurchases of Trust Fund Assets due to material breaches of the
Depositor's or the Master Servicer's representations and warranties, as
applicable. The yield to maturity experienced by a holder of Securities may
be affected by the rate of prepayment of the Loans comprising or underlying
the Trust Fund Assets. See "Yield and Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the
day immediately preceding each Distribution Date, and the effective yield
(at par) to Securityholders will be less than the indicated coupon rate.
See "Description of the Securities - Distributions of Interest".
BALLOON PAYMENTS
Certain of the Loans as of the Cut-off Date may not be fully amortizing
over their terms to maturity and, thus, will require substantial principal
payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Property.
The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
rates at the time of sale or refinancing, the borrower's equity in the
related Property, the financial condition of the borrower and tax laws.
NATURE OF MORTGAGES
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loans, together
with any senior financing on the Properties, if applicable, would equal or
exceed the value of the Properties. Among the factors that could adversely
affect the value of the Properties are an overall decline in the residential
real estate market in the areas in which the Properties are located or a
decline in the general condition of the Properties as a result of failure of
borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods.
In the case of Home Equity Loans, such decline could extinguish the value of
the interest of a junior mortgagee in the Property before having any effect
on the interest of the related senior mortgagee. If such a decline occurs,
the actual rates of delinquencies, foreclosures and losses on all Loans
could be higher than those currently experienced in the mortgage lending
industry in general.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on
a Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a
default by a borrower, these restrictions, among other things, may impede
the ability of the Master Servicer to foreclose on or sell the Property or
to obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted loan having a small remaining principal balance
as it would in the case of a defaulted loan having a large remaining
principal balance, the amount realized after expenses of liquidation would
be smaller as a percentage of the outstanding principal balance of the small
loan than would be the case with the defaulted loan having a large remaining
principal balance. Since the mortgages and deeds of trust securing the Home
Equity Loans will be primarily junior liens subordinate to the rights of the
mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of such senior mortgagees have been satisfied in
full, including any related foreclosure costs. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to any senior mortgage, in which case it must
either pay the entire amount due on any senior mortgage to the related
senior mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on any such senior mortgage in the event the
mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy any senior mortgages or make payments due to any senior
mortgagees.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the origination, servicing and collection of the Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles
may limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Loans, may entitle the borrower to a refund
of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See "Certain Legal
Aspects of the Loans".
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition under the laws of some
states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable,
as an "owner" or "operator", for costs of addressing releases or threatened
releases of hazardous substances that require remedy at a property, if
agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether the environmental damage
or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of the related property. See "Certain Legal Aspects of the
Loans--Environmental Risks".
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of
1994. These provisions impose additional disclosure and other requirements
on creditors with respect to non-purchase money mortgage loans with high
interest rates or high up-front fees and charges. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee
of the creditor would generally be subject to all claims and defenses that
the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission
and other similar federal and state statutes and regulations (collectively,
the "Holder in Due Course Rules"), which protect the homeowner from
defective craftsmanship or incomplete work by a contractor. These laws
permit the obligor to withhold payment if the work does not meet the quality
and durability standards agreed to by the homeowner and the contractor. The
Holder in Due Course Rules have the effect of subjecting any assignee of the
seller in a consumer credit transaction to all claims and defenses which the
obligor in the credit sale transaction could assert against the seller of
the goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to
damages and administrative enforcement. See "Certain Legal Aspects of the
Loans".
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities that
they be rated in one of the four highest rating categories by the Rating
Agency identified in the related Prospectus Supplement. Any such rating
would be based on among other things, the adequacy of the value of the Trust
Fund Assets and any credit enhancement with respect to such class and will
respect such Rating Agency's assessment solely of the likelihood that
holders of a class of Securities will receive payments to which such
Securityholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments on
the related Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Series of Securities. Such rating
shall not be deemed a recommendation to purchase, hold or sell Securities,
inasmuch as it does not address market price or suitability for a particular
investor. Such rating will not address the possibility that prepayment at
higher or lower rates than anticipated by an investor may cause such
investor to experience a lower than anticipated yield or that an investor
purchasing a Security at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn, among other reasons, because of an adverse change in
the financial or other condition of a credit enhancement provider or a
change in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of similar loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement
required with respect to each such class. There can be no assurance that
the historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of similar loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that the values of any Properties have remained or will remain at
their levels on the respective dates of origination of the related Loans.
If the residential real estate markets should experience an overall decline
in property values such that the outstanding principal balances of the Loans
in a particular Trust Fund and any secondary financing on the related
Properties become equal to or greater than the value of the Properties, the
rates of delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry. In addition,
adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To
the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more
classes of the Securities of the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the
liquidity of the Securities in the secondary trading market since investors
may be unwilling to purchase Securities for which they cannot obtain
physical certificates. Since transactions in Securities can be effected
only through the Depository Trust Company ("DTC"), participating
organizations ("Participants"), Financial Intermediaries and certain banks,
the ability of a Securityholder to pledge a Security to persons or entities
that do not participate in the DTC system, or otherwise to take actions in
respect of such Securities, may be limited due to lack of a physical
certificate representing the Securities.
In addition, Securityholders may experience some delay in their receipt
of distributions of interest and principal on the Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC
will then be required to credit such distributions to the accounts of
Participants which thereafter will be required to credit them to the
accounts of Securityholders either directly or indirectly through Financial
Intermediaries. See "Description of the Securities--Book-Entry Registration
of Securities".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing
Date the Depositor will deposit an amount (the "Pre-Funded Amount")
specified in such Prospectus Supplement into the Pre-Funding Account. In no
event shall the Pre-Funded Amount exceed 25% of the initial aggregate
principal amount of the Certificates and/or Notes of the related Series of
Securities. The Pre-Funded Amount will be used to purchase Loans
("Subsequent Loans") in a period from the Closing Date to a date not more
than three months after the Closing Date (such period, the "Funding Period")
from the Depositor (which, in turn, will acquire such Subsequent Loans from
the Seller or Sellers specified in the related Prospectus Supplement). To
the extent that the entire Pre-Funded Amount has not been applied to the
purchase of Subsequent Loans by the end of the related Funding Period, any
amounts remaining in the Pre-Funding Account will be distributed as a
prepayment of principal to Certificateholders and/or Noteholders on the
Distribution Date immediately following the end of the Funding Period, in
the amounts and pursuant to the priorities set forth in the related
Prospectus Supplement.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or
any other assets of a Series will at any time be equal to or greater than
the principal amount of the Securities of such Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the
Agreement for a Series and a sale of the assets in the Trust Fund or upon a
sale of the assets of a Trust Fund for a Series of Securities, the Trustee,
the Master Servicer, the credit enhancer, if any, and any other service
provider specified in the related Prospectus Supplement generally will be
entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement
prior to distributions to Securityholders. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on
the Securities of such Series.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets
of the related Trust Fund, and the Notes of each Series will be secured by
the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case
as specified in the related Prospectus Supplement.* The Pool will be created
on the first day of the month of the issuance of the related Series of
Securities or such other date specified in the Prospectus Supplement (the
"Cut-off Date"). The Securities will be entitled to payment from the assets
of the related Trust Fund or Funds or other assets pledged for the benefit
of the Securityholders as specified in the related Prospectus Supplement and
will not be entitled to payments in respect of the assets of any other trust
fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either
directly or through affiliates, from originators or sellers which may be
affiliates of the Depositor (the "Sellers"), and conveyed by the Depositor
to the related Trust Fund. Loans acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below
under "Loan Program-Underwriting Standards" or as otherwise described in a
related Prospectus Supplement. See "Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named
in the related Prospectus Supplement will service the Trust Fund Assets,
either directly or through other servicing institutions ("Sub-Servicers"),
pursuant to a Pooling and Servicing Agreement among the Depositor, the
Master Servicer and the Trustee with respect to a Series of Certificates, or
a servicing agreement (each, a "Servicing Agreement") between the Trustee
and the Servicer with respect to a Series of Notes, and will receive a fee
for such services. See "Loan Program" and "The Pooling and Servicing
Agreement". With respect to Loans serviced by the Master Servicer through
a Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Agreement as if the Master Servicer alone were
servicing such Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and
with respect to a Series of Notes, the Indenture and the Servicing
Agreement, as the context requires.
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* Whenever the terms "Pool", "Certificates" and "Notes" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Pool and the Certificates representing certain
undivided interests in, or Notes secured by the assets of, a single trust
fund (the "Trust Fund") consisting primarily of the Loans in such Pool.
Similarly, the term "Pass-Through Rate" will refer to the Pass-Through
Rate borne by the Certificates or Notes of one specific Series and the
term "Trust Fund" will refer to one specific Trust Fund.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the
laws of the state specified in the related Prospectus Supplement pursuant to
a trust agreement (each, a "Trust Agreement") between the Depositor and the
trustee of such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other
than acquiring, managing and holding of the related Trust Fund Assets and
other assets contemplated herein and in the related Prospectus Supplement
and the proceeds thereof, issuing Securities and making payments and
distributions thereon and certain related activities. No Trust Fund is
expected to have any source of capital other than its assets and any related
credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities
will be to obtain certain representations and warranties from the Sellers
and to assign to the Trustee for such Series of Securities the Depositor's
rights with respect to such representations and warranties. See "The
Agreements--Assignment of Trust Fund Assets". The obligations of the Master
Servicer with respect to the Loans will consist principally of its
contractual servicing obligations under the related Agreement (including its
obligation to enforce the obligations of the Sub-Servicers or Sellers, or
both, as more fully described herein under "Loan Program--Representations by
Sellers; Repurchases" and "The Agreements--Sub-Servicing of Loans", "--
Assignment of Trust Fund Assets") and its obligation, if any, to make
certain cash advances in the event of delinquencies in payments on or with
respect to the Loans in the amounts described herein under "Description of
the Securities--Advances". The obligations of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in
the related Prospectus Supplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust
Fund Assets is not known at the time the related Series of Securities
initially is offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to the
Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule
of the Trust Fund Assets relating to such Series will be attached to the
Agreement delivered to the Trustee upon delivery of the Securities.
THE LOANS
General. For purposes hereof, "Home Equity Loans" includes "Closed-End
Loans" and "Revolving Credit Line Loans". The real property which secures
repayment of the Loans is referred to as "Properties". Unless otherwise
specified in the related Prospectus Supplement, the Loans will be secured by
mortgages or deeds of trust or other similar security instruments creating
a lien on a Property, which may be subordinated to one or more senior liens
on the related Properties, each as described in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement,
the Loans may be "conventional" loans or loans that are insured or
guaranteed by a governmental agency such as the FHA or VA.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments,
and certain other dwelling units ("Single Family Properties") or Small
Mixed-Used Properties (as defined herein) which consist of structures of not
more than three stories which include one- to four-family residential
dwelling units and space used for retail, professional or other commercial
uses. Such Properties may include vacation and second homes, investment
properties and leasehold interests. The Properties may be located in any
one of the fifty states, the District of Columbia, Guam, Puerto Rico or any
other territory of the United States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features,
all as described above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time or
under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Loans may provide for
the payment of interest at a rate lower than the specified interest rate
borne by such Mortgage (the "Loan Rate") for a period of time or for the life
of the Loan, and the amount of any difference may be contributed from
funds supplied by the Seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the original
term to maturity or on an interest rate that is different from the interest
rate on the Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ("balloon payment"). Principal may include interest that
has been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and may
be prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire loan in connection with
the sale or certain transfers of the related Property. Other loans may be
assumable by persons meeting the then applicable underwriting standards of
the Seller.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered
from time to time during promotional periods, is computed and payable
monthly on the average daily outstanding principal balance of such Loan.
Principal amounts on a Revolving Credit Line Loan may be drawn down (up to
a maximum amount as set forth in the related Prospectus Supplement) or
repaid under each Revolving Credit Line Loan from time to time, but may be
subject to a minimum periodic payment. Except to the extent provided in the
related Prospectus Supplement, the Trust Fund will not include any amounts
borrowed under a Revolving Credit Line Loan after the Cut-off Date. The
full amount of a Closed-End Loan is advanced at the inception of the loan
and generally is repayable in equal (or substantially equal) installments of
an amount to fully amortize such loan at its stated maturity. Except to the
extent provided in the related Prospectus Supplement, the original terms to
stated maturity of Closed-End Loan will not exceed 360 months. Under
certain circumstances, under either a Revolving Credit Line Loan or a
Closed-End Loan, a borrower may choose an interest only payment option and
is obligated to pay only the amount of interest which accrues on the loan
during the billing cycle. An interest only payment option may be available
for a specified period before the borrower must begin paying at least the
minimum monthly payment of a specified percentage of the average outstanding
balance of the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
basis for a representation that a given percentage of the Loans is secured
by Single Family Property that is owner-occupied will be either (i) the
making of a representation by the borrower at origination of the Loan either
that the underlying Property will be used by the borrower for a period of at
least six months every year or that the borrower intends to use the Property
as a primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having
terms to maturity of up to 30 years and secured by first-lien mortgages
originated on Properties containing one to four residential units and no
more than three income producing non-residential units ("Small Mixed-Use
Properties"). At least 50% of the units contained in a Small Mixed-Use
Property will consist of residential units. Income from such non-residential
units will not exceed 40% of the adjusted gross income of the
related borrower. The maximum Loan-to-Value Ratio on Small Mixed-Use
Properties will not exceed 65%. Small Mixed-Use Properties may be owner
occupied or investor properties and the loan purpose may be a refinancing or
a purchase.
Home Improvement Contracts. The Trust Fund Assets for a Series may
consist, in whole or part, of home improvement installment sales contracts
and installment loan agreements (the "Home Improvement Contracts")
originated by a home improvement contractor, a thrift or a commercial
mortgage banker in the ordinary course of business. As specified in the
related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Property, or
secured by purchase money security interest in the Home Improvements
financed thereby. Except as otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may
have fixed interest rates or adjustable interest rates and may provide for
other payment characteristics as described below and in the related
Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts will include, but are not limited to, replacement windows, house
siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling goods and solar heating panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the Depositor, with respect to the Loans
contained in the related Pool, including (i) the aggregate outstanding
principal balance and the average outstanding principal balance of the Loans
as of the applicable Cut-off Date, (ii) the type of property securing the
Loan (e.g., one- to four-family houses, individual units in condominium
apartment buildings, vacation and second homes or other real property),
(iii) the original terms to maturity of the Loans, (iv) the largest
principal balance and the smallest principal balance of any of the Loans,
(v) the earliest origination date and latest maturity date of any of the
Loans, (vi) the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as
applicable, of the Loans, (vii) the Loan Rates or annual percentage rates
("APR") or range of Loan Rates or APR's borne by the Loans, and (viii) the
geographical location of the Loans on a state-by-state basis. If specific
information respecting the Loans is not known to the Depositor at the time
the related Securities are initially offered, more general information of
the nature described above will be provided in the related Prospectus
Supplement, and specific information will be set forth in the Detailed
Description.
Except as otherwise specified in the related Prospectus Supplement, the
"Combined Loan-to-Value Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal
balance of the Loan (or, in the case of a Revolving Credit Line Loan, the
maximum amount thereof available) and (b) the outstanding principal balance
at the date of origination of the Loan of any senior mortgage loan(s) or, in
the case of any open-ended senior mortgage loan, the maximum available line
of credit with respect to such mortgage loan, regardless of any lesser
amount actually outstanding at the date of origination of the Loan, to (ii)
the Collateral Value of the related Property. Except as otherwise
specified in the related Prospectus Supplement, the "Collateral Value" of
the Property, other than with respect to certain Loans the proceeds of which
were used to refinance an existing mortgage loan (each, a "Refinance Loan"),
is the lesser of (a) the appraised value determined in an appraisal obtained
by the originator at origination of such Loan and (b) the sales price for
such Property. In the case of Refinance Loans, the "Collateral Value" of
the related Property is the appraised value thereof determined in an
appraisal obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
General. Private Asset Backed Securities may consist of (a) pass-
through certificates or participation certificates evidencing an undivided
interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home
improvement loans. Private Asset Backed Securities may include stripped
asset backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions)
or the interest distributions (but not the principal distributions) or in
some specified portion of the principal and interest distributions (but not
all of such distributions) on certain home equity or home improvement loans.
Private Asset Backed Securities will have been issued pursuant to a pooling
and servicing agreement, an indenture or similar agreement (a "PABS
Agreement"). The seller/servicer of the underlying Loans will have entered
into the PABS Agreement with the trustee under such PABS Agreement (the
"PABS Trustee"). The PABS Trustee or its agent, or a custodian, will
possess the loans underlying such Private Asset Backed Security. Loans
underlying a Private Asset Backed Security will be serviced by a servicer
(the "PABS Servicer") directly or by one or more subservicers who may be
subject to the supervision of the PABS Servicer. Except as otherwise
specified in the related Prospectus Supplement, the PABS Servicer will be a
FNMA or FHLMC approved servicer and, if FHA Loans underlie the Private Asset
Backed Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts and selling beneficial interests in
such trusts. The PABS Issuer shall not be an affiliate of the Depositor.
The obligations of the PABS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
the related trust. Except as otherwise specified in the related Prospectus
Supplement, the PABS Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Asset Backed Securities
issued under the PABS Agreement. Additionally, although the loans
underlying the Private Asset Backed Securities may be guaranteed by an
agency or instrumentality of the United States, the Private Asset Backed
Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest
distributions. Principal and interest distributions will be made on the
Private Asset Backed Securities by the PABS Trustee or the PABS Servicer.
The PABS Issuer or the PABS Servicer may have the right to repurchase assets
underlying the Private Asset Backed Securities after a certain date or under
other circumstances as specified in the related Prospectus Supplement.
Underlying Loans. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level
payment, fully amortizing loans or graduated payment loans, buydown loans,
adjustable rate loans, or loans having balloon or other special payment
features. Such loans may be secured by single family property, multifamily
property, manufactured homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a cooperative and
the related shares issued by such cooperative. Except as otherwise
specified in the related Prospectus Supplement, the underlying loans will
have the following characterizations: (i) no loan will have had a Loan-to-
Value Ratio at origination in excess of 95%, (ii) each single family loan
secured by a mortgaged property that had a Loan-to-Value ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy,
(iii) each loan will have had an original term to stated maturity of not
less than 5 years and not more than 40 years, (iv) no loan that was more
than 89 days delinquent as to the payment of principal or interest will have
been eligible for inclusion in the assets under the related PABS Agreement,
(v) each loan (other than a cooperative loan) will be required to be covered
by a standard hazard insurance policy (which may be a blanket policy), and
(vi) each loan (other than a cooperative loan or a contract secured by a
manufactured home) will be covered by a title insurance policy.
Credit Support Relating to Private Asset Backed Securities. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety
bonds, insurance policies or other types of credit support may be provided
with respect to the loans underlying the Private Asset Backed Securities
themselves.
Rating of Private Asset Backed Securities. The PABS upon their
issuance will have been assigned a rating in one of the four highest rating
categories by at least one nationally recognized statistical rating agency.
Additional Information. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private Asset
Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the loans which comprise the underlying assets for the
Private Asset Backed Securities including (A) the payment features of such
loans, (B) the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the loans, and (D)
the minimum and maximum stated maturities of the underlying loans at
origination, (iii) the maximum original term-to-stated maturity of the
Private Asset Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Asset Backed Securities, (v) the pass-through or
certificate rate of the Private Asset Backed Securities, (vi) the weighted
average pass-through or certificate rate of the Private Asset Backed
Securities, (vii) the PABS Issuer, the PABS Servicer (if other than the PABS
Issuer) and the PABS Trustee for such Private Asset Backed Securities,
(viii) certain characteristics of credit support, if any, such as reserve
funds, insurance policies, surety bonds, letters of credit or guaranties
relating to the loans underlying the Private Asset Backed Securities or to
such Private Asset Backed Securities themselves, (ix) the term on which the
underlying loans for such Private Asset Backed Securities may, or are
required to, be purchased prior to their stated maturity or the stated
maturity of the Private Asset Backed Securities, (x) the terms on which
loans may be substituted for those originally underlying the Private Asset
Backed Securities and (xi) to the extent provided in a periodic report to
the Trustee in its capacity as holder of the PABS, certain information
regarding the status of the credit support, if any, relating to the PABS.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be
used by the Depositor for general corporate purposes. The Depositor expects
to sell Securities in Series from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the
volume of Trust Fund Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of
acquiring, owning and transferring Trust Fund Assets and selling interests
therein or bonds secured thereby. It is an indirect, limited purpose
finance subsidiary of 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
Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing
Act of 1934, as amended. In addition to the Title I Program of the FHA, see
"Certain Legal Considerations -- Title I Program", certain Loans will be
insured under various FHA programs including the standard FHA 203(b) program
to finance the acquisition of one- to four-family housing units and the FHA
245 graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by
circumstances beyond the mortgagor's control, the Master Servicer or any
Sub-Servicer is expected to make an effort to avoid foreclosure by entering,
if feasible, into one of a number of available forms of forbearance plans
with the mortgagor. Such plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with such payments to be
made upon or before the maturity date of the mortgage, or the recasting of
payments due under the mortgage up to or, other than Loans originated under
the Title I Program of the FHA, beyond the maturity date. In addition, when
a default caused by such circumstances is accompanied by certain other
criteria, HUD may provide relief by making payments to the Master Servicer
or any Sub-Servicer in partial or full satisfaction of amounts due under the
Loan (which payments are to be repaid by the mortgagor to HUD) or by
accepting assignment of the loan from the Master Servicer or any Sub-
Servicer. With certain exceptions, at least three full monthly installments
must be due and unpaid under the Loan, and HUD must have rejected any
request for relief from the mortgagor before the Master Servicer or any Sub-
Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued
in satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount
equal to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct
certain amounts received or retained by the Master Servicer or Sub-Servicer
after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds
of its foreclosure costs, and is compensated for interest accrued and unpaid
prior to such date but in general only to the extent it was allowed pursuant
to a forbearance plan approved by HUD. When entitlement to insurance
benefits results from assignment of the Loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA-insured
Loan, bears interest from a date 30 days after the borrower's first
uncorrected failure to perform any obligation to make any payment due under
the mortgage and, upon assignment, from the date of assignment to the date
of payment of the claim, in each case at the same interest rate as the
applicable HUD debenture interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan
guarantee by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The
program has no mortgage loan limits, requires no down payment from the
purchaser and permits the guarantee of mortgage loans of up to 30 years'
duration. However, no Loan guaranteed by the VA will have an original
principal amount greater than five times the partial VA guarantee for such
Loan.
The maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section
1803(a), as amended. As of January 1, 1990, the maximum guarantee that may
be issued by the VA under a VA guaranteed mortgage loan of more than
$144,000 is the lesser of 25% of the original principal amount of the
mortgage loan and $46,000. The liability on the guarantee is reduced or
increased pro rata with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guarantee
exceed the amount of the original guarantee. The VA may, at its option and
without regard to the guarantee, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce
its intention to foreclose only when the default has continued for three
months. Generally, a claim for the guarantee is submitted after liquidation
of the Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as
of the applicable date of computation specified in the VA regulations.
Payments under the guarantee will be equal to the unpaid principal amount of
the Loan, interest accrued on the unpaid balance of the Loan to the
appropriate date of computation and limited expenses of the mortgagee, but
in each case only to the extent that such amounts have not been recovered
through liquidation of the Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in 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.
<TABLE>
<CAPTION>
<S> <C>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN CITYSCAPE HOME EQUITY LOAN TRUST
AUTHORIZED TO GIVE SERIES 1996-3
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, $60,800,000 (Approximate) Class A-1A,
IF GIVEN OR 6.70% Pass-Through Rate
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED $76,000,000 (Approximate) Class A-1B
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR Variable Pass-Through Rate
THE
UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE $21,000,000 (Approximate) Class A-2,
PROSPECTUS DO 6.65% Pass-Through Rate
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO $59,000,000 (Approximate) Class A-3,
WHICH THEY RELATE OR AN OFFER TO SELL, OR A 6.85% Pass-Through Rate
SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION $50,000,000 (Approximate) Class A-4,
WHERE SUCH AN 6.80% Pass-Through Rate
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY $14,000,000 (Approximate) Class A-5,
OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS 7.05% Pass-Through Rate
NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, $52,300,000 (Approximate) Class A-6,
CREATE ANY 7.15% Pass-Through Rate
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS $31,700,000 (Approximate) Class A-7,
OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES. 7.50% Pass-Through Rate
$31,644,000 (Approximate) Class A-8,
7.65% Pass-Through Rate*
TABLE OF CONTENTS
Class A-IO, 1.00% Pass-Through Rate
PAGE
PROSPECTUS SUPPLEMENT
FINANCIAL ASSET SECURITIES CORP.
(DEPOSITOR)
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . S-3
Summary of Terms . . . . . . . . . . . S-5
Risk Factors . . . . . . . . . . . . . S-14 ---------------------------
The Seller's Portfolio of Mortgage
Loans. . . . . . . . . . . . . . . . . S-18
The Seller and the Servicer . . . . . . S-22 PROSPECTUS SUPPLEMENT
The Mortgage Pool . . . . . . . . . . . S-24
The Pooling and Servicing Agreement . . S-32 ---------------------------
Description of the Certificates . . . . S-34
The Certificate Insurer . . . . . . . . S-57
Sensitivity of the Class A-IO Certificates GREENWICH CAPITAL MARKETS, INC.
Use of Proceeds . . . . . . . . . . . . S-59
Certain Material Federal Income Tax
Consequences . . . . . . . . . . . . . S-60 August 28, 1996
State Taxes . . . . . . . . . . . . . . S-61
ERISA Considerations . . . . . . . . . S-61
Method of Distribution . . . . . . . . S-63 ---------------
Legal Matters . . . . . . . . . . . . . S-63 * Subject to certain limitations described herein.
Ratings . . . . . . . . . . . . . . . . S-63
Experts . . . . . . . . . . . . . . . . S-62
PROSPECTUS
Prospectus Supplement or Current Report
on Form 8-K . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . 2
Available Information . . . . . . . . . 2
Reports to Securityholders . . . . . . 3
Summary of Terms . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . 12
The Trust Fund . . . . . . . . . . . . . 17
Use of Proceeds . . . . . . . . . . . . 22
The Depositor . . . . . . . . . . . . . 22
Loan Program . . . . . . . . . . . . . . 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 Material Federal Income
Tax Considerations . . . . . . . . . . . 66
State Tax Considerations . . . . . . . . 85
ERISA Considerations . . . . . . . . . . 85
Legal Investment . . . . . . . . . . . .. 88
Method of Distribution . . . . . . . . . 89
Legal Matters . . . . . . . . . . . . . . 90
Financial Information . . . . . . . . . . 90
Rating . . . . . . . . . . . . . . . . . 90
</TABLE>
