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RULE NO. 424(b)(5)
REGISTRATION NO. 33-99018
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 26, 1996)
HEADLANDS HOME EQUITY LOAN TRUST 1996-1
REVOLVING HOME EQUITY LOAN ASSET-BACKED CERTIFICATES,
SERIES 1996-1
$125,595,644.60 Class A Variable Pass-Through Rate Certificates
Class S 1% Pass-Through Rate Certificates
HEADLANDS MORTGAGE COMPANY,
AS SERVICER
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Each Revolving Home Equity Loan Asset-Backed Certificate, Series 1996-1, Class
A and Class S (collectively, the "Certificates") will represent an undivided
interest in the Headlands Home Equity Loan Trust 1996-1 (the "Trust") to be
formed pursuant to a Pooling and Servicing Agreement among, Financial Asset
Securities Corp., as depositor (the "Depositor") Headlands Mortgage Company
("Headlands"), as Servicer, Headlands Mortgage L.L.C., as Transferor, and The
First National Bank of Chicago, as Trustee. The Certificates will consist of
two classes (referred to herein as the "Class A Certificates" and the "Class S
Certificates"). The property of the Trust will consist primarily of a pool of
adjustable rate home equity revolving credit line loans made or to be made (the
"HELOCs") under certain home equity revolving credit line loan agreements and
fixed-rate closed-end home equity loans (the "Closed-End Loans" and together
with the HELOCs, the "Mortgage Loans"). The Mortgage Loans are secured by first
or second deeds of trust or mortgages on primarily one-to four-family
residential properties.
The aggregate undivided interest in the Trust represented by the Class A
Certificates will initially represent approximately 98% of the outstanding
principal balances of the Mortgage Loans and interest thereon at a rate
generally equal to LIBOR plus .20% (the "Class A Certificate Rate"). The
Class S Certificates will represent an interest in the interest payable on the
Mortgage Loans in excess of the Class A Certificate Rate. The remaining
undivided interest in the Trust not represented by the Certificates (the
"Transferor Interest") will initially be equal to approximately 2% of the
outstanding principal balances of the Mortgage Loans. Only the Certificates are
offered hereby. Continued on next page.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES,
SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-24 HEREIN AND IN THE
PROSPECTUS ON PAGE 12.
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THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF HEADLANDS, THE TRUSTEE, THE DEPOSITOR, THE
UNDERWRITER OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN.
NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY HEADLANDS, THE TRUSTEE, THE DEPOSITOR, THE UNDERWRITER OR ANY
AFFILIATE THEREOF OR BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY 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.
Greenwich Capital Markets, Inc. has agreed to purchase the Class A
Certificates from the Depositor for a purchase price resulting in aggregate
proceeds to the Depositor of approximately $125,218,858 before deducting
expenses payable by the Depositor estimated at $400,000.
Greenwich Capital Markets Inc. proposes to offer the Class A Certificates and
the Class S Certificates from time to time for sale in negotiated transactions
or otherwise, at prices determined at the time of sale. For further information
with respect to the plan of sale and any discounts, commissions or profits on
resale that may be deemed underwriting discounts or commissions, see
"Underwriting."
The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
December 26, 1996
Distributions on the Certificates will be made on the fifteenth day of each
month or, if such date is not a Business Day, then on the next succeeding
Business Day (each, a "Distribution Date"), commencing January 15, 1997. On
each Distribution Date, holders of the Class A Certificates will be entitled to
receive, from and to the limited extent of funds available in the Collection
Account (as defined herein), distributions with respect to interest and
principal, and holders of the Class S Certificates will be entitled to receive,
from and to the limited extent of funds in the Collection Account, distributions
with respect to interest calculated as set forth herein. The Certificates are
not guaranteed by Headlands, the Trustee or any affiliate thereof. However, the
Certificates will be unconditionally and irrevocably guaranteed as to the
payment of the Guaranteed Distributions (as defined herein) on each Distribution
Date pursuant to the terms of a certificate guaranty insurance policy (the
"Policy") to be issued by Capital Markets Assurance Corporation.
There is currently no market for the Certificates offered hereby and there can
be no assurance that such a market will develop or if it does develop that it
will continue. See "RISK FACTORS" herein and in the Prospectus.
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THE YIELDS TO MATURITY OF THE CLASSES OF 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 THEREOF ARE
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS)
OF THE MORTGAGE LOANS. THE YIELD TO MATURITY OF THE CLASS A 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 S CERTIFICATES WILL BE EXTREMELY SENSITIVE TO
THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE
MORTGAGE LOANS. HOLDERS OF THE CLASS A CERTIFICATES SHOULD CONSIDER, IN THE
CASE OF ANY CLASS A CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A LOWER
THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT
IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY CLASS A CERTIFICATES
PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD. HOLDERS OF THE CLASS S 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 Certificates will be represented by book-
entries on the records of The Depository Trust Company (the "Depository") and
participating members thereof ("Book-Entry Certificates"). No person acquiring
a beneficial interest in a Certificate will be entitled to receive a physical
certificate representing such Certificate, except in the limited circumstances
described herein. See "Description of the Certificates--Book-Entry
Certificates" herein.
Except for certain representations and warranties relating to the Mortgage
Loans, Headlands' obligations with respect to the Certificates are limited to
its contractual servicing obligations. The Certificates evidence interests in
the Trust only and are payable solely from amounts received with respect
thereto. The Certificates do not constitute an obligation of or an interest in
the Depositor, the Trustee, the Underwriter, the Certificate Insurer or
Headlands, or any of their respective affiliates, and will not be insured or
guaranteed by any governmental agency.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Certificates, but has no obligation to do so. There is
currently no secondary market for the 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 Certificates. Additional information is contained in the
Prospectus dated December 26, 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 Certificates may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE 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 (the "1934 Act"), on or subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the
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
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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 in writing to Mr. Peter McMullin,
Financial Asset Securities Corp. at 600 Steamboat Road, Greenwich, Connecticut
06830.
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SUMMARY
The following summary of certain pertinent information is qualified
in its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and the accompanying Prospectus. Certain
capitalized terms used in the Summary are defined elsewhere in this Prospectus
Supplement or in the Prospectus. Reference is made to the Index of Defined
Terms herein for the definitions of certain capitalized terms.
Trust........................... Headlands Home Equity Loan Trust 1996-1 (the
"Trust") will be formed pursuant to a pooling
and servicing agreement (the "Agreement") to
be dated as of December 1, 1996 among
Financial Asset Securities Corp., as depositor
(the "Depositor"), Headlands Mortgage Company
("Headlands"), as seller and servicer
(together with any successor in such capacity,
the "Seller" and the "Servicer",
respectively), Headlands Mortgage L.L.C.
("Headlands SPC"), as transferor (the
"Transferor") and The First National Bank of
Chicago, as trustee (the "Trustee"). The
property of the Trust will include certain
adjustable rate home equity revolving credit
line loans made or to be made and conveyed to
the Trust on the Closing Date (the "Initial
HELOCs") under certain home equity revolving
credit line loan agreements and promissory
notes (the "Credit Line Agreements"), and
certain fixed-rate closed-end home equity
loans conveyed to the Trust on the Closing
Date (the "Initial Closed-End Loans" and
together with the Initial HELOCs, the "Initial
Mortgage Loans"). The obligations of obligors
under the Closed-End Loans are set forth in
the related mortgage notes (the "Mortgage
Notes" and together with the Credit Line
Agreements, the "Loan Agreements"). The
Mortgage Loans are secured by either first or
second deeds of trust or mortgages on
residential properties that are primarily one-
to four-family properties and also include
planned unit developments and condominiums
(the "Mortgaged Properties"); the collections
in respect of the Mortgage Loans received
after the related Cut-Off Date (as defined
herein) (except with respect to interest
payments on the Initial Mortgage Loans, an
amount equal to fifteen days interest on the
Original Pool Balance at the weighted average
gross Loan Rate; property that secured a
Mortgage Loan that has been acquired by
foreclosure or deed in lieu of foreclosure;
rights of the Transferor under hazard
insurance policies covering the Mortgaged
Properties; an irrevocable and unconditional
limited certificate guaranty insurance policy
(the "Policy"); amounts on deposit in the
Collection Account; amounts on deposit in the
Funding Account (as defined herein); amounts
on deposit in the Spread Account; amounts on
deposit in the Deferred Interest Account (as
defined
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herein); and certain other property, as
described more fully herein. In addition,
during the Funding Period, the Trust shall
have the right to purchase additional Mortgage
Loans (the "Subsequent Mortgage Loans") from
amounts on deposit in the Funding Account. The
Initial Mortgage Loans and the Subsequent
Mortgage Loans constitute Mortgage Loans.
The Trust property will include the unpaid
principal balance of each Mortgage Loan as of
the related Cut-Off Date (the "Cut-Off Date
Principal Balance") plus, with respect to the
HELOCs, any additions thereto as a result of
new advances made pursuant to the applicable
Credit Line Agreements (the "Additional
Balances") during the life of the Trust. With
respect to any date, the "Pool Balance" will
be equal to the aggregate of the Principal
Balances of all Mortgage Loans as of such
date. The aggregate Principal Balance of the
Mortgage Loans as of November 30, 1996 is
$128,158,821.02 (the "Original Pool Balance").
The "Principal Balance" of a Mortgage Loan
(other than a Liquidated Mortgage Loan) on any
day is equal to its Cut-Off Date Principal
Balance, plus, with respect to a HELOC, any
Additional Balances in respect of such HELOC,
minus, with respect to all Mortgage Loans, all
collections credited against the Principal
Balance of such Mortgage Loan in accordance
with the related Credit Line Agreement or the
Mortgage Note, as the case may be, prior to
such day. The Principal Balance of a
Liquidated Mortgage Loan (as defined herein)
after final recovery of related Liquidation
Proceeds (as defined herein) shall be zero.
The "Cut-Off Date" with respect to any Initial
Mortgage Loan shall be November 30, 1996 and
with respect to each Subsequent Mortgage Loan
shall be the date on which such Mortgage Loan
is transferred to the Trust.
Securities Offered.............. Each of the Revolving Home Equity Loan Asset-
Backed Certificates, Series 1996-1, Class A
and Class S offered hereby (the
"Certificates") represents an undivided
interest in the Trust. Each Class A
Certificate represents the right to receive
payments of interest at the variable rate
described below (the "Class A Certificate
Rate"), payable monthly, and payments of
principal at such time and to the extent
provided below. Each Class S Certificate
represents the right to receive interest at
the rate of 1.00% per annum (the "Class S
Certificate Rate" and together with the Class
A Certificate Rate, the "Certificate Rates")
on the Class S Notional Amount for such
Distribution Date. The "Class S Notional
Amount"
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for any Distribution Date shall be the
Certificate Principal Balance for the Class A
Certificates on such Distribution Date (prior
to giving effect to any distributions on such
Distribution Date). The aggregate undivided
interest in the Trust represented by the
Certificates as of the Closing Date will equal
$125,595,644.60 (the "Original Invested
Amount"), which represents approximately 98%
of the Original Pool Balance. The "Original
Class A Certificate Principal Balance" will
equal $125,595,644.60. Following the Closing
Date, the "Invested Amount" with respect to
any date will be an amount equal to the
Original Invested Amount minus (i) the amount
of Principal Collections (as defined herein)
previously distributed to Class A
Certificateholders, amounts allocable to the
Transferor that are used to reimburse Investor
Loss Amounts and amounts distributed as
Guaranteed Principal Distribution Amounts as
draws under the Policy), and minus (ii) an
amount equal to the Investor Loss Amounts not
previously absorbed by the
Overcollateralization Amount, reallocation to
the Transferor Interest (up to the Transferor
Subordinated Amount (as defined herein)),
withdrawals from the Spread Account or draws
on the Policy. The Transferor (as described
below) will own the remaining undivided
interest in the Trust (the "Transferor
Interest"), with a principal amount
approximately equal to the Pool Balance plus
funds on deposit in the Funding Account minus
the Certificate Principal Balance and will
initially equal approximately 2% of the
Original Pool Balance.
The Certificates will be issued pursuant to
the Agreement. The principal amount of the
outstanding Class A Certificates (the
"Certificate Principal Balance") on any date
is equal to the Original Certificate Principal
Balance minus the aggregate of amounts
actually distributed as principal to the
Certificateholders. The notional amount of
the outstanding Class S Certificates on any
date is equal to the Certificate Principal
Balance on such date. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Removal of Certain Mortgage
Loans; Additional Balances...... Subject to certain conditions, on any
Distribution Date the Transferor may, but
shall not be obligated to, designate for
removal from the Trust certain Mortgage Loans
without notice to the holders of the
Certificates (the "Certificateholders"). The
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Transferor is permitted to designate the
Mortgage Loans to be removed. Mortgage Loans
so designated will only be removed upon
satisfaction of certain conditions specified
in the Agreement, including that: (i) the
Transferor Interest as of the Transfer Date
(as defined herein) after giving effect to
such removal exceeds the Minimum Transferor
Interest (as defined below); (ii) the
Transferor shall have delivered to the Trustee
a "Mortgage Loan Schedule" containing a list
of all Mortgage Loans remaining in the Trust
after such removal; (iii) the Transferor shall
represent and warrant that no selection
procedures which are adverse to the interests
of the Certificateholders or the Certificate
Insurer were used by the Transferor in
selecting such Mortgage Loans; (iv) in
connection with each such retransfer of
Mortgage Loans, the Rating Agencies (as
defined herein) shall have been notified of
the proposed transfer and prior to the
Transfer Date shall not have notified the
Transferor or the Certificate Insurer in
writing that such transfer would result in a
reduction or withdrawal of the ratings
assigned to the Certificates without regard to
the Policy; (v) the proposed retransfer shall
not cause a Rapid Amortization Event (as
defined herein) to occur; (vi) the Rapid
Amortization Period (as defined herein) shall
not have commenced; and (vii) the Transferor
shall have delivered to the Trustee and the
Certificate Insurer an officer's certificate
confirming the conditions set forth in clauses
(i) through (vi) above. Where the removal of
such Mortgage Loans results in the Transferor
Interest being reduced below the Minimum
Transferor Interest, the Transferor will be
required to deposit an amount equal to the
Principal Balance of each Mortgage Loan
transferred from the Trust to the Transferor
plus accrued interest thereon through the date
of such transfer with the Trust. See
"DESCRIPTION OF THE CERTIFICATES--Optional
Retransfers of Mortgage Loans to the
Transferor."
The "Minimum Transferor Interest" as of any
date is an amount equal to the lesser of (a)
5% of the Pool Balance on such date and (b)
the Transferor Interest as of the Closing
Date.
During the term of the Trust, all Additional
Balances will be transferred to and become
property of the Trust. Funds on deposit in the
Collection Account, to the extent available,
will be used to purchase such Additional
Balances. The Pool Balance at any time will
generally fluctuate from day to day because
the amount of Additional Balances and the
amount of
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principal payments with respect to the
Mortgage Loans will usually differ from day to
day. Because the Transferor Interest is equal
to the Pool Balance plus funds on deposit in
the Funding Account minus the Certificate
Principal Balance, the amount of the
Transferor Interest will fluctuate from day to
day as draws are made with respect to the
HELOCs and as Principal Collections are
received.
The Mortgage Loans.............. The Initial Mortgage Loans are secured by
first and second deeds of trust or mortgages
on Mortgaged Properties located in 11 states.
On the Closing Date, the Depositor will
transfer the Initial Mortgage Loans to the
Trust, pursuant to the Agreement. As of the
Cut-Off Date, the percentage of the Original
Pool Balance of the Initial Mortgage Loans
secured primarily by Mortgaged Properties
located in the States of California,
Washington and Oregon is approximately 87.91%,
3.19% and 2.61%. No other state represented
more than 2% of the Original Pool Balance. The
"Combined Loan-to-Value Ratio" of each HELOC
is the ratio of (A) the sum of (i) the maximum
amount the borrower is permitted to draw down
under the related Credit Line Agreement (the
"Credit Limit") and (ii) the amounts of any
related senior mortgage loans (computed as of
the date of origination of the HELOC) to (B)
the appraised value of the Mortgaged Property
as determined either by a drive-by inspection
or an appraisal. The "Combined Loan-to-Value
Ratio" of each "Closed-End Loan" is the ratio
of (A) the sum of (i) the original principal
balance of such Closed-End Loan and (ii) the
outstanding principal balance as of the date
of execution of the related Loan Agreement of
any mortgage loan or mortgage loans that are
senior or equal in priority to the Closed End
Loan and that is or are secured by the same
Mortgaged Property to (B) the appraised value
of the Mortgaged Property as determined either
by a drive-by inspection or an appraisal. As
of the Cut-Off Date, the weighted average
Combined Loan-to-Value Ratio of the Initial
Mortgage Loans was approximately 86.91%.
Interest on each HELOC is payable monthly and
computed on the related daily outstanding
Principal Balance for each day in the billing
cycle at a variable rate per annum (with
respect to the HELOCs, the "Loan Rate") equal
at any time (subject to maximum rates, as
described herein under "DESCRIPTION OF THE
MORTGAGE LOANS--Mortgage Loan Terms," and
further subject to applicable usury
limitations) to the sum of (i) the highest
prime rate
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published in the "Money Rates" section of The
Wall Street Journal (such rate, the "Index
Rate") and (ii) a margin (the "Margin") within
the range of 0% to 6.00%; provided that the
Loan Rate for HELOCS is subject to a maximum
rate of 18%. As of the Cut-Off Date, the
weighted average Margin for the Initial HELOCs
was approximately 2.69%. Loan Rates on the
HELOCs are adjusted monthly based on changes
in the Index Rate through the end of the prior
month. Interest on each Closed-End Loan is
payable monthly at a fixed rate (with respect
to the Closed-End Loans, the "Loan Rate") on
the related outstanding Principal Balance of
such Mortgage Loan. A fixed monthly payment is
due on each of the Mortgage Loans. The Closed-
End Loans are actuarial loans under which the
payment is allocated to a pre-determined
amount of principal and interest. The HELOCs
are simple-interest loans under which the
payment is applied first to interest accrued
on the Mortgage Loan through the date of
receipt and then to reduction of the principal
balance. As to each Closed-End Loan, the "Due
Date" is the first day of each month and for
each HELOC, the "Due Date" is the twenty-fifth
day of each month. The Cut-Off Date Principal
Balances of the Initial Mortgage Loans ranged
from zero to $238,527.12 and averaged
approximately $34,516.25. Credit Limits under
the Initial HELOCs as of the Cut-Off Date
ranged from $10,000 to $250,000 and had an
average Credit Limit of approximately
$45,388.50. Each Initial Mortgage Loan was
originated in the period from March 6, 1996 to
November 26, 1996. As of the Cut-Off Date, the
maximum Credit Limit Utilization Rate (as
defined herein) for any Initial HELOC was 100%
and the HELOCs had a weighted average Credit
Limit Utilization Rate (weighted by credit
line) of approximately 75.19%. As of the Cut-
Off Date, none of the Initial Mortgage Loans
represented first liens on the related
Mortgaged Properties. All of the Initial
Mortgage Loans represented second liens.
HELOCs have final scheduled maturities in
fifteen years and twenty-five years. As of the
Cut-Off Date, the Initial Mortgage Loans had
remaining terms to scheduled maturity ranging
from 172 months to 300 months and had a
weighted average remaining term to scheduled
maturity of approximately 238.12 months. See
"DESCRIPTION OF THE MORTGAGE LOANS" herein.
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The Subsequent Mortgage Loans will (subject to
the availability thereof and to certain
limitations and conditions) be conveyed to the
Trust and be originated by Headlands. The
Subsequent Mortgage Loans will meet the
criteria specified in the Agreement as of
their Cut-Off Date. The Trust intends to
accept transfer of the Subsequent Mortgage
Loans, if available, from time to time on any
Distribution Date during the Funding Period
for an amount equal to the Principal Balance
of each such loan as of the transfer date.
Such amount will be released from amounts on
deposit in the Funding Account. Some of the
Mortgage Loans may be teaser loans with lower
initial Loan Rates at the time of sale to the
Trust than if they were fully indexed and such
Mortgage Loans may not become fully indexed
until after a period of time after which they
were sold to the Trust. See "--Interest" and
"--Deferred Interest Account."
Sale and Transfer
of the Mortgage Loans........... All of the Mortgage Loans were originated or
acquired by the Seller and will be sold to the
Transferor pursuant to a purchase agreement
between the Seller and the Transferor and
thereafter transferred from the Transferor to
the Depositor and from the Depositor to the
Trust pursuant to the Agreement.
Denominations................... The Certificates will be offered for purchase
in denominations of $1,000 and multiples of $1
in excess thereof. The interest in the Trust
evidenced by a Certificate (the "Percentage
Interest") will be equal to (i) with respect
to the Class A Certificates, the percentage
derived by dividing the denomination of such
Certificate by the Original Class A
Certificate Principal Balance and (ii) with
respect to the Class S Certificates, the
percentage derived by dividing the notional
amount of such Certificate by the Class S
Notional Amount on the Closing Date.
Registration of Certificates.... The Certificates will be issued in book-entry
form. So long as such Certificates are Book-
Entry Certificates, 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
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.
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Servicer of the Mortgage Loans... Headlands Mortgage Company, a closely held
California S-corporation, will act as the
servicer (in such capacity, the "Servicer").
See "HEADLANDS MORTGAGE COMPANY" herein.
Collections...................... All collections on the Mortgage Loans will
generally be allocated in accordance with the
Loan Agreements between amounts collected in
respect of interest and amounts collected in
respect of principal. As to any Distribution
Date, "Interest Collections" will be equal to
the amounts collected during the related
Collection Period, including the portion of
Net Liquidation Proceeds (as defined below)
allocated to interest pursuant to the terms of
the Loan Agreements and any earnings received
on the amounts on deposit in the Funding
Account, less Servicing Fees for the related
Collection Period.
As to any Distribution Date, "Principal
Collections" will be equal to the sum of (i)
the amounts collected during the related
Collection Period, including the portion of
Net Liquidation Proceeds, allocated to
principal pursuant to the terms of the Loan
Agreements and (ii) any Transfer Deposit
Amounts (as defined herein).
"Net Liquidation Proceeds" with respect to a
Mortgage Loan are the proceeds received in
connection with the liquidation of any
Mortgage Loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by
related expenses, but not including the
portion, if any, of such amount that exceeds
the Principal Balance of the Mortgage Loan
plus any accrued and unpaid interest thereon
to the end of the Collection Period during
which such Mortgage Loan became a Liquidated
Mortgage Loan.
With respect to any Distribution Date, the
portion of Interest Collections allocable to
the Certificates ("Investor Interest
Collections") will equal the product of (a)
Interest Collections for such Distribution
Date and (b) the Investor Floating Allocation
Percentage for such Distribution Date. With
respect to any Distribution Date, the
"Investor Floating Allocation Percentage" is
the percentage equivalent of a fraction
determined by dividing (a) the Invested Amount
at the close of business on the preceding
Distribution Date (or at the Closing Date in
the case of the first Distribution Date) by
(b) the sum as of the beginning of the related
Collection Period of (i) the Pool Balance
(adjusted for any Mortgage Loans removed from
the Trust or Additional Balances added to the
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Trust during the prior Collection Period) and
(ii) the amount of Principal Collections on
deposit in the Funding Account. The remaining
amount of Interest Collections will be
allocated to the Transferor Interest as more
fully described herein.
On each Distribution Date, the Investor
Interest Collections, amounts transferred from
the Deferred Interest Account and the
Spread Account will be applied in the
following order of priority:
(i) as payment to the Class A
Certificateholders for the accrued
interest due and any overdue accrued
interest (with interest thereon) (other
than Deferred Interest (as defined
herein) on the Certificate Principal
Balance of the Class A Certificates;
(ii) as payment to the Class S
Certificateholders for the accrued
interest due and any overdue accrued
interest (with interest thereon) on the
Class S Notional Amount;
(iii) to pay any Investor Loss Amount (as
defined herein) for such Distribution
Date;
(iv) as payment for any Investor Loss Amount
for a previous Distribution Date that was
not previously (a) funded by Investor
Interest Collections allocable to the
Certificateholders, (b) funded by amounts
on deposit in the Spread Account, (c)
absorbed by the Overcollateralization
Amount, (d) funded by Interest
Collections and Principal Collections
allocable to the Transferor Interest up
to the Transferor Subordinated Amount as
described under "--Limited Subordination
of Transferor Interest" below, or (e)
funded by draws on the Policy;
(v) as payment to the Certificate Insurer for
the monthly premium for the Policy;
(vi) to reimburse prior draws made from the
Policy (with interest thereon);
(vii) to pay principal on the Class A
Certificates until the Invested Amount
exceeds the Certificate Principal Balance
by the Required Overcollateralization
Amount (as defined herein) (the aggregate
of amounts, if any, paid pursuant to this
clause (vii) being referred to
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herein as the "Accelerated Principal
Distribution Amount");
(viii) to deposit any other amounts required to
be deposited in an account (the "Spread
Account") for the benefit of the
Certificate Insurer and
Certificateholders pursuant to the
Agreement and the Insurance Agreement;
(ix) to pay any other amounts owed to the
Certificate Insurer pursuant to the
Insurance Agreement;
(x) as payment to the Trustee for its fee for
services rendered pursuant to the
Agreement;
(xi) to pay certain amounts that may be
required to be paid to the Servicer
pursuant to the Agreement;
(xii) to pay Deferred Interest on the Class A
Certificates and interest thereon at the
Class A Certificate Rate; and
(xiii) to the Transferor to the extent permitted
as described herein.
Investor Interest Collections available after
the payment of interest on the Certificates
may be insufficient to cover any Investor Loss
Amount. If such insufficiency exists after
(i) giving effect to the distribution, if any,
of principal to the Class A Certificateholders
on such Distribution Date (including all
withdrawals from the Spread Account) and (ii)
the Transferor Subordinated Amount has been
reduced to zero, then if the Certificate
Principal Balance as of such Distribution Date
exceeds the Invested Amount, a draw in an
amount equal to such difference will be made
on the Policy in accordance with the terms of
the Policy.
The "Overcollateralization Amount" on any date
of determination is the amount, if any, by
which the Invested Amount exceeds the
Certificate Principal Balance on such day.
Payments to Certificateholders pursuant to
clauses (i), (ii) and (xii) will be interest
payments on the Certificates. Payments to
Certificateholders pursuant to clauses (iii)
and (iv) will be principal payments on the
Class A Certificates and will therefore reduce
the Certificate Principal Balance and the
Invested Amount, however, payments pursuant to
clause (vii) will reduce the Certificate
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<PAGE>
Principal Balance but will not reduce the
Invested Amount. The Accelerated Principal
Distribution Amount is not guaranteed by the
Policy. The "Required Overcollateralization
Amount" is $1,922,382.32, minus the aggregate
Principal Balance of all Subsequent Mortgage
Loans that the transferor designates to
provide additional overcollateralization (the
"Overcollateralization Loans").
"Liquidation Loss Amount" means with respect
to any Liquidated Mortgage Loan, the
unrecovered Principal Balance thereof at the
end of the related Collection Period in which
such Mortgage Loan became a Liquidated
Mortgage Loan, after giving effect to the Net
Liquidation Proceeds in connection therewith.
The "Investor Loss Amount" shall be the
product of the Investor Floating Allocation
Percentage and the aggregate of the
Liquidation Loss Amounts for such Distribution
Date. See "DESCRIPTION OF THE CERTIFICATES--
Distributions on the Certificates."
Principal Collections will be allocated
between the Certificateholders and the
Transferor ("Investor Principal Collections"
and "Transferor Principal Collections",
respectively) in accordance with their
percentage interests in the Initial Mortgage
Loans of approximately 98% and 2%,
respectively, as of the Cut-Off Date (the
"Fixed Allocation Percentage"), but (i) during
the Funding Period no amount of Principal
Collections will be distributed to the
Certificateholders and (ii) during the Managed
Amortization Period, a lesser amount of
Principal Collections may be distributed to
Certificateholders, each as described below.
The "Investor Fixed Allocation Percentage"
shall be 98%. Transferor Principal
Collections will be used to purchase
Additional Balances.
The Servicer will deposit Interest Collections
and Principal Collections in respect of the
Mortgage Loans in an account established for
such purpose under the Agreement (the
"Collection Account"). See "DESCRIPTION OF
THE CERTIFICATES--Payments on Mortgage Loans;
Deposits to Collection Account."
Collection Period............... As to any Distribution Date, the "Collection
Period" is the calendar month preceding the
month of such Distribution Date.
Interest........................ Interest on the Certificates will be
distributed monthly on the fifteenth day of
each month or, if such day is not a Business
Day, then the next succeeding Business
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<PAGE>
Day (each, a "Distribution Date"), commencing
on January 15, 1997, at the related
Certificate Rate for the related Interest
Period (as defined below). The Class S
Certificate Rate for an Interest Period shall
be equal to 1.00% per annum. The Class A
Certificate Rate for an Interest Period will
generally equal the sum of (a) the London
interbank offered rate for one-month United
States dollar deposits ("LIBOR") appearing on
the Telerate Screen Page 3750, as of the
second LIBOR Business Day (as defined herein)
prior to the first day of such Interest Period
(or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first
Interest Period) and (b) .20%. Notwithstanding
the foregoing, in no event will the amount of
interest required to be distributed in respect
of the Class A Certificates on any
Distribution Date exceed a rate (the "Maximum
Rate") equal to the weighted average of the
Loan Rates (net of the Class S Certificate
Rate, the Servicing Fee Rate, the fee payable
to the Trustee expressed as a rate and the
rate at which the premium payable to the
Certificate Insurer is calculated) weighted on
the basis of the average daily balance of each
Mortgage Loan during the related billing cycle
prior to the Collection Period relating to
such Distribution Date (adjusted to an
effective rate reflecting accrued interest
calculated on the basis of the actual number
of days in such Collection Period and a 360-
day year) To the extent the Maximum Rate is
less than the Class A Certificate Rate for any
Distribution Date, the deficiency will be
deferred (the "Deferred Interest"). See
"DESCRIPTION OF THE CERTIFICATES--
Collections." The Policy will not guarantee
the payment of Deferred Interest. In certain
circumstances, the addition of Subsequent
Mortgage Loans to the Trust may result in the
Class A Certificate Rate exceeding the Maximum
Rate. Interest on the Certificates in respect
of any Distribution Date will accrue from the
preceding Distribution Date (or, in the case
of the first Distribution Date, from the date
of the initial issuance of the Certificates
(the "Closing Date")) through the day
preceding such Distribution Date (each such
period, an "Interest Period") on the basis of
the actual number of days in the Interest
Period and a 360-day year.
Interest payments on the Certificates will be
funded from Investor Interest Collections, the
Deferred Interest Account, investment
earnings on amounts on deposit in the Funding
Account, the Spread Account, and, if
necessary, from collections allocable to the
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<PAGE>
Transferor up to the then outstanding
Transferor Subordinated Amount and from draws
on the Policy. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Principal Payments from
Principal Collections........... During the period commencing on the Closing
Date and ending on the earlier of (i) the
close of business on January, 1998
Distribution Date and (ii) the commencement of
the Rapid Amortization Period (the "Funding
Period"), the Scheduled Principal Collections
Distribution Amount (as defined below) will be
deposited in the Funding Account. In the event
that not all of the Principal Collections on
deposit in the Funding Account have been used
to acquire Subsequent Mortgage Loans on the
last Distribution Date of the Funding Period,
the remaining amount on deposit in the Funding
Account shall be used to acquire any remaining
Additional Balances on such Distribution Date
and any remaining amount on deposit in the
Funding Account thereafter will be distributed
to the Class A Certificateholders on such
Distribution Date as a payment of principal.
For the period beginning on the first
Distribution Date following the end of the
Funding Period and, unless a Rapid
Amortization Event (as defined herein) shall
have earlier occurred, ending on the
Distribution Date in January, 2003 (such
period, the "Managed Amortization Period"),
the amount of Principal Collections payable to
Class A Certificateholders as of each
Distribution Date during the Managed
Amortization Period will equal, to the extent
funds are available therefor, the Scheduled
Principal Collections Distribution Amount for
such Distribution Date. On any Distribution
Date, the "Scheduled Principal Collections
Distribution Amount" shall equal the lesser of
(i) the Maximum Principal Payment (as defined
herein) and (ii) the Alternative Principal
Payment (as defined herein). With respect to
any Distribution Date, the "Maximum Principal
Payment" will equal the product of the
Investor Fixed Allocation Percentage and
Principal Collections for such Distribution
Date. With respect to any Distribution Date,
the "Alternative Principal Payment" will equal
the amount (but not less than zero) of
Principal Collections for such Distribution
Date less the aggregate of Additional Balances
created during the related Collection Period.
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<PAGE>
Beginning with the first Distribution Date in
the Rapid Amortization Period, the amount of
Principal Collections payable to Class A
Certificateholders on each Distribution Date
will be equal to the Maximum Principal
Payment. See "DESCRIPTION OF THE
CERTIFICATES--Distributions on the
Certificates."
In addition, to the extent funds are available
therefor (including funds on deposit in the
Spread Account and funds available under the
Policy), on the Distribution Date in January,
2024, Class A Certificateholders will be
entitled to receive as payment of principal an
amount equal to the outstanding Certificate
Principal Balance.
Distributions of Principal Collections based
upon the Investor Fixed Allocation Percentage
may result in distributions of principal to
Class A Certificateholders in amounts that are
greater relative to the declining Pool Balance
than would be the case if the Investor
Floating Allocation Percentage were used to
determine the percentage of Principal
Collections distributed in respect of the
Invested Amount. The aggregate distributions
of principal to Certificateholders will not
exceed the Original Certificate Principal
Balance.
Funding Account................. The "Funding Account" will be an Eligible
Account (as defined herein) established with
the Trustee on the Closing Date. On each
Distribution Date during the Funding Period
the Scheduled Principal Collections
Distribution Amount for such Distribution Date
will be deposited in the Funding Account and
may be used by the Trustee to purchase
Subsequent Mortgage Loans. In the event that
not all of the Principal Collections on
deposit in the Funding Account have been used
to acquire Subsequent Mortgage Loans on the
last Distribution Date in the Funding Period,
the remaining amount on deposit in the Funding
Account shall be used to acquire any remaining
Additional Balances on such Distribution Date
and any remaining amounts on deposit in the
Funding Account thereafter will be distributed
to the Certificateholders as payment of
principal.
Deferred Interest Account....... On the Closing Date an amount equal to
$340,397.14 will be deposited, and on each
transfer date of Subsequent Mortgage Loans an
amount calculated by the Transferor necessary
to pay any Deferred Interest (as defined
herein) during the lifetime of such Subsequent
Mortgage Loan will be deposited, in an account
(the "Deferred Interest Account") in the name
of the Trustee on behalf of the Trust. On each
Distribution Date, amounts in the Deferred
Interest Account in an amount of potential
Deferred Interest for such Distribution Date
will be deposited into the Collection Account
and applied in accordance with the priority of
payments set forth in "--Collections." Any
amounts
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<PAGE>
remaining in the Deferred Interest Account on
the later of (i) the Distribution Date
following the end of the Funding Period and
(ii) the Distribution Date following the date
on which all teaser Mortgage Loans have become
fully indexed, will be deposited in the
Collection Account for distribution.
The Certificate Insurer......... Capital Markets Assurance Corporation, a
monoline stock insurance corporation organized
under the laws of the State of New York
("CapMAC" or the "Certificate Insurer") See
"THE CERTIFICATE INSURER."
Policy.......................... On or before the Closing Date, the Policy will
be issued by the Certificate Insurer pursuant
to the provisions of the Insurance and
Reimbursement Agreement (the "Insurance
Agreement") to be dated as of December 1,
1996, among Headlands, as Seller and Servicer,
the Transferor, the Depositor, the Trustee and
the Certificate Insurer.
The Policy will irrevocably and
unconditionally guarantee on each Distribution
Date to the Trustee for the benefit of the
Certificateholders the full and complete
payment of (i) the Guaranteed Principal
Distribution Amount (as defined herein) with
respect to the Class A Certificates for such
Distribution Date and (ii) after application
of amounts available from Investor Interest
Collections, amounts transferred from the
Deferred Interest Account and amounts on
deposit in the Spread Account and certain
other amounts in the Collection Account, any
shortfall in accrued and unpaid interest due
on the Certificates (together, the "Guaranteed
Distributions"), with such Guaranteed
Distributions having been calculated in
accordance with the original terms of the
Certificates or the Agreement. Any amendments
or modifications to such terms shall require
the Certificate Insurer's prior written
consent. The effect of the Policy is to
guarantee the timely payment of interest on
the Class A and Class S Certificates, and the
ultimate payment of the principal amount of
the Class A Certificates.
The "Guaranteed Principal Distribution Amount"
for any Distribution Date on which the
Transferor Subordinated Amount has been
reduced to zero shall be the amount, if any,
by which the Certificate Principal Balance
(after giving effect to all other amounts
distributable and allocable to principal on
the Certificates on such Distribution Date
including application of any amounts available
therefor in the Spread Account) exceeds the
Invested Amount for such Distribution Date
after giving effect to distributions of
principal, if any, to the
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<PAGE>
Certificateholders and the allocation of
Investor Loss Amounts on such Distribution
Date. In addition, the Policy will guarantee
the payment of the outstanding Certificate
Principal Balance on the Distribution Date in
January, 2024 (after giving effect to all
other amounts distributable and allocable to
principal on such Distribution Date and after
applying any amounts available in the Spread
Account).
In accordance with the Agreement and the
Insurance Agreement, the Trustee will be
required to establish and maintain an account
(the "Spread Account") for the benefit of the
Certificate Insurer and the Certificateholders
to be used prior to any draws upon the Policy.
The Trustee shall deposit the amounts into the
Spread Account as required by the Agreement
and the Insurance Agreement.
In the absence of payments from the Spread
Account and under the Policy,
Certificateholders will directly bear the
credit and other risks associated with their
undivided interest in the Trust. See
"DESCRIPTION OF THE CERTIFICATES--The Policy."
Limited Subordination of
Transferor Interest............. If Investor Interest Collections and funds
payable from the Deferred Interest Account
on any Distribution Date are insufficient to
pay (i) accrued interest due and any overdue
accrued interest (with interest thereon) on
the Class A Certificates and then accrued
interest due and any overdue accrued interest
(with interest thereon) on the Class S
Certificates, and (ii) the Investor Loss
Amount (as defined herein), allocable to the
Certificateholders on such Distribution Date
(such insufficiency being the "Required
Amount"), Interest Collections and Principal
Collections allocable to the Transferor
Interest (but not in excess of the then
outstanding Transferor Subordinated Amount,
determined as provided herein) will be applied
to cover the Required Amount. The portion of
the Required Amount in respect of clause (ii)
above not covered by such collections (up to
the remaining Transferor Subordinated Amount
and not in excess of the Investor Loss Amounts
allocable to Certificateholders) will be
reallocated to the Transferor Interest,
thereby reducing the Transferor Interest. If
such Investor Interest Collections plus the
amount of collections allocable to the
Transferor Interest which have been so applied
to cover the Required Amount plus the amount
available therefore in the Spread Account are
together insufficient to pay the amounts set
forth in item (i) of the definition of
Required Amount, then a draw will be made on
the
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<PAGE>
Policy for such Distribution Date to cover the
amount by which interest owed to the Class A
Certificateholders at the Class A Certificate
Rate and to the Class S Certificateholders at
the Class S Certificate Rate exceeds Investor
Interest Collections, amounts available in the
Deferred Interest Account and amounts on
deposit in the Spread Account. In addition, if
on any Distribution Date on or after the
Transferor Subordinated Amount is reduced to
zero, the Certificate Principal Balance
exceeds the Invested Amount (after giving
effect to all allocations and distributions
with respect to principal to be made on the
Class A Certificates on such Distribution
Date), a draw will be made on the Policy for
such Distribution Date in the amount by which
the Certificate Principal Balance exceeds the
Invested Amount. After the Transferor
Subordinated Amount has been reduced to zero,
the Required Amount will no longer be
supported by the Transferor Subordinated
Amount as described above.
With respect to any Distribution Date, the
"Transferor Subordinated Amount" equals
$2,563,176.42 plus the Principal Balance of
any Overcollateralization Loans minus (i) the
aggregate amount of principal and interest
collections allocable to the Transferor
Interest that have previously been distributed
to the Certificateholders to cover a Required
Amount as described above and (ii) the
aggregate amount of the Investor Loss Amounts
that have previously been reallocated to the
Transferor Interest as described above. The
Transferor Subordinated Amount at any time may
also be further reduced if such reduction is
consented to by both the Rating Agencies and
the Certificate Insurer and upon satisfaction
of certain other conditions specified in the
Agreement.
Overcollateralization Amount... The distribution of Accelerated Principal
Distribution Amounts, if any, to Class A
Certificateholders may result in the Invested
Amount being greater than the Certificate
Principal Balance, thereby creating the
Overcollateralization Amount. The
Overcollateralization Amount, if any, will be
available to absorb any Investor Loss Amount
not covered by Investor Interest Collections
and available funds on deposit in the
Deferred Interest Account. Payments of
Accelerated Principal Distribution Amounts are
not covered by the Policy. Any Investor Loss
Amounts
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<PAGE>
not covered by such overcollateralization,
collections otherwise payable to the
Transferor up to the Transferor Subordinated
Amount, amounts on deposit in the Spread
Account and available funds on deposit in the
Deferred Interest Account or Investor
Interest Collections will be covered by draws
on the Policy to the extent provided therein.
Record Date.................... The last day preceding a Distribution Date or,
if the Certificates are no longer Book-Entry
Certificates, the last day of the month
preceding a Distribution Date.
Servicing...................... The Servicer will be responsible for
servicing, managing and making collections on
the Mortgage Loans. The Servicer will deposit
all collections in respect of the Mortgage
Loans into the Collection Account as described
herein. On or before the third Business Day
prior to each Distribution Date (the
"Determination Date"), the Servicer will
calculate, and instruct the Trustee regarding
the amounts to be paid, as described herein,
to the Certificateholders on such Distribution
Date. See "DESCRIPTION OF THE CERTIFICATES--
Distributions on the Certificates." With
respect to each Collection Period, the
Servicer will retain from collections in
respect of interest on the Mortgage Loans, on
behalf of itself, a portion of such
collections as a monthly servicing fee (the
"Servicing Fee") in the amount of 0.50% per
annum (the "Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage
Loans as of the first day of each such
Collection Period. See "DESCRIPTION OF THE
CERTIFICATES--Servicing Compensation and
Payment of Expenses." In certain limited
circumstances, the Servicer may resign or be
removed, in which event either the Trustee or
a third-party servicer will be appointed as a
successor Servicer. See "DESCRIPTION OF THE
CERTIFICATES--Certain Matters Regarding the
Servicer and the Transferor."
Final Payment of Principal;
Termination.................... The Trust will generally terminate on the
latter of (A) the Distribution Date
immediately following the payment in full of
all amounts owing to the Certificate Insurer
and (B) the earliest of (i) the Distribution
Date on which the Certificate Principal
Balance has been reduced to zero and all other
amounts due and owing to the
Certificateholders have been paid, (ii) the
Distribution Date immediately following the
final payment or other liquidation of the last
Mortgage Loan in the Trust, (iii) the
Distribution Date immediately following the
optional retransfer to the
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<PAGE>
Transferor of the Certificates, as described
below and (iv) the Distribution Date in
January, 2024. Interest on the Class S
Certificates will not accrue after the
Certificate Principal Balance has been reduced
to zero. The Certificates will be subject to
optional retransfer to the Transferor on any
Distribution Date after the Certificate
Principal Balance is reduced to an amount less
than or equal to approximately $12,815,882.10
(10% of the Original Certificate Principal
Balance) and all amounts due and owing to the
Certificate Insurer and unreimbursed draws on
the Policy, together with interest thereon, as
provided under the Insurance Agreement, have
been paid. The retransfer price will be equal
to the sum of the outstanding Certificate
Principal Balance and accrued and unpaid
interest thereon at the Certificate Rate plus
payment of all amounts due and owing to the
Class S Certificateholders through the day
preceding the final Distribution Date,
together with all amounts due and owing to the
Certificate Insurer and unreimbursed draws on
the Policy. See "DESCRIPTION OF THE
CERTIFICATES--Termination; Retirement of the
Certificates" herein.
In addition, the Trust may be liquidated as a
result of certain events of bankruptcy,
insolvency or receivership relating to the
Transferor. See "DESCRIPTION OF THE
CERTIFICATES--Rapid Amortization Events"
herein.
Trustee......................... The First National Bank of Chicago, a national
banking association (the "Trustee") will act
as Trustee on behalf of the
Certificateholders.
Mandatory Retransfer of
Certain Mortgage Loans.......... The Transferor will make certain
representations and warranties in the
Agreement with respect to the Mortgage Loans.
If the Transferor breaches certain of its
representations and warranties with respect to
any Mortgage Loan and such breach materially
and adversely affects the interests of the
Certificateholders or the Certificate Insurer
and is not cured within the specified period,
the Mortgage Loan will be removed from the
Trust upon the expiration of a specified
period from the date on which the Transferor
becomes aware or receives notice of such
breach and will be reassigned to the
Transferor. See "DESCRIPTION OF THE
CERTIFICATES--Assignment of Mortgage Loans"
herein.
Federal Tax Considerations...... Subject to the qualifications set forth in
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
herein, special tax counsel to the Depositor
and counsel to the Underwriters ("Tax
Counsel") is of the opinion
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<PAGE>
that, under existing law, the Certificates
will be treated as debt instruments for
federal income tax purposes as of the Closing
Date. Under the Agreement, the Depositor, the
Transferor and the Certificateholders will
agree to treat the Certificates as
indebtedness for federal, state and local
income and franchise tax purposes. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
herein for additional information concerning
the application of Federal income tax laws.
ERISA Considerations............ The Certificates are not eligible for
acquisition by a pension or other employee
benefit plan subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA") or a plan subject to Section
4975 of the Internal Revenue Code (each a
"Plan") or a person investing "plan assets" of
a Plan (including, without limitation, for
this purpose any insurance company general
account). By its acceptance of a Class A
Certificate, each purchaser will be deemed to
have represented and warranted that it is not
subject to the foregoing limitation. See
"ERISA Considerations " herein.
Legal Investment Considerations. The Certificates will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), because not all of the
Mortgages securing the Mortgage Loans are
first mortgages. Accordingly, many
institutions with legal authority to invest in
comparably rated securities based solely on
first mortgages may not be legally authorized
to invest in the Certificates. See "LEGAL
INVESTMENT CONSIDERATIONS" herein.
Certificate Rating.............. It is a condition to the issuance of the Class
A and Class S Certificates that they be rated
"AAA" and "AAAr," respectively, by Standard &
Poor's Rating Services, a division of The
McGraw Hill Companies, Inc. ("Standard &
Poor's") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's" and together with
Standard & Poor's, the "Rating Agencies"). The
ratings assigned to the Class A Certificates
do not address the timeliness or likelihood of
the payment of Deferred Interest. In general,
ratings address credit risk and do not address
the likelihood of prepayments. See "RATINGS"
herein.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors
in connection with the purchase of the Certificates.
Book-Entry Certificates. Issuance of the Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary trading
market since investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates. See "Description of the Certificates--
Book-Entry Certificates" herein and "Risk Factors--Book-Entry Registration" in
the Prospectus.
Since transactions in the Certificates can be effected only through
the Depository, participating organizations, indirect participants and certain
banks, the ability of a beneficial owner of a Book-Entry Certificate (a
"Certificate Owner") to pledge a Certificate to persons or entities that do not
participate in the Depository may be limited due to lack of a physical
certificate representing the Certificates. See "Description of the
Certificates--Book-Entry Certificates" herein and "Risk Factors--Book-Entry
Registration" in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to the Depository and the
Depository will credit such distributions to the accounts of its participants
which will thereafter credit them to the accounts of Certificate Owners either
directly or indirectly through indirect participants. Certificate Owners will
not be recognized as Certificateholders as such term is used in the Agreement,
and Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through the Depository and its participants.
See "Description of the Certificates--Book-Entry Certificates" herein and "Risk
Factors--Book-Entry Registration" in the Prospectus.
Cash Flow Considerations. Minimum required monthly payments on the
Mortgage Loans will at least equal accrued monthly interest on the
Certificates. Even assuming that the Mortgaged Properties provide adequate
security for the Mortgage Loans, substantial delays could be encountered in
connection with the liquidation of Mortgage Loans that are delinquent and
resulting shortfalls in distributions to Certificateholders could occur if the
Certificate Insurer were unable to perform on its obligations under the Policy.
Further, liquidation expenses (such as legal fees, real estate taxes, and
maintenance and preservation expenses) will reduce the security for the
Mortgage Loans and thereby reduce the proceeds payable to Certificateholders.
In the event any of the Mortgaged Properties fail to provide adequate security
for the related Mortgage Loans, Certificateholders could experience a loss if
the Certificate Insurer were unable to perform its obligations under the
Policy.
Prepayment Considerations. The Mortgage Loans may be prepaid in
whole or in part at any time without penalty. Home equity loans, such as the
Mortgage Loans, have been originated in significant volume only during the past
few years and neither the Transferor nor the Servicer is aware of any relevant
studies or statistics on the rate of prepayment of such loans. Generally,
home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment than
traditional mortgage loans. The Trust's prepayment experience may be affected
by a wide variety of factors, including general economic conditions, interest
rates, the availability of alternative financing and homeowner mobility. In
addition, all of the Mortgage Loans contain due-on-sale provisions and the
Servicer intends to enforce such provisions unless (i) such enforcement is not
permitted by applicable law or (ii) the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable
law, such assumption will not release the original borrower from its obligation
under any such Mortgage Loan. See "DESCRIPTION OF THE CERTIFICATES" herein and
"CERTAIN LEGAL ASPECTS OF THE LOANS--Due-on-Sale
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<PAGE>
Clauses" in the Prospectus for a description of certain provisions of the Loan
Agreements that may affect the prepayment experience on the Mortgage Loans.
Certificate Ratings. The ratings of the Certificates will depend
primarily on an assessment by the Rating Agencies of the Mortgage Loans and
upon the claims-paying ability of the Certificate Insurer. Any reduction in a
rating assigned to the claims-paying ability of the Certificate Insurer below
the rating initially given to the Certificates may result in a reduction in the
rating of the Certificates. The ratings by the Rating Agencies of the
Certificates are not a recommendation to purchase, hold or sell the
Certificates, inasmuch as such ratings do not address the market price or
suitability for a particular investor. There is no assurance that the ratings
will remain in place for any given period of time or that the ratings will not
be lowered or withdrawn by the Rating Agencies. In general, the ratings
address credit risk and do not address the likelihood of prepayments. The
ratings of the Certificates do not address the possibility of the imposition of
United States withholding tax with respect to non-U.S. persons.
Legal Considerations. The Mortgage Loans are secured by mortgages or
deeds of trust (which generally are second mortgages). With respect to
Mortgage Loans that are secured by first mortgages, the Servicer has the power
under certain circumstances to consent to a new mortgage lien on the Mortgaged
Property having priority over such Mortgage Loan. Mortgage Loans secured by
second mortgages or deeds of trust are entitled to proceeds that remain from
the sale of the related Mortgaged Property after any related senior mortgage
loan and prior statutory liens have been satisfied. In the event that such
proceeds are insufficient to satisfy such loans and prior liens in the
aggregate and the Certificate Insurer is unable to perform its obligations
under the Policy, the Certificateholders will bear (i) the risk of delay in
distributions while a deficiency judgment against the borrower is obtained and
(ii) the risk of loss if the deficiency judgment cannot be obtained or is not
realized upon. See "CERTAIN LEGAL ASPECTS OF THE LOANS" in the Prospectus.
Insolvency Related Matters. The sale of the Mortgage Loans from
Headlands to Headlands SPC pursuant to a purchase agreement (the "Purchase
Agreement") will be treated as a sale of the Mortgage Loans. However, in the
event of an insolvency of Headlands, the trustee in bankruptcy of Headlands may
attempt to recharacterize the sale of the Mortgage Loans as a borrowing by
Headlands, secured by a pledge of the applicable Mortgage Loans. If the
trustee in bankruptcy decided to challenge such transfer, (i) if the Mortgage
Loans have not been delivered to the Trustee, the interest of the Trust in the
Mortgage Loans will be that of an unperfected security interest and (ii) even
if the Mortgage Loans have been delivered to the Trustee, delays in payments of
the Certificates and reductions in the amounts thereof could occur. The
Transferor will warrant in the Agreement that the transfer of the Mortgage
Loans by it to the Trust is either a valid transfer and assignment of such
Mortgage Loans to the Trust or the grant to the Trust of a security interest in
such Mortgage Loans.
If a conservator, receiver or trustee were appointed for the
Transferor, or if certain other events relating to the bankruptcy or insolvency
of either Headlands or the Transferor were to occur, Additional Balances would
not be sold to the Trust Fund. In such an event, the Rapid Amortization Period
would commence and the Trustee would attempt to sell the Mortgage Loans (unless
Certificateholders holding Certificates evidencing undivided interest
aggregating at least 51% of the Voting Rights instruct otherwise), thereby
causing early payment of the Certificate Principal Balance. The net proceeds
of such sale will first be paid to the Certificate Insurer to the extent of
unreimbursed draws under the Policy and other amounts owing to the Certificate
Insurer pursuant to the Insurance Agreement. The Investor Fixed Allocation
Percentage of remaining amounts will be distributed to the Class A
Certificateholders and the remaining net proceeds may be insufficient to pay
the Certificate Principal Balance or interest at the Certificate Rate in full.
Subject to the prior written consent of the Certificate Insurer to the terms of
such sale or other disposition of the Mortgage Loans, the Policy will be
available to cover such shortfalls. Upon termination of the Trust as discussed
in this paragraph, the right of the Holders of the Class S Certificates to
receive distributions in respect of interest will be terminated.
S-25
<PAGE>
In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Certificateholders from appointing a successor Servicer.
Geographic Concentration. As of the Cut-Off Date, approximately
87.91%, 3.19%, and 2.61% of the Initial Mortgage Loans (by Original Pool
Balance) are secured by Mortgaged Properties are located in the States of
California, Washington and Oregon, respectively. An overall decline in the
residential real estate markets in these states could adversely affect the
values of the Mortgaged Properties securing such Mortgage Loans such that the
Principal Balances of the related Mortgage Loans, together with any primary
financing on such Mortgaged Properties, could equal or exceed the value of such
Mortgaged Properties. As the residential real estate market is influenced by
many factors, including the general condition of the economy and interest
rates, no assurances may be given that the residential real estate markets in
these states will not weaken. If these residential real estate markets should
experience an overall decline in property values after the dates of origination
of the Mortgage Loans, the rates of losses on the Mortgage Loans would be
expected to increase, and could increase substantially. In the event of a
natural disaster, such as an earthquake, fire or flood, the values of the
Mortgaged Properties may decline. Neither the Mortgages, the Agreement or the
Loan Agreements require natural disaster insurance such as would ensure against
earthquake damage.
Servicer's Ability to Change the Terms of the Mortgage Loans. The
Servicer may agree to changes in the terms of a Loan Agreement, provided that
such changes (i) do not adversely affect the interest of the Certificateholders
or the Certificate Insurer, and (ii) are consistent with prudent business
practice. There can be no assurance that changes in applicable law or the
marketplace for home equity loans or prudent business practice will not result
in changes in the terms of the Mortgage Loans. In addition, the Agreement
permits the Servicer, within certain limitations described therein, to increase
the Credit Limit of the related HELOC or reduce the Margin for such HELOC.
Delinquent Mortgage Loans. The Trust will include Mortgage Loans
which are 30 or fewer days delinquent as of the Cut-Off Date. Only 4 Initial
Mortgage Loans which are between 30 days and 59 days delinquent as of the Cut-
Off Date are included in the Trust. If (i) there are not sufficient funds from
the Investor Interest Collections to cover the Investor Loss Amounts for any
Distribution Date, (ii) the amount on deposit in the Spread Account has been
reduced to zero, (iii) the Transferor Subordinated Amount has been reduced to
zero, (iv) the Overcollateralization Amount has been reduced to zero, and (v)
the Certificate Insurer fails to perform its obligations under the Policy, the
aggregate amount of principal returned to the Certificateholders may be less
than the Certificate Principal Balance on the day the Certificates are issued.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided
by the Certificate Insurer. Accordingly, the Seller, the Transferor, the
Servicer and the Underwriter make no representation as to the accuracy and
completeness of such information.
CapMAC is a New York-domiciled monoline stock insurance company which
engages only in the business of financial guarantee and surety insurance.
CapMAC is licensed in 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate, municipal and other financial obligations
in the U.S. and international capital markets. CapMAC also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc., "AAA" by Standard & Poor's Ratings Services, "AAA" by Duff &
Phelps Credit Rating Co. and "AAA" by Nippon Investors
S-26
<PAGE>
Service Inc. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies.
CapMAC is a wholly-owned subsidiary of CapMAC Holdings Inc.
("Holdings"). Neither Holdings nor any of its stockholders is obligated to pay
any claims under any surety bond issued by CapMAC or any debts of CapMAC or to
make additional capital contributions to CapMAC.
CapMAC is regulated by the Superintendent of Insurance of the State
of New York. In addition, CapMAC is subject to regulation by the insurance
laws and regulations of the other jurisdictions in which it is licensed. Such
insurance laws regulate, among other things, the amount of net exposure per
risk that CapMAC may retain, capital transfers, dividends, investment of
assets, changes in control, transactions with affiliates and consolidations and
acquisitions. CapMAC is subject to periodic regulatory examinations by the
same regulatory authorities.
CapMAC's obligations under the Policy may be reinsured. Such
reinsurance does not relieve CapMAC of any of its obligations under the Policy.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As at December 31, 1995 and 1994, CapMAC had qualified statutory
capital (which consists of policyholders' surplus and contingency reserve) of
approximately $240 million and $170 million, respectively, and had not incurred
any debt obligations. Article 69 of the New York State Insurance Law requires
CapMAC to establish and maintain the contingency reserve, which is available to
cover claims under surety bonds issued by CapMAC.
The audited financial statements of CapMAC prepared in accordance
with generally accepted accounting principles as of December 31, 1995 and 1994
and for each of the years in the three-year period ended December 31, 1995 and
the unaudited financial statements of CapMAC as of September 30, 1996 and 1995
and for each of the three-month and nine-month periods then ended are attached
as exhibits to this document as Annex I. Copies of CapMAC's financial
statements prepared in accordance with statutory accounting standards, which
differ from generally accepted accounting principles, are filed with the
Insurance Department of the State of New York and are available upon request.
CapMAC is located at 885 Third Avenue, New York, New York 10022, and
its telephone number is (212) 755-1155.
HEADLANDS MORTGAGE COMPANY
GENERAL
Headlands Mortgage Company ("Headlands") is a closely-held California
S-corporation which was organized in 1981. The common stock of Headlands is
owned by the Hart and Paul families. Headlands is engaged in the mortgage
banking business, which consists of the origination, acquisition, sale and
servicing of residential mortgage loans secured primarily by one- to four-unit
family residences, and the purchase and sale of mortgage servicing rights. As
of December 31, 1995 and September 30, 1996, Headlands had total assets of
$147,431,468 and $256,654,061, respectively and shareholders equity of
$25,874,121 and $21,501,020, respectively.
S-27
<PAGE>
Headlands is headquartered in Northern California, and has production
branches in California, Washington, Oregon, Idaho, Nevada and Arizona. Loans
are originated primarily on a wholesale basis, through a network of independent
mortgage loan brokers approved by Headlands. The Mortgage Loans were acquired
by Headlands in one of the three following manners: (i) originated by an
independent broker and purchased by Headlands, (ii) originated by a broker and
funded by Headlands, or (iii) originated and funded by Headlands in the
ordinary course of business.
Headlands' executive offices are located at 700 Larkspur Landing
Circle, Suite 250, Larkspur, CA 94939.
SERVICING OVERVIEW
Headlands (in its capacity as master servicer) will act as master
servicer for the Mortgage Loans pursuant to the Agreement. All of the Mortgage
Loans are currently serviced by Headlands substantially in accordance with the
procedures described herein and in the accompanying Prospectus. Headlands has
only recently started servicing home equity loans. As a result, there is limited
information as to the losses on HELOCs and Closed-End Loans serviced by
Headlands.
As of October 31, 1996, Headlands' mortgage loan servicing portfolio
consisted of 31,361 one- to four-family residential mortgage loans with an
aggregate principal balance of $4.1 billion. Headlands' primary source of
mortgage servicing rights is from mortgage loans originated through mortgage
brokers.
Headlands' Servicing Center was established in January 1994. It has
a staff of 48 employees. Prior to January 1994, Headlands' servicing portfolio
was subserviced by a third party.
Mortgage loan servicing includes collecting payments from borrowers
and remitting those funds to investors, accounting for mortgage loan principal
and interest, reporting to investors, holding custodial funds for payment of
mortgage and mortgage related expenses such as taxes and insurance, advancing
funds to cover delinquent payments, inspecting foreclosures and property
disposition in the event of unremedied defaults, and otherwise administering
the mortgages.
The following table summarizes the delinquency experience including
pending foreclosures on residential mortgage loans originated or acquired as
part of Headlands' mortgage banking operations and included in Headlands'
servicing portfolio at the dates indicated. As of December 31, 1993, 1994 and
1995 and October 31, 1996, the total principal balance of loans serviced by
Headlands was $4.283 million, $4.779 million, $4.149 million and $4.106
million, respectively.
S-28
<PAGE>
HEADLANDS MORTGAGE COMPANY
OVERALL MORTGAGE PORTFOLIO
DELINQUENCY AND FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
at December 31
---------------------------------------------------------------------
1993 1994 1995 at November 30, 1996
--------------------- ---------------------- ---------------------- -----------------------------
Percent of Percent of Percent of Percent of
Servicing Servicing Servicing Servicing
Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number** 26,410 100% 29,076 100% 27,261 100% 32,623 100%
======== =========== ======== ============ ========= =========== ============== ============
Period of Delinquency:
30-59 days 265 1.0% 327 1.1% 283 1.0% 426 1.3%
60-89 days 49 0.2% 49 0.2% 62 0.2% 68 0.2%
90 days or more 40 0.2% 50 0.2% 47 0.2% 13 0.0%
-------- ----------- -------- ------------ --------- ----------- -------------- -------------
Total Delinquencies 354 1.3% 426 1.5% 392 1.4% 507 1.6%
======== =========== ======== ============ ========= =========== ============== =============
(excluding Foreclosures)
Foreclosures Pending 107 0.4% 102 0.3% 146 0.5% 198 0.6%
=== ==== === ==== === ==== === ====
</TABLE>
** The total portfolio has been reduced by the number of loans pending service
release or have been foreclosed.
HEADLANDS MORTGAGE COMPANY
CLOSED-END SECOND MORTGAGE AND HELOCS
DELINQUENCY AND FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
December 31, 1995 March 31, 1996 June 30, 1996 September 30, 1996 November 30, 1996
----------------- ----------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Servicing Servicing Servicing Servicing Servicing
Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio
----- ---------- ----- ---------- ------ ---------- ------ ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Number 297 100% 390 100% 1,223 100% 2,582 100% 3,844 100%
Period of Delinquency:
30-59 days 2 0.7% 4 1.0% 5 0.4% 3 0.1% 9 0.2%
60-89 days 1 0.3% 3 0.8% 2 0.2% 3 0.1% 2 0.1%
90 days or more 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
----- ---------- ----- ---------- ------ ---------- ------ ----------- ----- -----------
3 1.0% 7 1.8% 7 0.6% 6 0.2% 11 0.3%
Total Delinquencies
(excluding Foreclosures)
Foreclosures Pending 2 0.67% 3 0.77% 2 0.16% 2 0.08% 1 0.03%
</TABLE>
S-29
<PAGE>
HEADLANDS' HOME EQUITY LOAN PROGRAM
The Mortgage Loans will have been purchased by Headlands, either directly
or through affiliates, from mortgage loan brokers. The Mortgage Loans have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards."
UNDERWRITING STANDARDS
Headlands believes that the Mortgage Loans originated were underwritten in
accordance with standards consistent with those utilized by mortgage lenders or
manufactured home lenders generally during the period of origination.
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 Mortgaged Property as collateral. In general, a prospective
borrower applying for either a home equity line of credit or a closed-end
second is required to fill out a detailed application designed to provide to
the underwriting officer pertinent credit information. 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 Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to single family
loans, 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. With respect to a loan on a two-to-four unit
property, the appraisal must specify whether an income analysis, a market
analysis or a cost analysis, was used. An appraisal employing the income
approach to value analyzes a two-to-four unit project's cash flow, expenses,
capitalization and other operational information in determining the property's
value. The market approach to value focuses its analysis on the prices paid
for the purchase of similar properties in the two-to-four unit project's area,
with adjustments made for variations between these other properties and the
multifamily project being appraised. The cost approach calls for the appraiser
to make an estimate of land value and then determine the current cost of
reproducing the building less any accrued depreciation. In any case, 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. For loan values to $650,000 originators may use
either a full appraisal (FNMA 1104/FHLMC 70) or a drive-by appraisal (FHLMC
704); for values between $650,001 to $1,000,000 with a combined loan-to-value
of less than 75%, only a full appraisal is acceptable; for values between
$650,001 to $1,000,000 with a combined loan-to-value of greater than 75%, only
a full appraisal and one field review ordered by Headlands is acceptable; and
for loans with values greater than $1,000,000 with a combined loan-to-value
greater than 65%, two full appraisals are required. Headlands may order
discretionary reviews at any time to ensure the value of the properties.
In the case of single family loans, 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 (a) to
meet the borrower's monthly obligations on the proposed mortgage loan
(determined on the basis of the monthly payments due in the year of
origination) and other expenses related to the
S-30
<PAGE>
mortgaged property (such as property taxes and hazard insurance) and (b) to
meet monthly housing expenses and other financial obligations and monthly
living expenses. The underwriting standards applied by Headlands may be varied
in appropriate cases where factors such as low loan-to-value ratios or other
favorable credit exist.
Headlands requires title insurance for all mortgage loans. Fire and
extended hazard insurance and flood insurance, when applicable, are also
required.
A lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to streamline the loan
approval process and thereby improve the lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on credit score and property underwriting than on certain
credit underwriting documentation concerning income and employment verification
is waived.
In the case of a Mortgage Loan secured by a leasehold interest in a real
property, the title to which is held by a third party lessor, the Seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term of the
Mortgage Loan.
HEADLANDS SPC
Headlands Mortgage L.L.C. ("Headlands SPC") is a limited liability company
incorporated in Delaware on November 20, 1996. Headlands SPC is a special
purpose corporation organized for limited purposes, with limited assets and a
limited operating history.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans were originated pursuant to loan agreements and
promissory notes and the appropriate state disclosure statements (with respect
to the HELOCs, the "Credit Line Agreements," with respect to the Closed-End
Loans, the "Mortgage Notes" and together with the Credit Line Agreements, the
"Loan Agreements") and are secured by mortgages or deeds of trust, which are
either first or second mortgages or deeds of trust, on Mortgaged Properties
located in 11 states. The Mortgaged Properties securing the Mortgage Loans
consist primarily of residential properties that are one- to four-family
properties. See "--Mortgage Loan Terms" below.
The Original Pool Balance is $128,158,821.02, which is equal to the
aggregate Principal Balances of the Initial Mortgage Loans as of the Cut-Off
Date. As of the Cut-Off Date, only 4 Initial Mortgage Loans were up to 59 days
delinquent and no Initial Mortgage Loan was more than 59 days delinquent. The
average Cut-Off Date Principal Balance of the Initial Mortgage Loans was
approximately $34,516.25, the minimum Cut-Off Date Principal Balance of the
Initial Mortgage Loans was zero, the maximum Cut-Off Date Principal Balance of
the Initial Mortgage Loans was $238,527.12, the minimum Loan Rate and the
maximum Loan Rate as of the Cut-Off Date were 5.875% and 14.25% per annum,
respectively, and the weighted average Loan Rate as of the Cut-Off Date was
approximately 8.98% per annum. As of the Cut-Off Date, the weighted average
Credit Limit Utilization Rate (weighted by credit line) (as defined below) of
the Initial HELOCs was approximately 75.19% and the maximum Credit Limit
Utilization Rate was 100%. The "Credit Limit Utilization Rate" of a HELOC is
determined by dividing the Cut-Off Date Principal Balance by the Credit Limit
of the related Credit Line Agreement. The remaining term to scheduled maturity
for the Initial Mortgage Loans as of the Cut-Off Date ranged from 172 months to
300 months and the weighted average remaining term to scheduled maturity was
S-31
<PAGE>
approximately 238.12 months. As of the Cut-Off Date, the weighted average
Combined Loan-to-Value Ratio (as defined below) of the Initial Mortgage Loans
was approximately 86.91%. The Combined Loan-to-Value Ratio for a HELOC is the
ratio (expressed as a percentage) of (A) the sum of (i) the Credit Limit of the
Mortgage Loan and (ii) any outstanding principal balances of mortgage loans
senior to such Mortgage Loan (calculated at the date of origination of the
HELOC) to (B) the appraised value of the related Mortgaged Property as
set forth in the loan files at such date of origination. The "Combined Loan-
to-Value Ratio" of each Closed-End Loan is the ratio of (A) the sum of (i) the
original principal balance of such Closed-End Loan and (ii) the outstanding
principal balance as of the date of execution of the related Loan Agreement of
any mortgage loan or mortgage loans that are senior or equal in priority to the
Closed-End Loan and that is or are secured by the same Mortgaged Property to
(B) the appraised value of the Mortgaged Property as determined either by a
drive-by inspection or an appraisal. Credit Limits under the initial HELOCs as
of the Cut-Off Date ranged from $10,000 to $250,000 and averaged approximately
$45,388.50. The weighted average second mortgage ratio (which is the Credit
Limit for the related HELOC, provided such Mortgage Loan was in the second lien
position, divided by the sum of such Credit Limit and the outstanding principal
balance of any mortgage loan senior to the related Initial Mortgage Loan) was
approximately 20.57%. As of the Cut-Off Date, no Initial Mortgage Loans
represented first liens on the related Mortgaged Properties, while
approximately 100% of the Initial Mortgage Loans represented second liens. As
of the Cut-Off Date approximately 83.23% of the Initial Mortgage Loans are
secured by Mortgaged Properties which are single-family residences and
approximately 99% of the single family residences were owner-occupied. As of
the Cut-Off Date, approximately 87.91%, 3.19% and 2.61% of the Initial Mortgage
Loans by Original Pool Balance are located in the States of California,
Washington and Oregon. No other state represents more than 2% of the Original
Pool Balance of the Initial Mortgage Loans.
Real estate lenders in California are unable as a practical matter to
obtain a deficiency judgment against the borrower on a loan secured by one- to
four-unit real estate. See "CERTAIN LEGAL ASPECTS OF THE LOANS--Anti-Deficiency
Legislation and Other Limitations on Lenders in the Prospectus."
MORTGAGE LOAN TERMS
The Mortgage Loans consist of loans originated under three different loan
term options: a 15-year Closed-End Loan, a 15-year HELOC or a 25-year HELOC.
The Closed-End Loans are fixed-rate, fully amortizing second mortgages. The
monthly payment remains constant throughout the term of the Closed-End Loans,
and is applied to principal and interest based on a pre-determined actuarial
paydown schedule. The borrowers may prepay at any time without penalty.
The HELOC loan programs have either a 5-year or 15-year draw period, during
which the borrower may make cash withdrawals against the equity line, and a
10-year repayment period, during which the balance of the HELOC as of the draw
period is repaid.
A borrower may access a HELOC credit line at any time during the draw
period by writing a check. The minimum payment during the draw period of the
HELOC is the greater of accrued finance charges on the average daily balance of
the HELOC at the applicable Loan Rate, $100, or 1% of the outstanding principal
balance. The payment during the repayment period of the HELOC is calculated as
accrued interest plus .8333% of principal outstanding as of the last day of the
draw period. HELOCs bear interest at a variable rate which changes monthly with
changes in the applicable Index Rate (as defined below). All Mortgage Loans are
subject to a maximum per annum interest rate (the "Maximum Rate") equal to
approximately 18% per annum and subject to applicable usury limitations. The
daily periodic rate on the Mortgage Loans (the "Loan Rate") is the sum of the
Index Rate plus the spread (the "Margin") which generally ranges between 0% and
6.00% and had a weighted average, as of the Cut-Off Date, of approximately
2.69%, divided by 365 days. The "Index Rate" is based on the highest "prime
rate" published in the "Money Rates" table of The Wall Street Journal.]
S-32
<PAGE>
The sum of the columns in the tables below may not equal the total
indicated due to rounding. Set forth below is a description of certain
characteristics of the Initial Mortgage Loans as of the Cut-Off Date:
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER AGGREGATE PERCENT OF
OF INITIAL CUT-OFF DATE ORIGINAL POOL
RANGE OF PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
--------------------------- -------------- ----------------- ---------------
<S> <C> <C> <C>
less than 0................ 165 $ 0.00 0.00%
$0 - $ 25,000.00............. 1,274 20,332,858.06 15.87
$25,001.01 - $ 50,000.00..... 1,683 61,703,642.62 48.15
$50,001.01 - $ 75,000.00..... 361 22,281,275.13 17.39
$75,001.01 - $100,000.00..... 174 15,564,270.67 12.14
$ greater than - $100,000.00. 56 8,276,774.54 6.46
--------------- ----------------- ---------------
Total........................ 3,713 $128,158,821.02 100.00%
=============== ================= ================
</TABLE>
S-33
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT OF
RANGE OF INITIAL CUT-OFF DATE ORIGINAL
COMBINED LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE POOL BALANCE
- ------------------------------ -------------- ------------------ -------------
<S> <C> <C> <C>
less than 10.00%.......... 3 $ 62,073.53 0.05%
10.01% to 20.00%.......... 10 177,033.60 0.14%
20.01% to 30.00%.......... 13 475,072.98 0.37%
30.01% to 40.00%.......... 20 484,312.99 0.38%
40.01% to 50.00%.......... 41 1,211,335.33 0.95%
50.01% to 60.00%.......... 72 2,386,514.73 1.86%
60.01% to 70.00%.......... 130 4,241,671.76 3.31%
70.01% to 80.00%.......... 520 20,107,635.45 15.69%
80.01% to 90.00%.......... 1,893 63,265,391.36 49.36%
90.01% to 100.00%.......... 1,011 35,747,779.39 27.89%
-------------- ------------------ ------------
Total....................... 3,713 $128,158,821.02 100.00%
============== ================== ============
</TABLE>
__________________
(1) With respect to HELOCs the ratio (expressed as a percentage) of (A) the sum
of (i) the Credit Limit of the HELOCs and (ii) any outstanding principal
balances of mortgage loans senior to the HELOCs (calculated at the date of
origination of the HELOCs) to (B) the appraised value of the related
Mortgaged Property as set forth in loan files at such date of origination.
With respect to the "Closed-End Loans" the ratio of (A) the sum of (i) the
original principal balance of such Closed-End Loan and (ii) the outstanding
principal balance as of the date of execution of the related Loan Agreement
of any mortgage loan or mortgage loans that are senior or equal in priority
to the Closed-End Loan and that is or are secured by the same Mortgaged
Property to (B) the appraised value of the Mortgaged Property as determined
either by a drive-by inspection or an appraisal.
S-34
<PAGE>
<TABLE>
<CAPTION>
LOAN RATES
NUMBER OF AGGREGATE
INITIAL CUT-OFF DATE PERCENT OF ORIGINAL
LOAN RATES MORTGAGE LOANS/1/ PRINCIPAL BALANCE POOL BALANCE
- ------------------------- ---------------- ------------------ -------------------
<S> <C> <C> <C>
5.88 - 6.00............. 1,564 $ 53,646,708.06 41.86%
6.01 - 6.50............. 2 107,603.19 0.08
6.51 - 7.00............. 9 192,867.63 0.15
8.01 - 8.50............. 23 506,489.45 0.40
8.51 - 9.00............. 77 1,808,820.89 1.41
9.01 - 9.50............. 123 4,940,257.51 3.85
9.51 - 10.00............ 65 2,813,170.96 2.20
10.01 - 10.50............ 330 9,620,427.60 7.51
10.51 - 11.00............ 346 12,846,105.77 10.02
11.01 - 11.50............ 497 15,814,940.37 12.34
11.51 - 12.00............ 346 13,516,256.28 10.55
12.01 - 12.50............ 175 6,136,512.21 4.79
12.51 - 13.00............ 112 4,434,503.10 3.46
13.01 - 13.50............ 32 1,330,792.28 1.04
13.51 - 14.00............ 11 433,265.72 0.34
14.01 - 14.25............ 1 10,100.00 0.01
---------------- ------------------ -------------------
Total.................... 3,713 $128,158,821.02 100.00%
================ ================== ===================
</TABLE>
/1/ Includes both HELOCs and Closed-End Loans
S-35
<PAGE>
MARGIN
<TABLE> AGGREGATE
<CAPTION> CUT-OFF DATE PERCENT OF AGGREGATE
NUMBER OF PRINCIPAL CUT-OFF DATE
INITIAL BALANCE PRINCIPAL BALANCE OF
MARGINS HELOCS OF HELOCS HELOCS
- --------------------- --------------- ----------------- ----------------------
<S> <C> <C> <C>
greater than 0.50% 190 $ 4,000,455.94 3.81%
0.51% to 1.00%.. 314 11,474,178.23 10.94
1.01% to 1.50%.. 142 6,041,093.06 5.76
1.51% to 2.00%.. 128 4,145,937.09 3.95
2.01% to 2.50%.. 574 16,153,960.79 15.40
2.51% to 3.00%.. 557 19,268,811.11 18.37
3.01% to 3.50%.. 537 18,521,790.99 17.66
3.51% to 4.00%.. 387 15,983,600.36 15.24
4.01% to 4.50%.. 187 6,837,824.47 6.52
4.51% to 5.00%.. 41 1,720,804.34 1.64
5.01% to 5.50%.. 12 577,744.27 0.55
5.51% to 6.00%.. 4 142,200.00 0.14
--------------- ----------------- ----------------------
Total........... 3,073 $104,868,400.65 100.00%
=============== ================= ======================
</TABLE>
CREDIT LIMIT UTILIZATION RATES(1)
<TABLE>
<CAPTION> AGGREGATE
CUT-OFF DATE PERCENT OF AGGREGATE
NUMBER OF PRINCIPAL CUT-OFF DATE
INITIAL BALANCE PRINCIPAL BALANCE OF
RANGE OF UTILIZATION RATES HELOCS OF HELOCS HELOCS
- ---------------------------- --------------- ------------------- ----------------------
<S> <C> <C> <C>
less than 0.00%............. 165 $ 0.00 0.00%
0.01% to 10.00%.......... 98 212,591.11 0.20
10.01% to 20.00%.......... 51 463,376.53 0.44
20.01% to 30.00%.......... 78 1,253,978.24 1.20
30.01% to 40.00%.......... 87 1,645,667.94 1.57
40.01% to 50.00%.......... 88 1,714,830.42 1.64
50.01% to 60.00%.......... 97 2,365,560.34 2.26
60.01% to 70.00%.......... 112 3,310,335.09 3.16
70.01% to 80.00%.......... 117 4,663,805.64 4.45
80.01% to 90.00%.......... 158 6,088,543.51 5.81
90.01% to 100.00%......... 2,022 83,149,711.83 79.29
--------------- ------------------- ----------------------
Total 3,073 $104,868,400.65 100.00%
=============== =================== ======================
</TABLE>
_____________
(1) The "Credit Limit Utilization Rate" of a HELOC is determined by dividing
the Cut-Off Date Principal Balance of such Mortgage Loan by the Credit Limit of
the related Credit Line Agreement.
S-36
<PAGE>
CREDIT LIMITS
<TABLE>
<CAPTION> AGGREGATE
CUT-OFF DATE PERCENT OF AGGREGATE
PRINCIPAL CUT-OFF DATE
NUMBER OF INITIAL BALANCE PRINCIPAL BALANCE OF
RANGE OF CREDIT LIMITS HELOCS OF HELOCS HELOCS
--------------------------- ----------------- ------------------ -----------------------
<S> <C> <C> <C>
$ 10,000 to $ 25,000....... 790 $12,123,552.48 11.56%
$ 25,001 to $ 50,000....... 1,535 47,892,562.87 45.67
$ 50,001 to $ 75,000....... 362 18,548,947.52 17.69
$ 75,001 to $100,000....... 286 17,154,448.88 16.36
$100,001 to $125,000....... 26 2,077,190.66 1.98
$125,001 to $150,000....... 27 2,285,508.75 2.18
$150,001 to $175,000....... 8 570,990.31 0.51
greater than $175,000...... 39 4,215,199.18 4.02
----------------- ------------------ ------------------------
Total...................... 3,073 $104,868,400.65 100.00%
================= ================== ========================
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF INITIAL CUT-OFF DATE PERCENT OF ORIGINAL
SCHEDULED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE POOL BALANCE
- ------------------------- ----------------- -------------------- -------------------
<S> <C> <C> <C>
172 to 176................ 551 $ 19,039,062.00 14.86%
177 to 182................ 1,267 43,973,195.64 34.31
291 to 296................ 830 28,350,435.71 22.12
297 to 300................ 1,065 36,796,127.67 28.71
----------------- ------------------- ---------------------
Total..................... 3,713 $128,158,821.02 100.00%
================= ==================== =====================
</TABLE>
S-37
<PAGE>
MONTH AND YEAR OF ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT OF
INITIAL CUT-OFF DATE ORIGINAL
MONTH AND YEAR OF ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE POOL BALANCE
- ----------------------------- -------------- ------------------ -------------
<S> <C> <C> <C>
March 1996.................... 94 $ 2,936,645.17 2.29%
April 1996.................... 227 7,985,178.73 6.23
May 1996...................... 331 10,612,605.97 8.28
June 1996..................... 392 14,225,837.65 11.10
July 1996..................... 418 14,564,092.21 11.36
August 1996................... 551 19,266,833.45 15.03
September 1996................ 507 17,350,780.19 13.54
October 1996.................. 679 23,372,428.38 18.24
November 1996................. 514 17,844,419.27 13.92
-------------- ------------------ -------------
Total......................... 3,713 $128,158,821.02 100.00%
============== ================== ==============
</TABLE>
TYPE OF MORTGAGE LOAN
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT OF
INITIAL CUT-OFF DATE ORIGINAL POOL
TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------------ --------------- ------------------ -----------------
<S> <C> <C> <C>
HELOC................... 3,073 $104,868,400.65 81.83%
Closed-End.............. 640 23,290,420.37 18.17
--------------- ------------------ -----------------
Total................... 3,713 $128,158,821.02 100.00%
=============== ================== =================
</TABLE>
S-38
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Agreement permits the Trust to acquire Subsequent Mortgage Loans
during the Funding Period for addition to the Trust. Accordingly, the
statistical characteristics of the Mortgage Loans will vary as of any
Distribution Date on which the acquisition of these additional Mortgage Loans
occurs.
The obligation of the Trust to purchase all of the Subsequent
Mortgage Loans for addition to the Trust is subject to the following aggregate
requirements: (i) the weighted average Margin of all of the Subsequent Mortgage
Loans that are HELOCs is at least 2.00% and weighted average interest rate of
all Subsequent Mortgage Loans that are Closed-End Loans is 10.00%; (ii) the
weighted average Combined Loan-to-Value Ratio of all of the Subsequent Mortgage
Loans is not more than 90.00% (iii) 100% of all of the Subsequent Mortgage
Loans are not more than 30 days delinquent (on a contractual basis) as of their
respective Cut-Off Dates; (iv) the remaining term to maturity of each
Subsequent Mortgage Loan may not exceed 300 months; and (v) no Subsequent
Mortgage Loan will have a Cut-Off Balance greater than $240,000; provided,
however, any of the foregoing requirements may be waived upon the consent of
the Rating Agency and the Certificate Insurer.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement, except as otherwise described herein, provides that
the Class A Certificateholders will be entitled to receive on each Distribution
Date distributions of principal, in the amounts described herein, until the
Certificate Principal Balance is reduced to zero. During the Funding Period,
the Scheduled Principal Collections Distribution Amount will be deposited into
the Funding Account and may be used by the Trustee to purchase Subsequent
Mortgage Loans. In the event that not all of the Principal Collections on
deposit in the Funding Account have been used to acquire Subsequent Mortgage
Loans on the last Distribution Date of the Funding Period, then such Principal
Collections will be used to acquire any remaining Additional Balances on such
Distribution Date and any remaining amount on deposit therein will be
distributed to the Class A Certificateholders as a payment of principal.
During the Managed Amortization Period, Class A Certificateholders will receive
the lesser of Investor Principal Collections and (ii) Principal Collections
less the aggregate of Additional Balances created during the applicable
Collection Period. During the Rapid Amortization Period, Class A
Certificateholders will receive amounts from Principal Collections based solely
upon the Investor Fixed Allocation Percentage. Because prior distributions of
Principal Collections to Class A Certificateholders serve to reduce the
Investor Floating Allocation Percentage but do not change the Investor Fixed
Allocation Percentage, allocations of Principal Collections based on the Fixed
Allocation Percentage may result in distributions of principal to the Class A
Certificateholders in amounts that are, in most cases, greater relative to the
declining balance of the Mortgage Loans than would be the case if the Investor
Floating Allocation Percentage were used to determine the percentage of
Principal Collections distributed to Class A Certificateholders. This is
especially true during the Rapid Amortization Period when the Class A
Certificateholders are entitled to receive Investor Principal Collections and
not a lesser amount. Moreover, to the extent of losses allocable to the Class
A Certificateholders during the Managed Amortization Period and the Rapid
Amortization Period, Class A Certificateholders may also receive as payment of
principal the amount of such losses either from Investor Interest Collections
or, in some instances, collections otherwise payable to the Transferor (as
described herein), draws on the Spread Account or under the Policy. The level
of losses may therefore affect the rate of payment of principal on the
Certificates.
To the extent obligors make more draws than principal payments, the
Transferor Interest may increase. Because during the Rapid Amortization Period
the Certificateholders' share of Principal Collections is based upon the
Investor Fixed Allocation Percentage (without reduction), an increase in the
Transferor Interest due to additional draws may also result in
Certificateholders receiving principal at a greater rate. The Agreement
permits the Transferor, at its option, but subject to the satisfaction of
certain conditions specified in the Agreement, including the conditions
described below, to remove certain Mortgage Loans from the Trust at any time
during the life of the Trust, so long as the Transferor Interest as of the
transfer date after giving
S-39
<PAGE>
effect to such removal exceeds the Minimum Transferor Interest. Such removals
may affect the rate at which principal is distributed to Certificateholders by
reducing the overall Pool Balance and thus the amount of Principal Collections.
See "DESCRIPTION OF THE CERTIFICATES--Optional Retransfers of Mortgage Loans to
the Transferor."
The Mortgage Loans may be prepaid in full or in part at any time
without penalty. The prepayment experience with respect to the Mortgage Loans
will affect the weighted average life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Neither the Servicer nor the Transferor is aware of any relevant studies or
statistics on the rate of prepayment of such Mortgage Loans. Generally, home
equity loans are not viewed by borrowers as permanent financing. Accordingly,
the Mortgage Loans may experience a higher rate of prepayment than traditional
first mortgage loans. On the other hand, because the HELOCs amortize as
described herein, rates of principal payment on the Mortgage Loans will
generally be slower than those of traditional fully-amortizing first mortgages
in the absence of prepayments on such Mortgage Loans. The prepayment
experience of the Trust with respect to the Mortgage Loans may be affected by a
wide variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing, homeowner
mobility, the frequency and, with respect to the HELOCs, amount of any future
draws on the Credit Line Agreements and changes affecting the deductibility for
Federal income tax purposes of interest payments on home equity loans. All of
the Mortgage Loans contain "due-on-sale" provisions, and, with respect to the
Mortgage Loans, the Servicer intends to enforce such provisions, unless (i)
such enforcement is not permitted by applicable law or (ii) the Servicer, in a
manner consistent with reasonable commercial practice, permits the purchaser of
the related Mortgaged Property to assume the Mortgage Loan. The enforcement of
a "due-on-sale" provision will have the same effect as a prepayment of the
related Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF THE LOANS--Due-on-Sale
Clauses" in the Prospectus.
The yield to an investor who purchases the Certificates in the
secondary market at a price other than par will vary from the anticipated yield
if the rate of prepayment on the Mortgage Loans is actually different than the
rate anticipated by such investor at the time such Certificates were purchased.
Collections on the HELOCs may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or 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 scheduled payments. Collections on the Mortgage
Loans may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree.
The following table set forth below is based on conditional
prepayment rate, constant draw rate (which for purposes of the assumptions is
the amount of Additional Balances on the Mortgage Loans drawn each month
expressed as an annualized percentage of the total principal of the pool of
Mortgage Loans outstanding at the beginning of such month). For the following
table, it was assumed that the Initial HELOCs have been aggregated into two
pools, one pool with a principal balance of $65,146,563.38 and a second pool
with a principal balance of $39,721,837.27. Further, the Mortgage Loans with
respect to the two pools are assumed to have weighted average initial loan rates
of 7.8965% and 9.1556%, respectively, weighted average margin of 2.2798% and
3.3692%, respectively, weighted average fully indexed rates, 2 months from
Cut-Off Date of 10.5298% and 11.6192%, respectively, weighted average credit
limit utilization rates (weighted by credit line) of 73.2330% and 78.6246%,
respectively, and as of the Cut-Off Date, weighted average remaining terms to
maturity of 297 months and 177 months, respectively. The Initial Closed-End
Loans have been aggregated into one pool with a principal balance of
$23,290.420.37, a weighted average loan rate of 11.6912%, and as of the Cut-Off
Date, a weighted average remaining term to maturity of 178 months. It was also
assumed that the Subsequent Mortgage Loans are HELOCs and will be purchased at
the end of each month during the Funding Period with an initial loan rate of
5.875%, a margin of 2.6925%, a fully indexed rate, 3 months from date of
purchase, of 10.9425%, credit limit utilization rate (weighted by credit line)
of 75.1859%, and a remaining term to maturity of 254 months.
In addition, it was assumed that (i) the distributions are made in
accordance with the description set forth under "Description of the
Certificates--Distributions on the Certificates", (ii) distributions of
principal and interest on the Certificates will be made on the 15th day of each
calendar month regardless of the day on which the Distribution Date actually
occurs, (iii) no extension past the scheduled maturity date of a Mortgage Loan
is made, (iv) no delinquencies occur, (v) scheduled monthly payments on the
HELOCs are comprised of interest only payments and the only principal payments
on the HELOCs are those represented by prepayments calculated under each of the
prepayment assumptions as set forth in the tables below before giving effect to
draws; and scheduled monthly payments on the Closed-End Loans consist of
principal and interest payments, (v) monthly draws are calculated under each of
the assumptions as set forth in the table before giving effect to prepayments,
(vii) each HELOC Loan is subject to a maximum credit utilization rate of 100%,
(viii) the scheduled due date of the Mortgage Loans is the first day of each
month, (ix) each month consists of 30 days, (x) the Closing Date is December 30,
1996, (xi) for each Distribution Date the Class A Certificate Rate is 5.86406%,
(xii) monthly fees (Servicing Fee, Trustee Fee, and the Insurance Premium Fee)
comprise, in the aggregate, an amount equal to 0.71%.
<TABLE>
<CAPTION>
Percentage of Original Certificate Principal Balance - Amortization
-------------------------------------------------------------------
Schedule(1)(2)
--------------
Conditional Prepayment Rate (%CPR)
----------------------------------
Date 0% 10% 20% 25% 30% 35% 40%
- ---- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100%
12/15/1997............. 98 98 98 98 98 98 98
12/15/1998............. 98 98 93 88 82 76 70
12/15/1999............. 98 98 89 78 68 59 50
12/15/2000............. 97 98 85 70 57 46 36
12/15/2001............. 96 96 81 63 48 36 26
12/15/2002............. 95 95 78 57 40 28 18
12/15/2003............. 94 82 61 41 27 17 0
12/15/2004............. 93 69 44 26 15 0 0
12/15/2005............. 92 56 27 13 0 0 0
12/15/2006............. 91 44 11 0 0 0 0
12/15/2007............. 89 31 0 0 0 0 0
12/15/2008............. 87 19 0 0 0 0 0
12/15/2009............. 85 0 0 0 0 0 0
12/15/2010............. 83 0 0 0 0 0 0
12/15/2011............. 42 0 0 0 0 0 0
12/15/2012............. 42 0 0 0 0 0 0
12/15/2013............. 42 0 0 0 0 0 0
12/15/2014............. 42 0 0 0 0 0 0
12/15/2015............. 42 0 0 0 0 0 0
12/15/2016............. 42 0 0 0 0 0 0
12/15/2017............. 42 0 0 0 0 0 0
12/15/2018............. 41 0 0 0 0 0 0
12/15/2019............. 41 0 0 0 0 0 0
12/15/2020............. 41 0 0 0 0 0 0
12/15/2021............. 0 0 0 0 0 0 0
Weighted Average Life
Years................ 17.81 9.35 7.13 5.80 4.82 4.09 3.51
(1) Assumes (i) that an optional termination is exercised when the outstanding
Certificate Principal Balance is less than or equal to 10% of the Original
Certificate Principal Balance and (ii) a constant draw rate of 18%.
(2) All percentages are rounded to the nearest 1%.
</TABLE>
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the Servicer will
compute monthly expressing the Certificate Principal Balance of the Class A
Certificates as of each Distribution Date (after giving effect to any
distribution of principal on such Distribution Date) as a proportion of the
Original Certificate Principal Balance. On the Closing Date, the Pool Factor
will be 1.0000000. See "DESCRIPTION OF THE CERTIFICATES--Distributions on the
Certificates." Thereafter, the Pool Factor will decline to reflect reductions
in the related Certificate Principal Balance resulting from distributions of
principal to the Class A Certificates.
Pursuant to the Agreement, monthly reports concerning the Invested
Amount, the Pool Factor and various other items of information will be made
available to the Certificateholders. In addition, within 60 days
S-40
<PAGE>
after the end of each calendar year, beginning with the 1997 calendar year,
information for tax reporting purposes will be made available to each person
who has been a Certificateholder of record at any time during the preceding
calendar year. See "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates"
and "--Reports to Certificateholders" herein.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The
following summaries describe certain provisions of the Agreement. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreement.
Wherever particular sections or defined terms of the Agreement are referred to,
such sections or defined terms are incorporated herein by reference.
GENERAL
The Certificates will be issued in denominations of $1,000 and
multiples of $1 in excess thereof and will evidence specified undivided
interests in the Trust. The property of the Trust will consist of, to the
extent provided in the Agreement: (i) each of the Mortgage Loans that from time
to time are subject to the Agreement; (ii) collections on the Mortgage Loans
received after the Cut-Off Date; (iii) Mortgaged Properties relating to the
Mortgage Loans that are acquired by foreclosure or deed in lieu of foreclosure;
(iv) rights of the Transferor under hazard insurance policies covering the
Mortgaged Properties; (v) the Collection Account; (vi) the Spread Account;
(vii) the Funding Account; (viii) the Deferred Interest Account; and (ix)
the Policy. Definitive Certificates (as defined below), if issued, will be
transferable and exchangeable at the corporate trust office of the Trustee,
which will initially act as certificate registrar (the "Certificate
Registrar"). See "--Book-Entry Certificates" below. No service charge will be
made for any registration of exchange or transfer of Certificates, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
The aggregate undivided interest in the Trust represented by the
Class A Certificates as of the Closing Date will equal $125,595,644.60 (the
"Original Invested Amount"), which represents approximately 98% of the
aggregate Cut-Off Date Pool Balance and interest thereon generally at a rate
equal to LIBOR plus .20%. The Class S Certificate will represent an interest
in the interest payable on the Mortgage Loans in excess of the Class A
Certificate Rate. The "Original Certificate Principal Balance" will equal
$125,595,644.60. Following the Closing Date, the "Invested Amount" with
respect to any Distribution Date will be an amount equal to the Original
Invested Amount minus (i) the amount of Principal Collections previously
distributed to Class A Certificateholders, Principal Collections allocable to
the Transferor that are used to reimburse Investor Loss Amounts and amounts
distributed as Guaranteed Principal Distribution Amounts as draws under the
Policy, and minus (ii) an amount equal to the Investor Loss Amounts not
previously absorbed by the Overcollateralization Amount, reallocation to the
Transferor Interest (up to the Transferor Subordinated Amount), withdrawals
from the Spread Account or draws on the Policy. The principal amount of the
outstanding Class A Certificates (the "Certificate Principal Balance") on any
Distribution Date is equal to the Original Certificate Principal Balance minus
the aggregate of amounts actually distributed as principal to the
Certificateholders. See "--Distributions on the Certificates" below. Each Class
A Certificate represents the right to receive payments of interest at the
Certificate Rate and payments of principal as described below. The notional
amount of the Class S Certificates (the "Class S Notional Amount") as of any
Distribution Date will be equal to the Certificate Principal Balance of the
Class A Certificates on such Distribution Date (prior to giving effect to any
distributions on such Distribution Date). On the Closing Date, the Class S
Notional Amount will equal $125,595,644.60. Each Class S Certificate represents
the right to receive payments of interest at the related Certificate Rate as
described below.
S-41
<PAGE>
The Transferor will own the remaining undivided interest in the
Mortgage Loans (the "Transferor Interest"), with a principal amount
approximately equal to the Pool Balance plus funds on deposit in the Funding
Account less the Certificate Principal Balance. The Transferor Interest will
initially equal $2,563,176.42, which represents approximately 2% of the
Original Pool Balance. The Transferor as of any date is the owner of the
Transferor Interest which initially will be Headlands SPC. In general, the
Pool Balance will vary each day as principal is paid on the Mortgage Loans,
liquidation losses are incurred and, in the case of the HELOCs, Additional
Balances are drawn down by borrowers.
The Transferor has the right to sell or pledge the Transferor
Interest at any time, provided (i) the Rating Agencies (as defined herein) have
notified the Transferor and the Trustee in writing that such action will not
result in the reduction or withdrawal of the ratings assigned to the
Certificates without regard to the Policy, (ii) the Certificate Insurer
consents thereto, and (iii) certain other conditions specified in the Agreement
are satisfied.
BOOK-ENTRY CERTIFICATES
The Certificates will be Book-Entry Certificates. The Certificates
will be issued in one or more certificates, 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 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 Certificates. Except as described
below, no person acquiring a Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a participating firm that acts as agent for
the Financial Intermediary, whose interest will in turn be recorded on the
records of the Depository, if the beneficial owner's Financial Intermediary is
not a Depository participant). Therefore, the beneficial owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Certificate.
Beneficial ownership of a Certificate may be transferred only in compliance
with the procedures of such Financial Intermediaries and Depository
participants.
The Depository, which is a New York-chartered limited purpose trust
company, performs services for its participants, some of which (and/or their
representatives) own the Depository. In accordance with its normal procedures,
the Depository is expected to record the positions held by each Depository
participant in the Certificates, whether held for its own account or as a
nominee for another person. In general, beneficial ownership of the
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 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 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 Certificates that it represents.
Under a book-entry format, beneficial owners of the 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, the Servicer, the
Transferor or the Trustee is responsible or liable for such delays in the
application of such
S-42
<PAGE>
payments to such beneficial owners. Because the Depository can only act on
behalf of Financial Intermediaries, the ability of a beneficial owner to pledge
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of the Certificates, may be
limited due to the absence of physical certificates for the Certificates. In
addition, issuance of the 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 Certificates within the
meaning of the Agreement will be CEDE, as nominee of the Depository. Beneficial
owners of the Certificates will not be "Certificateholders", as that term is
used in the Agreement. Beneficial owners are only permitted to exercise the
rights of Certificateholders indirectly through Financial Intermediaries and
the Depository. Reports on the Trust 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 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 Certificates under the
Agreement only at the direction of one or more Financial Intermediaries to
whose Depository accounts the Certificates are credited, to the extent that
such actions are taken on behalf of Financial Intermediaries whose holdings
include such Certificates.
Definitive Certificates will be issued to beneficial owners of the
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 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 under the Agreement,
beneficial owners of the Certificates having not less than 51% of the Voting
Rights evidenced by the 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. With respect to any date of determination, "Voting Rights"
shall be allocated between the Class A Certificates and the Class S
Certificates in the proportion of 98% to 2%. Voting Rights allocated to a
Class of Certificates shall be allocated among the Certificates of such Class
in accordance with their respective Percentage Interests.
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 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
Certificates and instructions for re-registration, the Trustee will issue the
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders under the Agreement.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Transferor will
transfer to the Depositor, who will in turn transfer to the Trust, all of its
right, title and interest in and to each Mortgage Loan (including any
Additional Balances arising in the future), related Loan Agreements, mortgages
and other related documents (collectively, the "Related Documents"), including
all collections received on or with respect to each such Mortgage Loan after
the Cut-Off Date (except with respect to interest on the Initial Mortgage
Loans, an amount equal to fifteen days interest at the weighted average gross
Loan Rate on the Original Pool Balance). The Trustee will not have any
obligation to make additional fundings under the Loan Agreements. The Trustee,
concurrently with such transfer, will deliver the Certificates to the
Transferor and the Transferor Certificate (as defined in the Agreement) to the
Transferor. Each Mortgage Loan transferred
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to the Trust will be identified on a schedule (the "Mortgage Loan Schedule")
delivered to the Trustee pursuant to the Agreement. Such schedule will include
information as to the Cut-Off Date Principal Balance of each Mortgage Loan, as
well as information with respect to the Loan Rate. Subject to the following
conditions, among others, Subsequent Mortgage Loans, to the extent of the
availability thereof and the availability of sufficient Principal Collections
on deposit in the Funding Account, will be sold to the Trust on or before the
last Distribution Date of the Funding Period and (i) must meet the general
criteria for eligibility in accordance with the terms of the Agreement (other
than statistical information relating to the Initial Mortgage Loans or Eligible
Substitute Mortgage Loans); and (ii) must be selected by the Servicer in a
manner it believes will not materially adversely affect the Certificateholders
or the Certificate Insurer.
The Agreement will require that on or prior to the Closing Date, the
Servicer deliver to the Trustee (or a custodian, as the Trustee's agent for
such purpose) the Mortgage Notes endorsed in blank to the Trustee on behalf of
the Trust and the Related Documents. In lieu of delivery of original
mortgages, the Servicer may deliver true and correct copies thereof which with
respect to lost mortgages have been certified as to the authenticity by the
appropriate county recording office where such mortgage is recorded.
Under the terms of the Agreement, the Transferor will have 30 days
after the Closing Date to prepare and submit for recordation assignments of the
mortgages related to each Mortgage Loan in favor of the Trustee.
Within 90 days of the Closing Date with respect to the Initial
Mortgage Loans or 90 days of the transfer to the Trust of the Subsequent
Mortgage Loans, the Trustee will review the Mortgage Loans and the Related
Documents and if any Mortgage Loan or Related Document is found to be defective
in any material respect and such defect is not cured within 90 days following
notification thereof to the Transferor by the Trustee, the Transferor will be
obligated to accept the transfer of such Mortgage Loan from the Trust. Upon
such transfer, the Principal Balance of such Mortgage Loan will be deducted
from the Pool Balance, thus reducing the amount of the Transferor Interest. If
the deduction would cause the Transferor Interest to become less than the
Minimum Transferor Interest at such time (a "Transfer Deficiency"), the
Transferor will be obligated to either substitute an Eligible Substitute
Mortgage Loan or to make a deposit into the Collection Account in the amount
(the "Transfer Deposit Amount") equal to the amount by which the Transferor
Interest would be reduced to less than the Minimum Transferor Interest at such
time plus an amount equal to all accrued but unpaid interest on such removed
Mortgage Loan. Any such deduction or deposit, will be considered a payment in
full of such Mortgage Loan. Any Transfer Deposit Amount will be treated as a
Principal Collection. Notwithstanding the foregoing, however, prior to all
required deposits to the Collection Account being made no such transfer shall
be considered to have occurred unless such deposit is actually made. The
obligation of the Transferor to accept a transfer of a Defective Mortgage Loan
(as defined below) is the sole remedy regarding any defects in the Mortgage
Loans and Related Documents available to the Trustee or the Certificateholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Transferor for a Defective Mortgage Loan which must, on the date of such
substitution, as applicable, (i) have an outstanding Principal Balance (or, in
the case of a substitution of more than one Mortgage Loan for a Defective
Mortgage Loan, an aggregate Principal Balance), not more than 15%, nor less
than 5% than the Transfer Deficiency relating to such Defective Mortgage Loan;
(ii) except for Mortgage Loans still in their teaser period, have a Loan Rate
not less than the Loan Rate of the Defective Mortgage Loan and not more than
4.00% in excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a
Loan Rate based on the same Index with adjustments to such Loan Rate made on
the same Interest Rate Adjustment Date as that of the Defective Mortgage Loan;
(iv) except for Mortgage Loans still in their teaser period, have a Margin that
is not less than the Margin of the Defective Mortgage Loan and not more than
100 basis points higher than the Margin for the Defective Mortgage Loan; (v)
have a mortgage of the same or higher level of priority as the mortgage
relating to the Defective Mortgage Loan; (vi) have a remaining term to maturity
not more than 120 months earlier and not more than 180 months later than the
remaining term to maturity of the Defective Mortgage Loan; (vii) comply with
each
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representation and warranty as to the Mortgage Loans set forth in the Agreement
(deemed to be made as of the date of substitution); (viii) in general, have an
original Combined Loan-to-Value Ratio not greater than that of the Defective
Mortgage Loan; and (ix) satisfy certain other conditions specified in the
Agreement. To the extent the Principal Balance of an Eligible Substitute
Mortgage Loan is less than the Principal Balance of the related Defective
Mortgage Loan and to the extent that the Transferor Interest would be reduced
below the Minimum Transferor Interest, the Seller will be required to make a
deposit to the Collection Account equal to such difference plus all accrued and
unpaid interest on the amount by which the Principal Balance of the Defective
Mortgage Loan exceeds the Principal Balance of the Eligible Substitute Mortgage
Loan.
The Transferor will make certain representations and warranties as to
the accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Transferor will represent and
warrant on the Closing Date that at the time of transfer to the Trust, the
Transferor has transferred or assigned all of its rights, title and interest in
each Mortgage Loan and the Related Documents, free of any lien. Upon discovery
of a breach of any such representation and warranty which materially and
adversely affects the interests of the Certificateholders or the Certificate
Insurer in the related Mortgage Loan and Related Documents, the Transferor will
have a period of 90 days after discovery or notice of the breach to effect a
cure. If the breach cannot be cured within the 90-day period, the Transferor
will be obligated to accept a transfer of the Defective Mortgage Loan from the
Trust. The same procedure and limitations that are set forth for the transfer
of a Defective Mortgage Loan in the preceding paragraph will apply to the
transfer of a Mortgage Loan that is required to be transferred because of such
breach of a representation or warranty.
Mortgage Loans required to be transferred to the Transferor as
described in the preceding paragraphs are referred to as "Defective Mortgage
Loans."
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the Servicer may change the terms of the
Credit Line Agreements at any time provided that such changes (i) do not
adversely affect the interest of the Certificateholders or the Certificate
Insurer, and (ii) are consistent with prudent business practice. The Servicer
may make material changes to the Credit Line Agreements with the prior written
consent of the Certificate Insurer. In addition, the Agreement permits the
Servicer, within certain limitations described therein, to increase the Credit
Limit of the related Mortgage Loan or reduce the Margin for such Mortgage Loan.
OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, on any
Distribution Date the Transferor may, but shall not be obligated to, designate
for removal on such Distribution Date (the "Transfer Date") from the Trust,
certain Mortgage Loans without notice to the Certificateholders. Mortgage
Loans so designated will only be removed upon satisfaction of certain
conditions specified in the Agreement, including: (i) the Transferor Interest
as of such Transfer Date (after giving effect to such removal) exceeds the
Minimum Transferor Interest; (ii) the Transferor shall have delivered to the
Trustee a "Mortgage Loan Schedule" containing a list of all Mortgage Loans
remaining in the Trust after such removal; (iii) the Transferor shall represent
and warrant that no selection procedures which the Transferor reasonably
believes are adverse to the interests of the Certificateholders or the
Certificate Insurer were used by the Transferor in selecting such Mortgage
Loans; (iv) in connection with each such retransfer of Mortgage Loans, the
Rating Agencies shall have been notified of the proposed transfer and prior to
the Transfer Date shall not have notified the Transferor or the Certificate
Insurer in writing that such transfer would result in a reduction or withdrawal
of the ratings assigned to the Certificates without regard to the Policy; (v)
the proposed retransfer shall not cause a Rapid Amortization Event to occur;
(vi) the Rapid Amortization Period shall not have commenced; and (vii) the
Transferor shall have delivered to the Trustee and the Certificate Insurer an
officer's certificate confirming the conditions set forth in clauses (i)
through (vi) above.
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As of any date of determination, the "Minimum Transferor Interest" is
an amount equal to the lesser of (a) 5% of the Pool Balance on such date and
(b) the Transferor Interest as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT; DEPOSITS TO FUNDING
ACCOUNT
The Trustee shall establish and maintain an account (the "Collection
Account") for the benefit of the Certificateholders, the Certificate Insurer
and the Transferor, as their interests may appear. The Collection Account will
be an Eligible Account (as defined herein). Subject to the investment
provision described in the following paragraphs, within two Business Days of
receipt by the Servicer of amounts in respect of the Mortgage Loans (excluding
amounts representing administrative charges, annual fees, taxes, assessments,
credit insurance charges, insurance proceeds to be applied to the restoration
or repair of a Mortgaged Property or similar items), the Servicer will deposit
such amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Agreement) maturing no later than one
Business Day prior to the next Distribution Date or on such Distribution Date
if approved by the Rating Agencies and the Certificate Insurer. Not later than
the third Business Day prior to each Distribution Date (the "Determination
Date"), the Servicer will notify the Trustee of the amount of such deposit to
be included in funds available for the related Distribution Date.
The Funding Account will be an Eligible Account (as defined herein)
established with the Trustee on the Closing Date. Amounts so deposited into
the Funding Account will be invested in Eligible Investments at the direction
of the Servicer maturing no later than one Business Day prior to the related
Distribution Date or on the related Distribution Date if approved by the Rating
Agencies and the Certificate Insurer. All income or gain realized from any
investment in Eligible Investments shall constitute part of Investor Interest
Collections. On each Distribution Date during the Funding Period the Scheduled
Principal Collections Distribution Amount for such Distribution Date will be
deposited in the Funding Account. On the Distribution Date following the end of
the Funding Period, the amount of Principal Collections on deposit in the
Funding Account shall be used to acquire any remaining Additional Balances on
such Distribution Date and any remaining amounts on deposit therein will be
distributed to the Certificateholders as a payment of principal.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose short-term debt obligations at the time of any
deposit therein have the highest short-term debt rating by Standard & Poor's
and Moody's, (ii) one or more accounts maintained with a depository institution
whose long term unsecured debt rating by Standard & Poor's and Moody's is at
least investment grade and whose accounts are fully insured by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the Federal Deposit Insurance Corporation established by such fund, (iii) a
segregated trust account maintained with the Trustee in its fiduciary capacity
or (iv) otherwise acceptable to each Rating Agency and the Certificate Insurer
as evidenced by a letter from each Rating Agency and the Certificate Insurer to
the Trustee, without reduction or withdrawal of their then current ratings of
the Certificates.
Eligible Investments are specified in the Agreement and may also
include investments which meet the criteria of the Rating Agencies from time to
time as being consistent with their then current ratings of the Certificates.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Loan Agreements between amounts collected in respect of
interest and amounts collected in respect of principal. As to any Distribution
Date, "Interest Collections" will be equal to the amounts collected during the
related Collection Period, including such portion of Net Liquidation Proceeds
allocated to interest pursuant to the terms of the Loan Agreements and any
earnings received on the amounts on deposit in the Funding Account, less
Servicing Fees for the related Collection Period.
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As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including such portion of Net Liquidation Proceeds, allocated to principal
pursuant to the terms of the Loan Agreements and (ii) any Transfer Deposit
Amounts. "Net Liquidation Proceeds" with respect to a Mortgage Loan are equal
to the Liquidation Proceeds, reduced by related expenses, but not including the
portion, if any, of such amount that exceeds the Principal Balance of the
Mortgage Loan, and accrued and unpaid interest thereon to the end of the
Collection Period during which such Mortgage Loan became a Liquidated Mortgage
Loan. "Liquidation Proceeds" are the proceeds received in connection with the
liquidation of any Mortgage Loan, whether through trustee's sale, foreclosure
sale or otherwise.
With respect to any Distribution Date, the portion of Interest
Collections allocable to the Certificates ("Investor Interest Collections")
will equal the product of (i) Interest Collections for such Distribution Date
and (ii) the Investor Floating Allocation Percentage. With respect to any
Distribution Date, the "Investor Floating Allocation Percentage" is the
percentage equivalent of a fraction determined by dividing (a) the Invested
Amount at the close of business on the preceding Distribution Date (or the
Closing Date in the case of the first Distribution Date) by (b) the sum as of
the beginning of the related Collection Period of (i) the Pool Balance
(adjusted for any Mortgage Loans removed from the Trust or Additional Balances
added to the Trust during the prior Collection Period) and (ii) the amount of
Principal Collections on deposit in the Funding Account. The remaining amount
of Interest Collections will be allocated to the Transferor Interest.
Principal Collections will be allocated between the
Certificateholders and the Transferor ("Investor Principal Collections" and
"Transferor Principal Collections", respectively) as described herein.
The Trustee will deposit any amounts drawn under the Policy into the
Collection Account.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
Principal Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on
any day is equal to the Cut-Off Date Principal Balance thereof, plus (i) with
respect to any HELOC, any Additional Balances in respect of such Mortgage Loan
minus (ii) all collections credited against the Principal Balance of such
Mortgage Loan in accordance with the related Loan Agreement prior to such day.
The Principal Balance of a Liquidated Mortgage Loan after final recovery of
related Liquidation Proceeds shall be zero.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Distribution Date (which will occur on
January 15, 1997), distributions on the Certificates will be made by the
Trustee or the Paying Agent on each Distribution Date to the persons in whose
names such Certificates are registered at the close of business on the day
prior to each Distribution Date or, if the Certificates are no longer Book-
Entry Certificates, at the close of business on the last day of the month
preceding such Distribution Date (the "Record Date"). The term "Distribution
Date" means the fifteenth day of each month or, if such day is not a Business
Day, then the next succeeding Business Day. Distributions will be made by
check or money order mailed (or upon the request of a Certificateholder owning
Certificates having denominations aggregating at least $1,000,000, by wire
transfer or otherwise) to the address of the person entitled thereto (which, in
the case of Book-Entry Certificates, will be DTC or its nominee) as it appears
on the Certificate Register in amounts calculated as described herein on the
Determination Date. However, the final distribution in respect of the
Certificates will be made only upon presentation and surrender thereof at the
office or the agency of the Trustee specified in the notice to
Certificateholders of such final distribution. For purposes of the Agreement,
a "Business Day" is any day other than (i) a Saturday or Sunday or (ii) a day
on which banking institutions in New York State are required or authorized by
law to be closed.
Application of Interest Collections. On each Distribution Date, the
Trustee or the Paying Agent will apply the Investor Interest Collections,
amounts transferred from the Deferred Interest Account, and amounts
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transferred from the Spread Account in accordance with the Agreement in the
following manner and order of priority:
(i) for the accrued interest due and any overdue accrued interest (with
interest thereon to the extent permitted by law) (other than Deferred Interest)
on the Certificate Principal Balance of the Class A Certificates;
(ii) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon to the extent permitted by law) on the Class S
Notional Amount;
(iii) to pay Class A Certificateholders the Investor Loss Amount for
such Distribution Date;
(iv) as payment for any Investor Loss Amount for a previous Distribution
Date that was not previously (a) funded by Investor Interest Collections, (b)
funded by amounts on deposit in the Spread Account, (c) absorbed by the
Overcollateralization Amount, (d) funded by Interest Collections and Principal
Collections allocable to the Transferor Interest up to the Transferor
Subordinated Amount as described below, or (e) funded by draws on the Policy;
(v) as payment to the Certificate Insurer for the monthly premium for the
Policy;
(vi) to reimburse prior draws made from the Policy (with interest
thereon);
(vii) to pay principal on the Class A Certificates until the Invested
Amount exceeds the Certificate Principal Balance by the Required
Overcollateralization Amount (the aggregate of amounts, if any, paid pursuant
to this clause (vii) being referred to herein as the "Accelerated Principal
Distribution Amount");
(viii) to deposit any other amounts required to be deposited in the
Spread Account pursuant to the Agreement and the Insurance Agreement;
(ix) to pay any other amounts owed to the Certificate Insurer pursuant to
the Insurance Agreement; and
(x) as payment to the Trustee for its fee for services rendered pursuant
to the Agreement;
(xi) to pay certain amounts that may be required to be paid to the
Servicer pursuant to the Agreement;
(xii) to pay Deferred Interest on the Class A Certificates and interest
thereon at the Class A Certificate Rate;
(xiii) to the Transferor to the extent permitted as described herein.
The "Overcollateralization Amount" on any date of determination is the
amount, if any, by which the Invested Amount exceeds the Certificate Principal
Balance on such day. Payments to Certificateholders pursuant to clauses (i)
and (ii) will be interest payments on the Certificates. Payments to
Certificateholders pursuant to clauses (iii) and (iv) will be principal
payments on the Certificates and will therefore reduce the Certificate
Principal Balance and the Invested Amount; however, payments pursuant to clause
(vii) will reduce the Certificate Principal Balance but will not reduce the
Invested Amount. The Accelerated Principal Distribution Amount is not
guaranteed by the Policy. The "Required Overcollateralization Amount" is
$1,922,382.32, minus the aggregate Principal Balance of all
Overcollateralization Loans.
To the extent that Investor Interest Collections are applied to pay the
interest on the Certificates, available Investor Interest Collections may be
insufficient to cover Investor Loss Amounts. If such insufficiency exists
after (i) giving effect to the distribution, if any, of principal to the Class
A Certificateholders' on such Distribution Date (including all withdrawals from
the Spread Account) and (ii) the
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Transferor Subordinated Amount has been reduced to zero, then if the
Certificate Principal Balance as of such Distribution Date exceeds the Invested
Amount, a draw in an amount equal to such difference will be made on the Policy
in accordance with the terms of the Policy.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan, after
giving effect to the Net Liquidation Proceeds in connection therewith. The
"Investor Loss Amount" shall be the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amount for such Distribution Date.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Agreement, as of the end of the preceding
Collection Period that all Liquidation Proceeds which it expects to recover
with respect to the disposition of the related Mortgaged Property have been
recovered. The Investor Loss Amount will be allocated to the
Certificateholders.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding each Distribution Date.
Interest will be distributed on each Distribution Date at the Certificate
Rate for the related Interest Period (as defined below). The "Certificate
Rate" for the Class S Certificates for any Distribution Date will equal 1.00%
per annum. The "Certificate Rate" for the Class A Certificates for a
Distribution Date will generally equal the sum of (a) LIBOR, determined as
specified herein, as of the second LIBOR Business Day prior to the immediately
preceding Distribution Date (or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first Distribution Date) plus (b) .20% per
annum. Notwithstanding the foregoing, in no event will the amount of interest
required to be distributed in respect of the Certificates on any Distribution
Date exceed the Maximum Rate. To the extent the Maximum Rate is less than the
Class A Certificate Rate, the deficiency will be deferred and payable as
Deferred Interest. In certain circumstances, the addition of Subsequent
Mortgage Loans to the Trust may result in the Class A Certificate Rate
exceeding the Maximum Rate.
Interest on the Certificates in respect of any Distribution Date will
accrue on the Certificate Principal Balance, or the Class S Notional Amount in
the case of the Class S Certificates, from the preceding Distribution Date (or
in the case of the first Distribution Date, from the date of the initial
issuance of the Certificates (the "Closing Date")) through the day preceding
such Distribution Date (each such period, an "Interest Period") on the basis of
the actual number of days in the Interest Period and a 360-day year. Interest
payments on the Certificates will be funded from Investor Interest Collections
and, during the Funding Period, from the Deferred Interest Account and from
collections allocable to the Transferor Interest up to the then outstanding
Transferor Subordinated Amount and, if necessary, from draws on the Spread
Account and on the Policy.
Calculation of the LIBOR Rate. On the second LIBOR Business Day prior to
each Distribution Date, LIBOR shall be established by the Trustee and as to any
Interest Period, LIBOR will equal the rate for United States dollar deposits
for one month which appears on the Telerate Screen Page 3750 as of 11:00 A.M.,
London time, on the second LIBOR Business Day prior to the first day of such
Interest Period. "Telerate Screen Page 3750" means the display designated as
page 3750 on the Telerate Service (or such other page as may replace page 3750
on that service for the purpose of displaying London interbank offered rates of
major banks). If such rate does not appear on such page (or such other page as
may replace that page on that service, or if such service is no longer offered,
such other service for displaying LIBOR or comparable rates as may be selected
by the Transferor after consultation with the Trustee), the rate will be the
Reference Bank Rate. The "Reference Bank Rate" will be determined on the basis
of the rates at which deposits in U.S. Dollars are offered by the reference
banks (which shall be two major banks that are engaged in transactions in the
London interbank market, selected by the Transferor after consultation with the
Trustee) as of 11:00 A.M., London time, on the day that is two LIBOR Business
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Days prior to the immediately preceding Distribution Date to prime banks in the
London interbank market for a period of one month in amounts approximately
equal to the principal amount of the Certificates then outstanding. The
Trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate will be the arithmetic mean of the quotations. If on such
date fewer than two quotations are provided as requested, the rate will be the
arithmetic mean of the rates quoted by one or more major banks in New York
City, selected by the Transferor after consultation with the Trustee, as of
11:00 A.M., New York City time, on such date for loans in U.S. dollars to
leading European banks for a period of one month in amounts approximately equal
to the principal amount of the Certificates then outstanding. If no such
quotations can be obtained, the rate will be LIBOR for the prior Distribution
Date. "LIBOR Business Day" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the State of New York or in the
city of London, England are required or authorized by law to be closed.
Transferor Collections. Collections that are not distributed to
Certificateholders ("Transferor Collections") will be distributed to the
Transferor only to the extent that such distribution will not reduce the amount
of the Transferor Interest as of the related Distribution Date below the
Minimum Transferor Interest. Amounts of the Transferor Collections not
distributed to the Transferor because of such limitations will be retained in
the Collection Account until the Transferor Interest exceeds the Minimum
Transferor Interest, at which time such excess shall be released to the
Transferor. If any such amounts are still retained in the Collection Account
upon the commencement of the Rapid Amortization Period, such amounts will be
paid to the Certificateholders as a reduction of the Certificate Principal
Balance.
Overcollateralization. The distribution of the aggregate Accelerated
Principal Distribution Amount, if any, to Certificateholders may result in the
Invested Amount being greater than the Certificate Principal Balance, thereby
creating overcollateralization. The Overcollateralization Amount, if any, will
be available to absorb any Liquidation Loss Amount that is allocated to
Certificateholders and is not covered by the excess interest or the Transferor
Subordinated Amount.
Distributions of Principal Collections. During the Funding Period, the
Scheduled Principal Collections Distribution Amount will be deposited into the
Funding Account. In the event that not all of the Principal Collections
remaining on deposit in the Funding Account have been used to acquire
Subsequent Mortgage Loans on the last Distribution Date of the Funding Period,
then such Principal Collections will be used to acquire any remaining
Additional Balances on such Distribution Date and any remaining amount on
deposit therein will be distributed to the Certificateholders as a payment of
principal. During the Managed Amortization Period, the amount of Principal
Collections payable to Certificateholders as of each Distribution Date will
equal, to the extent funds are available therefor, the Scheduled Principal
Collections Distribution Amount for such Distribution Date. On any
Distribution Date, the "Scheduled Principal Collections Distribution Amount"
shall equal the lesser of (i) the Maximum Principal Payment (as defined herein)
and (ii) the Alternative Principal Payment (as defined herein). With respect
to any Distribution Date, the "Maximum Principal Payment" will equal the
product of the Investor Fixed Allocation Percentage and Principal Collections
for such Distribution Date. With respect to any Distribution Date, the
"Alternative Principal Payment" will equal the amount, but not less than zero,
of Principal Collections for such Distribution Date less the aggregate of
Additional Balances created during the related Collection Period.
During the Rapid Amortization Period, the amount of Principal Collections
payable to Certificateholders on each Distribution Date will be equal to the
Maximum Principal Payment.
Distributions of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining Pool
Balance than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of Principal Collections distributed in
respect of the Invested Amount. Principal Collections not
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allocated to the Class A Certificateholders will be allocated to the Transferor
Interest. The aggregate distributions of principal to the Certificateholders
will not exceed the Original Certificate Principal Balance.
In addition, to the extent of funds available therefor (including funds
on deposit in the Spread Account and funds available under the Policy), on the
Distribution Date in January, 2024, Class A Certificateholders will be entitled
to receive as a payment of principal an amount equal to the outstanding
Certificate Principal Balance.
The Paying Agent. The Paying Agent shall initially be the Trustee,
together with any successor thereto in such capacity (the "Paying Agent"). The
Paying Agent shall have the revocable power to withdraw funds from the
Collection Account for the purpose of making distributions to the
Certificateholders.
LIMITED SUBORDINATION OF TRANSFEROR INTEREST
If Investor Interest Collections and funds payable from the Deferred
Interest Account on any Distribution Date are insufficient to pay (i) accrued
interest due and any overdue accrued interest (with interest thereon) (other
than Deferred Interest) on the Certificates and (ii) the Investor Loss Amount
on such Distribution Date (such insufficiency being the "Required Amount"), a
portion of the Interest Collections and Principal Collections allocable to the
Transferor Interest (but not in excess of the then outstanding Transferor
Subordinated Amount, determined as provided herein) will be applied to cover
the Required Amount. The portion of the Required Amount in respect of clause
(ii) above not covered by such collections will be reallocated to the
Transferor Interest, thereby reducing the Transferor Interest (up to the
remaining Transferor Subordinated Amount and not in excess of the Investor Loss
Amounts). If such Investor Interest Collections and funds payable from the
Deferred Interest Account plus the amount of collections allocable to the
Transferor Interest which have been so applied to cover the Required Amount are
together insufficient to pay the amounts set forth in item (i) of the
definition of Required Amount, then a draw will be made on the Policy to cover
the amounts by which interest owed to the Class A Certificateholders at the
Class A Certificate Rate and to the Class S Certificateholders at the Class S
Certificate Rate exceeds Investor Interest Collections, amounts available in
the Deferred Interest Account and amounts on deposit in the Spread Account. In
addition, if on any Distribution Date on or after the Transferor Subordinated
Amount is reduced to zero, the Certificate Principal Balance exceeds the
Invested Amount (after giving effect to all allocations and distributions with
respect to principal to be made on the Class A Certificates on such
Distribution Date), a draw will be made on the Policy in the amount of such
excess for such Distribution Date. After the Transferor Subordinated Amount has
been reduced to zero, the Required Amount will no longer be supported by the
Transferor Subordinated Amount as described above.
To the extent the Original Certificate Principal Balance less all
principal payments actually distributed to Certificateholders exceeds the
Invested Amount on a Distribution Date in accordance with the terms of the
Policy when the Transferor Subordinated Amount is equal to zero, a draw will be
made upon the Policy to cover such shortfall in principal to the extent
available under the Policy. See "--The Policy."
With respect to any Distribution Date, the "Transferor Subordinated
Amount" equals $2,563,176.42 plus the aggregate Principal Balances of any
Overcollateralization Loans minus (i) the aggregate amount of principal and
interest collections allocable to the Transferor Interest that have previously
been distributed to the Certificateholders to cover a Required Amount as
described above and (ii) the aggregate amount of the Investor Loss Amounts
that have previously been reallocated to the Transferor Interest as described
above. The Transferor Subordinated Amount at any time may also be further
reduced if such reduction is consented to by both the Rating Agencies and the
Certificate Insurer and certain other conditions are satisfied. The
"Overcollateralization Amount" on any date of determination is the amount by
which the Invested Amount exceeds the Certificate Principal Balance on such
day.
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DEFERRED INTEREST ACCOUNT
On the Closing Date an amount equal to $340,397.14 will be deposited, and
on each transfer date of Subsequent Mortgage Loans an amount calculated by the
Transferor necessary to pay any Deferred Interest during the lifetime of such
Subsequent Mortgage Loan will be deposited, in an account (the "Deferred
Interest Account") in the name of the Trustee on behalf of the Trust. On each
Distribution Date, amounts in the Deferred Interest Account in an amount of
potential Deferred Interest for such Distribution Date will be deposited into
the Collection Account and applied in accordance with the priority of payments
set forth in "Description of the Certificates -- Distributions on the
Certificates. Any amounts remaining in the Deferred Interest Account on the
later of (i) the Distribution Date following the end of the Funding Period and
(ii) the Distribution Date following the date on which all teaser Mortgage Loans
have become fully indexed, will be deposited in the Collection Account for
distribution.
Amounts on deposit in the Deferred Interest Account shall be invested
in Eligible Investments.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue through
the Distribution Date in January 2003, unless a Rapid Amortization Event
occurs prior to such date in which case the Rapid Amortization Period will
commence prior to such date. The "Rapid Amortization Period" is the period
commencing on the earlier of (x) the end of the Managed Amortization Period and
(y) the day, if any, upon which a Rapid Amortization Event occurs and
concluding upon termination of the Trust. "Rapid Amortization Event" refers to
any of the following events:
(a) failure on the part of the Transferor or the Seller (i) to make a
payment or deposit required under the Agreement or the Insurance Agreement
within [two] Business Days after notification that such payment or deposit
is required to be made or (ii) to observe or perform in any material
respect any other covenants or agreements of the Transferor set forth in
the Agreement or the Insurance Agreement, which failure continues
unremedied for a period of 60 days after written notice;
(b) any representation or warranty made by the Transferor in the
Agreement or the Insurance Agreement proves to have been incorrect in any
material respect when made and continues to be incorrect in any material
respect for a period of 60 days after written notice and as a result of
which the interests of the Certificateholders or the Certificate Insurer
are materially and adversely affected; provided, however, that a Rapid
Amortization Event shall not be deemed to occur if the Transferor has
purchased the related Mortgage Loan or Mortgage Loans if applicable during
such period (or within an additional 60 days with the consent of the
Trustee and the Certificate Insurer) in accordance with the provisions of
the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Seller, the Transferor or the Depositor or
relating to the Trust;
(d) the Trust becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended;
(e) the aggregate of all draws under the Policy exceeds 1% of the
Original Pool Balance;
(f) if any of the transaction documents shall cease to be in full
force and effect or the security interest of the Trustee in the Trust shall
cease to be a first priority perfected security interest;
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(g) the occurrence of a change in control with respect to the
Headlands;
(h) the occurrence of any material breach by Headlands of the
provisions of its credit agreements during the term of the Trust;
(i) failure by the Servicer, if the Servicer is Headlands, to
maintain a minimum volume in its mortgage servicing portfolio of $2
billion, calculated by outstanding principal balances of mortgage loans
serviced, in accordance with the Servicer's credit and collection policy;
(j) at the end of each calendar quarter commencing on March 30, 1997,
failure by Headlands to maintain (a) "shareholder's equity" according to
GAAP, of $15 million or (b) a maximum ratio of total liabilities to
shareholder's equity according to GAAP of 20 to 1;
(k) the failure by the Seller or the Servicer to implement the CPI
servicing system or a servicing system mutually acceptable to the Servicer
and the Certificate Insurer within 90 days after availability of the
system;
(l) for each Distribution Date commencing on the third Distribution
Date, the percentage equivalent of a fraction the numerator of which is
equal to the average of the aggregate Asset Balances on such date of all
Mortgage Loans with respect to which principal or interest are at least 60
days delinquent as of the last day of each of the three immediately
preceding Collection Periods, and the denominator of which is equal to the
average of the Pool Balance as of the last day of each of the three
immediately preceding Collection Periods shall exceed 4%; or
(m) for each Distribution Date commencing on the third Distribution
Date, the percentage equivalent of a fraction, the numerator of which is
equal to the average of the aggregate Asset Balances on such date of all
defaulted Mortgage Loans (excluding Liquidated Mortgage Loans) as to which
(i) collection procedures are ongoing and (ii) the Servicer has charged off
all or a portion of the related Asset Balance as of the last day of each of
the three immediately preceding Collection Periods, and the denominator of
which is equal to the average of the Pool Balance as of the last day of
each of the three immediatly preceding Collection Periods shall exceed 2%.
In the case of any event described above, a Rapid Amortization Event will
be deemed to have occurred only if, after the applicable grace period, if any,
described in such clauses, either (i) the Trustee or Certificateholders holding
Certificates evidencing in the aggregate more than 51% of the Voting Rights,
with the consent of the Certificate Insurer, or (ii) the Certificate Insurer
(so long as there is no default by the Certificate Insurer in the performance
of its obligations under the Policy), by written notice to the Servicer (and to
the Trustee, if given by the Certificateholders) declare that a Rapid
Amortization Event has occurred as of the date of such notice; provided that
with respect to clauses, (c), (d) and (e) a Rapid Amoritization Event shall
occur immediately upon the occurrence of such, without any such notice.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of the
Transferor, on the day of any such filing or appointment no further Additional
Balances will be transferred to the Trust, the Transferor will immediately
cease to transfer Additional Balances to the Trust and the Transferor will
promptly give notice to the Trustee and the Certificate Insurer of any such
filing or appointment. Within 15 days, the Trustee will publish a notice of the
liquidation or the filing or appointment stating that the Trustee intends to
sell, dispose of or otherwise liquidate the Mortgage Loans in a commercially
reasonable manner and to the best of its ability. Unless otherwise instructed
within a specified period by Certificateholders evidencing in the aggregate
more than 51% of the Voting Rights, the Trustee will sell, dispose of or
otherwise liquidate the Mortgage Loans to a purchaser in a commercially
reasonable manner and on commercially reasonable terms; provided, however, that
the Certificate Insurer's consent to the terms of any such sale shall be
required, which consent shall not be unreasonably withheld. Any proceeds will
be treated as collections allocable to the Certificateholders and will be
distributed to the Certificateholders on the date such proceeds are received
(the "Dissolution Distribution Date"). The proceeds from the sale, disposition
or liquidation of the Mortgage Loans will first be paid to the Certificate
Insurer to the extent of unreimbursed draws under the Policy and other amounts
owing to the Certificate Insurer pursuant to the Insurance Agreement.
Notwithstanding the foregoing, if a conservator, receiver or trustee-in-
bankruptcy is appointed for the Transferor and no Rapid Amortization Event
exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the sale
of Mortgage Loans described above.
THE POLICY
On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Agreement and the Insurance and
Reimbursement Agreement (the "Insurance Agreement")
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to be dated as of December 1, 1996, among Headlands, as Seller and Servicer,
Headlands SPC, as Transferor, the Depositor, the Trustee and the Certificate
Insurer.
The Policy will irrevocably and unconditionally guarantee on each
Distribution Date to the Trustee for the benefit of the Certificateholders the
full and complete payment of (i) the Guaranteed Principal Distribution Amount
(as defined herein) with respect to the Class A Certificates for such
Distribution Date and (ii) after application of amounts available from Investor
Interest Collections, amounts transferred from the Deferred Interest Account,
investment earnings on amounts on deposit in the Funding Account and amounts on
deposit in the Spread Account, any shortfall in accrued and unpaid interest due
on the Certificates (together, the "Guaranteed Distributions"), with such
Guaranteed Distributions having been calculated in accordance with the original
terms of the Certificates or the Agreement. Any amendments or modifications to
such terms shall require the Certificate Insurer's prior written consent. The
effect of the Policy is to guarantee the timely payment of interest on the
Class A and Class S Certificates, and the ultimate payment of the principal
amount of the Class A Certificates.
The "Guaranteed Principal Distribution Amount" for any Distribution Date on
which the Transferor Subordinated Amount has been reduced to zero shall be the
amount, if any, by which the Certificate Principal Balance (after giving effect
to all other amounts distributable and allocable to principal on the
Certificates on such Distribution Date including application of any amounts
available therefor in the Spread Account) exceeds the Invested Amount as of
such Distribution Date (after giving effect to distributions of principal, if
any, to the Certificateholders and the allocation of Investor Loss Amounts on
such Distribution Date). In addition, the Policy will guarantee the payment of
the outstanding Certificate Principal Balance on the Distribution Date in
January, 2024 (after giving effect to all other amounts distributable and
allocable to principal on such Distribution Date and after application of
amounts on deposit in the Spread Account).
Payment of claims on the Policy 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) 11:00 a.m., New York City time, on the
Business Day next succeeding Receipt of such notice for payment and (ii) 11:00
a.m., New York City time, on the Business Day immediately preceding the
relevant Distribution Date.
If payment of any amount guaranteed by the Certificate Insurer pursuant to
the Policy is avoided as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law, the Certificate Insurer will pay such
amount following Receipt by the Certificate Insurer from the Trustee of (A) a
certified copy of the final order (the "Order") of the court or other
governmental body which exercised jurisdiction to the effect that the Trustee
is required to return the amount of any Guaranteed Distributions distributed
with respect to the Certificates during the term of the related Policy because
such distributions were avoidable preference payments under applicable
bankruptcy law with respect to which Order the appeal period has expired
without an appeal having been filed, (B) a certificate of the Trustee on behalf
of the Certificateholders that the Order has been entered and is not subject to
any stay, (C) an assignment, in such form as is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the Trustee and the Certificateholders relating to or
arising under the Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment and (D) a claim
for payment as required by the Certificate Insurer. 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 Certificateholder
directly.
The terms "Receipt" and "Received," with respect to the Policy, means
actual delivery to the Certificate Insurer prior to 2:00 p.m., New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 2:00 p.m., New York City time, shall be deemed to be Received on the next
succeeding Business Day. If any notice or certificate given under the Policy
by the Trustee is not in proper form or is
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not properly completed, executed or delivered it shall be deemed not to have
been Received, and the Certificate Insurer 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 The City of New York, New
York or the state in which the Trustee's corporate trust office is located are
authorized or obligated by law or executive order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are
transferred to the Trustee as provided in the Policy, whether or not such funds
are properly applied by the Trustee. On any Distribution Date, the amount
available under the Policy in respect of principal shall be equal to the excess
of the Original Certificate Principal Balance over the sum of (i) the aggregate
of all amounts theretofore paid by the Certificate Insurer in respect of
principal on the Certificates and (ii) the aggregate of all amounts withdrawn
from the Spread Account in respect of payments of principal on the
Certificates. Further, the aggregate amount of all claims paid under the
Policy in respect of principal may not exceed the Original Certificate
Principal Balance.
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 Guaranteed Distributions, 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 Guaranteed Distributions, 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 Guaranteed Distributions until all such Guaranteed
Distributions by the Certificate Insurer have been fully reimbursed. 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 Transferor.
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 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), will be entitled to exercise all rights of the
Certificateholders thereunder, without the consent of such Holders and the
Holders of the Certificates 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.
In the absence of payments from the Spread Account and under the Policy,
Certificateholders will bear directly the credit and other risks associated
with their undivided interest in the Trust.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Servicer
will forward to the Trustee for mailing to such Certificateholder a statement
setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to each Class of
Certificateholders;
(iii) the amount of interest included in such distribution and the
related Certificate Rate;
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(iv) the amount, if any, of overdue accrued interest and Deferred
Interest included in such distribution (and the amount of interest thereon);
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution;
(vii) the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to such distribution and the amount, if any,
of Liquidation Loss Amounts with respect to the related Collection Period;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount, the Certificate Principal Balance and the
Notional Amount, each after giving effect to such distribution;
(xi) the Pool Balance as of the end of the preceding Collection
Period;
(xii) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59 days, 60-
89 days and 90 or more days, respectively, as of the end of the preceding
Collection Period;
(xiii) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure;
(xiv) the amount of any draws on the Policy;
(xv) the amount, if any, on deposit in the Spread Account and the
amount, if any, transferred from the Spread Account in respect of such
Distribution Date;
(xvi) the amount of the amount, if any, of any losses allocated
against the Transferor Subordinated Amount on such Distribution Date and the
amount, if any, of the remaining Transferor Subordinated Amount (after making
distributions in respect of such Distribution Date).
In the case of information furnished pursuant to clauses (iii), (iv), (v),
(vi), (vii) and (viii) above, the amounts shall be expressed as a dollar amount
per Certificate with a $1,000 denomination.
Within 60 days after the end of each full calendar year after 1997, the
Servicer will be required to forward to the Trustee a statement containing the
information set forth in clauses (iii) and (vi) above aggregated for the prior
calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the Agreement, follow
such collection procedures as it follows from time to time with respect to the
home equity loans in its servicing portfolio comparable to the Mortgage Loans.
Consistent with the above, the Servicer may in its discretion waive any late
payment charge or any assumption or other fee or charge that may be collected
in the ordinary course of servicing the Mortgage Loans.
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With respect to the Mortgage Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Servicer's policies
with respect to the home equity mortgage loans it owns or services. In
accordance with the terms of the Agreement, the Servicer may consent under
certain circumstances to the placing of a subsequent senior lien in respect of
a Mortgage Loan.
HAZARD INSURANCE
The Servicer shall cause to be maintained for each Mortgage Loan hazard
insurance naming the Servicer or the related subservicer as loss payee
thereunder providing extended coverage in an amount which is at least equal to
the lesser of (i) the maximum insurable value of the improvements securing such
Mortgage Loan from time to time or (ii) the combined principal balance owing on
such Mortgage Loan and any mortgage loan senior to such Mortgage Loan from time
to time. The Servicers shall also maintain on property acquired upon
foreclosure, or by deed in lieu of foreclosure, hazard insurance with extended
coverage in an amount which is at least equal to the lesser of (i) the maximum
insurable value from time to time of the improvements which are a part of such
property or (ii) the combined principal balance owing on such Mortgage Loan and
any mortgage loan senior to such Mortgage Loan at the time of such foreclosure
or deed in lieu of foreclosure. Amounts collected by the Servicer under any
such policies shall be deposited in the Collection Account net of certain
amounts as indicated in the Agreement. In cases in which any Mortgage Property
is located in a federally designated flood area, the hazard insurance to be
maintained for the related Mortgage Loan shall include flood insurance. All
such flood insurance shall be in such amounts as are required under applicable
guidelines of the Federal Flood Emergency Act. The Servicer shall be under no
obligation to require that any Mortgagor maintain earthquake or other
additional insurance and shall be under no obligation itself to maintain any
such additional insurance on property acquired in respect of a Mortgage Loan,
other than pursuant to such applicable laws and regulations as shall at any
time be in force and as shall require such additional insurance. If the
Servicer shall obtain and maintain a blanket policy consistent with prudent
industry standards insuring against hazard losses on all of the Mortgage Loans
in an aggregate amount prudent under industry standards, it shall conclusively
be deemed to have satisfied its obligations and if there shall have been a loss
which would have been covered by such policy, deposit in the Collection
Account, as the case may be, the amount not otherwise payable under the blanket
policy because of any deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgage Properties.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices as it deems necessary or advisable and
as are in keeping with its general subordinate mortgage servicing activities,
provided the Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of default on a
related senior mortgage loan or restoration of any property
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unless, in its sole judgment, such foreclosure, correction or restoration will
increase Net Liquidation Proceeds. The Servicer will be reimbursed out of
Liquidation Proceeds for advances of its own funds as liquidation expenses
before any Net Liquidation Proceeds are distributed to Certificateholders or
the Transferor.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the Servicer will receive from
interest collections in respect of the Mortgage Loans a portion of such
interest collections as a monthly Servicing Fee in the amount equal to
approximately 0.50% per annum ("Servicing Fee Rate") on the aggregate Principal
Balances of the Mortgage Loans as of the first day of the related Collection
Period (or at the Cut-Off Date for the first Collection Period). All
assumption fees, late payment charges and other fees and charges, to the extent
collected from borrowers, will be retained by the Servicer as additional
servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the Agreement.
In addition, the Servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with defaulted Mortgage Loans and in
connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Net Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before May 31 in each year,
beginning in May 31, 1998, to the Trustee and the Certificate Insurer of an
annual statement signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its material obligations under the Agreement throughout
the preceding fiscal year, except as specified in such statement.
On or before May 31 of each year, beginning May 31, 1998, the Servicer will
furnish a report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to the Servicer or the
Transferor) to the Trustee, the Certificate Insurer and the Rating Agencies to
the effect that such firm has examined certain documents and the records
relating to servicing of the Mortgage Loans under the Agreement and that, on
the basis of such examination, such firm believes that such servicing was
conducted in compliance with the Agreement except for (a) such exceptions as
such firm believes to be immaterial and (b) such other exceptions as shall be
set forth in such report.
CERTAIN MATTERS REGARDING THE SERVICER AND THE TRANSFEROR
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Servicer has proposed a successor servicer to the Trustee
and the Certificate Insurer in writing and such proposed successor servicer is
reasonably acceptable to the Trustee and the Certificate Insurer and; (b) the
Rating Agencies have confirmed to the Trustee that the appointment of such
proposed successor servicer as the Servicer will not result in the reduction or
withdrawal of the then current ratings of the Certificates without regard to
the Policy. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Servicer's obligations and duties under the
Agreement.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates acceptable to the
Certificate Insurer, which may be affiliates of the Servicer. Notwithstanding
any such arrangement, the Servicer will remain liable and obligated to the
Trustee and the Certif-
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icateholders for the Servicer's duties and obligations under the Agreement,
without any diminution of such duties and obligations and as if the Servicer
itself were performing such duties and obligations.
The Agreement provides that the Servicer will indemnify the Trust and the
Trustee from and against any loss, liability, expense, damage or injury
suffered or sustained as a result of the Servicer's actions or omissions in
connection with the servicing and administration of the Mortgage Loans which
are not in accordance with the provisions of the Agreement. Under the
Agreement, the Transferor will indemnify an injured party for the entire amount
of any losses, claims, damages or liabilities arising out of or based on the
Agreement (other than losses resulting from defaults under the Mortgage Loans).
The Agreement provides that neither the Transferor nor the Servicer nor their
directors, officers, employees or agents will be under any other liability to
the Trust, the Trustee, the Certificateholders or any other person for any
action taken or for refraining from taking any action pursuant to the
Agreement. However, neither the Transferor nor the Servicer will be protected
against any liability which would otherwise be imposed by reason of willful
misconduct, bad faith or [gross] negligence of the Transferor or the Servicer
in the performance of its duties under the Agreement or by reason of reckless
disregard of its obligations thereunder. In addition, the Agreement provides
that the Servicer will not be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it to
any expense or liability. The Servicer may, in its sole discretion, undertake
any such legal action which it may deem necessary or desirable with respect to
the Agreement and the rights and duties of the parties thereto and the interest
of the Certificateholders thereunder.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any corporation succeeding to the business of
the Servicer shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the Agreement to the contrary notwithstanding.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by the
Servicer to deposit in the Collection Account any deposit required to be made
under the Agreement or to make any payment required to be made under the
Insurance Agreement, which failure continues unremedied for two Business Days
after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders evidencing an aggregate, of at least 25% of the Voting
Rights; (ii) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Agreement
which, in each case, materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer and continues unremedied for 60
days after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders evidencing an aggregate of at least 25% of the Voting
Rights; or (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Servicer and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations (each an "Insolvency
Event"). Under certain other circumstances, the Certificate Insurer may
deliver written notice to the Servicer terminating all the rights and
obligations of the Servicer under the Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of five Business Days or
referred to under clause (ii) above for a period of 60 Business Days, shall not
constitute an Event of Servicing Termination if such delay or failure could not
be prevented by the exercise of reasonable diligence by the Servicer and such
delay or failure was caused by an act of God or other similar occurrence. Upon
the occurrence of any such event the Servicer shall not be relieved from using
its best efforts to perform its obligations in a timely manner in accordance
with the terms of the Agreement and
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the Servicer shall provide the Trustee, the Transferor, the Certificate Insurer
and the Certificateholders prompt notice of such failure or delay by it,
together with a description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either (i)
the Trustee, or Certificateholders evidencing an aggregate of at least 51% of
the Voting Rights in each case with the consent of the Certificate Insurer or
(ii) the Certificate Insurer, may terminate all of the rights and obligations
of the Servicer under the Agreement and in and to the Mortgage Loans, whereupon
the Trustee will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed
the Servicer but is unwilling or unable so to act, it may appoint, or petition
a court of competent jurisdiction for the appointment of, a housing and home
finance institution or other mortgage loan or home equity loan servicer with
all licenses and permits required to perform its obligations under the
Agreement and having a net worth of at least $15,000,000 and acceptable to the
Certificate Insurer to act as successor to the Servicer under the Agreement.
Pending such appointment, the Trustee will be obligated to act in such capacity
unless prohibited by law. Such successor will be entitled to receive the same
compensation that the Servicer would otherwise have received (or such lesser
compensation as the Trustee and such successor may agree). A receiver or
conservator for the Servicer may be empowered to prevent the termination and
replacement of the Servicer where the only Event of Servicing Termination that
has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Transferor, the
Depositor, the Servicer and the Trustee and with the consent of the Certificate
Insurer, but without the consent of the Certificateholders, to cure any
ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the Agreement, to add to the duties
of the Transferor or the Servicer or to add or amend any provisions of the
Agreement as required by the Rating Agencies in order to maintain or improve
any rating of the Certificates (it being understood that, after obtaining the
ratings in effect on the Closing Date, neither the Transferor, the Trustee nor
the Servicer is obligated to obtain, maintain, or improve any such rating) or
to add any other provisions with respect to matters or questions arising under
the Agreement or the Policy which shall not be inconsistent with the
provisions of the Agreement or to comply with any requirement imposed by the
Code (as defined herein); provided that such action will not, as evidenced by
an opinion of counsel, adversely affect, in any material respect the interests
of any Certificateholder or the Certificate Insurer; provided, that any such
amendment will not be deemed to materially and adversely affect the
Certificateholders and no such opinion will be required to be delivered if the
person requesting such amendment obtains a letter from the Rating Agencies
stating that such amendment would not result in a downgrading of the then
current rating of the Certificates, without regard to the Policy. The Agreement
may also be amended from time to time by the Transferor, the Servicer, the
Depositor and the Trustee, with the consent of Certificateholders evidencing an
aggregate of at least 51% of the Voting Rights and the Certificate Insurer for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any
manner the rights of the Certificateholders, provided that no such amendment
will (i) reduce in any manner the amount of, or delay the timing of,
collections of payments on the Certificates or distributions or payments under
the Policy which are required to be made on any Certificate without the consent
of the holder of such Certificate or (ii) reduce the aforesaid percentage
required to consent to any such amendment, without the consent of the holders
of all Certificates then outstanding or (iii) adversely affect in any material
respect the interest of the Certificate Insurer.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will generally terminate on the later of (A) the Distribution
Date immediately following the payment in full of all amounts owing to the
Certificate Insurer and (B) the earliest of (i) the Distribution Date on which
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the Certificate Principal Balance has been reduced to zero and all other
amounts due and owing to the Certificateholders have been paid in full, (ii)
the Distribution Date immediately following the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the Distribution Date
immediately following the optional transfer to the Transferor of the
Certificates, as described below and (iv) the Distribution Date in January,
2024.
The Certificates will be subject to optional transfer to the Transferor on
any Distribution Date after the Certificate Principal Balance is reduced to an
amount less than or equal to 10% of the Original Certificate Principal Balance
and all amounts due and owing to the Certificate Insurer and unreimbursed draws
on the Policy, together with interest thereon, as provided under the Insurance
Agreement, have been paid. The retransfer price will be equal to the sum of the
outstanding Certificate Principal Balance and accrued and unpaid interest
thereon at the respective Certificate Rates through the day preceding the final
Distribution Date and interest accrued on any unpaid interest, to the extent
legally permissible, together with all amounts due and owing to the Certificate
Insurer and unreimbursed draws on the Policy. In no event, however, will the
Trust created by the Agreement continue for more than 21 years after the death
of certain individuals named in the Agreement. Written notice of termination of
the Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination.
In addition, the Trust may be liquidated as a result of certain events of
bankruptcy, insolvency or receivership relating to the Transferor. See "--
Rapid Amortization Events" herein.
THE TRUSTEE
The First National Bank of Chicago, a national banking association with its
principal place of business in Chicago, Illinois, has been named Trustee
pursuant to the Agreement. Pursuant to the Agreement, the Trustee will be
entitled to a monthly fee payable from the Servicer. The Trustee is only
obligated to perform the duties and obligations set forth in the Agreement.
The commercial bank or trust company serving as Trustee may own
Certificates and have normal banking relationships with the Servicer, the
Transferor and the Certificate Insurer and/or their affiliates.
The Trustee may resign at any time, in which event the Servicer will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Servicer may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Servicer will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 51% of the Certificate Principal Balance have made written requests
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for 60 days has neglected or refused to institute any such proceeding. The
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby.
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CERTAIN ACTIVITIES
The Trust will not: (i) borrow money; (ii) make loans; (iii) invest in
securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Agreement, engage in the purchase and sale (or
turnover) of investments; (vi) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (vii) repurchase or otherwise
reacquire its securities. See "--Evidence as to Compliance" above for
information regarding reports as to the compliance by the Servicer with the
terms of the Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor and the Transferor towards the purchase of the
Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion, which summarizes certain U.S. federal income tax
aspects of the purchase, ownership and disposition of the Certificates, is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations thereunder, and published rulings and court
decisions in effect as of the date hereof, all of which are subject to change,
possibly retroactively. This discussion does not address every aspect of the
U.S. federal income tax laws which may be relevant to Certificate Owners in
light of their personal investment circumstances or to certain types of
Certificate Owners subject to special treatment under the U.S. federal income
tax laws (for example, banks and life insurance companies). Accordingly,
investors should consult their tax advisors regarding U.S. federal, state,
local, foreign and any other tax consequences to them of investing in the
Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents and factors and assuming compliance with
the terms of the Agreement as in effect on the date of issuance of the
Certificates, Dewey Ballantine, special tax counsel to the Depositor and
counsel to the Underwriter ("Tax Counsel"), is of the opinion that, based on
the application of existing law to the facts as set forth in the Agreement and
other relevant documents and such investigations as it deemed appropriate, the
Certificates will be treated as debt instruments for federal income tax
purposes as of such date. Accordingly, upon issuance, the Certificates will be
treated as described herein.
The Transferor and the Certificateholders express in the Agreement their
intent that, for applicable tax purposes, the Certificates will be indebtedness
secured by the Mortgage Loans. The Transferor and the Certificateholders, by
accepting the Certificates, and each Certificate Owner by its acquisition of a
beneficial interest in a Certificate, have agreed to treat the Certificates as
indebtedness for federal, state and local income and franchise tax purposes.
Investors should be aware that no transaction closely comparable to that
contemplated herein has been the subject of any Treasury regulation, revenue
ruling or judicial decision, and therefore the matter is subject to
interpretation. Because different criteria are used to determine the non-tax
accounting characterization of the transaction, the Transferor intends to treat
this transaction as a sale of an interest in the Asset Balances of the Mortgage
Loans for financial accounting and certain regulatory purposes.
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In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors including the Depositor's economic analyses with
respect to the transaction in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by
the Transferor and has not been transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel believes that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the operative provisions of the documents
either accords with the characterization of the Class A Certificates as debt or
otherwise makes the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Interest Income on the Certificates. As a general rule, interest paid or
accrued on the Certificates will be treated as ordinary income to the holders
thereof. A Certificateholder using the accrual method of accounting for
federal income tax purposes is required to include interest paid or accrued on
the Certificates in ordinary income as such interest accrues, while a
Certificateholder using the cash receipts and disbursements method of
accounting for federal income tax purposes must include such interest in
ordinary income when payments are received (or made available for receipt) by
such holder. The following discussion is based in part on the rules governing
"original issue discount" ("OID") which are set forth in Sections 1271-1275 of
the Code and the Treasury regulations issued thereunder on February 2, 1994, as
amended on June 11, 1996 (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 Certificates.
It is anticipated that the Class A Certificates will not be issued with OID
within the meaning of Section 1273 of the Code, and that the Trust will not
take any OID deduction with respect thereto. If the Class A Certificates were
issued at more than a de minimis discount, however, such Certificates would be
treated as issued with OID for federal income tax purposes. The amount of OID
on a Class A Certificate will be considered to be zero if it is less than a de
minimis amount determined under the Code.
The Class S Certificates will be issued with OID within the meaning of
section 1273(a) of the Code. Payments of interest on the Class S Certificates
will not be treated as "qualified stated interest," as defined below. Holders
of the Class S Certificates should be aware that for federal income tax
purposes they must include in gross income OID as it accrues under a method
that takes account of the compounding of interest, generally in advance of
receipt of the cash attributable to such income. The Trustee will supply, at
the time and in the manner required by the IRS to holders of Class S
Certificates information with respect to the OID accruing on such Certificates.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Certificate and its issue price. The issue
price of a Certificate is the first price at which a substantial amount of
Certificates is sold to the public (excluding bond houses, brokers,
underwriters or wholesalers). The issue price of a Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the Certificate. The stated
redemption price at maturity of the Class S Certificates is equal to the sum of
all distributions to be made under such Certificates. The stated redemption
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price at maturity of a Class A Certificate includes the original principal
amount of the Certificate, 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 provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the Certificate. 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. Because the Class A Certificates will not be entitled to
penalty payments of interest on interest deficiencies [other than interest at
the coupon rate on the amount of such deficiencies] and do not provide for
default or acceleration rights in the event of interest shortfalls, the
interest payments on the Class A Certificates may not be treated by the IRS as
qualified stated interest, and in such event, the interest payments would be
taxed as OID. Holders of Class A Certificates should consult their own tax
advisors to determine the issue price and stated redemption price at maturity
of a Class A Certificate. While the tax treatment of interest on the Class A
Certificates is not entirely clear, the Trust intends to treat the stated
interest on the Class A Certificates as qualified stated interest for OID
purposes.
A Holder of a Certificate treated as issued with OID is required to include
in gross income, for all days during its taxable year on which it holds such
Certificate, 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. Generally, the
amount of OID includible in income of a Certificateholder 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 Certificate and the adjusted
issue price of the Certificate at the beginning of the accrual period, reduced
by any payments of qualified stated interest during such accrual period. The
adjusted issue price at the beginning of an accrual period is the sum of its
issue price plus prior accruals or OID, reduced by the total payments made with
respect to such Certificate in all prior periods, other than qualified stated
interest payments.
The amount of OID to be included in income by Certificateholders
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 for such Certificates is the
excess (if any) of the sum of (a) the present value of all payments remaining
to be made on the Certificates 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 Certificates, over the adjusted issue price of the
Certificates 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 Certificate (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 Certificateholder to take into account prepayments with respect to
the Mortgage 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 Certificateholder to take into
account prepayments with respect to the Mortgage Loans at a rate that is slower
than the Prepayment Assumption. Although original issue discount will be
reported to Certificateholders based on the Prepayment Assumption, no
representation is made to Certificateholders that Mortgage Loans will be
prepaid at that rate or at any other rate.
A subsequent holder of a Certificate will also be required to include OID
in gross income, but such a holder who purchases such Certificate for an amount
that exceeds its adjusted issue price will be entitled (as will an initial
holder who pays more than a Certificate's issue price) to offset such OID by
comparable economic accruals of portions of such excess.
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Variable Rate Certificates. Because the Class A Certificates bear interest
at a rate that varies directly, according to a fixed formula, with an objective
index, it appears that the present value of all payments remaining to be made
on such Certificates should be calculated as if the interest index remained at
its value as of the issue date of such Certificates. Because the proper method
of adjusting accruals of OID on a variable rate Certificate is uncertain,
holders of variable rate Certificates should consult their own tax advisors
regarding the appropriate treatment of such Certificates for federal income tax
purposes.
Market Discount. Certificateholders should be aware that the resale of a
Certificate may be affected by the market discount rules of the Code. These
rules generally provide that, subject to a de minimis exception, if a holder
acquires a Certificate at a market discount (i.e., at a price below its
"adjusted issue price") and thereafter recognizes gain upon a disposition of
the Certificate, the lesser of such gain or the portion of the market discount
that accrued while the Certificate was held by such holder will be treated as
ordinary interest income realized at the time of the disposition. A taxpayer
may instead elect to include market discount currently in gross income in
taxable years to which it is attributable, computed using either a ratable
accrual or a yield to maturity method.
Premium. A Certificateholder who purchases a Certificate for more than its
stated redemption price at maturity will be subject to the premium amortization
rules of the Code. Under those rules, the Certificateholder may elect to
amortize such premium on a constant yield method. Amortizable premium reduces
interest income on the Certificate. If the Certificateholder does not make
such an election, the premium paid for the Certificate generally will be
included in the tax basis of the Certificate in determining the gain or loss on
its disposition.
Election to Treat all Interest as Original Issue Discount. The OID
Regulations permit a holder of a Certificate to elect to accrue all interest,
discount (including de minimis market or original issue discount)
in income (as adjusted by any amortizable premium) as interest, based on a
constant yield method. If such an election were to be made with respect to a
Certificate with market discount, the holder of the Certificate 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
acquires during the year of the election or thereafter. Similarly, a holder of
a Certificate that makes this election for a Certificate 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 and discount on a
constant yield method with respect to a Certificate is irrevocable.
Each Certificateholder should consult his own tax advisor regarding the
impact of the original issue discount, market discount, and premium
amortization rules.
POSSIBLE CLASSIFICATION OF THE TRUST AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS
A CORPORATION
Although, as described above, it is the opinion of Tax Counsel that the
Certificates are properly characterized as debt for federal income tax
purposes, the opinion of Tax Counsel is not binding on the courts or the IRS
and no assurance can be given that this characterization will prevail. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Certificate Owners and that the proper classification of the legal
relationship between the Transferor and the Certificate Owners resulting from
this transaction is that of a partnership (including a publicly traded
partnership), a publicly traded partnership treated as a corporation, or an
association taxable as a corporation.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Mortgage Loans,
which would reduce the
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amounts available for distribution to the Certificate Owners. Cash
distributions to the Certificate Owners generally would be treated as dividends
for tax purposes to the extent of such corporation's earnings and profits. If
the transaction were treated as creating a partnership between the Certificate
Owners and the Transferor, the partnership itself would not be subject to U.S.
federal income tax (unless it were to be characterized as a publicly traded
partnership taxable as a corporation); rather, the Transferor and each
Certificate Owner would be taxed individually on their respective distributive
shares of the partnership's income, gain, loss, deductions and credits. The
amount and timing of items of income and deductions of the Certificate Owner
and the Transferor could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
The Transferor will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Certificates were not treated as indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or a portion
of any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on the
date of issuance, are complied with, although this matter is not free from
doubt, Tax Counsel is of the opinion that the arrangement created by the
Agreement will not be a taxable mortgage pool under Section 7701(i) of the Code
because although two classes of indebtedness secured by the Mortgage Loans are
being issued by the Trust, both classes should be regarded as having the same
maturity since neither class will be outstanding beyond the period the other is
outstanding. Investors should be aware, however, that neither the Code, the
Treasury regulations issued under the Code with respect to taxable mortgage
pools, nor any other relevant authority defines the term "maturity" for this
purpose.
Following the issuance of the Certificates, the Transferor anticipates
forming or causing an affiliate to form a trust (the "Post-Closing Trust")
which will issue an instrument (the "Instrument") entitling the holder thereof
to receive payments under certain circumstances. The original purchasers of
the Class S Certificates will be given the opportunity to purchase such
Instrument from the Transferor. The IRS could take the position that the Trust
and the Post-Closing Trust should be viewed as one arrangement for purposes of
applying the taxable mortgage pool rules. Because the Instruments will have
the same maturity as the Certificates, such a recharacterization will not cause
either the Trust or the Post-Closing Trust to be treated as a taxable mortgage
pool, although such conclusion is not free from doubt.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its
taxable income generated by ownership of the Mortgage Loans. Such a tax would
likely reduce amounts available for distributions to Certificate Owners. The
amount of such a tax would depend upon whether distributions to Certificate
Owners would be deductible as interest expense in computing the taxable income
of such an arrangement as a taxable mortgage pool.
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FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner also would be subject to branch
profits tax. Each non-foreign partner would be required to certify to the
partnership that it is not a foreign person. The tax withheld from each
foreign partner would be credited against such foreign partner's U.S. income
tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
The Small Business Job Protection Act of 1996 changed the definition of a
"foreign" trust. Under prior law, the definition was based on whether a
trust's foreign source income would be subject to U.S. tax. The new definition
contains two objective requirements which, if satisfied, will cause a trust to
be treated as a U.S. trust. It looks first to whether the trust's
administration is subject to a U.S. court's "primary supervision" and second to
whether U.S. fiduciaries control all substantial decisions of the trust. If
both these requirements are met, the trust is a U.S. trust. All other trusts
are "foreign" trusts.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance, failed to supply the Trustee or his broker with his
taxpayer identification number, furnish an incorrect taxpayer identification
number, failed to report interest, dividends, or other "reportable payments"
(as defined in the Code) properly, or, under certain circumstances, failed to
provide the Trustee or his broker with a certified statement, under penalty of
perjury, that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned
from Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct Federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a nonexempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest and payment with respect to OID (and principal) otherwise payable to
the Certificateholder, and remit the withheld amount to the IRS as a credit
against the Certificateholder's Federal income tax liability.
S-67
<PAGE>
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Certificates under the tax laws of
any state. Investors considering an investment in the Certificates should
consult their own tax advisors regarding such tax consequences.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE CERTIFICATES.
ERISA CONSIDERATIONS
The Certificates may not be acquired by a pension or other employee
benefit plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") or plan subject to Section 4975 of the Internal Revenue Code
(each a "Plan") or a person investing "plan assets" of a Plan (including
without limitation, for this purpose, any insurance company general account).
By its acceptance of a Certificate, each purchaser will be deemed to
have represented and warranted that it is not subject to the foregoing
limitation.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be
rated in the highest rating category of the Rating Agencies, the Certificates
will not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all of the
Mortgages securing the Mortgage Loans are first mortgages. Accordingly, many
institutions with legal authority to invest in comparably rated securities
based on first mortgage loans may not be legally authorized to invest in the
Certificates, which because they evidence interests in a pool that includes
junior mortgage loans are not "mortgage related securities" under SMMEA.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated December 26, 1996 (the "Underwriting Agreement"), between the
Depositor and Greenwich Capital Markets, Inc. (an affiliate of the Depositor,
the "Underwriter"), the Depositor has agreed to sell to the Underwriter, and
the Underwriter has agreed to purchase the Certificates from the Depositor.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the Certificates
offered hereby if any of the Certificates are purchased.
Greenwich Capital Markets, Inc. proposes to offer the Class A
Certificates and the Class S Certificates from time to time for sale in
negotiated transactions or otherwise, at prices determined at the time of sale.
S-68
<PAGE>
The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor and for the Underwriter and with regard to the tax
characterization of the Certificates by Dewey Ballantine, New York, New York.
EXPERTS
The financial statements of Capital Markets Assurance Corporation as
of December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995 are included herein beginning on page F-1 and have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their report thereon and are included in reliance upon the
authority of such firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements
referred to above contains an explanatory paragraph with regard to Capital
Markets Assurance Corporation's adoption at December 31, 1993 of Financial
Accounting Standard Board's Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
RATINGS
It is a condition to issuance that the Certificates be rated "AAA"
and "AAAr," respectively by Standard & Poor's and "Aaa" and by Moody's.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. However, the ratings
of the Class A Certificates do not address the timeliness or likelihood of the
payment of Deferred Interest. The rating takes into consideration the
characteristics of the Mortgage Loans and the structural and legal aspects
associated with the Certificates. The ratings on the Certificates do not,
however, constitute statements regarding the likelihood or frequency of
prepayments on the Mortgage Loans or the possibility that Certificateholders
might realize a lower than anticipated yield.
The ratings assigned to the Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Certificates may result in a reduction of one
or more of the ratings assigned to the Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-69
<PAGE>
INDEX OF DEFINED TERMS
PAGE
1934 Act............................................. S-2
Accelerated Principal Distribution Amount............ S-13, S-51
Additional Balances.................................. S-5
Agreement............................................ S-4
Alternative Principal Payment........................ S-16, S-53
BIF.................................................. S-49
Book-Entry Certificates.............................. S-2
Business Day......................................... S-50, S-58
CapMAC............................................... S-18
CEDE................................................. S-10
Certificate Insurer.................................. S-18
Certificate Owner.................................... S-24
Certificate Principal Balance........................ S-6, S-44
Certificate Rate..................................S-6, S-15, S-52
Certificate Registrar................................ S-44
Certificateholders................................... S-6
Certificates......................................... S-0, S-5
Class A Certificate Rate............................. S-0, S-5
Class A Certificates................................. S-0
Class S Certificate Rate............................. S-5
Class S Certificates................................. S-0
Class S Notional Amount.............................. S-6, S-44
Closed-End Loans..................................... S-0
Closing Date......................................... S-15, S-52
Code................................................. S-65
Collection Account................................... S-14, S-49
Collection Period.................................... S-14, S-52
Combined Loan-to-Value Ratio......................... S-8, S-32
Commission........................................... S-2
Credit Limit......................................... S-8
Credit Limit Utilization Rate........................ S-31
Credit Line Agreements............................... S-4, S-31
Cut-Off Date......................................... S-5
Cut-Off Date Principal Balance....................... S-5
Defective Mortgage Loans............................. S-48
Deferred Interest.................................... S-15
Deferred Interest Account............................ S-17
Definitive Certificate............................... S-45
Depositor............................................ S-4
Depository........................................... S-2, S-10
Determination Date................................... S-21, S-49
Dissolution Distribution Date........................ S-56
Distribution Date.................................S-0, S-15, S-50
Due Date............................................. S-9
Eligible Account..................................... S-49
Eligible Substitute Mortgage Loan.................... S-47
Events of Servicing Termination...................... S-62
S-70
<PAGE>
Page
----
Fixed Allocation Percentage.......................... S-14
Funding Account...................................... S-17
Guaranteed Distributions............................. S-18, S-57
Guaranteed Principal Distribution Amount............. S-18, S-57
Headlands............................................ S-0, S-4, S-27
Headlands SPC........................................ S-4, S-31
HELOCs............................................... S-0
Holdings............................................. S-27
Index Rate........................................... S-9, S-33
Initial Closed-End Loans............................. S-4
Initial HELOCs....................................... S-4
Initial Mortgage Loans............................... S-4
Insolvency Event..................................... S-62
Instrument........................................... S-69
Insurance Agreement.................................. S-18, S-57
Interest Collections................................. S-11, S-49
Interest Period...................................... S-15, S-52
Invested Amount...................................... S-6, S-44
Investor Fixed Allocation Percentage................. S-14
Investor Floating Allocation Percentage.............. S-11, S-50
Investor Interest Collections........................ S-11, S-50
Investor Loss Amount................................. S-14, S-52
Investor Principal Collections....................... S-14, S-50
IRS.................................................. S-66
LIBOR................................................ S-15
LIBOR Business Day................................... S-53
Liquidated Mortgage Loan............................. S-52
Liquidation Loss Amount.............................. S-14, S-52
Liquidation Proceeds................................. S-50
Loan Agreements...................................... S-4, S-31
Loan Rate............................................ S-8, S-9, S-32
Managed Amortization Period.......................... S-16
Margin............................................... S-9, S-32
Maximum Principal Payment............................ S-16, S-53
Maximum Rate......................................... S-15, S-32
Minimum Transferor Interest.......................... S-7, S-49
Moody's.............................................. S-23
Mortgage Loan Schedule............................... S-7, S-47, S-48
Mortgage Loans....................................... S-0, S-5
Mortgage Notes....................................... S-4, S-31
Mortgaged Properties................................. S-4
Net Liquidation Proceeds............................. S-11, S-50
OID.................................................. S-66
OID Regulations...................................... S-66
One-Month LIBOR...................................... S-2
Order................................................ S-57
Original Certificate Principal Balance............... S-44
Original Class A Certificate Principal Balance....... S-6
Original Invested Amount............................. S-6, S-44
Original Pool Balance................................ S-5
Overcollateralization Amount.........................S-13, S-51, S-55
S-71
<PAGE>
Page
----
Overcollateralization Loans.......................... S-14
Paying Agent......................................... S-54
Percentage Interest.................................. S-10
Policy............................................... S-0, S-4
Pool Balance......................................... S-5, S-50
Pool Factor.......................................... S-43
Post-Closing Trust................................... S-69
Prepayment Assumption................................ S-67
Principal Balance.................................... S-5
Principal Collections................................ S-11, S-50
Prospectus........................................... S-2
Purchase Agreement................................... S-25
Rapid Amortization Event............................. S-55
Rapid Amortization Period............................ S-55
Rating Agencies...................................... S-23
Receipt.............................................. S-58
Received............................................. S-58
Record Date.......................................... S-50
Reference Bank Rate.................................. S-53
Related Documents.................................... S-46
Required Amount...................................... S-19
Required Overcollateralization Amount................ S-14, S-51
SAIF................................................. S-49
Scheduled Principal Collections Distribution Amount.. S-16, S-53
Seller............................................... S-4
Servicer............................................. S-4, S-11
Servicing Fee........................................ S-21
Servicing Fee Rate................................... S-21, S-61
SMMEA................................................ S-23, S-71
Spread Account....................................... S-13, S-19
Standard & Poor's.................................... S-23
Subsequent Mortgage Loans............................ S-5
Tax Counsel.......................................... S-23, S-65
Telerate Screen Page 3750............................ S-52
Transfer Date........................................ S-48
Transfer Deficiency.................................. S-47
Transfer Deposit Amount.............................. S-47
Transferor........................................... S-4
Transferor Collections............................... S-53
Transferor Interest.................................. S-0, S-6, S-45
Transferor Principal Collections..................... S-14, S-50
Transferor Subordinated Amount....................... S-20, S-54
Trust................................................ S-0, S-4
Trustee.............................................. S-4, S-22
Underwriter.......................................... S-2, S-71
Underwriting Agreement............................... S-71
Voting Rights........................................ S-46
Yield Supplement Account............................. S-55
S-72
<PAGE>
Annex I
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
<PAGE>
Capital Markets Assurance Corporation
Balance sheets
(Dollars in thousands)
ASSETS
------
<TABLE>
<CAPTION>
September 30, 1996 December 31,1995
(Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $283,996 at
September 30, 1996 and $210,651 at December 31,
1995) $ 284,595 215,706
Short-term investments (at amortized cost which
approximates fair value) 23,081 68,646
- ---------------------------------------------------------------------------------------------
Total investments 307,676 284,352
=============================================================================================
Cash 514 344
Accrued investment income 3,604 3,136
Deferred acquisition costs 42,350 35,162
Premiums receivable 4,068 3,540
Prepaid reinsurance 17,801 13,171
Other assets 4,194 3,428
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 380,207 343,133
=============================================================================================
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
LIABILITIES:
Unearned premiums $ 61,410 45,767
Reserve for losses and loss adjustment expenses 9,602 6,548
Ceded reinsurance 2,455 2,469
Accounts payable and other accrued expenses 12,446 10,844
Current income taxes - 136
Deferred income taxes 13,608 11,303
- ---------------------------------------------------------------------------------------------
Total liabilities 99,521 77,067
- ---------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 389 3,286
Retained earnings 56,822 41,972
- ---------------------------------------------------------------------------------------------
Total stockholder's equity 280,686 266,066
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 380,207 343,133
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30 September 30
1996 1995 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Direct premiums written $ 17,206 12,204 49,983 45,042
Assumed premiums written 8 102 1,032 925
Ceded premiums written (4,129) (6,188) (11,142) (11,834)
- -------------------------------------------------------------------------------------
Net premiums written 13,085 6,118 39,873 34,133
(Increase) decrease in unearned premiums (3,042) 1,193 (11,014) (12,418)
- -------------------------------------------------------------------------------------
Net premiums earned 10,043 7,311 28,859 21,715
Net investment income 4,307 3,013 12,296 8,606
Net realized capital gains (loss) (57) 364 111 449
Other income 25 14 104 38
- -------------------------------------------------------------------------------------
Total revenues 14,318 10,702 41,370 30,808
- -------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 1,248 821 3,432 2,279
Underwriting and operating expenses 3,780 2,563 11,142 9,939
Policy acquisition costs 2,126 2,022 6,249 5,481
- -------------------------------------------------------------------------------------
Total expenses 7,154 5,406 20,823 17,699
- -------------------------------------------------------------------------------------
Income before income taxes 7,164 5,296 20,547 13,109
- -------------------------------------------------------------------------------------
INCOME TAXES:
Current federal income tax 1,027 231 3,008 895
Deferred federal income tax 718 1,280 2,689 2,256
- -------------------------------------------------------------------------------------
Total income taxes 1,745 1,511 5,697 3,151
- -------------------------------------------------------------------------------------
NET INCOME $ 5,419 3,785 14,850 9,958
=====================================================================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
- ------------------------------------------------------------------------------
<S> <C>
COMMON STOCK:
Balance at beginning of period $ 15,000
- ------------------------------------------------------------------------------
Balance at end of period 15,000
- ------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 205,808
Capital contribution 2,667
- ------------------------------------------------------------------------------
Balance at end of period 208,475
- ------------------------------------------------------------------------------
UNREALIZED (DEPRECIATION) APPRECIATION
ON INVESTMENTS, NET OF TAX:
Balance at beginning of period 3,286
Unrealized depreciation on investments (2,897)
- ------------------------------------------------------------------------------
Balance at end of period 389
- ------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of period 41,972
Net income 14,850
- ------------------------------------------------------------------------------
Balance at end of period 56,822
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 280,686
==============================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,850 9,958
- --------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment expenses 3,054 1,474
Unearned premiums 15,643 17,982
Deferred acquisition costs (7,188) (6,981)
Premiums receivable (528) 81
Accrued investment income (468) 63
Income taxes payable 2,341 2,447
Net realized capital gains (111) (449)
Accounts payable and other accrued expenses 5,445 3,456
Prepaid reinsurance (4,630) (5,564)
Other, net (381) 2,253
- --------------------------------------------------------------------------------------------
Total adjustments 13,177 14,762
- --------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,027 24,720
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (154,308) (109,235)
Proceeds from sale of investments 35,388 38,577
Proceeds from maturities of investments 91,063 37,361
- --------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (27,857) (33,297)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paid-in capital - 9,000
- --------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 9,000
- --------------------------------------------------------------------------------------------
Net increase in cash 170 423
Cash balance at beginning of period 344 85
- --------------------------------------------------------------------------------------------
CASH BALANCE AT END OF PERIOD $ 514 508
============================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid $ 3,225 650
Tax and loss bonds purchased $ 131 54
============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BACKGROUND
Capital Markets Assurance Corporation ("CapMAC") is a New York-domiciled
monoline stock insurance company which engages only in the business of
financial guaranty and surety insurance. CapMAC is a wholly-owned
subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is licensed in all
50 states in addition to the District of Columbia, the Commonwealth of
Puerto Rico and the territory of Guam. CapMAC insures structured asset-
backed, corporate, municipal and other financial obligations in the U.S.
and international capital markets. CapMAC also provides financial guaranty
reinsurance for structured asset-backed, corporate, municipal and other
financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating agency.
Such ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
2. BASIS OF PRESENTATION
CapMAC's unaudited interim financial statements have been prepared on the
basis of generally accepted accounting principles and, in the opinion of
management, reflect all adjustments necessary for a fair presentation of
the CapMAC's financial condition, results of operations and cash flows for
the periods presented. The results of operations for the nine months ended
September 30, 1996 may not be indicative of the results that may be
expected for the full year ending December 31, 1996. These financial
statements and notes should be read in conjunction with the financial
statements and notes included in the audited financial statements of
CapMAC as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995.
3. RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
current period presentation.
F-6
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-7
<PAGE>
[LOGO] KPMG PEAT MARWICK LLP
345 Park Avenue
New York, NY 10154
Independent Auditors' Report
----------------------------
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in note 2, the Company changed its method of accounting for
investments to adopt 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," at December 31, 1993.
/s/ KPMG Peat Marwick LLP
January 25, 1996
F-8
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
ASSETS
------
<TABLE>
<CAPTION>
December 31 December 31
1995 1994
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $210,651 at December 31,
1995 and $178,882 at December 31, 1994) $ 215,706 172,016
- -----------------------------------------------------------------------------------------------
Short-term investments (at amortized cost which approximates
fair value) 68,646 2,083
Mutual funds at fair value (cost $16,434 at December 31, 1994) - 14,969
- -----------------------------------------------------------------------------------------------
Total investments 284,352 189,068
- -----------------------------------------------------------------------------------------------
Cash 344 85
Accrued investment income 3,136 2,746
Deferred acquisition costs 35,162 24,860
Premiums receivable 3,540 3,379
Prepaid reinsurance 13,171 5,551
Other assets 3,428 3,754
- -----------------------------------------------------------------------------------------------
Total assets $ 343,133 229,443
===============================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
LIABILITIES:
Unearned premiums $ 45,767 25,905
Reserve for losses and loss adjustment expenses 6,548 5,191
Ceded reinsurance 2,469 1,497
Accounts payable and other accrued expenses 10,844 10,372
Current income taxes 136 -
Deferred income taxes 11,303 3,599
- -----------------------------------------------------------------------------------------------
Total liabilities 77,067 46,564
- -----------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock 15,000 15,000
Additional paid-in capital 205,808 146,808
Unrealized appreciation (depreciation) on investments,
net of tax 3,286 (5,499)
Retained earnings 41,972 26,570
- -----------------------------------------------------------------------------------------------
Total stockholder's equity 266,066 182,879
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 343,133 229,443
===============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31,1994 December 31, 1993
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
REVENUES:
Direct premiums written $ 56,541 43,598 24,491
Assumed premiums written 935 1,064 403
Ceded premiums written (15,992) (11,069) (3,586)
- ---------------------------------------------------------------------------------------------
Net premiums written 41,484 33,593 21,308
Increase in unearned premiums (12,242) (10,490) (3,825)
- ---------------------------------------------------------------------------------------------
Net premiums earned 29,242 23,103 17,483
Net investment income 11,953 10,072 10,010
Net realized capital gains 1,301 92 1,544
Other income 2,273 120 354
- ---------------------------------------------------------------------------------------------
Total revenues 44,769 33,387 29,391
- ---------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 3,141 1,429 902
Underwriting and operating expenses 13,808 11,833 11,470
Policy acquisition costs 7,203 4,529 2,663
- ---------------------------------------------------------------------------------------------
Total expenses 24,152 17,791 15,035
- ---------------------------------------------------------------------------------------------
Income before income taxes 20,617 15,596 14,356
- ---------------------------------------------------------------------------------------------
INCOME TAXES:
Current income tax 2,113 865 1,002
Deferred income tax 3,102 2,843 2,724
- ---------------------------------------------------------------------------------------------
Total income taxes 5,215 3,708 3,726
- ---------------------------------------------------------------------------------------------
NET INCOME $ 15,402 11,888 10,630
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31,1995 December 31, 1994 December 31, 1993
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of period $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------
Balance at end of period 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 146,808 146,808 146,808
Paid-in capital 59,000 - -
- ---------------------------------------------------------------------------------------------
Balance at end of period 205,808 146,808 146,808
- ---------------------------------------------------------------------------------------------
UNREALIZED (DEPRECIATION) APPRECIATION
ON INVESTMENTS, NET OF TAX:
Balance at beginning of period (5,499) 3,600 -
Unrealized appreciation (depreciation) on
investments 8,785 (9,099) 3,600
- ---------------------------------------------------------------------------------------------
Balance at end of period 3,286 (5,499) 3,600
- ---------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of period 26,570 14,682 4,052
Net income 15,402 11,888 10,630
- ---------------------------------------------------------------------------------------------
Balance at end of period 41,972 26,570 14,682
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 266,066 182,879 180,090
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,402 11,888 10,630
- ----------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment
expenses 1,357 1,429 902
Unearned premiums 19,862 15,843 4,024
Deferred acquisition costs (10,302) (9,611) (9,815)
Premiums receivable (161) (2,103) (432)
Accrued investment income (390) (848) (110)
Income taxes payable 3,621 2,611 2,872
Net realized capital gains (1,301) (92) (1,544)
Accounts payable and other accrued
expenses 472 3,726 1,079
Prepaid reinsurance (7,620) (5,352) (199)
Other, net 992 689 1,201
- ----------------------------------------------------------------------------------------------
Total adjustments 6,530 6,292 (2,022)
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,932 18,180 8,608
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (158,830) (77,980) (139,061)
Proceeds from sales of investments 49,354 39,967 24,395
Proceeds from maturities of investments 28,803 19,665 106,042
- ----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (80,673) (18,348) (8,624)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 59,000 - -
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,000 - -
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash 259 (168) (16)
Cash balance at beginning of period 85 253 269
- ----------------------------------------------------------------------------------------------
CASH BALANCE AT END OF PERIOD $ 344 85 253
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid $ 1,450 1,063 833
==============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1995 and 1994
1) BACKGROUND
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a New
York-domiciled monoline stock insurance company which engages only in the
business of financial guarantee and surety insurance. CapMAC is a wholly
owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is licensed
in all 50 states in addition to the District of Columbia, the Commonwealth
of Puerto Rico and the territory of Guam. CapMAC insures structured asset-
backed, corporate, municipal and other financial obligations in the U.S.
and international capital markets. CapMAC also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal
and other financial obligations written by other major insurance
companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"), and
"AAA" by Nippon Investors Service, Inc., a Japanese rating agency. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
2) SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
a) BASIS OF PRESENTATION
The accompanying financial statements are prepared on the basis of
generally accepted accounting principles ("GAAP"). Such accounting
principles differ from statutory reporting practices used by insurance
companies in reporting to state regulatory authorities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the 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. Management believes
the most significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and disclosures of
financial guarantees outstanding. Actual results could differ from
those estimates.
b) INVESTMENTS
At December 31, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No.
115, the Company can classify its debt and marketable equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability
and intent to hold the securities until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale. As of December 31, 1995 and 1994, all of the
Company's securities have been classified as available-for-sale.
F-13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Available-for-sale securities are recorded at fair value. Fair value is
based upon quoted market prices. Unrealized holding gains and losses, net
of the related tax effect, on available-for-sale securities are excluded
from earnings and are reported as a separate component of stockholder's
equity until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer.
A decline in the fair value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings resulting in
the establishment of a new cost basis for the security.
Short-term investments are those investments having a maturity of less
than one year at purchase date. Short-term investments are carried at
amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized
gains and losses are included in earnings and are derived using the FIFO
(first-in, first-out) method for determining the cost of securities sold.
c) REVENUE RECOGNITION
Premiums which are payable monthly to CapMAC are reflected in income when
due, net of amounts payable to reinsurers. Premiums which are payable
quarterly, semi-annually or annually are reflected in income, net of
amounts payable to reinsurers, on an equal monthly basis over the
corresponding policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one year are
earned, net of amounts payable to reinsurers, by allocating premium to
each bond maturity based on the principal amount and earning it straight-
line over the term of each bond maturity. For the year ended December 31,
1995, 91% of net premiums earned were attributable to premiums payable in
installments and 9% were attributable to premiums collected on an up-front
basis.
d) DEFERRED ACQUISITION COSTS
Certain costs incurred by CapMAC, which vary with and are primarily
related to the production of new business, are deferred. These costs
include direct and indirect expenses related to underwriting, marketing
and policy issuance, rating agency fees and premium taxes. The deferred
acquisition costs are amortized over the period in proportion to the
related premium earnings. The actual amount of premium earnings may differ
from projections due to various factors such as renewal or early
termination of insurance contracts or different run-off patterns of
exposure resulting in a corresponding change in the amortization pattern
of the deferred acquisition costs.
e) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a
Supplemental Loss Reserve ("SLR") and a case basis loss reserve. The SLR
is established based on expected levels of defaults resulting from credit
failures on currently insured issues. This SLR is based on estimates of
the portion of earned premiums required to cover those claims.
F-14
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
A case basis loss reserve is established for insured obligations when, in
the judgement of management, a default in the timely payment of debt
service is imminent. For defaults considered temporary, a case basis loss
reserve is established in an amount equal to the present value of the
anticipated defaulted debt service payments over the expected period of
default. If the default is judged not to be temporary, the present value
of all remaining defaulted debt service payments is recorded as a case
basis loss reserve. Anticipated salvage recoveries are considered in
establishing case basis loss reserves when such amounts are reasonably
estimable.
Management believes that the current level of reserves is adequate to
cover the estimated liability for claims and the related adjustment
expenses with respect to financial guaranties issued by CapMAC. The
establishment of the appropriate level of loss reserves is an inherently
uncertain process involving numerous estimates and subjective judgments by
management, and therefore there can be no assurance that losses in
CapMAC's insured portfolio will not exceed the loss reserves.
f) DEPRECIATION
Leasehold improvements, furniture and fixtures are being depreciated over
the lease term or useful life, whichever is shorter, using the straight-
line method.
g) INCOME TAXES
Deferred income taxes are provided with respect to temporary differences
between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse.
h) RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
F-15
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
3) INSURED PORTFOLIO
At December 31, 1995 and 1994, the principal amount of financial
obligations insured by CapMAC was $16.9 billion and $11.6 billion,
respectively, and net of reinsurance (net principal outstanding), was
$12.6 billion and $9.4 billion, respectively, with a weighted average life
of 6.0 years and 5.0 years, respectively. CapMAC's insured portfolio was
broadly diversified by geographic distribution and type of insured
obligations, with no single insured obligation in excess of statutory
single risk limits, after giving effect to any reinsurance and collateral,
which are a function of CapMAC's statutory qualified capital (the sum of
statutory capital and surplus and mandatory contingency reserve). At
December 31, 1995 and 1994, the statutory qualified capital was
approximately $240 million and $170 million, respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
December 31, 1995 December 31, 1994
--------------------- --------------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer receivables $ 6,959 55.1 $4,740 50.4
Trade and other corporate
obligations 4,912 38.9 4,039 43.0
Municipal/government obligations 757 6.0 618 6.6
- ------------------------------------------------------------------------------------------
TOTAL $12,628 100.0 $9,397 100.0
==========================================================================================
</TABLE>
At December 31, 1995, approximately 85% of CapMAC's insured portfolio was
comprised of structured asset-backed transactions. Under these structures,
a pool of assets covering at least 100% of the principal amount guaranteed
under its insurance contract is sold or pledged to a special purpose
bankruptcy remote entity. CapMAC's primary risk from such insurance
contracts is the impairment of cash flows due to delinquency or loss on
the underlying assets. CapMAC, therefore, evaluates all the factors
affecting past and future asset performance by studying historical data on
losses, delinquencies and recoveries of the underlying assets. Each
transaction is reviewed to ensure that an appropriate legal structure is
used to protect against the bankruptcy risk of the originator of the
assets. Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, overcollateralization, or recourse to a
third party. The level of first loss protection depends upon the
historical losses and dilution of the underlying assets, but is typically
several times the normal historical loss experience for the underlying
type of assets.
During 1995, the Company sold without recourse its interest in potential
cash flows from transactions included in its insured portfolio and
recognized $2,200,000 of income which has been included in other income in
the accompanying financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
- -------------------- -------------------- -------------------------
% of % of % of
Name Revenues Name Revenues Name Revenues
- -------------------- -------------------- -------------------------
Citicorp 15.2 Citicorp 16.3 Citicorp 13.7
Merrill Lynch & Co. 14.1
F-16
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
4) INVESTMENTS
At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. The amortized cost, gross
unrealized gains, gross unrealized losses and estimated fair value for
available-for-sale securities by major security type at December 31, 1995
and 1994 were as follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1995
- --------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
- --------------------------------------------------------------------------------------
TOTAL $ 279,297 5,222 167 284,352
======================================================================================
<CAPTION>
December 31, 1994
- --------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,295 - 153 4,142
Mortgage-backed securities of U.S.
government instrumentalities and
agencies 40,973 - 2,986 37,987
Obligations of states, municipalities
and political subdivisions 128,856 364 3,994 125,226
Corporate and asset-backed
securities 6,841 15 112 6,744
Mutual Funds 16,434 - 1,465 14,969
- --------------------------------------------------------------------------------------
TOTAL $ 197,399 379 8,710 189,068
======================================================================================
</TABLE>
The Company's investment in mutual funds in 1994 represents an investment in
an open-end management investment company which invests primarily in
investment-grade fixed-income securities denominated in foreign and United
States currencies.
F-17
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt securities
at december 31, 1995 by contractual maturity are shown below ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1995
- ----------------------------------------------------------
Amortized Estimated
Securities Available-for-Sale Cost Fair Value
- ----------------------------------------------------------
<S> <C> <C>
Less than one year to maturity $ 5,569 5,572
One to five years to maturity 37,630 38,553
Five to ten years to maturity 99,567 102,264
Greater than ten years to maturity 35,903 37,101
- ----------------------------------------------------------
Sub-total 178,669 183,490
Mortgage-backed securities 100,628 100,862
- ----------------------------------------------------------
TOTAL $ 279,297 284,352
==========================================================
</TABLE>
Actual maturities may differ from contractual maturities because borrowers may
call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investment securities were approximately $49 million,
$40 million and $24 million in 1995, 1994 and 1993, respectively. Gross
realized capital gains of $1,320,000, $714,000 and $1,621,000, and gross
realized capital losses of $19,000, $622,000 and $77,000 were realized on
those sales for the years ended December 31, 1995, 1994 and 1993,
respectively.
Investments include bonds having a fair value of approximately $3,985,000 and
$3,873,000 (amortized cost of $3,970,000 and $4,011,000) which are on deposit
by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS $11,105 9,193 7,803
SHORT-TERM INVESTMENTS 1,245 484 572
MUTUAL FUNDS (162) 579 1,801
INVESTMENT EXPENSES (235) (184) (166)
- -----------------------------------------------------------------------------------
TOTAL $11,953 10,072 10,010
===================================================================================
</TABLE>
F-18
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The change in unrealized appreciation (depreciation) on available-for-sale
securities is included in a separate component of stockholder's equity as
shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ (5,499) 3,600
Change in unrealized appreciation (depreciation) 13,386 (13,786)
Income tax effect (4,601) 4,687
- ------------------------------------------------------------------------------------------
Net change 8,785 (9,099)
- ------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 3,286 (5,499)
==========================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 10% of stockholder's equity as of
December 31, 1995.
5) DEFERRED ACQUISITION COSTS
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 24,860 15,249 5,434
Additions 17,505 14,140 12,478
Amortization (policy
acquisition costs) (7,203) (4,529) (2,663)
- ----------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 35,162 24,860 15,249
==============================================================================================
</TABLE>
6) EMPLOYEE BENEFITS
On June 25, 1992, CapMAC entered into a Service Agreement with CapMAC
Financial Services, Inc. ("CFS"), which was then a newly formed wholly owned
subsidiary of Holdings. Under the Service Agreement, CFS has agreed to
provide various services, including underwriting, reinsurance, data
processing and other services to CapMAC in connection with the operation of
CapMAC's insurance business. CapMAC pays CFS an arm's length fee for
providing such services, but not in excess of CFS's cost for such services.
CFS incurred, on behalf of CapMAC, total compensation expenses, excluding
bonuses, of $13,484,000, $11,081,000 and $9,789,000 in 1995, 1994 and 1993,
respectively.
CFS maintains an incentive compensation plan for its employees. The plan is
an annual discretionary bonus award based upon Holdings' and an individual's
performance. CFS also has a health and welfare plan and a 401(k) plan to
cover substantially all of its employees. CapMAC reimburses CFS for all out-
of-pocket expenses incurred by CFS in providing services to CapMAC,
including awards given under the incentive compensation plan and benefits
provided under the health and welfare plan. For the years ended December 31,
1995, 1994 and 1993, the Company had provided approximately $7,804,000,
$5,253,000 and $3,528,000, respectively, for the annual discretionary bonus
plan.
F-19
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers agreed
to defer receipt of such cash amount in exchange for receiving the same
number of new shares of restricted stock of Holdings as the number of RSU's
such officers previously held. The cash amount will be held by Holdings and
invested in accordance with certain guidelines. Such amount, including the
investment earnings thereon, will be paid to each officer upon the
occurrence of certain events but no later than December, 2000.
7) EMPLOYEE STOCK OWNERSHIP PLAN
On June 25, 1992, Holdings adopted an Employee Stock Ownership Plan
("ESOP") to provide its employees the opportunity to obtain beneficial
interests in the stock of Holdings through a trust (the "ESOP Trust"). The
ESOP Trust purchased 750,000 shares at $13.33 per share of Holdings' stock.
The ESOP Trust financed its purchase of common stock with a loan from
Holdings in the amount of $10 million. The ESOP loan is evidenced by a
promissory note delivered to Holdings. An amount representing unearned
employee compensation, equivalent in value to the unpaid balance of the
ESOP loan, is recorded as a deduction from stockholder's equity
(unallocated ESOP shares).
CFS is required to make contributions to the ESOP Trust, which enables the
ESOP Trust to service its loan to Holdings. The ESOP expense is calculated
using the shares allocated method. Shares are released for allocation to
the participants and held in trust for the employees based upon the ratio
of the current year's principal and interest payment to the sum of
principal and interest payments estimated over the life of the loan. As of
December 31, 1995 approximately 262,800 shares were allocated to the
participants. Compensation expense related to the ESOP was approximately
$2,087,000, $2,086,000 and $1,652,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
8) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995 CapMAC incurred its first claim on a financial guarantee policy.
Based on its current estimate, the company expects the aggregate amount of
claims and related expenses not to exceed $2.7 million, although no
assurance can be given that such claims and related expenses will not
exceed that amount. Such loss amount was covered through a recovery under a
quota share reinsurance agreement of $0.2 million and a reduction in the
SLR of $2.5 million. The portion of such claims and expenses not covered
under the quota share agreement is being funded through payments to capmac
from the Lureco Trust Account (see note 12).
F-20
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following is a summary of the activity in the case basis loss reserve
account and the components of the liability for losses and loss adjustment
expenses ($ in thousands):
CASE BASIS LOSS RESERVE:
<TABLE>
<S> <C>
Net balance at January 1, 1995 $ -
- ------------------------------------------------------------------------------
INCURRED RELATED TO:
Current year 2,473
Prior years -
- ------------------------------------------------------------------------------
Total incurred 2,473
- ------------------------------------------------------------------------------
PAID INCURRED TO:
Current year 1,853
Prior years -
- ------------------------------------------------------------------------------
Total paid 1,853
- ------------------------------------------------------------------------------
Balance at December 31, 1995 620
- ------------------------------------------------------------------------------
Reinsurance recoverable 69
- ------------------------------------------------------------------------------
Supplemental loss reserve 5,859
- ------------------------------------------------------------------------------
TOTAL $ 6,548
==============================================================================
</TABLE>
9) INCOME TAXES
Pursuant to a tax sharing agreement with Holdings, the Company is included
in Holdings' consolidated U.S. Federal income tax return. The Company's
annual Federal income tax liability is determined by computing its pro rata
share of the consolidated group Federal income tax liability.
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 35% in 1995 and 34% in 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
$ in thousands Amount % Amount % Amount %
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 7,216 35.0 $ 5,303 34.0 $ 4,881 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,335) (11.3) (1,646) (10.6) (1,140) (7.9)
Other, net 334 1.6 51 0.4 (15) (0.1)
- ---------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 5,215 25.3 $ 3,708 23.8 $ 3,726 26.0
=========================================================================================================
</TABLE>
F-21
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Unrealized capital losses on investments $ - (2,833)
Deferred compensation (1,901) (1,233)
Losses and loss adjustment expenses (1,002) (936)
Unearned premiums (852) (762)
Other, net (98) (228)
- ------------------------------------------------------------------------------------
Total gross deferred tax assets (3,853) (5,992)
- ------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs 12,307 8,453
Unrealized capital gains on investments 1,769 -
Deferred capital gains on investments 654 726
Other, net 426 412
- ------------------------------------------------------------------------------------
Total gross deferred tax liabilities 15,156 9,591
- ------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 11,303 3,599
====================================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Management
believes that the deferred tax assets will be fully realized in the
future.
10) INSURANCE REGULATORY RESTRICTIONS
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that may
be paid without obtaining approval for such dividends from the
Superintendent of Insurance to the lower of (i) net investment income as
defined or (ii) 10% of statutory surplus as of December 31 of the
preceding year. No dividends were paid by CapMAC to Holdings during the
years ended December 31, 1995, 1994 and 1993. No dividends could be paid
during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1995 and 1994 was approximately
$195,018,000 and $139,739,000, respectively. Statutory surplus differs
from stockholder's equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting purposes
and differences in accounting for investments, deferred acquisition
costs, SLR and deferred taxes provided under GAAP. Statutory net income
was $9,000,000, $4,543,000 and $4,528,000 for the years ended December
31, 1995, 1994 and 1993, respectively. Statutory net income differs from
net income determined under GAAP principally due to deferred acquisition
costs, SLR and deferred income taxes.
F-22
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
11) COMMITMENTS AND CONTINGENCIES
On January 1, 1988, the Company assumed from Citibank, N.A. the
obligations of a sublease agreement for space occupied in New York. On
November 21, 1993, the sublease was terminated and a new lease was
negotiated which expires on November 20, 2008. CapMAC has a lease
agreement for its London office beginning October 1, 1992 and expiring
October 1, 2002. As of December 31, 1995, future minimum payments under
the lease agreements are as follows:
$ in thousands Payment
-----------------------------------------------------------
1996 $ 2,255
1997 2,948
1998 3,027
1999 3,476
2000 and thereafter 36,172
-----------------------------------------------------------
TOTAL $ 47,878
===========================================================
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,939,000, $2,243,000 and
$2,065,000, respectively.
CapMAC has available a $100,000,000 standby corporate liquidity facility
(the "Liquidity Facility") provided by a consortium of banks, headed by
Bank of Montreal, as agent, which is rated "A-1+" and "P-1" by S&P and
Moody's, respectively. Under the Liquidity Facility, CapMAC will be able,
subject to satisfying certain conditions, to borrow funds from time to
time in order to enable it to fund any claim payments or payments made in
settlement or mitigation of claim payments under its insurance contracts.
For the years ended December 31, 1995, 1994 and 1993, no draws had been
made under the Liquidity Facility.
12) REINSURANCE
In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts primarily
designed to minimize losses from large risks and protect the capital and
surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------
1995 1994 1993
------------------- ---------------- ----------------
$ in thousands Written Earned Written Earned Written Earned
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 56,541 36,853 43,598 28,561 24,491 20,510
Assumed 935 761 1,064 258 403 364
Ceded (15,992) (8,372) (11,069) (5,716) (3,586) (3,391)
- ---------------------------------------------------------------------------------
NET PREMIUMS $ 41,484 29,242 33,593 23,103 21,308 17,483
=================================================================================
</TABLE>
F-23
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Although the reinsurance of risk does not relieve the ceding insurer of
its original liability to its policyholders, it is the industry practice
of insurers for financial statement purposes to treat reinsured risks as
though they were risks for which the ceding insurer was only contingently
liable. A contingent liability exists with respect to the aforementioned
reinsurance arrangements which may become a liability of CapMAC in the
event the reinsurers are unable to meet obligations assumed by them under
the reinsurance contracts. At December 31, 1995 and 1994, CapMAC had
ceded loss reserves of $69,000 and $0, respectively and had ceded
unearned premiums of $13,171,000 and $5,551,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The agreement
reinsured and indemnified the Company for any loss incurred by CapMAC
during the agreement period up to the limits of the agreement. The Lureco
Treaty provides that the annual reinsurance premium payable by CapMAC to
Lureco, after deduction of the reinsurer's fee payable to Lureco, be
deposited in a trust account (the "Lureco Trust Account") to be applied
by CapMAC, at its option, to offset losses and loss expenses incurred by
CapMAC in connection with incurred claims. Amounts on deposit in the
Lureco Trust Account which have not been applied against claims are
contractually due to CapMAC at the termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement. Premiums
in excess of the deposit amounts have been recorded as ceded premiums in
the statements of income. In the 1994 policy year, the agreement provided
$5 million of loss coverage in excess of the premium deposit amounts of
$2 million retained in the Lureco Trust Account. No losses were applied
against the Lureco Trust Account or ceded to the Lureco Treaty in 1994.
The agreement was renewed for the 1995 policy year and provides $5
million of loss coverage in excess of the premium deposit amount of $4.5
million retained in the Lureco Trust Account. Additional coverage is
provided for losses incurred in excess of 200% of the net premiums earned
up to $4 million for any one agreement year. In September 1995, a claim
of approximately $2.5 million on an insurance policy was applied against
the Lureco Trust Account.
In addition to its capital (including statutory contingency reserves) and
other reinsurance available to pay claims under its insurance contracts,
on June 25, 1992, CapMAC entered into a Stop Loss Reinsurance Agreement
(the "Stop-loss Agreement") with Winterthur Swiss Insurance Company
("Winterthur") which is rated "AAA" by S&P and "Aaa" by Moody's. At the
same time, CapMAC and Winterthur also entered into a Quota Share
Reinsurance Agreement (the "Winterthur Quota Share Agreement") pursuant
to which Winterthur had the right to reinsure on a quota share basis 10%
of each policy written by CapMAC.
The Winterthur Stop-loss Agreement had an original term of seven years
and was renewable for successive one-year periods. In April 1995,
Winterthur notified CapMAC that it was canceling the Winterthur Stop-loss
Agreement and the Winterthur Quota Share Agreement effective June 30,
1996.
CapMAC elected to terminate the Winterthur Stop-loss Agreement effective
November 30, 1995 and, on the same date, entered into a Stop-loss
Reinsurance Agreement with Mitsui Marine (the "Mitsui Stop-loss
Agreement"). Under the Mitsui Stop-loss Agreement, Mitsui
F-24
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Marine would be required to pay any losses in excess of $100 million in
the aggregate incurred by CapMAC during the term of the Mitsui Stop-loss
Agreement on the insurance policies in effect on December 1, 1995 and
written during the one-year period thereafter, up to an aggregate limit
payable under the Mitsui Stop-loss Agreement of $50 million. The Mitsui
Stop-loss Agreement has a term of seven years and is subject to early
termination by CapMAC in certain circumstances.
The Winterthur Quota Share Agreement was canceled November 30, 1995. On
January 1, 1996, CapMAC reassumed the liability, principally unearned
premium, for all policies reinsured by Winterthur. As a result, CapMAC
reassumed approximately $1.4 billion of principal insured by Winterthur
as of December 31, 1995. In connection with the commutation, Winterthur
will return the unearned premiums as of December 31, 1995, net of ceding
commission and federal excise tax. Such amount is expected to total
approximately $2.0 million.
13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1995 and
1994. SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Investments $ 284,352 284,352 189,068 189,068
OFF-BALANCE-SHEET INSTRUMENTS:
Financial Guarantees Outstanding $ - 147,840 - 93,494
Ceding Commission $ - 44,352 - 28,048
--------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
INVESTMENTS
The fair values of fixed maturities and mutual funds are based upon
quoted market prices. The fair value of short-term investments
approximates amortized cost.
F-25
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
FINANCIAL GUARANTEES OUTSTANDING
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2) the
fair value of installment revenue which is derived by calculating the
present value of the estimated future cash inflow to CapMAC of policies
in force having installment premiums, net of amounts payable to
reinsurers, at a discount rate of 7% at December 31, 1995 and 1994. The
amount calculated is equivalent to the consideration that would be paid
under market conditions prevailing at the reporting dates to transfer
CapMAC's financial guarantee business to a third party under reinsurance
and other agreements. Ceding commission represents the expected amount
that would be paid to CapMAC to compensate CapMAC for originating and
servicing the insurance contracts. In constructing estimated future cash
inflows, management makes assumptions regarding prepayments for
amortizing asset-backed securities which are consistent with relevant
historical experience. For revolving programs, assumptions are made
regarding program utilization based on discussions with program users.
The amount of installment premium actually realized by the Company could
be reduced in the future due to factors such as early termination of
insurance contracts, accelerated prepayments of underlying obligations or
lower than anticipated utilization of insured structured programs, such
as commercial paper conduits. Although increases in future installment
revenue due to renewals of existing insurance contracts historically have
been greater than reductions in future installment revenue due to factors
such as those described above, there can be no assurance that future
circumstances might not cause a net reduction in installment revenue,
resulting in lower revenues.
14) CAPITALIZATION
The Company's certificate of incorporation authorizes the issuance of
15,000,000 shares of common stock, par value $1.00 per share. Authorized,
issued and outstanding shares at December 31, 1995 and 1994 were
15,000,000 at $1.00 per share.
In 1995, $59.0 million of the proceeds received by Holdings from the sale
of shares in connection with an Initial Public Offering and private
placements were contributed to CapMAC.
F-26
<PAGE>
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.
The date of this Prospectus is December 26, 1996
<PAGE>
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.
<PAGE>
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".
3
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities Asset Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which are issuable in
Series.
Depositor Financial Asset Securities Corp., a Delaware corporation,
and an indirect limited purpose finance subsidiary of
National Westminster Bank Plc and an affiliate of
Greenwich Capital Markets, Inc. See "The Depositor"
herein.
Trustee The trustee (the "Trustee") for each Series of Securities
will be specified in the related Prospectus Supplement.
See "The Agreements" herein for a description of the
Trustee's rights and obligations.
Master Servicer The entity or entities named as Master Servicer (the
"Master Servicer") will be specified in the related
Prospectus Supplement. See "The Agreements--Certain
Matters Regarding the Master Servicer and the Depositor".
Trust Fund Assets Assets of the Trust Fund for a Series of Securities will
include certain assets (the "Trust Fund Assets") which
will primarily consist of (a) Loans or (b) Private Asset
Backed Securities, together with payments in respect of
such Trust Fund Assets and certain other accounts,
obligations or agreements, in each case as specified in
the related Prospectus Supplement. The Loans will be
collected in a pool (each, a "Pool") as of the first day
of the month of the issuance of the related Series of
Securities or such other date specified in the Prospectus
Supplement (the "Cut-off Date"). Trust Fund assets also
may include insurance policies, cash accounts,
reinvestment income, guaranties, letters of credit or
other assets to the extent described in the related
Prospectus Supplement. See "Credit Enhancement". In
addition, if the related Prospectus Supplement so
provides, the related Trust Funds' assets will include
the funds on deposit in an account (a "Pre-Funding
Account") which will be used to purchase additional Loans
during the period specified in the related Prospectus
Supplement. See "The Agreements--Pre-Funding Accounts".
A. Loans The Loans will consist of (i) closed-end loans (the
"Closed-End Loans") and/or revolving home equity loans or
certain balances therein (the "Revolving Credit Line
Loans", together with the Closed-End Loans, the "Home
Equity Loans"), and (ii) home improvement installment
sales contracts and installment loan agreements (the
"Home Improvement Contracts"). The Home Equity Loans and
the Home Improvement Contracts are collectively referred
to herein as the "Loans". All Loans
4
<PAGE>
will have been purchased by the Depositor, either
directly or through an affiliate, from one or more
Sellers.
As specified in the related Prospectus Supplement, the
Home Equity Loans will, and the Home Improvement
Contracts may, be secured by mortgages or deeds of trust
or other similar security instruments creating a lien on
a mortgaged property (the "Mortgaged Property"), which
may be subordinated to one or more senior liens on the
Mortgaged Property, as described in the related
Prospectus Supplement. As specified in the related
Prospectus Supplement, Home Improvement Contracts may be
unsecured or secured by purchase money security interests
in the Home Improvements financed thereby. The Mortgaged
Properties and the Home Improvements are collectively
referred to herein as the "Properties".
B. Private Asset-
Backed Securities Private Asset Backed Securities may include (a)
pass-through certificates representing beneficial
interests in certain loans and/or (b) collateralized
obligations secured by such loans. Private Asset Backed
Securities may include stripped securities representing
an undivided interest in all or a part of either the
principal distributions (but not the interest
distributions) or the interest distributions (but not the
principal distributions) or in some specified portion of
the principal and interest distributions (but not all of
such distributions) on certain loans. Although
individual loans underlying a Private Asset Backed
Security may be insured or guaranteed by the United
States or an agency or instrumentality thereof, they need
not be, and the Private Asset Backed Securities
themselves will not be so insured or guaranteed.
Payments on the Private Asset Backed Securities will be
distributed directly to the Trustee as registered owner
of such Private Asset Backed Securities. See "The Trust
Fund--Private Asset Backed Securities".
Description of
the Securities Each Security will represent a beneficial ownership
interest in, or will be secured by the assets of, a Trust
Fund created by the Depositor pursuant to an Agreement
among the Depositor, the Master Servicer and the Trustee
for the related Series. The Securities of any Series may
be issued in one or more classes as specified in the
related Prospectus Supplement. A Series of Securities
may include one or more classes of senior Securities
(collectively, the "Senior Securities") and one or more
classes of subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or classes of
Securities may be covered by insurance policies or other
forms of credit enhancement, in each case as described
herein and in the related Prospectus Supplement.
One or more classes of Securities of each Series (i) may
be entitled to receive distributions allocable only to
principal, only to interest or to any combination
thereof; (ii) may be entitled to receive distributions
only of prepayments of principal throughout the lives of
the Securities or during specified periods; (iii) may be
subordinated in the right to receive distributions of
scheduled payments of principal, prepayments of
principal, interest or any combination thereof to one or
more other classes of Securities of such Series
throughout the lives of the Securities
5
<PAGE>
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.
6
<PAGE>
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
7
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Subordinated Securities in a Series, the circumstances in
which such subordination will be applicable, and the
manner, if any, in which the amount of subordination will
decrease over time.
B. Reserve Account One or more reserve accounts (each, a "Reserve Account")
may be established and maintained for each Series. The
related Prospectus Supplement will specify whether or not
such Reserve Accounts will be included in the corpus of
the Trust Fund for such Series and will also specify the
manner of funding the related Reserve Accounts and the
conditions under which the amounts in any such Reserve
Accounts will be used to make distributions to holders of
Securities of a particular class or released from the
related Reserve Account.
C. Special Hazard
Insurance Policy Certain classes of Securities may have the benefit of a
Special Hazard Insurance Policy. Certain physical risks
that are not otherwise insured against by standard hazard
insurance policies may be covered by a Special Hazard
Insurance Policy or Policies. Each Special Hazard
Insurance Policy will be limited in scope and will cover
losses pursuant to the provisions of each such Special
Hazard Insurance Policy as described in the related
Prospectus Supplement.
D. Bankruptcy Bond One or more bankruptcy bonds (each a "Bankruptcy Bond")
may be obtained covering certain losses resulting from
action which may be taken by a bankruptcy court in
connection with a Loan. The level of coverage and the
limitations in scope of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
E. Loan Pool
Insurance Policy A mortgage pool insurance policy or policies may
be obtained and maintained for Loans relating to any
Series, which shall be limited in scope, covering
defaults on the related Loans in an initial amount equal
to a specified percentage of the aggregate principal
balance of all Loans included in the Pool as of the Cut-
off Date.
F. FHA Insurance If specified in the related Prospectus Supplement, (i)
all or a portion of the Loans in a Pool may be insured by
the Federal Housing Administration (the "FHA") and/or
(ii) all or a portion of the Loans may be partially
guaranteed by the Department of Veterans' Affairs (the
"VA"). See "Certain Legal Considerations--Title I
Program".
G. Cross-Support If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets
included in a Trust Fund may be evidenced by separate
classes of the related Series of Securities. In such
case, credit support may be provided by a cross-support
feature which requires that distributions be made with
respect to Securities evidencing beneficial ownership of
one or more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial ownership
interest in, or secured by, other asset groups within the
same Trust Fund.
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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
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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".
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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
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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
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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
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties such as those subject to the
Loans. The failure to comply with such laws and regulations may result in fines
and penalties.
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of addressing hazardous
substances on, in or beneath such property and related costs. Such liability
could exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
Under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), contamination
of property may give rise 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.
Under the laws of some states, and under CERCLA and the federal Solid Waste
Disposal Act, there is a possibility 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, or releases of petroleum from an underground
storage tank, under certain circumstances. 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;
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(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
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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
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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./1/ The Pool will be created on the first day of the
month of the issuance of the related Series of Securities or such other date
specified in the Prospectus Supplement (the "Cut-off Date"). The Securities
will be entitled to payment from the assets of the related Trust Fund or Funds
or other assets pledged for the benefit of the Securityholders as specified in
the related Prospectus Supplement and will not be entitled to payments in
respect of the assets of any other trust fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either directly or
through affiliates, from originators or sellers which may be affiliates of the
Depositor (the "Sellers"), and conveyed by the Depositor to the related Trust
Fund. Loans acquired by the Depositor will have been originated in accordance
with the underwriting criteria specified below under "Loan Program--Underwriting
Standards" or as otherwise described in a related Prospectus Supplement. See
"Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named in
the related Prospectus Supplement will service the Trust Fund Assets, either
directly or through other servicing institutions ("Sub-Servicers"), pursuant to
a Pooling and Servicing Agreement among the Depositor, the Master Servicer and
the Trustee with respect to a Series of Certificates, or a servicing agreement
(each, a "Servicing Agreement") between the Trustee and the Servicer with
respect to a Series of Notes, and will receive a fee for such services. See
"Loan Program" and "The Pooling and Servicing Agreement". With respect to Loans
serviced by the Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund.
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.
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/1/ 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.
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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.
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(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.
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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
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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
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entity, (C) the servicing fee or range of servicing fees with respect to the
loans, and (D) the minimum and maximum stated maturities of the underlying loans
at origination, (iii) the maximum original term-to-stated maturity of the
Private Asset Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Asset Backed Securities, (v) the pass-through or
certificate rate of the Private Asset Backed Securities, (vi) the weighted
average pass-through or certificate rate of the Private Asset Backed Securities,
(vii) the PABS Issuer, the PABS Servicer (if other than the PABS Issuer) and the
PABS Trustee for such Private Asset Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, surety bonds, letters of credit or guaranties relating to the loans
underlying the Private Asset Backed Securities or to such Private Asset Backed
Securities themselves, (ix) the term on which the underlying loans for such
Private Asset Backed Securities may, or are required to, be purchased prior to
their stated maturity or the stated maturity of the Private Asset Backed
Securities, (x) the terms on which loans may be substituted for those originally
underlying the Private Asset Backed Securities and (xi) to the extent provided
in a periodic report to the Trustee in its capacity as holder of the PABS,
certain information regarding the status of the credit support, if any, relating
to the PABS.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell
Securities in Series from time to time, but the timing and amount of offerings
of Securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware corporation
organized on August 2, 1995 for the limited purpose of acquiring, owning and
transferring Trust Fund Assets and selling interests therein or bonds secured
thereby. It is an indirect limited purpose finance subsidiary of National
Westminster Bank Plc and an affiliate of Greenwich Capital Markets, Inc.
Greenwich Capital Markets, Inc. is a registered broker-dealer engaged in the
United States government securities and related capital markets business. The
Depositor maintains its principal office at 600 Steamboat Road, Greenwich,
Connecticut 06830. Its telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been underwritten
in accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans. As to
any Loan insured by the FHA or partially guaranteed by the VA, the Seller will
represent that it has complied with underwriting policies of the FHA or the VA,
as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Property as collateral. In general, a prospective borrower applying for
a Loan is required to fill out a detailed application designed to provide to the
underwriting officer pertinent credit information, including the principal
balance and payment history with respect to any senior mortgage, if any, which,
unless otherwise specified in the related Prospectus Supplement, the borrower's
income will be verified by the Seller. As part of the description of the
borrower's financial condition, the borrower generally is required to provide a
current list of assets and liabilities and a statement of income and expenses,
as
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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
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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
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record of a Security of such Series addressed to Financial Asset Securities
Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed
Finance Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry or
fully registered form, in the authorized denominations specified in the related
Prospectus Supplement, will be secured by the pledge of the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
included in any other Trust Fund established by the Depositor. The Securities
will not represent obligations of the Depositor or any affiliate of the
Depositor. Certain of the Loans may be guaranteed or insured as set forth in
the related Prospectus Supplement. Each Trust Fund will consist of, to the
extent provided in the Agreement, (i) the Trust Fund Assets, as from time to
time are subject to the related Agreement (exclusive of any amounts specified in
the related Prospectus Supplement ("Retained Interest")), including all payments
of interest and principal received with respect to the Loans after the Cut-off
Date (to the extent not applied in computing the Cut-off Date Principal
Balance); (ii) such assets as from time to time are required to be deposited in
the related Security Account, as described below under "The Agreements--Payments
on Loans; Deposits to Security Account"; (iii) property which secured a Loan and
which is acquired on behalf of the Securityholders by foreclosure or deed in
lieu of foreclosure and (iv) any insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related Agreement. If so
specified in the related Prospectus Supplement, a Trust Fund may also include
one or more of the following: reinvestment income on payments received on the
Trust Fund Assets, a Reserve Account, a mortgage pool insurance policy, a
Special Hazard Insurance Policy, a Bankruptcy Bond, one or more letters of
credit, a surety bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to payment
to one or more other classes of Securities of such Series. One or more classes
of Securities of a Series may be entitled to receive distributions of principal,
interest or any combination thereof. Distributions on one or more classes of a
Series of Securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Trust Fund Assets in the
related Trust Fund or on a different basis, in each case as specified in the
related Prospectus Supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities will be made by the Trustee on each
Distribution Date (i.e., monthly or at such other intervals and on the dates as
are specified in the Prospectus Supplement) in proportion to the percentages
specified in the related Prospectus Supplement. Distributions will be made to
the persons in whose names the Securities are registered at the close of
business on the dates specified in the related Prospectus Supplement (each, a
"Record Date"). Distributions will be made in the manner specified in the
Prospectus Supplement to the persons entitled thereto at the address appearing
in the register maintained for holders of Securities (the "Security Register");
provided, however, that the final distribution in retirement of the Securities
will be made only upon presentation and surrender of the Securities at the
office or agency of the Trustee or other person specified in the notice to
Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
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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
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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
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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.
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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
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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
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(xiv) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant class having the Percentage Interest
specified in the related Prospectus Supplement. The report to Securityholders
for any Series of Securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States, or
Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System ("Euroclear") (in
Europe) if they are participants ("Participants") of such systems, or indirectly
through organizations which are Participants in such systems. The Book-Entry
Securities will be issued in one or more certificates which equal the aggregate
principal balance of the Securities and will initially be registered in the name
of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus
positions on behalf of their Participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and the Brussels, Belgium branch of Morgan Guarantee Trust Company of
New York ("Morgan") will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Except as described below, no Security Owner will be entitled
to receive a physical certificate representing such Security (a "Definitive
Security"). Unless and until Definitive Securities are issued, it is
anticipated that the only "Securityholders" of the Securities will be Cede &
Co., as nominee of DTC. Security Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Security
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Security will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Security Owner's
Financial Intermediary is not a Participant and on the records of CEDEL or
Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security
Owners have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will
not possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants
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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
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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.
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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.
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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
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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
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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
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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
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the Property. The amount payable under the guarantee may in no event exceed the
amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a Trust
Fund may be evidenced by separate classes of the related Series of Securities.
In such case, credit support may be provided by a cross-support feature which
requires that distributions be made with respect to Securities evidencing a
beneficial ownership interest in, or secured by, other asset groups within the
same Trust Fund. The related Prospectus Supplement for a Series which includes
a cross-support feature will describe the manner and conditions for applying
such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds, letters
of credit or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust Fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of such
assets or principal payment rate on such assets. Such arrangements may include
agreements under which Securityholders are entitled to receive amounts deposited
in various accounts held by the Trustee upon the terms specified in such
Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Trust Fund Assets included in the related Trust Fund. With
respect to a Trust Fund which includes Private Asset Backed Securities, the
possible effects of the amount and timing of principal payments received with
respect to the underlying mortgage loans will be described in the related
Prospectus Supplement. The original terms to maturity of the Loans in a given
Pool will vary depending upon the type of Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Loans in the related Pool. Unless otherwise specified in the
related Prospectus Supplement, Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience on the Loans in a Pool will
affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity loans
and home improvement contracts have been originated in significant volume only
during the past few years and the Depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a
higher rate of prepayment than traditional first mortgage loans. On the other
hand, because home equity loans such as the Revolving Credit Line Loans
generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment
experience of the related Trust Fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate levels,
the availability of alternative financing and homeowner mobility and the
frequency and amount of any future draws on any Revolving Credit Line Loans.
Other factors that might be expected to affect the prepayment rate of a pool of
home equity mortgage loans or home improvement contracts include the amounts of,
and interest rates on, the underlying senior mortgage loans, and the use of
first mortgage loans as long-term financing for home purchase and subordinate
mortgage loans as shorter-term financing for a variety of purposes, including
home improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Loans may experience a higher rate of prepayment
than traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of
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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
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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
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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.
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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
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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
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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
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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
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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".
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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.
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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.
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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
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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
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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 66 2/3% 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
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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.
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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
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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
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks,
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at off-
site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise 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
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mortgage against such property. Under CERCLA, such a lien is subordinate to
pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
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 current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act ("SWDA") provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the
management" of the facility in question or is found not to have held its
interest primarily to protect a security interest, the lender may forfeit its
secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
("EPA") in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to provide
additional clarification regarding the scope of the lender liability exemptions
under the two statutes. Among other things, the 1996 amendments specify the
circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still in
possession of the facility encumbered by the security interest, the lender (1)
exercises decisionmaking control over environmental compliance related to the
facility, such that the lender has undertaken responsibility for hazardous
substance handling or disposal practices related to the facility, or (2)
exercises control at a level comparable to that of a manager of the facility,
such that the person has assumed or manifested responsibility (a) for overall
management of the facility encompassing day-to-day decisionmaking with respect
to environmental compliance, or (b) over all or substantially all of the
operational functions (as distinguished from financial or administrative
functions) of the facility other than the function of environmental compliance.
The amendments also specify certain activities that are not considered to be
"participation in management", including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
The 1996 amendments also specify that a lender who did not participate in
management of a facility prior to foreclosure will not be considered an "owner
or operator", even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Home Equity Loans and the Home Improvement Contracts. The amendments
do not clearly address the potential liability of lenders who retain legal title
to a property and enter into an agreement with the purchaser for the payment of
the purchase price, and interest, over the term of the contract, such as the
Trust Fund does in connection with the Installment Contracts.
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If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, such persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the Loans, or at a
property subject to an Installment Contract, would be imposed on the Trust Fund,
and thus occasion a loss to the Securityholders, therefore depends on the
specific factual and legal circumstances at issue.
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
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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
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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
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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
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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
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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
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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
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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.
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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 Dewey Ballantine, 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
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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 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 (ii)
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
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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 regulations (the
"Contingent Regulations") governing the calculation of OID on instruments having
contingent interest payments. The Contingent Regulations 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
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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
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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
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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. 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 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 (ii) 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) or (ii)
above, then a Security will qualify for the tax treatment described in (i) or
(ii) 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
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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.
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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
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Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. Except to the extent provided in
regulations, which have not yet been issued, any loss upon disposition of a
Residual Interest Security will be disallowed if the selling holder acquires any
residual interest in a REMIC or similar mortgage pool within six months before
or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the REMIC
taxable income of a holder of a Residual Interest Security consisting of "excess
inclusion" income may not be offset by other deductions or losses, including net
operating losses, on such holder's federal income tax return. An exception
applies to organizations to which Code Section 593 applies (generally, certain
thrift institutions); however, such exception will not apply if the aggregate
value of the Residual Interest Securities is not considered to be "significant,"
as described below. Further, if the holder of a Residual Interest Security is
an organization subject to the tax on unrelated business income imposed by Code
Section 511, such holder's excess inclusion income will be treated as unrelated
business taxable income of such holder. In addition, under Treasury regulations
yet to be issued, if a real estate investment trust, a regulated investment
company, a common trust fund, or certain cooperatives were to own a Residual
Interest Security, a portion of dividends (or other distributions) paid by the
real estate investment trust (or other entity) would be treated as excess
inclusion income. If a Residual Security is owned by a foreign person excess
inclusion income is subject to tax at a rate of 30% which may not be reduced by
treaty, is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "Tax Treatment of Foreign Investors." The
Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December
31, 1986, unless a residual holder elects to have such rules apply only to tax
years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
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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.
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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
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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.
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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 "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,
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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."
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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
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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.
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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.
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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
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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
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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,
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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
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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
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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.
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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 Dewey Ballantine, New York, New York 10019.
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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.
88
<PAGE>
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No dealer, salesman or other person has been authorized to give
any information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or the Underwriter. This Prospectus Supplement or the Prospectus does
not constitute an offer of any securities other than those to which they relate
or an offer to sell, or a solicitation of an offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be unlawful. Neither the
delivery of this Prospectus Supplement or the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to their
respective dates.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUPPLEMENT
Summary................................................................ 4
Risk Factors........................................................... 24
The Certificate Insurer................................................ 26
Headlands Mortgage Company............................................. 27
Headlands' Home Equity Loan Program.................................... 29
Description of the Mortgage Loans...................................... 30
Maturity and Prepayment Considerations................................. 38
Pool Factor and Trading Information.................................... 39
Description of the Certificates........................................ 40
Use of Proceeds........................................................ 61
Certain Federal Income Tax Consequences................................ 61
State Taxes............................................................ 67
ERISA Considerations................................................... 67
Legal Investment Considerations........................................ 67
Underwriting........................................................... 67
Legal Matters.......................................................... 68
Ratings................................................................ 68
Index of Defined Terms................................................. 69
Annex I................................................................ I-1
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........................................................... 23
Description of the Securities.......................................... 25
Credit Enhancement..................................................... 35
Yield and Prepayment Considerations.................................... 41
The Agreements......................................................... 43
Certain Legal Aspects of the Loans..................................... 56
Certain Material Federal Income Tax Consequences....................... 68
State Tax Considerations............................................... 88
ERISA Considerations................................................... 88
Legal Investment....................................................... 91
Method of Distribution................................................. 92
Legal Matters.......................................................... 92
Financial Information.................................................. 93
Rating................................................................. 93
</TABLE>
HEADLANDS HOME EQUITY
LOAN TRUST 1961-1
$125,595,644.60 Class A
Variable Pass-Through Rate
Class S 1.0% Pass-Through Rate
REVOLVING HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES
1996-1
FINANCIAL ASSET SECURITIES CORP.
(DEPOSITOR)
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PROSPECTUS SUPPLEMENT
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GREENWICH CAPITAL
MARKETS, INC.
December 26, 1996
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