PROSPECTUS SUPPLEMENT
(To Prospectus dated August 14, 1996)
MEGO MORTGAGE FHA TITLE I LOAN TRUST 1996-2
$48,537,000 CLASS A, 7.275% PASS-THROUGH RATE
FHA TITLE I LOAN ASSET-BACKED CERTIFICATES, SERIES 1996-2
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN
SEPTEMBER 1996
FINANCIAL ASSET SECURITIES CORP.,
As Depositor
MEGO MORTGAGE CORPORATION,
As Seller and Servicer
__________________
The FHA Title I Loan Asset-Backed Certificates, Series 1996-2 (the
"Certificates") will consist of the Class A Certificates, Class S
Certificates and the Class R Certificates. The Class A Certificates are
referred to herein as the "Offered Certificates," and together with the Class
S Certificates are referred to herein as the "Senior Certificates." Only the
Offered Certificates are being offered hereby.
Financial Asset Securities Corp. (the "Depositor") has caused MBIA
Insurance Corporation (the "Certificate Insurer") to issue an unconditional
certificate guaranty insurance policy (the "Policy") for the benefit of
holders of the Senior Certificates pursuant to which the Certificate Insurer
will guarantee certain payments to the Trustee on behalf of the holders of
the Senior Certificates as described herein.
(MBIA logo)
The Certificates will evidence in the aggregate the entire beneficial
interest in the Mego Mortgage FHA Title I Loan Trust 1996-2 (the "Trust") to
be formed pursuant to a pooling and servicing agreement dated as of August
1, 1996 (the "Agreement"), among Financial Asset Securities Corp., as
depositor (the "Depositor"), Mego Mortgage Corporation ("Mego"), as seller,
servicer and claims administrator (in such capacities, the "Seller",
"Servicer" and "Claims Administrator", respectively), Norwest Bank Minnesota,
N.A., as master servicer (the "Master Servicer"), and First Trust of New
York, National Association, as trustee and contract of insurance holder (in
such capacities, the "Trustee" and "Contract of Insurance Holder",
respectively). The property of the Trust will include a pool of fixed-rate
residential first- and junior-lien home improvement loans and retail
installment sale contracts (the "Loans"), all monies due thereunder, as
described herein, liens on the properties that secure the Loans, the Policy
and certain other property. All of the Loans will be acquired by the
Depositor from the Seller pursuant to a purchase agreement dated as of August
1, 1996 (the "Purchase Agreement"), between the Depositor and the Seller.
See "Property of the Trust" herein. All of the Loans will be partially
insured by the Federal Housing Administration (the "FHA") of the United
States Department of Housing and Urban Development ("HUD") under Title I of
the National Housing Act of 1934, as amended. See "The Title I Loan Program
and the Contract of Insurance--The Contract of Insurance" herein.
The aggregate undivided interest in the Trust represented by the Offered
Certificates initially will equal $48,537,000, which is approximately 99.5%
of the aggregate outstanding Loan Balance of the Loans (the "Aggregate Loan
Balance") as of the opening of business on August 1, 1996 or, with respect
to any Mortgage Loan originated on or after August 1, 1996, as of the
origination date of such Mortgage Loan (as to each Mortgage Loan, the "Cut-
Off Date").
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED CERTIFICATES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE S-16
HEREIN AND IN THE PROSPECTUS ON PAGE 12.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR , THE SELLER, THE MASTER
SERVICER, THE TRUSTEE, THE SERVICER, THE CERTIFICATE INSURER, THE CLAIMS
ADMINISTRATOR, THE CONTRACT OF INSURANCE HOLDER OR ANY AFFILIATE THEREOF,
EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE CERTIFICATES NOR THE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, OTHER THAN TO THE
EXTENT OF THE FHA INSURANCE DESCRIBED HEREIN. THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Offered Certificates are being offered by the Underwriter from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor are expected to be
approximately $48,499,080, plus accrued interest, before deducting issuance
expenses payable by the Depositor, estimated to be $150,000 in the aggregate.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel. It is expected that
delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company (the "Depository") on
or about August 15, 1996.
GREENWICH CAPITAL
M A R K E T S, I N C.
August 14, 1996
_______________________
THE YIELDS TO MATURITY OF THE OFFERED CERTIFICATES MAY VARY FROM THE
ANTICIPATED YIELDS TO THE EXTENT THAT ANY SUCH CERTIFICATES ARE PURCHASED AT
A DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS
THEREON ARE SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE LOANS. CERTIFICATEHOLDERS SHOULD CONSIDER, IN THE CASE
OF ANY OFFERED CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A LOWER
THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD
THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED
CERTIFICATES PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED
RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
THE ANTICIPATED YIELD.
______________________
The interests of the owners of the Offered Certificates will be
represented by book-entries on the records of the Depository and
participating members thereof. No person acquiring a beneficial interest in
an Offered Certificate will be entitled to receive a physical certificate
representing such Certificate, except in the limited circumstances described
herein. See "Description of the Certificates--Book-Entry Certificates"
herein.
Except for certain representations and warranties relating to the Loans,
Mego's obligations with respect to the Certificates are limited to its
contractual servicing and claim administration obligations. The Offered
Certificates evidence interests in the Trust only and are payable solely from
amounts received with respect thereto. The Offered Certificates do not
constitute an obligation of or an interest in the Depositor, the Seller, the
Servicer, the Master Servicer, the Claims Administrator, the Trustee or the
Certificate Insurer or any of their respective affiliates, and will not be
insured or guaranteed by any governmental agency.
An election will be made to treat the Trust as a "real estate mortgage
investment" conduit (the "REMIC") for federal income tax purposes. See
"Certain Material Federal Income Tax Consequences" in the Prospectus.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Offered Certificates but has no obligation to do so.
There is currently no secondary market for the Offered Certificates and there
can be no assurance that such a market will develop or, if it does develop,
that it will continue.
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is contained
in the Prospectus dated August 14, 1996 (the "Prospectus") which accompanies
this Prospectus Supplement and purchasers are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Offered
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus Supplement and the Prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, on or subsequent to the
date of this Prospectus Supplement and prior to the termination of the
offering of the Offered Certificates made by this Prospectus Supplement. The
Depositor will provide without charge to each person to whom this Prospectus
Supplement and Prospectus are delivered, on request of such person, a copy
of any or all of the documents incorporated herein by reference other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be made to
Kari A. Skilbred, Vice President of Financial Asset Securities Corp. in
writing at 600 Steamboat Road, Greenwich, Connecticut 06830.
AVAILABLE INFORMATION
In addition to the locations specified under "Available Information" in
the accompanying Prospectus, the Securities and Exchange Commission (the
"Commission") maintains a Web site at http://www.sec.gov containing reports,
proxy and information statements and other information regarding registrants,
including the Depositor, that file electronically with the Commission.
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and
in the accompanying Prospectus. Certain capitalized terms used in this
Summary of Terms are defined elsewhere in this Prospectus Supplement or in
the Prospectus.
Trust.............. Mego Mortgage FHA Title I Loan Trust 1996-2
(the "Trust") will be formed pursuant to a
pooling and servicing agreement (the "Agree-
ment") to be dated as of August 1, 1996
(the "Agreement") among Financial Asset
Securities Corp., as depositor (the "Depositor"),
Mego Mortgage Corporation ("Mego"), as seller,
servicer and claims administrator (in such
capacities, the "Seller", "Servicer" and
"Claims Administrator", respectively), Norwest
Bank Minnesota, N.A., as master servicer (the
"Master Servicer"), and First Trust of New York,
National Association, as trustee and contract of
insurance holder (in such capacities, the
"Trustee" and "Contract of Insurance Holder,"
respectively). The property of the Trust will
consist primarily of the Loans (defined below).
Securities Issued.. The FHA Title I Loan Asset-Backed Certificates,
Series 1996-2 (the "Certificates") will consist
of the Class A Certificates, Class S Certificates
and the Class R Certificates. The Class A
Certificates are referred to herein as the
"Offered Certificates," and together with the
Class S Certificates are referred to herein as
the "Senior Certificates." Only the Offered
Certificates are offered hereby. Each Offered
Certificate represents the right to receive
payments of interest at the per annum rate
set forth on the cover hereof (the "Pass-Through
Rate"), subject to certain limitations described
herein, payable monthly, and payments of principal
to the extent provided below. The aggregate
undivided interest in the Trust represented by
the Offered Certificates as of the Closing Date
will equal $48,537,000 of principal (the "Original
Class A Principal Balance"), which represents
approximately 99.5% of the aggregate outstanding
Loan Balance of the Loans (the "Aggregate Loan
Balance") as of the Cut-Off Date. The principal
amount of the Offered Certificates (the "Class A
Principal Balance") on any date is equal to the
Original Class A Principal Balance minus the
aggregate of amounts previously distributed as
principal to the Class A Certificateholders.
Each Class S Certificate represents the right to
receive interest at a Pass-Through Rate of 1.0%
per annum, payable monthly, on a notional
amount (the "Class S Notional Amount") equal
with respect to any Distribution Date to the
Aggregate Loan Balance as of the beginning of the
calendar month preceding the month of such
Distribution Date (or, in the case of the
first Distribution Date, the Cut-Off Date
Aggregate Loan Balance). The Class S
Certificates have no class principal balance.
The Class R Certificates have no class principal
balance, will bear no interest and will be
entitled to distributions as described herein.
See "Description of the Certificates" herein.
The Loans......... The Loans will be conveyed to the Trust by the
Depositor on or about August 15, 1996 (the
"Closing Date") and are expected to consist of
closed-end fixed-rate home improvement loans
and retail installment sale contracts secured
by first- and junior-lien mortgages, deeds of
trust and security deeds on residences (which
are primarily condominiums, townhouses and one-
to four-family residences), including investment
properties (the "Mortgaged Properties"). The
Aggregate Loan Balance as of the Cut-Off Date
is $48,781,405.44 (the "Cut-Off Date Aggregate
Loan Balance"). Interest on each Loan is payable
monthly on the outstanding Loan Balance thereof
at a fixed rate per annum (the "Loan Rate").
See "Description of the Loans" herein.
All of the Loans will be partially insured by the
Federal Housing Administration ("FHA") of the
United States Department of Housing and Urban
Development ("HUD") under Title I of the National
Housing Act of 1934, as amended. The Loans will
not be insured by primary mortgage insurance
policies, nor will any pool insurance insure the
Loans. In addition, in accordance with FHA
regulations, the Master Servicer will not
require hazard insurance to be maintained on
the Mortgaged Properties. The Agreement requires
the Master Servicer to service the Loans in
accordance with the standards and procedures
required by the FHA under the Title I Program.
The Loans will not be guaranteed by the Seller,
the Depositor or any of their respective
affiliates. The FHA Title I insurance claims
administration will be performed by Mego,
in its capacity as the Claims Administrator.
See "The Title I Loan Program and The Contract
of Insurance" herein.
Denominations..... The Offered Certificates are offered for purchase
in minimum denominations of $1,000 and integral
multiples thereof.
Registration of Offered
Certificates.... The Offered Certificates will initially be issued
in book-entry form. Persons acquiring beneficial
ownership interests in the Offered Certificates
("beneficial owners") will hold their interests
through The Depository Trust Company (the
"Depository"). Transfers within the Depository
will be made in accordance with the usual rules
and operating procedures of the Depository. So
long as the Offered Certificates are Book-Entry
Certificates (as defined herein), such
Certificates will be evidenced by one or more
certificates registered in the name of Cede & Co.
("Cede"), as the nominee of the Depository.
No beneficial owners of Book-Entry Certificates
will be entitled to receive a definitive
certificate representing such owner's interest,
except in the event that Definitive
Certificates (as defined herein) are issued under
the limited circumstances described herein. All
references in this Prospectus Supplement to the
rights of holders of the Offered Certificates
reflect the rights of such beneficial owners
only as such rights may be exercised through
the Depository and its participating organizations
for so long as such Offered Certificates are held
by the Depository. See "Description of the
Certificates--Book-Entry Certificates" herein.
Depositor......... Financial Asset Securities Corp. (the
"Depositor"), a Delaware corporation. The
Depositor is an indirect limited purpose
finance subsidiary of The Long-Term Credit Bank
of Japan, Limited and an affiliate of Greenwich
Capital Markets, Inc. (the "Underwriter").
See "The Depositor" in the Prospectus and
"Method of Distribution" herein. National
Westminster Bank Plc has entered into an agree-
ment to acquire the direct parent company of the
Depositor. Completion of that acquisition is
subject to receipt of regulatory approval
and is expected to occur in late 1996. None
of the Depositor, The Long-Term Credit Bank
of Japan, Limited or any of their affiliates
or any other person or entity (other than the
Certificate Insurer to the extent set forth
herein) will insure or guarantee or otherwise
be obligated with respect to the Certificates.
The Seller........ Mego Mortgage Corporation, a Delaware corporation
and a wholly-owned subsidiary of Mego Financial
Corp. Master Servicer Norwest Bank Minnesota, N.A.
(the "Master Servicer"), a national banking
association with its executive offices at Sixth
and Marquette, Minneapolis, Minnesota 55479 and
its master servicing offices located at 11000
Broken Land Parkway, Columbia, Maryland 21044.
The Servicer and Claims
Administrator.... Mego Mortgage Corporation. Pursuant to a servicing
agreement (the "Servicing Agreement") dated as of
August 1, 1996 between Mego and the Master
Servicer, Mego will service the Loans on behalf
of the Master Servicer. Mego will also administer
claims filed under the contract of insurance as
Claims Administrator under the Agreement.
Pass-Through Rate.. The "Pass-Through Rate" applicable to the Offered
Certificates on any Distribution Date is the rate
per annum set forth on the cover hereof, subject
to certain limitations set forth herein under
"Description Of The Certificates--Pass-Through
Rate". The "Pass-Through Rate" with respect
to the Class S Certificates on any Distribution
Date is 1.0% per annum. Interest on the Senior
Certificates in respect of any Distribution
Date will accrue from the first day of the month
preceding such Distribution Date through the
last day of the month preceding such Distribution
Date calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions...... On the 25th day of each month, or if such a day
is not a Business Day, then the next
succeeding Business Day, commencing in
September 1996 (each such day, a "Distribution
Date"), the Trustee will be required to
distribute from funds available therefor in
the Distribution Account (as described herein)
to the holders of the Senior Certificates (the
"Senior Certificateholders") of record as of
the last day of the calendar month immediately
preceding the calendar month in which such
Distribution Date occurs (the "Record Date"),
except that the final distribution on the
Offered Certificates will be made only upon
presentation and surrender of the Offered
Certificates at the office or agency of the
Trustee in New York, New York. Distributions
on the Loans will be applied to the payment
of principal and interest on the Certificates
in accordance with the priorities described
below.
1. Interest... On each Distribution Date, to the
extent of funds available
therefor and in accordance with
the priorities described herein,
interest will be distributed with
respect to each class of Senior
Certificates in an amount (each
a "Class Interest Distribution")
equal to the sum of (a) one
month's interest at the
applicable Pass-Through Rate on
the Class A Principal Balance or
the Class S Notional Amount, as
applicable, for such
Distribution Date (the "Class
Monthly Interest Amount") and
(b) any related Class Interest
Shortfall (as defined below) for
such Distribution Date. As to
any Distribution Date and class
of Senior Certificates, "Class
Interest Shortfall" is the sum
of (a) the excess of the related
Class Monthly Interest Amount
for the preceding Distribution
Date and any outstanding Class
Interest Shortfall with respect
to such class on such preceding
Distribution Date, over the
amount in respect of interest
that is actually distributed to
the holders of such class on such
preceding Distribution Date and
(b) interest on such excess, to
the extent permitted by law, at
the related Pass-Through Rate
from such preceding Distribution
Date through the current Distri-
bution Date. Notwithstanding
the foregoing, the Class Monthly
Interest Amount for any
Distribution Date and class will
be reduced by such class's pro
rata share (based on the interest
such class would otherwise be
entitled to receive absent the
shortfalls specified below)
of (x) Prepayment Interest Short-
falls (as defined herein), to the
extent not covered by the
Servicing Fee or the portion of
any Excess Spread (as defined
herein) otherwise distributable
in respect of the Class R
Certificates and (y) any Civil
Relief Act Interest Shortfalls
(as defined herein) for such
Distribution Date. Neither Pre-
payment Interest Shortfalls nor
Civil Relief Act Interest Short-
falls will be covered by payments
under the Policy. See "Risk
Factors -- Civil Relief Act
Shortfalls" herein.
Distributions of the related
Class Interest Distribution
for the Class S Certificates
will be made prior to the
distribution of the related
Class Interest Distribution
to the Offered Certificates.
See "Description of the
Certificates--Distributions"
herein.
2. Principal. On each Distribution Date, to
the extent of funds available
therefor and in accordance
with the priorities described
herein, principal will be
distributed to the holders of
the Offered Certificates, in an
amount equal to the lesser of
(A) the Class A Principal
Balance and (B) the Class A
Principal Distribution for such
Distribution Date. The "Class A
Principal Distribution" means,
with respect to any Distribution
Date, the sum of the Class A
Monthly Principal Amount for
such Distribution Date and any
outstanding Class A Principal
Shortfall as of the close of
business on the preceding
Distribution Date.
"Class A Monthly Principal
Amount" means, with respect to
any Distribution Date, the sum
of the following amounts (without
duplication) with respect to the
immediately preceding Due Period
(as defined below): (i) that
portion of all payments received
on Loans (other than Defaulted
Loans (as defined herein))
allocable to principal, including
all full and partial principal
prepayments, (ii) the Loan
Balance of each Loan that became
a Defaulted Loan for the first
time during such Due Period,
(iii) the portion of the Purchase
Price (as defined herein)
allocable to principal of all
Defective Loans (as defined here-
in) with respect to such Due
Period, (iv) any Substitution
Adjustments (as defined herein)
received on or prior to the
related Determination Date (as
defined herein) and not yet
distributed, and (v) the
Distributable Excess Spread
(as defined herein), if any, in
respect of such Distribution
Date. See "Description of the
Certificates--Principal" herein.
"Class A Principal Shortfall"
means, with respect to any
Distribution Date, the excess
of the sum of the Class A Monthly
Principal Amount for the
preceding Distribution Date and
any outstanding Class A Principal
Shortfall on such preceding
Distribution Date over the amount
in respect of principal that is
actually distributed to the
holders of the Offered
Certificates on such preceding
Distribution Date.
Distributions to the Offered
Certificateholders of
Distributable Excess Spread
will result in acceleration
of principal payments to the
holders of the Offered
Certificates and reduce the
weighted average life of the
Offered Certificates. See
"Description of Certificates--
Overcollateralization
Provisions" and "Description
of the Certificates-Weighted
Average Life" herein.
Credit
Enhancement..... The credit enhancement provided for the benefit of
the Certificateholders consists of (x) FHA
Title I Insurance to the extent described
herein, (y) the overcollateralization in effect
on the Closing Date and created by the application
of the internal cash flows of the Trust, as
described herein, and (z) the Policy.
FHA Insurance Program and Contract of Insurance:
The aggregate amount of insurance provided by the
FHA pursuant to the Title I Program that is
expected to be available to the Claims
Administrator in respect of the Loans is
$4,878,140 (the "Trust Designated Insurance
Amount"). Such amount represents 10% of the
Cut-Off Date Aggregate Loan Balance.
First Trust of New York, National Association
holds the Contract of Insurance for the benefit
of the Trust and other Related Series Trusts
(defined herein). As of the Closing Date the
aggregate amount of insurance transferred or to
be transferred by the FHA pursuant to the Title
I Program to the Contract of Insurance Holder
is $13,297,514 (the "Combined FHA Insurance
Amount") and for any date of determination there-
after, the Combined FHA Insurance Amount will
equal such amount plus all amounts subsequently
transferred by the Secretary of HUD to the
Contract of Insurance Holder's FHA Reserve Account
(defined below) less the amount of FHA Insurance
proceeds received since the Closing Date under
the Contract of Insurance with respect to the
Loans and loans in other Related Series Trusts.
The Combined FHA Insurance Amount will be
reflected in an insurance coverage reserve account
maintained by the FHA in the name of the Contract
of Insurance Holder (the "FHA Reserve Account").
The Secretary of HUD will not earmark the monies
in the FHA Reserve Account for the benefit of the
Trust or any other Related Series Trust;
however, each of the Contract of Insurance Holder
and the Claims Administrator has agreed in the
Agreement to earmark the Trust Designated
Insurance Amount exclusively for the benefit of
the Trust. The Trust Designated Insurance Amount
and any trust designated insurance amount for
any Related Series Trust may be increased up to
the Combined FHA Insurance Amount with the consent
of the Certificate Insurer. In the event that
any portion of the Combined FHA Insurance Amount
is applied to loans in a Related Series Trust
other than the Trust in excess of the trust
designated insurance amount for such Related
Series Trust, the portion of the Combined FHA
Insurance Amount available to cover defaults
on the Loans may be reduced below the remaining
Trust Designated Insurance Amount for the
Trust. See "Risk Factors--Limitations on FHA
Insurance," "The Title I Loan Program and
the Contract of Insurance--FHA Insurance Coverage"
and "--The Contract Of Insurance" herein.
Subject to the then remaining Combined FHA
Insurance Amount, each FHA Loan will be insured
by the FHA in an amount equal to 90% of the sum of
the following: (a) the unpaid loan obligation
(equal to the net unpaid principal and the
uncollected interest earned to the date of
default) with adjustments thereto if the holder
of the loan has proceeded against property
securing such loan, (b) the interest on the
unpaid amount of the loan obligation from the
date of default to the date of the claim's
initial submission for payment plus 15 calendar
days (not to exceed nine months from the date of
default), calculated at the rate of 7% per annum,
(c) the uncollected court costs, (d) the
attorneys' fees (not to exceed $500), and
(e) the expenses for recording the assignment of
the security to the United States of America.
See "The Title I Loan Program and the
Contract of Insurance--The Title I Program"
herein. Since the remaining Combined FHA
Insurance Amount is dependent upon future
events, including reductions for the payment of
claims, no assurance can be given that the
Combined FHA Insurance Amount will be adequate
to cover 90% of the losses on such Loans.
Overcollateralization. The credit enhancement
provisions of the Trust include overcollaterali-
zation in effect as of the Closing Date (i.e.,
the excess of the Aggregate Loan Balance over the
Class A Principal Balance) and a limited
acceleration of principal distributions on the
Offered Certificates in the early months of
the transaction that is intended to create
additional overcollateralization. This accelera-
tion of principal distributions on the
Offered Certificates is achieved by application
of Distributable Excess Spread as principal of the
Offered Certificates. Once the level of over-
collateralization specified in the Agreement is
reached and subject to the provisions described
herein under "Description of the
Certificates -- Overcollateralization Provisions",
the acceleration feature will cease, unless
necessary to maintain the required level of
overcollateralization.
The Agreement provides that, subject to certain
trigger tests, the required level of over-
collateralization may increase or decrease over
time. An increase would result in a temporary
period of accelerated amortization of the Offered
Certificates to increase the actual level of
overcollateralization to its required level;
a decrease would result in a temporary period
of decelerated amortization to reduce the actual
level of overcollateralization to its required
level. See "Description of the Certifi-
cates--Principal" herein.
The Policy. Holders of the Senior Certificates
will have the benefit of a certificate guaranty
insurance policy (the "Policy") to be issued
by the Certificate Insurer on the Closing Date.
The Policy is being issued as a means of pro-
viding additional credit enhancement to the Senior
Certificates. The Policy will unconditionally
and irrevocably guarantee that with respect to
each Distribution Date, an amount equal to the
Insured Payment (as defined herein) will be
paid to the Trustee, on behalf of the Senior
Certificateholders, as further described herein.
In the event of a default 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"
herein.
The Certificate
Insurer......... MBIA Insurance Corporation (the "Certificate
Insurer"), a stock insurance company organized
under the laws of the State of New York. See
"The Certificate Insurer" herein.
Servicing......... The Master Servicer is responsible for servicing,
managing and making collections on the Loans. All
collections in respect of the Loans will be
deposited into the Collection Account as described
herein. Not later than the fifth Business Day
prior to each Distribution Date (the "Determina-
tion Date"), the Trustee will calculate the
amounts to be paid, as described herein, to the
Certificateholders on such Distribution Date.
See "Description of the Certificates--Distribu-
tions." With respect to each Due Period, the
Master Servicer will receive from payments in
respect of interest on the Loans, a portion
of such payments as a monthly master servicing
fee (the "Master Servicing Fee") in the amount
of 0.08% per annum (the "Master Servicing Fee
Rate") on the Loan Balance of each Loan as of
the first day of each such Due Period as to
which such a payment was made.
The Servicer will service the Loans on behalf
of the Master Servicer pursuant to the terms of
the Servicing Agreement. The Servicer will
also receive from payments in respect of interest
on the Loans a monthly servicing fee (the
"Servicing Fee") in an amount equal to 1.00%
per annum (the "Servicing Fee Rate") on the
Loan Balance of each Loan. See "Description
of the Certificates--Servicing Compensation
and Payment of Expenses." In certain limited
circumstances, the Master Servicer may resign
or be removed, in which event either the
Trustee or a third-party servicer will be
appointed as a successor Master Servicer.
See "Description of the Certificates--Certain
Matters Regarding the Master Servicer."
Trustee........... First Trust of New York, National Association
(the "Trustee"). Notices and correspondence
for the Trustee should be directed to First Bank
National Association, First Trust Center, 180
East Fifth Street, St. Paul, MN 55101.
Interest
Advances........ The Master Servicer is required to remit to the
Trustee no later than the close of business
on the Determination Date for each Distribution
Date, for deposit in the Distribution Account, an
amount equal to the scheduled installment of
interest due on each Loan (other than a Defaulted
Loan) but not received during the related Due
Period, net of the related Servicing Fee (each,
an "Interest Advance"). The Master Servicer is
not required to make any Interest Advance that
it determines would be nonrecoverable. Interest
Advances are reimbursable to the Master Servicer
subject to certain conditions and restrictions,
and are intended to provide sufficient funds
for the required distributions of interest on
the Senior Certificates. See "Description of
the Certificates--Interest Advances" herein.
Payments to Cover
Prepayment Interest
Shortfalls...... The Servicer will be required to fund in respect
of each Distribution Date, without any right of
reimbursement, an amount equal to the lesser of
(a) the aggregate, for each Loan, the excess, if
any, of (x) a full month's interest on the amount
of each principal prepayment in full at a per
annum rate equal to the related Loan Rate (or such
lower rate as may be in effect for a Loan because
of application of the Civil Relief Act) minus the
Servicing Fee Rate over (y) the amount of interest
actually paid by the Obligor in connection with
such principal prepayment during the related Due
Period (a "Prepayment Interest Shortfall") and
(b) the aggregate Servicing Fee to be
received by the Servicer in the related Due
Period. See "Description of the Certificates--
Adjustment to Servicing Fee in Connection with
Certain Prepaid Loans". Any Prepayment Interest
Shortfall not covered by such Servicing Fee
will be covered by the application of the
portion, if any, of any Excess Spread otherwise
distributable in respect of the Class R
Certificates, but will not be covered by the
Policy.
Optional Termination by the
Master Servicer or
Mego............ The Master Servicer or Mego, each with the consent
of the Certificate Insurer if such purchase
would result in a claim under the Policy, may
purchase from the Trust all (but not fewer than
all) remaining Loans and other property of the
Trust, thereby effecting early retirement of the
Certificates, on any Distribution Date as of which
the Aggregate Loan Balance is less than 10% of
the Cut-Off Date Aggregate Loan Balance. See
"Description of the Certificates--Termination;
Retirement of the Certificates."
Certain Federal Income Tax
Considerations.... An election will be made to treat the Trust as a
"real estate mortgage investment conduit" (the
"REMIC") for federal income tax purposes. The
Senior Certificates will constitute "regular
interests" in the REMIC and the Class R
Certificates will constitute the sole class of
"residual interests" in the REMIC. The Offered
Certificates may be issued with original issue
discount for federal income tax purposes. For
purposes of determining the amount and rate of
accrual of original issue discount and market
discount, the Depositor intends to assume that
principal prepayments on the Loans will occur at
a constant prepayment rate ("CPR") equal to
15% per annum. No representation is made as to
whether the Loans will prepay at that rate or any
other rate. See "Certain Material Federal Income
Tax Consequences" in the Prospectus.
ERISA
Considerations... The acquisition of an Offered Certificate by an
employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or a plan or arrangement subject to
Section 4975 of the Code (each of the foregoing,
a "Plan") could, in some instances, result in a
"prohibited transaction" or other violation of
the fiduciary responsibility provisions of ERISA
and Code Section 4975.
Any Plan fiduciary considering whether to purchase
any Offered Certificates on behalf of a Plan
should consult with its counsel regarding the
applicability of the provisions of ERISA and the
Code. See "ERISA Considerations" herein and in
the Prospectus.
Legal
Investment....... The Offered Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") because some of the Loans
are secured by junior liens. Accordingly, many
institutions with legal authority to invest in
comparably rated securities based on first
mortgage loans may not be legally authorized
to invest in the Offered Certificates.
See "Legal Investment" in the Prospectus.
Ratings........... It is a condition of the issuance of the
Offered Certificates that they be rated AAA
by Standard & Poor's Rating Services ("S&P"),
and Aaa by Moody's Investors Service, Inc.
("Moody's" and, together with S&P, the
"Rating Agencies"). The security ratings of
the Offered Certificates should be evaluated
independently from similar ratings on other
types of securities. A security rating is not
a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the Rating Agencies. See "Ratings"
herein.
RISK FACTORS
Investors are urged to carefully consider, among other things, the
following factors in connection with a purchase of the Offered Certificates.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
YIELD GENERALLY. The yields to maturity of the Offered Certificates may
vary from the anticipated yields to the extent such Certificates are
purchased at a discount or premium and to the extent the rate and timing of
payments thereon are sensitive to the rate and timing of principal payments
(including prepayments) of the Loans. Certificateholders should consider,
in the case of any Offered Certificates purchased at a discount, the risk
that a lower than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield and, in the case of any
Offered Certificates purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield that
is lower than the anticipated yield. In addition, the timing of changes in
the rate of Principal Prepayments (as defined herein) on the Loans may
significantly affect an investor's actual yield to maturity, even if the
average rate of Principal Prepayments is consistent with such investor's
expectation. In general, the earlier a Principal Prepayment on a Loan
occurs, the greater the effect of such Principal Prepayment on an investor's
yield to maturity. The effect on an investor's yield of Principal
Prepayments occurring at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of the
Certificates may not be offset by a subsequent like decrease (or increase)
in the rate of Principal Prepayments.
PREPAYMENT CONSIDERATIONS AND RISKS. The rates of principal payments,
on the Offered Certificates and the aggregate amount of distributions and the
yields to maturity of the Offered Certificates will be related to, among
other things, the rate and timing of payments of principal on the Loans. The
rate of principal payments on the Loans will in turn be affected by the
amortization of the Loans and by the rate of Principal Prepayments thereon
(including for this purpose, prepayments resulting from (i) refinancing, (ii)
liquidations of the Loans due to defaults, casualties and condemnations and
(iii) repurchases by the Seller as required pursuant to the Agreement).
Generally, if prevailing interest rates on similar loans fall significantly
below the interest rates on the Loans, the Loans may be subject to higher
prepayment rates than if prevailing rates remain at or above the interest
rates on the Loans. Conversely, if prevailing interest rates rise
significantly above the interest rates on the Loans, the rate of prepayments
may decrease. The Loans may be prepaid by the obligors thereunder (the
"Obligors") at any time. The Loans are subject to the "due-on-sale"
provisions included therein. Prepayments, liquidations and purchases of the
Loans (including any purchase by the Master Servicer or the Seller of the
remaining Loans and Mortgaged Properties (title to which has been acquired
by the Trust) in connection with the optional termination of the Trust) will,
subject to certain conditions, result in distributions to holders of the
Offered Certificates then entitled to receive principal distributions of
principal that would otherwise be distributed over the remaining terms of the
Loans. In addition, the overcollateralization provisions of the Trust will
result in a limited acceleration of principal payments to the holders of the
Offered Certificates. See "Description of the Certificates" herein. Since
the rate of payment of principal on the Loans will depend on future events
and a variety of factors, no assurance can be given as to such rate or the
rate of Principal Prepayments.
The weighted average life of a pool of loans is the average amount of
time that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because
it is expected that there will be prepayments and defaults on the Loans, the
actual weighted average life of the Offered Certificates is expected to vary
substantially from the weighted average remaining term to stated maturity of
the Loans as set forth under "Description of the Loans."
DEFAULTS AND DELINQUENT PAYMENTS. The yields to maturity of the Offered
Certificates will be sensitive to defaults and delinquent payments on the
Loans. Neither the Master Servicer nor the Servicer will be required to
advance amounts in respect of delinquent payments of principal of the Loans.
If a purchaser of an Offered Certificate calculates its anticipated yield
based on an assumed rate of default and amount of losses that is lower than
the default rate and amount of losses actually incurred and not covered by
the Policy, its actual yield to maturity will be lower than that so
calculated and could, in the event of substantial losses, be negative. The
timing of losses that are not covered by the Policy will also affect an
investor's actual yield to maturity even if the rate of defaults and severity
of such losses are consistent with an investor's expectations. In general,
the earlier a loss occurs, the greater is the effect on an investor's yield
to maturity. There can be no assurance as to the delinquency, foreclosure
or loss experience with respect to the Loans.
PAYMENT DELAY. Under the Agreement, payments of principal and interest
on the Loans in respect of any Due Period generally will not be passed
through to the holders of the Offered Certificates until the Distribution
Date in the following calendar month. As a result, the monthly distributions
to the holders of the Offered Certificates generally will reflect Obligor
payments during the prior calendar month. Each Distribution Date will be on
the 25th day of each month (or the next succeeding business day), and the
first Distribution Date will not occur until September 25, 1996. Thus, the
effective yields to the holders of the Offered Certificates will be lower
than those otherwise produced by the related Pass-Through Rates because
distributions on the Offered Certificates in respect of any given month will
not be made until on or about the 25th day of the following month and will
not bear interest during such delay.
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY.
Since a substantial portion (27.46% by Cut-Off Date Aggregate Loan Balance)
of the Mortgaged Properties is located in California, an overall decline in
the California residential real estate market could adversely affect the
values of the Mortgaged Properties securing such Loans such that the Loan
Balances of the related Loans, together with any primary financing on such
Mortgaged Properties, could equal or exceed the value of such Mortgaged
Properties. As the residential real estate market is influenced by many
factors, including the general condition of the economy and interest rates,
no assurances can be given that the California real estate market will not
weaken further. If the California residential real estate market should
experience an overall decline in property values after the dates of
origination of the Loans, the rates of losses on the Loans may be expected
to increase, and may increase substantially. Because a substantial portion
of the Mortgaged Properties is in California, the risk of occurrence of
earthquake damage exists that may not be covered by any hazard insurance.
NATURE OF MORTGAGES; MORTGAGEDPROPERTIES. TheLoans are secured byfirst-
and junior-lien mortgages and security deeds. Loans secured by junior-lien
mortgages are entitled to proceeds that remain from the sale of the related
Mortgaged Property after any related senior mortgage loan or mortgage loans
and prior statutory liens have been satisfied. In the event that such
proceeds are insufficient to satisfy such loans and prior liens in the
aggregate or the Title I insurance in respect of the Loans (the "FHA
Insurance"), if applicable, is insufficient or unavailable and the
Certificate Insurer does not perform its obligations under the Policy, the
Trust and, accordingly, the Certificateholders, bear (i) the risk of delay
in distributions while a deficiency judgment against the borrower is obtained
and (ii) the risk of loss if the deficiency judgment cannot be obtained or
is not realized upon. See "Certain Legal Aspects of the Loans" in the
Prospectus.
Furthermore, Title I Loans generally are not required to be written with
any equity in the Mortgaged Property above the aggregate amount of the liens
(including the amount of the related lien securing the Loan on the related
Mortgaged Property). In addition, a junior lienholder may not foreclose on
the property securing a junior lien unless it forecloses subject to the
senior lien(s), in which case it must either pay the entire amount due on the
senior lien(s) to the senior mortgagee at or prior to the foreclosure sale
or undertake the obligation to make payments on the senior mortgage(s) in the
event the mortgagor is in default thereunder. See "Certain Legal Aspects of
the Loans" in the Prospectus. In servicing Title I Loans in its portfolios,
it is not the Master Servicer's or the Servicer's practice to satisfy the
senior lien(s) at or prior to the foreclosure sale, nor to advance funds to
keep the senior mortgage(s) current. The Trust will have no source of funds
(and may not be permitted under the REMIC provisions of the Code) to satisfy
the senior mortgagee(s) or make payments due to the senior mortgagee(s), and
therefore, Certificateholders should not expect that any senior mortgage(s)
will be kept current by the Trust for the purpose of protecting the Trust's
junior lien. As a result, it is not expected that the Master Servicer or the
Servicer will pursue foreclosure proceedings with respect to the Loans
secured by a junior lien on a Mortgaged Property. See "The Title I Loan
Program and the Contract of Insurance" herein.
RELATED SERIES TRUSTS. The Contract of Insurance Holder is First Trust
of New York, National Association for the benefit of the Trust. The Contract
of Insurance will be held for the benefit of the Trust, as well as the Mego
Mortgage FHA Title I Loan Trust 1996-1, and may be held for the benefit of
other subsequently created trusts of which the Trustee is the trustee and to
which Title I Loans are sold directly or indirectly by the Seller and the
related senior certificates of which are insured by a certificate guaranty
insurance policy issued by the Certificate Insurer (each, a "Related Series
Trust"). The Secretary of HUD will not earmark the monies in the FHA Reserve
Account for the benefit of any particular Related Series Trust, but each of
the Contract of Insurance Holder and the Claims Administrator has agreed in
the Agreement to earmark $4,878,140 (the "Trust Designated Insurance Amount")
of such monies exclusively for the benefit of the Trust. Unless the
Certificate Insurer consents, the Contract of Insurance Holder and the Claims
Administrator will not submit any claim to the FHA in respect of the Loans
if the amount of such claim and all claims paid in respect of the Loans would
exceed the Trust Designated Insurance Amount. The Trust Designated Insurance
Amount and any trust designated insurance amount for any other Related Series
Trust may be increased up to the Combined FHA Insurance Amount with the
consent of the Certificate Insurer. In the event that any portion of the
Combined FHA Insurance Amount is applied to loans in a Related Series Trust
other than the Trust in excess of the designated insurance amount for such
Related Series Trust, the Combined FHA Insurance Amount available to cover
defaults on the Loans may be reduced below the remaining Trust Designated
Insurance Amount. Such an occurrence could result in shortfalls of interest
and principal on the Offered Certificates, to the extent such shortfalls are
not otherwise covered by overcollateralization or by the Policy.
As of the Closing Date, the Combined FHA Insurance Amount that is
expected to be available under the Contract of Insurance in respect of the
Loans and the loans of the Related Series Trusts is $13,297,514. The
Combined FHA Insurance Amount available under the Contract of Insurance will
be reduced by the amount of proceeds received under the Contract of
Insurance. See "The Title I Loan Program and the Contract of Insurance --
The Contract of Insurance" herein.
LIMITATIONS ON FHA INSURANCE. The availability of FHA Insurance
following a default on a Loan is limited and is subject to a number of
conditions, including strict compliance by the Seller, the Contract of
Insurance Holder, the Claims Administrator, the Master Servicer and the
Servicer with FHA Regulations in originating and servicing the Loan and
limits on the aggregate insurance coverage available with respect to all
Title I Loans then owned and reported for FHA Insurance by the Contract
of Insurance Holder. The availability of FHA Insurance in respect of
the Loans is also limited to the extent of the Trust Designated Insurance
Amount. Although the Seller has represented that it has complied with
all applicable FHA Regulations, such regulations are susceptible to
differences in interpretation. The Contract of Insurance Holder is not
required to obtain, and has not obtained, approval from FHA of the
origination and servicing practices of the Seller, the Master Servicer
and the Servicer. Failure to comply with all FHA Regulations may
result in a denial of FHA Insurance claims, and there can be no assurance
that FHA's interpretation of its regulations will not become more strict in
the future. In addition, any claim paid by FHA will cover, at most, 90% of
the sum of the unpaid principal on the Loan, a portion of the unpaid interest
and certain other liquidation costs up to the Contract of Insurance Holder's
aggregate amount of FHA insurance coverage. The Seller and, in limited
circumstances, the Master Servicer have agreed in the Agreement to purchase
from the Trust any Loan that is rejected by the FHA for insurance benefits
under the Contract of Insurance (other than rejection for clerical error in
computing the claim amount or due to the exhaustion of Combined FHA Insurance
Amount).
LEGAL CONSIDERATIONS. The sale of the Loans from the Seller to the
Depositor pursuant to the Purchase Agreement will be treated by the Seller
and the Depositor as a sale of the Loans. The Seller will warrant that such
transfer is a sale of its interest in the Loans. In the event of an
insolvency of the Seller, the bankruptcy trustee of the Seller may attempt
to recharacterize the sale of the Loans as a borrowing by the Seller secured
by a pledge of the Loans. If such attempt were successful, the Trust would
have a perfected security interest in the Loans. If the bankruptcy trustee
decided to challenge such transfer, delays in payments on the Certificates
and possible reductions in the amount thereof could occur. The Depositor
will warrant in the Agreement that the transfer of the Loans to the Trust is
a valid transfer of all of the Depositor's right, title and interest in the
Loans to the Trust.
The assignments to the Trustee of any mortgage or deed of trust securing
a Loan will be recorded in the appropriate public office for real property
records within the time period specified in the Agreement, except where, in
the opinion of counsel, such recording is not required to protect the
Trustee's interest in the related Loan against the claim of any subsequent
transferee or any successor to a creditor of the Depositor or the Seller.
See "Description of the Certificates--Assignment of Loans" herein and
"Certain Legal Aspects of the Loans" in the Prospectus.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS. Applicable
state laws generally regulate interest rates and other charges and require
certain disclosures. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the
Loans, may entitle the borrower to a refund of amounts previously paid and,
in addition, could subject the owner of the Loans to damages and
administrative enforcement. See "Risk Factors--Certain Other Legal
Considerations Regarding the Mortgage Loans" in the Prospectus.
CIVIL RELIEF ACT SHORTFALLS. The amount required to be distributed as
interest on the Senior Certificates will be reduced as a result of shortfalls
on the Loans attributable to the application of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended ("Civil Relief Act Interest
Shortfalls"). See "Description of the Certificates--Interest" and "Certain
Legal Aspects of the Loans--Soldiers' and Sailors' Civil Relief Act" in the
Prospectus. Civil Relief Act Interest Shortfalls will not be covered by the
Policy.
CERTIFICATE RATINGS. The ratings of the Offered Certificates depend
primarily on assessments by the Rating Agencies of the claims-paying ability
of the Certificate Insurer. Any reduction in the ratings assigned to the
claims-paying ability of the Certificate Insurer below the ratings initially
assigned to the Offered Certificates may result in a reduction in the ratings
of the Offered Certificates. See "Risk Factors - Rating of the Securities"
in the Prospectus.
PROPERTY OF THE TRUST
The Mego Mortgage FHA Title I Loan Trust 1996-2 (the "Trust") will be
formed pursuant to a Pooling and Servicing Agreement, dated as of August 1,
1996 (the "Agreement"), among the Depositor, the Seller, the Master Servicer,
the Servicer, the Claims Administrator, the Trustee and the Contract of
Insurance Holder. The property of the Trust will include (i) a pool of
closed-end fixed-rate home improvement loans and retail installment sale
contracts transferred to the Trust on or about the Closing Date (the
"Loans"), (ii) payments in respect of the Loans received on or after the Cut-
Off Date, (iii) Mortgaged Properties that are acquired by foreclosure or deed
in lieu of foreclosure, (iv) an assignment of the Depositor's rights under
a purchase agreement dated as of August 1, 1996, between Mego and the
Depositor (the "Purchase Agreement"), (v) rights under certain insurance
policies covering the Mortgaged Properties and (vi) the Collection Account
and Distribution Account. In addition, the Depositor will cause the
Certificate Insurer to issue an irrevocable and unconditional certificate
guaranty insurance policy (the "Policy") to the Trustee for the benefit of
the Senior Certificateholders pursuant to which it will guarantee certain
payments to the Trustee for the benefit of holders of the Senior
Certificates. See "The Certificate Guaranty Insurance Policy" herein.
The Loans will be secured by first- and junior-lien mortgages, deeds of
trust and security deeds on real property improved by residences (which are
primarily condominiums, townhouses and one- to four-family residences and not
manufactured housing), including investment properties (the "Mortgaged
Properties"). The Mortgaged Properties may be owner-occupied (which includes
second and vacation homes) and non-owner occupied investment properties. All
of the Loans will be partially insured under the Title I Program. See "The
Title I Loan Program and the Contract of Insurance" herein.
The Trust property will include the unpaid principal balance of each
Loan as of the Cut-Off Date (the "Cut-Off Date Loan Balance") for such Loan.
With respect to any date, the "Aggregate Loan Balance" will be equal to the
aggregate of the Loan Balances of all Loans as of such date. The "Loan
Balance" of a Loan on any day is equal to its Cut-Off Date Loan Balance,
minus all collections credited against the Loan Balance of such Loan on and
after the Cut-Off Date. If the Master Servicer determines that it has
received all amounts that it expects to receive with respect to a Loan
(including amounts in respect of liquidation of the related Mortgaged
Property and any related FHA Insurance proceeds), the Loan Balance of such
Loan will be deemed to be zero.
The Trust may be terminated and thereby effect an early retirement of
the Certificates, at the option of the Master Servicer or the Seller, each
with the consent of the Certificate Insurer if such purchase would result in
a claim under the Policy, upon the purchase from the Trust of all (but not
fewer than all) remaining Loans and certain other property on any
Distribution Date when the Aggregate Loan Balance is less than 10% of the
Cut-Off Date Aggregate Loan Balance. See "Description of the Certificates--
Termination; Retirement of the Certificates" herein.
MEGO MORTGAGE CORPORATION
GENERAL
Mego Mortgage Corporation ("Mego"), a Delaware corporation and a wholly-
owned subsidiary of Mego Financial Corp. ("Mego Financial"), commenced
operations in March 1994. Mego is an approved Title I lender that is
primarily engaged in the business of originating, purchasing, selling and
servicing loans for property improvement that qualify under the provisions
of Title I (such loans, "Title I Loans" and the program, the "Title I
Program") of the National Housing Act of 1934, as amended, which is
administered by the Federal Housing Administration (the "FHA") of the U.S.
Department of Housing and Urban Development ("HUD"). Mego also originates,
purchases and services conventional home improvement loans. Mego is a FNMA
approved seller/servicer. Mego has not applied for and therefore is not a
FHLMC approved Seller/Servicer.
Mego has two principal divisions for the origination of Title I Loans,
the Correspondent Division and the Dealer Division. The Correspondent
Division represents Mego's largest source of Title I Loans. Through its
Correspondent Division, Mego originates direct Title I Loans from a
nationwide network of financial intermediaries, mortgage companies,
commercial banks and savings and loan institutions (collectively,
"Correspondents"). Mego typically originates direct Title I Loans from
Correspondents on an individual loan basis, pursuant to which each loan is
pre-approved by Mego and is purchased after the closing, generally before the
first payment is due. The Correspondent Division conducts operations from
its headquarters in Atlanta, Georgia. At May 31, 1996, Mego had a network
of approximately 254 active Correspondents. In addition to purchasing
individual Title I Loans from time to time, the Correspondent Division
purchases portfolios of Title I Loans from Correspondents.
The Dealer Division originates Title I Loans through a network of home
improvement construction contractors (collectively, "Dealers"), approved by
Mego in accordance with Title I, by acquiring individual retail installment
sale contracts ("Installment Contracts") from Dealers. An Installment
Contract is an agreement between the Dealer and the borrower pursuant to
which the Dealer performs the improvements to the property and the borrower
agrees to pay in installments the price of the improvements. Before entering
into an Installment Contract with a customer, the Dealer assists the borrower
in submitting a loan application to Mego. If the loan application is
approved, the Dealer enters into an Installment Contract with the borrower,
the Dealer assigns the Installment Contract to Mego upon completion of the
home improvements and Mego, upon receipt of the requisite loan documentation
and completion of a satisfactory telephonic interview with the borrower,
purchases the Installment Contract from the Dealer. The Dealer Division
maintains ten branch offices located in Montvale, New Jersey, Kansas City,
Missouri, Las Vegas, Nevada, Austin, Texas, Oklahoma City, Oklahoma, Seattle,
Washington, Columbus, Ohio, Elmhurst, Illinois, Waterford, Michigan and
Woodbridge, Virginia through which it conducts its marketing to Dealers in
the state in which the branch is located as well as certain contiguous
states. At May 31, 1996, Mego had a network of approximately 445 active
Dealers in 31 states.
Correspondents and Dealers qualify to participate in Mego's programs
only after a review by Mego's management of their reputation and expertise,
including a review of references and financial statements, as well as a
personal visit to Dealers by one or more representatives of Mego. Title I
requires Mego to reapprove its Dealers annually and to monitor the
performance of those Correspondents that are sponsored by Mego.
LEGAL PROCEEDINGS
Following Mego Financial's announcement on November 10, 1995 disclosing
certain accounting adjustments, on November 13, 1995, an action was filed in
the United States District Court, District of Nevada (Christopher Dunleavy
v. Robert Nederlander, Jerome J. Cohen, Herbert B. Hirsch, Wilbur L. Ross,
Jr., Mego Financial Corp., and Deloitte & Touche, LLP; Case No. CV-S-95-
01082-LDG), as a purported class action against Mego Financial, certain of
Mego Financial's officers and directors and Mego Financial's independent
auditors, Deloitte & Touche, LLP. The complaint alleges, among other things,
that the defendants violated Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder in connection with the preparation
and issuance of certain of Mego Financial's financial reports issued in 1994
and 1995, including certain financial statements certified by Deloitte &
Touche, LLP. The complaint also alleges that one of the director defendants
violated the federal securities laws by engaging in "insider trading." The
named plaintiff seeks to represent a class consisting of purchasers of Mego
Financial's Common Stock between January 14, 1994 and November 9, 1995, and
seeks damages in an unspecified amount, costs, attorney's fees, and such
other relief as the court may deem just and proper. Mego Financial believes
that it has substantial defenses in the action.
On November 16, 1995 a second action was filed in the United States
District Court for the District of Nevada (Alan Peyser v. Robert Nederlander,
Jerome J. Cohen, Herbert B. Hirsch and Mego Financial Corp.; Case No. CV-S-
95-01112-LDG), as a purported class action against Mego Financial and certain
of Mego Financial's officers and directors. The complaint alleges, among
other things, that the defendants violated the federal securities laws by
making statements and issuing certain financial reports in 1994 and 1995 that
overstated the Company's earnings and business prospects. The named
plaintiff seeks to represent a class consisting of purchasers of Mego
Financial's Common Stock between November 28, 1994 and November 9, 1995, and
seeks damages in an unspecified amount, costs, attorneys's fees, and such
other relief as the court may deem just and proper. Mego Financial believes
that it has substantial defenses to the action.
On or about June 10, 1996, both actions were consolidated under the
caption "In re Mego Financial Corp. Securities Litigation, Master File No.
CV-9-95-01082-LDG (RLH)", pursuant to a stipulation by the parties. On or
about July 26, 1996, Michael Nadler filed a motion in the above matter
requesting that he be added as a class representative and that his attorney
be added as additional counsel for the class.
UNDERWRITING
The following is a brief description of the underwriting policies
customarily employed by Mego with respect to its home improvement Title I
Loans secured by first or more junior liens on one-to four-family residential
properties. Mego's underwriting guidelines for Title I Loans meet FHA's
underwriting criteria.
The Title I Loans originated by Mego are executed on forms meeting FHA
requirements as well as Federal and state regulations. All Title I Loans are
individually analyzed by employees of Mego at Mego's loan processing
headquarters in Atlanta, Georgia. Loan applications and retail installment
sale contracts are submitted to Mego's processing headquarters for credit and
compliance verification. The information provided in loan applications is
first verified by, among other things, (i) confirmations of the applicant's
income and, if necessary, bank deposits, (ii) a formal credit bureau report
on the applicant from a credit reporting agency, (iii) a title report, (iv)
if necessary, a real estate appraisal and (v) if necessary, evidence of flood
insurance. Loan applications are also reviewed to ascertain whether or not
they satisfy Mego's underwriting criteria, including loan-to-value ratios,
borrower income qualifications, employment stability, improvement eligibility
and necessary insurance and property appraisal requirements.
The principal amounts of the Title I Loans purchased or originated by
Mego generally range from a minimum of $2,500 to a maximum of $25,000. The
mortgaged properties securing such Title I Loans are generally one- to four-
family residences, including condominiums and townhomes, and such properties
may or may not be occupied by the owner.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's complete credit history is
required. The credit report typically contains information reflecting
delinquencies, repossessions, judgments, foreclosures, garnishments,
bankruptcies and similar instances of adverse credit that can be discovered
by a search of public records. An applicant's past credit performance weighs
heavily in the evaluation of risk by Mego. Slow payments on the borrower's
credit report must be satisfactorily explained and will normally reduce the
amount of the loan for which the applicant can be approved.
With respect to all non-owner occupied secured Title I Loans with an
original principal amount in excess of $15,000, Mego requires that an
appraisal of the related mortgaged property be performed in connection with
the origination of such loan to the extent required by Title I. Title I
regulations were amended to eliminate this requirement with respect to all
Title I Loans for which a FHA Title I case number is requested on or after
June 3, 1996. Appraisals are performed by third party, pre-approved, fee-
based appraisers that meet Mego's standards for experience, education and
reputation. Each such appraisal includes, among other things, a drive-by
inspection of the mortgaged property and, where available, data from sales
within the preceding 12 months of similar properties within the same general
location as the subject property.
Mego does not require title insurance on the mortgaged properties
securing the Title I Loans it originates or purchases but reviews a title
report on the related mortgaged property prepared by a pre-approved title
insurance company. The applicant is also required to secure flood insurance
if the mortgaged property is located in an area that has been identified by
the Federal Emergency Management Agency (FEMA) as having special flood
hazards, in an amount sufficient to cover the Title I Loan, subject to the
maximum amount available under the National Flood Insurance Program.
In evaluating a borrower for creditworthiness a key factor viewed by
Mego is the debt to income ratio. The monthly first and all junior lien
payments plus impounds for real estate taxes and insurance premiums are
factored into the debt to income ratio which generally may not exceed
approximately 45% of the applicant's stable monthly income. If the property
is subject to any homeowner's association fees or common elements, property
charges or maintenance charges, they are included in the calculation of the
debt to income ratio. In cases where compensating factors exist, the 45%
debt ratio may be exceeded.
Subject to underwriting approval of an application forwarded to Mego by
a Dealer, Mego issues a commitment to purchase an Installment Contract from
a Dealer upon Mego's receipt of a fully completed loan package and notice
from the borrower of satisfactory work completion. Subject to underwriting
approval of an application forwarded to Mego by a Correspondent, Mego issues
a commitment to purchase a Title I Loan upon Mego's receipt of a fully
completed loan package. Commitments indicate loan amounts, fees, funding
conditions, approval expiration dates and interest rates. Loan commitments
are generally issued for periods up to 45 days in the case of Correspondents
and 90 days in the case of Dealers.
Mego's underwriting personnel review completed loan applications to
verify compliance with Mego's underwriting standards, FHA requirements and
Federal and state regulations. In the case of Title I Loans being acquired
from Dealers, Mego conducts a prefunding telephonic interview with the
property owner to determine that the improvements have been completed in
accordance with the terms of the Installment Contract and to the owner's
satisfaction. Mego utilizes a network of independent inspectors to perform
required on-site inspections of improvements.
Since Mego does not currently originate or acquire Title I Loans on an
individual basis with an original principal balance in excess of $25,000, the
FHA does not individually review the Title I Loans originated by Mego.
Mego's Quality Control Department reviews a statistical sample of loans
closed each month. In addition, each month, the Quality Control Department
takes a supplemental sample of loans, focusing on new Correspondents or
Dealers with higher than normal exceptions, and other loans perceived as
higher than average risks. The Quality Control Department's procedures
typically include reverifying employment and bank deposits and obtaining
separate credit reports. In conducting its review, the Quality Control
Department monitors compliance with FHA requirements and Federal and state
regulations and standards.
SERVICING
Pursuant to a servicing agreement dated as of August 1, 1996 (the
"Servicing Agreement") between the Master Servicer and Mego, as servicer (in
such capacity, the "Servicer"), the Servicer will be responsible for
servicing, managing and making collections on the Loans. Upon the occurrence
of certain events specified in the Servicing Agreement, any of the Master
Servicer or the Certificate Insurer, or, in certain circumstances, the
Trustee may terminate all of the Servicer's rights under the Servicing
Agreement.
Under the Agreement, Mego will act as Claims Administrator and as such
will be responsible for the administration of claims under Title I in respect
of the Loans.
The following is a description of the servicing policies and procedures
customarily and currently employed by Mego with respect to its Title I Loan
portfolio. Mego revises such policies and procedures from time to time in
connection with changing economic and market conditions and changing legal
requirements.
Mego's loan servicing activities, which are facilitated under an
existing sub-servicing agreement by a direct link to the servicing system of
Mego's affiliate, Preferred Equity Corporation ("PEC"), include responding
to borrower inquiries, processing and administering loan payments, reporting
and remitting principal and interest to the purchasers who own interests in
the loans, attempting to collect delinquent loan payments, processing Title
I insurance claims and otherwise administering the loans. Mego's loan
servicing functions are organized into three areas of operation: routine
loan servicing, purchaser reporting and nonperforming loan management. The
routine loan servicing function is performed for Mego by PEC, under an
existing subservicing arrangement. PEC's servicing systems conform to the
servicing standards and procedures mandated by the Title I Program.
Routine loan servicing personnel are responsible for processing and
administering loan payments, attempting to collect loan payments that are
less than 60 days late and providing prompt and accurate responses to all
customer inquiries and complaints. With respect to loan payments that are
less than 60 days late, routine loan servicing utilizes a system of mailed
notices and telephonic conferences for reminding borrowers of late payments
and encouraging borrowers to bring their accounts current. Installment
payment invoices and return envelopes are mailed to each borrower on a
monthly basis. Periodic telephone calls and letters are utilized during the
collection cycle.
Purchaser reporting personnel are responsible for reporting and
remitting principal and interest to the purchasers who own interests in loans
serviced by Mego. Purchaser reports are generated by Mego from information
compiled by PEC under the subservicing arrangement.
Loan management personnel are responsible for collecting loan payments
on loans over 60 days delinquent and/or filing Title I insurance claims.
Operating from Mego's headquarters in Atlanta, Georgia, collection personnel
are responsible for collecting delinquent Title I Loan payments and seeking
to mitigate losses by providing various alternatives to Title I insurance
claims, including modifications, special refinancing and indulgence plans.
Title I insurance claim personnel are responsible for managing Title I
insurance claims, utilizing a claim management system designed to track
insurance claims for Title I Loans so that all required conditions precedent
to claim perfection and the requirements of Title I are met.
See "The Title I Loan Program and the Contract of Insurance--Claims
Procedures Under Title I" for a description of the procedures followed by
Mego following the default and acceleration of the maturity of a secured
Title I home improvement loan.
DELINQUENCY EXPERIENCE
The following table sets forth information relating to the delinquency
and Title I insurance claims experience of Mego for its servicing portfolio
of all Title I Loans (including Title I Loans serviced for others) for the
periods indicated.
The information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of Mego's Title I Loan
portfolio during the periods shown. Accordingly, delinquency as percentages
of aggregate principal balance of Title I Loans serviced for each period
would be higher than those shown if a group of Title I Loans were
artificially isolated at a point in time and the information showed the
activity only in that isolated group. However, since most of the Title I
Loans in Mego's portfolio are not fully seasoned, the delinquency
information for such an isolated group would also be distorted to some
degree.
Three Months Ended
------------------
<TABLE>
<CAPTION>
February 28, May 31, August 31, November 30, February 29, May 31,
1995 1995 1995 1995 1996 1996
------------ ------- ----------- ------------ ------------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Delinquency period (1)
31-60 days . . . . . 1.47% 1.27% 2.57% 1.43% 1.89% 2.41%
61-90 days . . . . . 0.85% 0.39% 0.73% 0.59% 1.06% 0.78%
91 days and over . . 0.39% 0.68% 0.99% 2.18%(2) 3.34%(2) 4.34%(2)
Title I insurance claims
made as a percentage of
loans serviced . . . . 0.02% 0.00% 0.00% 0.23% 0.23% 1.81%
Number of Title I
insurance claims filed
during period . . . . . 1 0 0 19 20 180
Total servicing portfolio
at end of period . . . $31,682 $58,650 $92,286 $123,279 $142,403 $171,048
Amount of FHA insurance
available . . . . . . $3,244 $6,029 $9,552 $12,899 $15,023 $18,084(3)
Amount of FHA insurance
available as a
percentage of
loans serviced . . . . 10.24% 10.28% 10.35% 10.46% 10.55% 10.57%
Losses on liquidated
loans(4) . . . . . . . $2.2 $.67 $0 $0 $3.2 $7.6
</TABLE>
- ------------------
(1) The dollar amount of delinquent Title I Loans as a percentage of
total dollar amount of loans serviced by Mego (including loans
owned by Mego) as of the date indicated.
(2) Percentage includes claims filed.
(3) Subject to completion of all administrative procedures by HUD.
(4) A loss is recognized upon receipt of payment of a claim or final
rejection thereof. Claims paid in a period may relate to a claim
filed in an earlier period.
Since Mego commenced its Title I lending operations in March 1994,
there has been no final rejection of a claim by the FHA. Aggregate
losses on liquidated Title I Loans relate to 29 of the 225 Title I
insurance claims made by Mego since commencing operations through
May 31, 1996. Losses on liquidated loans will increase as the
balance of the claims are processed by HUD. Mego has received an
average payment from HUD equal to 90% of the outstanding principal
balance of such Title I Loans, plus appropriate interest
and costs.
While the above delinquency and Title I insurance claims experience
reflect Mego's experience for the periods indicated, there can be no
assurance that such experience on the Loans will be similar. Accordingly,
this information should not be considered to reflect the credit quality of
the Loans included in the Trust, or as a basis of assessing the likelihood,
amount or severity of losses on the Loans. The statistical data in the table
is based on all of the Title I Loans in Mego's servicing portfolio. The
Loans may, in general, be more recently originated than, and are likely to
have other characteristics which distinguish them from, the majority of the
Title I Loans in Mego's servicing portfolio.
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE
THE TITLE I PROGRAM
The National Housing Act of 1934, as amended (the "Housing Act"),
authorized the creation of the FHA and the Title I Program. Under the Title
I Program, the FHA is authorized to insure qualified lending institutions
against losses on certain types of loans, including loans to finance actions
or items that substantially protect or improve the basic livability or
utility of several types of properties ("home improvement loans"). All of
the Loans are home improvement loans for single family residences that will
have been originated under the Title I Program and will be partially insured
under the Title I Program. None of the Loans are loans made to finance
improvements of manufactured housing or multifamily residences. The
regulations referenced herein apply only to non-manufactured housing home
improvement loans. See "Certain Legal Aspects of the Loans -- The Title I
Program" in the Prospectus.
The Title I Program operates as a coinsurance program in which the FHA
insures up to 90% of certain losses incurred on an individual insured loan,
including the unpaid principal balance thereof, but only to the extent of the
insurance coverage available in the lender's Insurance Coverage Reserve
Account (as defined below). See "--FHA Insurance Coverage" herein. The
owner of the loan bears the uninsured loss on each loan.
There are two basic methods of lending or originating loans which
include a "direct loan" or a "dealer loan." With respect to a direct loan,
the borrower makes application directly to a lender without any assistance
from a dealer. Such application must be executed by the borrower and any
co-maker or co-signer. The lender may disburse the loan proceeds of direct
loans solely to the borrower or jointly to the borrower and other parties to
the transaction. With respect to a dealer loan, the dealer, who has a direct
or indirect financial interest in the loan transaction assists the borrower
in preparing the loan application or otherwise assists the borrower in
obtaining the loan from the lender. The lender may disburse proceeds of
dealer loans solely to the dealer or the borrower or jointly to the borrower
and the dealer or other parties. A dealer may be a seller, a contractor or
supplier of goods or services. The Loans include direct and dealer loans.
See "Mego Mortgage Corporation--General".
Title I Loans are required to have fixed interest rates and generally
provide for equal installment payments due weekly, biweekly, semi-monthly,
or monthly, except that a loan may be payable quarterly or semi-annually in
certain circumstances where the borrower has an irregular flow of income.
The first or last payments (or both) may vary in amount but may not exceed
150% of the regular installment payment, and the first payment may be due
no later than two (2) months from the date the loan is funded. The note must
contain a provision permitting full or partial prepayment of the loan. The
interest rate must be negotiated and agreed to by the borrower and the lender
and must be fixed for the term of the loan and recited in the note. Interest
on a Title I Loan must accrue from the date of the loan and be calculated
according to the actuarial method. The lender must assure that the note and
all other documents evidencing the loan are in compliance with applicable
federal, state and local laws.
The Title I Program requires each lender to use prudent lending
standards in underwriting loans and to satisfy the applicable loan
underwriting requirements under the Title I Program prior to its approval of
the loan. Generally, the lender must exercise prudence and diligence to
determine whether the borrower and any co-maker is solvent and an acceptable
credit risk, with a reasonable ability to make payments on the loan. The
lender's credit application and review must determine whether the borrower's
income will be adequate to meet the periodic payments required by the loan,
as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
established by the Secretary of HUD unless the lender determines and
documents in the loan file evidence of the existence of compensating factors
concerning the borrower's creditworthiness which support approval of the
loan.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT APPROVE FOR QUALIFICATION
FOR INSURANCE ANY LOAN INSURED THEREUNDER AT THE TIME OF APPROVAL BY THE
LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER FEDERAL LOAN
INSURANCE PROGRAMS). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, the lender is required promptly to
report this to the Secretary of HUD. In such case, provided that the
validity of any lien on the property has not been impaired, the insurance of
the loan under the Title I Program will not be affected by such material
misstatement or misuse of loan proceeds unless such material misstatement of
fact or misuse of loan proceeds was caused by (or was knowingly sanctioned
by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS
The maximum principal amounts for home improvement loans insured under
the Title I Program must not exceed the actual cost of the project plus any
applicable fees and charges allowed under the Title I Program. The following
is the maximum loan amount for certain types of loans: (i) $25,000 for a home
improvement loan secured by a single family property; (ii) the lesser of
$60,000 or an average of $12,000 per dwelling unit for a home improvement
loan secured by a multifamily property; and (iii) $7,500 for an unsecured
home improvement loan. Prior to June 3, 1996, any Title I home improvement
loan that would result in a single borrower having a total unpaid principal
obligation in excess of $25,000 required the prior approval of the
Secretary of HUD. As of June 3, 1996, HUD has eliminated this requirement.
Generally, the term of a secured Title I home improvement loan may not be
less than six months nor greater than 20 years and 32 days. A
borrower may obtain multiple Title I home improvement loans with respect to
multiple properties, and a borrower may obtain more than one Title I home
improvement loan with respect to a single property, as long as the total
outstanding balance of all Title I home improvement loans on the same
property does not exceed the maximum loan amount for the type of Title I home
improvement loans thereon.
Borrower eligibility for a secured Title I home improvement loan
requires that the borrower have at least a one-half interest in either fee
simple title to the real property, a lease thereof for a term expiring at
least six months after the final maturity of the Title I home improvement
loan or a properly recorded land installment contract for the purchase of the
real property. Since August 1994 and prior to June 3, 1996, in the case of
a Title I home improvement loan with a principal balance over $15,000, a
borrower was required to have equity in the property being improved at least
equal to the principal amount of the loan, as demonstrated by a current
appraisal, unless the borrower occupied the property as his/her primary
residence and the structure thereon had been completed and occupied for at
least six months prior to the date of the Title I loan application. As of
June 3, 1996, this equity requirement has been eliminated in its entirety.
Generally, any Title I home improvement loan originated after August
1994 in excess of $7,500 must be secured by a recorded lien on the improved
property which is evidenced by a mortgage or deed of trust executed by the
borrower and all other owners in fee simple. Prior to August 1994, any Title
I home improvement loan in excess of $5,000 was required to be secured by
such a recorded lien. In order to facilitate the financing of small home
improvement projects, the FHA does not require loans of $7,500 or less, in
the case of Title I Loans originated after August 1994, and $5,000 or less,
in the case of Title I Loans originated prior to August 1994, to be secured
by the property being improved. Notwithstanding the preceding sentence, such
loans must be secured by a recorded lien on the improved property, if the
total amount of all Title I home improvement loans obtained by the borrower
exceeds $7,500 or $5,000, as the case may be. All of the Loans are secured
by a recorded lien on the related Mortgaged Property.
The proceeds from a Title I home improvement loan may be used only to
finance property improvements which substantially protect or improve the
basic livability or utility of the property as disclosed in the loan
application. The Secretary of HUD has established a list of items and
activities which cannot be financed with proceeds from any Title I home
improvement loans which the Secretary of HUD may amend from time to time.
Generally, loan proceeds may be used only to finance property improve-
ments commenced after the approval of the loan. With respect to any
dealer Title I home improvement loan, prior to disbursing funds, the
lender must have in its possession a completion certificate on a HUD-
approved form, signed by the borrower and the dealer. With respect to
any direct Title I home improvement loan, the lender is required to
obtain, promptly upon completion of the improvements but not later than
six months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate signed by the
borrower. The lender is required to conduct an on-site inspection on any
Title I home improvement loan where the original principal balance is $7,500
or more and on any direct Title I Loan where the borrower fails to submit a
completion certificate.
FHA INSURANCE COVERAGE
Under the Title I Program, the FHA establishes an insurance coverage
reserve account (an "Insurance Coverage Reserve Account") for each lender
which has been granted a Title I contract of insurance. The amount of
insurance coverage in this account is a maximum of 10% of the amount
disbursed, advanced or expended by the lender in originating or purchasing
eligible loans registered with the FHA for Title I insurance, with certain
adjustments. The balance in the Insurance Coverage Reserve Account is the
maximum amount of insurance claims the FHA is required to pay to the Title
I lender. Loans to be insured under the Title I Program will be registered
for insurance by the FHA and the insurance coverage attributable to such
loans will be included in the Insurance Coverage Reserve Account for the
originating or purchasing lender following the receipt and acknowledgment by
the FHA of a loan report on the prescribed form pursuant to the Title I
regulations. For each eligible loan reported and acknowledged for insurance,
the FHA charges a fee (the "Insurance Premium"). For loans having a maturity
of 25 months or less, the FHA bills the lender for the entire Insurance
Premium in an amount equal to the product of 0.50% of the original loan
amount and the loan term. For home improvement loans with a maturity greater
than 25 months, each year that a loan is outstanding the FHA bills the lender
for an Insurance Premium in an amount equal to 0.50% of the original loan
amount. If a loan is prepaid during the year, the FHA will not refund or
abate the Insurance Premium paid for such year.
Originations and acquisitions of new eligible loans will continue to
increase a lender's Insurance Coverage Reserve Account balance by the lesser
of (a) the amount of the FHA Insurance available for transfer at the time of
transfer from the qualified lender selling the loans and (b) 10% of the
amount disbursed, advanced or expended in originating or acquiring such
eligible loans registered with the FHA for insurance under the Title I
Program. The Secretary of HUD may transfer insurance coverage
between Insurance Coverage Reserve Accounts 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. As described under the
caption "The Title I Loan Program--The Contract of Insurance," the FHA
Insurance in the FHA Reserve Account will not be earmarked by the Secretary
of HUD solely for the Trust or any other Related Series Trust.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guarantee or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's Insurance Coverage Reserve Account to the transferee's Insurance
Coverage Reserve Account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever
is less). However, under the Title I Program not more than $5,000 in
insurance coverage shall be transferred to or from a lender's Insurance
Coverage Reserve Account during any October 1 to September 30 fiscal year
without the prior approval of the Secretary of HUD. Amounts which may be
recovered by the Secretary of HUD after payment of an insurance claim are not
added to the amount of insurance coverage in the related lender's Insurance
Coverage Reserve Account.
CLAIMS PROCEDURES UNDER TITLE I
Under the Title I Program the lender may accelerate an insured loan
following a default on such loan only after the lender or its agent has
contacted the borrower in a face-to-face meeting or by telephone to discuss
the reasons for the default and to seek its cure. If the borrower does not
cure the default or agree to a modification agreement or repayment plan, the
lender will notify the borrower in writing that, unless within 30 days the
default is cured or the borrower enters into a modification agreement or
repayment plan, the loan will be accelerated and that, if the default
persists, the lender will report the default to an appropriate credit agency.
The lender may rescind the acceleration of maturity after full payment is due
and reinstate the loan only if the borrower brings the loan current, executes
a modification agreement or agrees to an acceptable repayment plan. See
"Certain Legal Aspects of the Loans--The Title I Program" in the Prospectus.
Following acceleration of maturity on a secured Title I home improvement
loan, the lender may either (a) proceed against the related mortgaged
property under any security instrument, or (b) make a claim under the
lender's contract of insurance. Generally lenders make a claim under their
contract of insurance. If the lender chooses to proceed against the
mortgaged property under a security instrument (or if it accepts a voluntary
conveyance or surrender of the mortgaged property), the lender can later
file an insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any
foreclosure or repossession, and where the borrower is in bankruptcy or
deceased, evidence that the lender has properly filed proofs of claims.
Generally, a claim for reimbursement for loss on any eligible loan must be
filed with the FHA no later than 9 months after the date of default for home
improvement loans. Concurrently with filing the insurance claim, the lender
must assign to the United States of America the lender's entire interest in
the loan note (or a judgment in lieu of the note), in any security held and
in any claim filed in any legal proceedings. If, at the time the note is
assigned to the U.S., the Secretary of HUD has reason to believe that the
note is not valid or enforceable against the borrower, the FHA may deny the
claim and reassign the note to the lender. If either such defect is
discovered after the FHA has paid a claim, the FHA may require the lender to
repurchase the paid claim and to accept a reassignment of the loan note. If
the lender subsequently obtains a valid and enforceable judgment against the
borrower, the lender may resubmit a new insurance claim with an assignment
of the judgment. Although regulations permit the FHA to contest any
insurance claim and to make a demand for repurchase of the loan at any time
up to two years from the date the claim was certified for payment (and may
do so thereafter in the event of fraud or misrepresentation on the part of
the lender), the FHA has expressed an intention to take such action within
one year from the date the claim was certified for payment.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that
enforcement of the regulations would impose an injustice upon a lender which
has substantially complied with the regulations in good faith. See "Risk
Factors--Limitations on FHA Insurance."
Under the Title I Program, the amount of a FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's Insurance Coverage Reserve Account established by
HUD. The "Claimable Amount" for home improvement loans is equal to 90% of
the sum of: (a) the unpaid loan obligation (equal to the net unpaid principal
and the uncollected interest earned to the date of default) with adjustments
thereto if the lender has proceeded against property securing such loan; (b)
the interest on the unpaid amount of the loan obligation from the date of
default to the date of the claim's initial submission for payment plus 15
calendar days (but not to exceed 9 months from the date of default),
calculated at the rate of 7% per annum; (c) the uncollected court costs;
(d) the attorneys' fees not to exceed $500; and (e) the expenses for
recording the assignment of the security to the United States.
THE CONTRACT OF INSURANCE
The aggregate amount of insurance provided by the FHA pursuant to the
Title I Program that is expected to be available to the Claims Administrator
in respect of the Loans is $4,878,140 (the "Trust Designated Insurance
Amount"). Such amount represents 10% of the Cut-Off Date Aggregate Loan
Balance.
First Trust of New York, National Association holds the Contract of
Insurance for the benefit of the Trust and other Related Series Trusts
(defined herein). As of the Closing Date, the aggregate amount of insurance
transferred or to be transferred by the FHA pursuant to the Title I Program
to the Contract of Insurance Holder is $13,297,514 (the "Combined FHA
Insurance Amount") and for any date of determination thereafter, the Combined
FHA Insurance Amount will equal such amount plus all amounts subsequently
transferred by the Secretary of HUD to the Contract of Insurance Holder's FHA
Reserve Account less the amount of FHA Insurance proceeds received since the
Closing Date under the Contract of Insurance with respect to the Loans and
loans in other Related Series Trusts. The Combined FHA Insurance Amount will
be reflected in an insurance coverage reserve account maintained by the FHA
in the name of the Contract of Insurance Holder (the "FHA Reserve Account").
All proceeds received under the Contract of Insurance in respect of claims
relating to the Loans shall be deposited into the related Distribution
Account.
With respect to those Loans for which FHA Insurance coverage reserves
have not been transferred to the Contract of Insurance Holder's Insurance
Coverage Reserve Account by the Closing Date, the Seller will be required to
take appropriate steps to cause the FHA to transfer the appropriate amounts
of FHA Insurance coverage reserves from the Insurance Coverage Reserve
Account of the Seller to that of the Contract of Insurance Holder. To
accomplish this transfer, on or after the date on which the Seller receives
the FHA Title I Case Numbers for such Loans, the Seller will be required to
submit a transfer of note report to the Secretary of HUD regarding the
conveyance of such Loans to the Trustee.
The Secretary of HUD will not earmark the monies in the FHA
Reserve Account for the benefit of the Trust or any other Related Series
Trust; however, each of the Contract of Insurance Holder and the Claims
Administrator has agreed in the Agreement to earmark the Trust Designated
Insurance Amount exclusively for the benefit of the Trust. The Trust
Designated Insurance Amount and any trust designated insurance amount for any
Related Series Trust may be increased up to the Combined FHA Insurance Amount
with the consent of the Certificate Insurer. In the event that any portion
of the Combined FHA Insurance Amount is applied to loans in a Related Series
Trust other than the Trust in excess of the trust designated insurance amount
for such Related Series Trust, the Combined FHA Insurance Amount available
to cover defaults on the Loans may be reduced below the remaining Trust
Designated Insurance Amount for the Trust.
THE MASTER SERVICER
NORWEST BANK MINNESOTA, N.A.
The information set forth below has been provided by Norwest Bank
Minnesota, N.A. (the "Master Servicer") and the Depositor does not make any
representations or warranties as to the accuracy or completeness of such
information.
The Master Servicer is a national banking association, with executive
offices located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota
55479 and its master servicing offices are located at 11000 Broken Land
Parkway, Columbia, Maryland 21044.
The Master Servicer will enter into the Servicing Agreement with the
Servicer, pursuant to which the Servicer will service all of the Loans.
However, the Servicing Agreement will not relieve the Master Servicer of any
of its duties and obligations to the Trustee under the Agreement. The Master
Servicer will be obligated with respect thereto as if it alone were
performing all duties and obligations in connection with the collection and
servicing in respect of the Loans.
DELINQUENCY AND LOSSES
The Master Servicer is engaged in the business of master servicing, on
behalf of third party investors, residential single family mortgage loans
secured by properties located in all 50 states and the District of Columbia.
As of January 31, 1996, the Master Servicer was master servicing more than
111,000 mortgage loans representing an aggregate outstanding principal
balance of approximately $17.5 billion. No specific delinquency or
foreclosure data relating to the Master Servicer's master servicing portfolio
is provided because the Master Servicer has limited master servicing
experience with Title I Loans.
DESCRIPTION OF THE LOANS
The statistical information presented herein with respect to the Loans
describes the Loans as of the Cut-Off Date. Unless otherwise specified,
percentages are stated by Aggregate Loan Balance as of the Cut-Off Date. In
addition, all weighted averages specified herein are weighted based on the
Cut-Off Date Loan Balances of the Loans.
GENERAL
Interest on each Loan is payable monthly on the outstanding Principal
Balance thereof at a fixed rate per annum (the "Loan Rate"). The Loans are
actuarial loans which provide that interest is charged to the obligors
thereunder (the "Obligors"), and payments are due from such Obligors, as of
a scheduled day of each month which is fixed at the time of origination.
Each payment made by the Obligor is, therefore, treated as containing a
predetermined amount of interest and principal. Scheduled monthly payments
made by the Obligors on the Loans either earlier or later than the scheduled
due dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest. All of the Loans
will be partially insured under the Title I Program. See "The Title I Loan
Program and the Contract of Insurance" herein. Interest accrued on the Loans
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months.
The Aggregate Loan Balance as of the Cut-Off Date is $48,781,405.44
(the "Cut-Off Date Aggregate Loan Balance"). With respect to the Loans, the
average Cut-Off Date Loan Balance is expected to be $16,938 the minimum
Cut-Off Date Loan Balance is expected to be $2,264, the maximum Cut-Off Date
Loan Balance is expected to be approximately $25,000, the minimum Loan Rate
and the maximum Loan Rate on the Cut-Off Date are expected to be 11.00% and
18.99% per annum, respectively, and the weighted average Loan Rate on the
Cut-Off Date is expected to be 14.02% per annum. As of the Cut-Off Date, the
weighted average remaining term to maturity of the Loans is expected to be
201 months and the remaining terms to maturity of the Loans will range from
14 months to 240 months. No Loan is expected to mature later than August
2016. As of the Closing Date, no more than 0.35% of the Loans (by Cut-Off
Date Aggregate Loan Balance) will be more than 30 days delinquent and none
of the Loans will be more than 60 days delinquent.
Certain Statistical Characteristics of the Loans
Original Loan Balances
<TABLE>
<CAPTION>
Loan Balances % of Aggregate
Range of Original Loan Number of as of Loan Balance as
Balances Loans Cut-Off Date of Cut-Off Date
- ---------------------- ---------- -------------- ---------------
<S> <C> <C> <C>
$ 2,380.00 - 5,000.00 87 $ 343,530.18 0.70%
5,000.01 - 10,000.00 541 4,451,649.46 9.13
10,000.01 - 15,000.00 720 9,526,662.45 19.53
15,000.01 - 20,000.00 488 8,873,236.66 18.19
20,000.01 - 25,000.00 1,044 25,586,326.69 52.45
- ---------------------- ---------- -------------
TOTAL 2,880 $48,781,405.44 100.00%
====================== ========== ============== ===========
</TABLE>
RANGE OF LOAN RATES
<TABLE>
<CAPTION> Loan Balances % of Aggregate
Number of as of Loan Balance as of
Range of Loan Rates Loans Cut-Off Date Cut-Off Date
- ------------------------------- -------------- ------------------ ---------------------
<S> <C> <C> <C>
11.000% - 11.499% 4 $ 53,800.52 0.11%
11.500 - 11.999 346 5,850,070.87 11.99
12.000 - 12.499 3 68,844.96 0.14
12.500 - 12.999 474 8,168,664.67 16.75
13.000 - 13.499 5 100,050.78 0.21
13.500 - 13.999 950 16,172,824.30 33.15
14.000 - 14.499 28 445,728.76 0.91
14.500 - 14.999 704 12,165,351.20 24.94
15.000 - 15.499 14 210,066.42 0.43
15.500 - 15.999 243 3,599,862.38 7.38
16.000 - 16.499 6 69,584.99 0.14
16.500 - 16.999 101 1,836,733.08 3.77
17.500 - 17.999 1 14,822.51 0.03
18.500 - 18.990 1 25,000.00 0.05
- ------------------------------- -------------- ------------------ ---------------------
TOTAL 2,880 $ 48,781,405.44 100.00%
=============================== ============== ================== =====================
</TABLE>
NUMBER OF MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
Number of Loan Balances % of Aggregate
Months Since Number of as of Loan Balance as of
Origination Loans Cut-Off Date Cut-Off Date
- --------------------------------- ----------- ----------------------- ---------------------
<S> <C> <C> <C>
0 134 $ 2,283,472.00 4.68%
1 653 11,083,529.07 22.72
2 546 9,652,599.15 19.79
3 611 10,265,060.80 21.04
4 632 10,573,337.31 21.67
5 211 3,453,265.90 7.08
6 12 216,876.69 0.44
7 1 14,328.28 0.03
8 4 49,406.90 0.10
9 5 68,036.16 0.14
10 6 101,625.88 0.21
11 17 293,184.20 0.60
12 11 218,955.29 0.45
13 11 218,777.26 0.45
14 12 160,797.50 0.33
15 1 24,731.09 0.05
47 4 37,458.74 0.08
48 1 3,006.92 0.01
49 5 39,236.76 0.08
50 2 15,211.37 0.03
51 1 8,508.17 0.02
- --------------------------------- ----------- ----------------------- ---------------------
TOTAL 2,880 $ 48,781,405.44 100.00%
================================= =========== ======================= =====================
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
Loan Balances % of Aggregate
Months Remaining Number of as of Loan Balance as of
To Scheduled Maturity Loans Cut-Off Date Cut-Off Date
- ------------------------------- ----------- ------------------ ---------------------
<S> <C> <C> <C>
14 - 24 4 $ 13,159.11 0.03%
25 - 36 10 37,332.01 0.08
37 - 48 10 61,845.59 0.13
49 - 60 85 544,108.97 1.12
61 - 72 18 120,769.75 0.25
73 - 84 48 352,076.29 0.72
85 - 96 22 197,193.05 0.40
97 - 108 6 63,482.73 0.13
109 - 120 405 4,280,491.59 8.77
121 - 132 5 51,280.89 0.11
133 - 144 83 890,530.34 1.83
157 - 168 14 251,246.95 0.52
169 - 180 955 15,252,904.78 31.27
205 - 216 1 15,982.89 0.03
217 - 228 17 363,251.65 0.74
229 - 240 1,197 26,285,748.85 53.88
- ------------------------------- ----------- ------------------ ---------------------
TOTAL 2,880 $ 48,781,405.44 100.00%
=============================== =========== ================== =====================
</TABLE>
<TABLE>
<CAPTION>
Geographical Distribution of Mortgaged Properties by State/(1)/
Loan Balances % of Aggregate
Number of as of Loan Balance as of
State Loans Cut-Off Date Cut-Off Date
- --------------------------------- ----------- ------------------- --------------------
<C> <S> <S> <S>
Arizona . . . . . . . . . . . . . 50 $ 938,820.76 1.92%
Arkansas . . . . . . . . . . . . 61 652,329.51 1.34
California . . . . . . . . . . . 633 13,395,712.90 27.46
Colorado . . . . . . . . . . . . 63 1,181,072.11 2.42
Connecticut . . . . . . . . . . . 11 211,238.18 0.43
Delaware . . . . . . . . . . . . 15 219,570.43 0.45
District of Columbia . . . . . . 9 167,294.06 0.34
Florida . . . . . . . . . . . . . 451 8,187,101.90 16.78
Georgia . . . . . . . . . . . . . 110 1,862,535.62 3.82
Hawaii . . . . . . . . . . . . . 1 19,964.47 0.04
Idaho . . . . . . . . . . . . . . 4 77,820.40 0.16
Illinois . . . . . . . . . . . . 58 834,057.20 1.71
Indiana . . . . . . . . . . . . . 4 58,709.82 0.12
Iowa . . . . . . . . . . . . . . 12 169,565.79 0.35
Kansas . . . . . . . . . . . . . 30 339,473.39 0.70
Kentucky . . . . . . . . . . . . 3 31,014.13 0.06
Louisiana . . . . . . . . . . . . 13 123,869.86 0.25
Maine . . . . . . . . . . . . . . 7 137,869.73 0.28
Maryland . . . . . . . . . . . . 19 406,953.70 0.83
Massachusetts . . . . . . . . . . 13 175,651.46 0.36
Michigan . . . . . . . . . . . . 23 288,642.61 0.59
Minnesota . . . . . . . . . . . . 29 416,406.33 0.85
Mississippi . . . . . . . . . . . 1 13,536.33 0.03
Missouri . . . . . . . . . . . . 53 712,824.53 1.46
Montana . . . . . . . . . . . . 2 31,914.13 0.07
Nevada . . . . . . . . . . . . . 114 2,201,047.31 4.51
New Hampshire . . . . . . . . . . 6 88,866.16 0.18
New Jersey . . . . . . . . . . . 123 1,777,363.05 3.64
New Mexico . . . . . . . . . . . 1 24,949.21 0.05
New York . . . . . . . . . . . . 176 2,817,041.86 5.77
North Carolina . . . . . . . . . 53 625,140.34 1.28
Ohio . . . . . . . . . . . . . . 77 1,178,187.10 2.42
Oklahoma . . . . . . . . . . . . 55 527,337.84 1.08
Oregon . . . . . . . . . . . . . 9 181,460.46 0.37
Pennsylvania . . . . . . . . . . 255 3,521,218.22 7.22
Rhode Island . . . . . . . . . . 27 423,050.74 0.87
South Carolina . . . . . . . . . 22 300,807.99 0.62
Tennessee . . . . . . . . . . . . 9 143,197.85 0.29
Texas . . . . . . . . . . . . . . 177 2,591,193.87 5.31
Utah . . . . . . . . . . . . . . 5 94,804.03 0.19
Virginia . . . . . . . . . . . . 26 370,923.37 0.76
Washington . . . . . . . . . . . 57 1,061,675.95 2.18
West Virginia . . . . . . . . . . 4 51,311.35 0.11
Wisconsin . . . . . . . . . . . . 9 147,879.39 0.30
- --------------------------------- ----------- ------------------- --------------------
TOTAL 2,880 $ 48,781,405.44 100.00%
================================= =========== =================== ====================
</TABLE>
(1) Determined by mailing address of the related Obligor. The mailing
address is not always the same address as the address of the related
Mortgaged Property.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The FHA Title I Loan Asset-Backed Certificates, Series 1996-2 (the
"Certificates"), will consist of the Class A Certificates, Class S
Certificates and the Class R Certificates. The Class A Certificates are
referred to herein as the "Offered Certificates," and together with the Class
S Certificates are referred to herein as the "Senior Certificates." Only the
Offered Certificates are being offered hereby.
The aggregate undivided interest in the Trust represented by the Offered
Certificates initially will equal $48,537,000 of principal (the "Original
Class A Principal Balance"), which is approximately 99.5% of the Cut-Off Date
Aggregate Loan Balance. The Class S Certificates will have no principal
balance and will be entitled to receive distributions of interest only,
calculated as specified herein, on the Class S Notional Amount. See "--
Distributions" herein. The principal amount of the Offered Certificates (the
"Class A Principal Balance") on any Distribution Date is equal to the
Original Class A Principal Balance minus the aggregate of amounts actually
distributed as principal to the Class A Certificateholders. The Offered
Certificates represent the right to receive payments of interest at the
applicable Pass-Through Rate and payments of principal as described below.
With respect to any Distribution Date, the "Class S Notional Amount" is
the Aggregate Loan Balance as of the beginning of the calendar month
preceding the month of such Distribution Date (or in the case of the first
Distribution Date, the Cut-Off Date Aggregate Loan Balance).
When used herein, "Business Day" means a day that, in any of the City
of New York, the city in which the corporate trust office of the Trustee is
located or the city or cities in which the Master Servicer's or Servicer's
servicing operations are located, is neither a legal holiday nor a day on
which banking institutions are authorized or obligated by law, regulations
or executive order to be closed.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar
denominations of $1,000 and integral multiples thereof.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates. The Offered
Certificates will be issued on one or more certificates, the original
aggregate principal balances of which will equal the Original Class A
Principal Balance and will be held by a nominee of The Depository Trust
Company (together with any successor depository selected by the Depositor,
the "Depository"). Beneficial interests in the Offered Certificates will be
indirectly held by investors through the book-entry facilities of the
Depository, as described herein. The Depositor has been informed by the
Depository that its nominee will be CEDE & Co. ("CEDE"). Accordingly, CEDE
is expected to be the holder of record of the Offered Certificates. Except
as described below, no person acquiring an Offered Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of the Depository (or of a participating firm that
acts as agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of the Depository, if the beneficial owner's
Financial Intermediary is not a Depository participant). Therefore, the
beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of an Offered Certificate. Beneficial ownership of an
Offered Certificate may be transferred only in compliance with the procedures
of such Financial Intermediaries and Depository participants.
The Depository, which is a New York-chartered limited purpose trust
company, performs services for its participants, some of which (and/or their
representatives) own the Depository. In accordance with its normal
procedures, the Depository is expected to record the positions held by each
Depository participant in the Offered Certificates, whether held for its own
account or as a nominee for another person. In general, beneficial ownership
of the Offered Certificates will be subject to the rules, regulations and
procedures governing the Depository and Depository participants as in effect
from time to time.
Distributions on the Offered Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing
such payments to the beneficial owners of the Offered Certificates that it
represents and to each Financial Intermediary for which it acts as agent.
Each such Financial Intermediary will be responsible for disbursing funds to
the beneficial owners of the Offered Certificates that it represents.
Under a book-entry format, beneficial owners of the Offered Certificates
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to CEDE. Neither the Trustee nor the
Depositor shall be responsible or liable for such delays in the application
of such payments to such beneficial owners. Because the Depository can only
act on behalf of Financial Intermediaries, the ability of a beneficial owner
to pledge Offered Certificates to persons or entities that do not participate
in the Depository system, or otherwise take actions in respect of the Offered
Certificates, may be limited due to the absence of physical certificates for
the Offered Certificates. In addition, issuance of the Offered Certificates
in book-entry form may reduce the liquidity of such Certificates in the
secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Offered Certificates will be CEDE,
as nominee of the Depository. Beneficial owners of the Offered Certificates
will not be Certificateholders, as that term is used in the Agreement.
Beneficial owners are only permitted to exercise the rights of
Certificateholders indirectly through Financial Intermediaries and the
Depository. Reports on the Trust provided by the Servicer to CEDE, as
nominee of the Depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
Depository accounts the Offered Certificates of such beneficial owners are
credited.
The Depository has advised the Depositor and the Trustee that, unless
and until Definitive Certificates are issued, the Depository will take any
action permitted to be taken by the holders of the Offered Certificates under
the Agreement only at the direction of one or more Financial Intermediaries
to whose Depository accounts the Offered Certificates are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries
whose holdings include such Offered Certificates.
Definitive Certificates will be issued to beneficial owners of the
Offered Certificates, or their nominees, rather than to the Depository, only
if (a) the Depositor advises the Trustee in writing that the Depository is
no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Offered
Certificates and the Depositor or the Trustee is unable to locate a qualified
successor; (b) the Depositor, at its sole option, advises the Trustee that
it elects to terminate a book-entry system through the Depository; or (c)
with the consent of the Certificate Insurer after occurrence of an Event of
Default (as described below), beneficial owners of the Offered Certificates
having not less than 51% of the Voting Rights evidenced by the Offered
Certificates advise the Trustee and the Depository through the Financial
Intermediaries in writing that the continuation of a book-entry system with
respect such Book-Entry Certificates through the Depository (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the Offered Certificates through the Depository of the occurrence
of such event and the availability of Definitive Certificates. Upon
surrender by the Depository of the global certificate or certificates
representing the Offered Certificates and instructions for reregistration,
the Trustee will issue the Definitive Certificates, and thereafter the
Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
ASSIGNMENT OF LOANS
At the time of issuance of the Certificates the Depositor will transfer
to the Trust all of its right, title and interest in and to each Loan, the
related note or contract or any mortgages relating to the Loans and other
related documents (collectively, the "Related Documents"), including all
payments received on or with respect to each such Loan on or after the
related Cut-Off Date. The Trustee, concurrently with the transfer of the
Loans, will deliver the Certificates to the Depositor. Each Loan transferred
to the Trust will be identified on a schedule (the "Loan Schedule") delivered
to the Trustee pursuant to the Agreement. Such schedule will include
information as to the Loan Balance as of the Cut-Off Date of each Loan, as
well as information with respect to the Loan Rate.
The Agreement requires that, within the time period specified therein,
the Depositor deliver or cause to be delivered to the Trustee (or a
custodian, as the Trustee's agent for such purpose) the mortgages relating
to the Loans with evidence of a recording indicated thereon, the notes
relating to the Loans, and certain other Related Documents (the "Mortgage
Files"). In lieu of delivery of original mortgages, the Depositor may
deliver or cause to be delivered true and correct copies thereof which have
been certified as to authenticity by the appropriate county recording office
where such mortgage is recorded. The Agreement provides, however, that the
Servicer, for the benefit of and as agent for the Certificateholders and the
Certificate Insurer will retain possession of certain portions of the Related
Documents, including, without limitation, the application and credit
underwriting file with respect to each Loan (the "Credit File"). The
assignments to the Trustee (or any co-trustee appointed under the Agreement)
of any mortgage or deed of trust securing a Loan will be recorded in the
appropriate public office for real property records within the time period
specified in the Agreement, except where, in the opinion of counsel, such
recording is not required to protect the Trustee's interest in the related
Loan against the claim of any subsequent transferee or any successor to a
creditor of the Depositor or the Seller.
If the FHA has not assigned a case number under the Contract of
Insurance to a Loan, to indicate that such Loan is eligible for Title I
Insurance coverage under the Contract of Insurance, on or before the 120th
day after the Closing Date, the Seller shall be obligated, on the last day
of the calendar month in which such 120th day occurs, to repurchase such
Loan. If the FHA reserve amount with respect to a Loan, which will be in an
amount equal to 10% of the Loan Balance of such Loan as of the Cut-Off Date,
has not been transferred to the Contract of Insurance Holder's Insurance
Coverage Reserve Account on or before the 150th day after the Closing Date,
the Seller shall be obligated, on the last day of the calendar month in which
such 150th day occurs, to repurchase such Loan.
Within 45 Business Days of the Closing Date, the Trustee will review the
Related Documents. If at that time any Related Document is found to be
defective in any material respect and such defect is not cured within 60 days
following the receipt of notice thereof, the Seller will be obligated to
either (i) substitute for such Loan an Eligible Substitute Loan (provided,
however, that such substitution is permitted only within two years of the
Closing Date) or (ii) purchase such Loan at a price (the "Purchase Price")
equal to the outstanding Loan Balance of such Loan as of the date of
purchase, plus unpaid accrued interest at the Loan Rate to the last day of
the month in which such purchase occurs; provided, however, that no such
substitution may be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify the Trust as a REMIC or
result in a prohibited transaction tax under the Code. In certain
circumstances, the Certificate Insurer may elect to extend by up to 150 days
the cure periods described in the preceding sentence. The Purchase Price
will be deposited in the Distribution Account on or prior to the last
Business Day of the month in which such obligation arises. The obligation
of the Seller to repurchase or substitute for a Defective Loan is the sole
remedy regarding any defects in the Loans and Related Documents available to
the Trustee or the Certificateholders against the Seller.
In connection with the substitution of an Eligible Substitute Loan, the
Seller will be required to deposit in the Distribution Account as of the
Determination Date on which such obligation arises an amount (the
"Substitution Adjustment") equal to the excess of the Loan Balance of the
related Defective Loan over the Loan Balance of such Eligible Substitute
Loan.
An "Eligible Substitute Loan" is a mortgage loan substituted by the
Seller for a Defective Loan which must, on the date of such substitution,
(i) have an outstanding Loan Balance (or in the case of a substitution of more
than one Loan for a Defective Loan, an aggregate Loan Balance), not in excess
of, and not more than 1% less than, the Loan Balance of the Defective Loan;
(ii) have a Loan Rate at least equal to the Loan Rate of the Defective Loan;
(iii) have a remaining term to maturity not later than the remaining term to
maturity of the Defective Loan; (iv) comply with each representation and
warranty as to the Loans set forth in the Agreement (deemed to be made as of
the date of substitution); and (v) satisfy certain other conditions
specified in the Agreement. Additionally, if more than one Eligible
Substitute Loan is being substituted for one or more Defective Loans on any
day, in lieu of the requirement in clause (ii) above, the weighted average
Loan Rate of such Eligible Substitute Loans must equal or exceed the weighted
average Loan Rate of the Defective Loans immediately prior to giving effect
to the substitution.
The Seller will make certain representations and warranties as of the
Cut-Off Date (or such later date as may be specified in the Agreement) as to
the accuracy in all material respects of certain information furnished to the
Trustee with respect to each Loan (e.g., Cut-Off Date Loan Balance and the
Loan Rate). In addition, the Seller will represent and warrant, among other
things, that the Seller has transferred all of its right, title and interest
in each Loan and the Related Documents free and clear of liens and that each
Loan complied, at the time of origination, in all material respects with
applicable state and federal laws, including, without limitation, the
requirements of Title I with respect to the Loans. Upon discovery of a
breach of any representation and warranty which materially and adversely
affects the interests of the Certificateholders or the Certificate Insurer
in the related Loan and Related Documents, the Seller will have a period of
sixty Business Days following the date of such discovery to cure such breach.
If the breach cannot be cured within such sixty Business Day period, the
Seller will be obligated to (i) substitute for such Defective Loan an
Eligible Substitute Loan or (ii) purchase such Defective Loan from the Trust.
The same procedure and limitations that are set forth above for the
substitution or purchase of Defective Loans as a result of deficient
documentation relating thereto will apply to the substitution or purchase of
a Defective Loan as a result of a breach of a representation or warranty in
the Agreement that materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer.
Loans required to be repurchased or substituted by the Seller as
described in the preceding paragraphs are referred to as "Defective Loans."
PAYMENTS ON LOANS; COLLECTION ACCOUNT AND DISTRIBUTION ACCOUNT
The Trustee will establish and shall maintain on behalf of the Trust one
or more accounts (the "Collection Account") for the benefit of the
Certificateholders. The Collection Account will be an Eligible Account (as
defined herein). Amounts deposited to the Collection Account may be invested
in Eligible Investments maturing no later than the Business Day on which the
amount on deposit therein is required to be deposited in the Distribution
Account.
The Trustee will establish an account (the "Distribution Account") into
which will be deposited all amounts for distribution to Certificateholders
on a Distribution Date. The Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Eligible Investments maturing
on or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is (i) an account that is a segregated trust
account that is maintained with the corporate trust department of a
depository institution acceptable to the Certificate Insurer (so long as an
Insurer Default shall not have occurred and be continuing), or (ii) a
segregated direct deposit account maintained with a depository institution
or trust company organized under the laws of the United States of America,
or any of the States thereof, or the District of Columbia, having a
certificate of deposit, short term deposit or commercial paper rating of at
least A-1+ by Standard & Poor's and P-1 by Moody's and (so long as an Insurer
Default shall not have occurred and be continuing) acceptable to the
Certificate Insurer.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies and approval of
the Certificate Insurer from time to time as being consistent with their then
current ratings of the Senior Certificates.
The Master Servicer shall cause the Servicer to deposit into the
Collection Account all payments in respect of the Loans received by it
promptly upon receipt. The Master Servicer shall also cause the Servicer to
deposit into the Collection Account all payments of premiums with respect to
FHA Insurance received from Obligors.
The following amounts will be deposited to the Distribution Account in
respect of a Due Period and constitute available funds (the "Available
Funds") for the following Distribution Date: (i) from amounts withdrawn from
the Collection Account not later than two Business Days prior to each
Distribution Date, (a) payments of interest and principal in respect of the
Loans received during such Due Period and (b) FHA Insurance premiums received
during the related Due Period; (ii) net liquidation proceeds from the sale
of Foreclosed Property during such Due Period; (iii) the Purchase Price for
repurchased Loans and Substitution Adjustments in respect of substitutions
of Loans during such Due Period; (iv) Insurance Proceeds received by the
Master Servicer during such Due Period; (v) payments of FHA Insurance
received during such Due Period; (vi) payments received during such Due
Period from the Master Servicer or the Seller in connection with the
termination of the Trust as provided in the Agreement; (vii) Interest
Advances in respect of such Distribution Date; and (viii) any amounts paid
under the Policy.
INTEREST ADVANCES
The Master Servicer is required to remit to the Trustee no later than
the fifth Business Day prior to the related Distribution Date (the
"Determination Date") for deposit in the Distribution Account an amount equal
to the scheduled installment of interest on each Loan (calculated at the rate
set forth in the Agreement) (other than a Defaulted Loan (as defined herein))
due on a date during the related Due Period (the "Due Date") less the amount
of scheduled installment of interest on each Loan due during such Due Period
and received by the Servicer and deposited into the Distribution Account
during the related Due Period (an "Interest Advance"). Interest Advances will
be made by the Master Servicer from its own funds, from funds held in the
Collection Account for future distributions to Certificateholders or from any
combination of the foregoing.
Notwithstanding the foregoing, the Master Servicer is not required to
make any Interest Advances if in the good faith judgment of the Master
Servicer, the Master Servicer determines that such advance will not
ultimately be recoverable from collections received from the Obligor under
the related Loan or other recoveries of such Loan.
If Interest Advances are made by the Master Servicer from funds held in
the Collection Account for future distribution to Certificateholders, the
Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Collection Account with
respect to such Distribution Date would be less than the amount required to
be available for distribution on such Distribution Date as a result of such
Interest Advances. The Master Servicer will be entitled to be reimbursed for
previously unreimbursed Interest Advances made from its own funds with
respect to a Loan on Distribution Dates subsequent to the Distribution Date
in respect of which such Interest Advance was made from payments in respect
of such Loan. If a Loan shall become a Defaulted Loan and the Master Servicer
shall not have been fully reimbursed for any Interest Advances with respect
to such Loan, the Master Servicer shall be entitled to be reimbursed for the
outstanding amount of such Interest Advances from unrelated Loans. No
interest shall be due to the Master Servicer in respect of any Interest
Advance for any period prior to the reimbursement thereof.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the
25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing on September 25, 1996 (each, a
"Distribution Date"), to the holders in whose names such Certificates are
registered at the close of business on the last Business Day of the month
preceding the month of such Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed,
via first class mail, postage prepaid, to the address of the
Certificateholder entitled thereto as it appears on the Certificate Register
or, in the case of any holder of Offered Certificates of at least a
$1,000,000 denomination, and that has so notified the Trustee in writing in
accordance with the Agreement, by wire transfer in immediately available
funds to the account of such holder at a bank or other depository institution
having appropriate wire transfer facilities; provided, however, that the
final distribution in retirement of the Offered Certificates will be made
only upon presentation and surrender of such Certificates at the Corporate
Trust Office of the Trustee. On each Distribution Date, the holder of an
Offered Certificate will be entitled to receive its Percentage Interest of
the amounts distributed in respect of the Offered Certificates. The
"Percentage Interest" evidenced by an Offered Certificate will equal the
percentage derived by dividing the denomination of such Certificate by the
Original Class A Principal Balance.
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers, to the extent of Available Funds therefor, in
the following order of priority:
(i) for deposit in the FHA Premium Account, the FHA Premium Account
Deposit for such Distribution Date;
(ii) (a) to the Master Servicer, the Master Servicing Fee and (b)
to the Servicer, the Servicing Fee, in each case for such Distribution Date;
(iii) to the Master Servicer or Servicer, any amount in respect of
reimbursement of Interest Advances or Foreclosure Advances to which the
Master Servicer or Servicer is entitled with respect to such Distribution
Date and, to the Claims Administrator, any amount in respect of reimbursement
of expenses of filing FHA Insurance claims;
(iv) to the Trustee, the Trustee Fee for such Distribution Date;
(v) to the Certificate Insurer, amounts owing to the Certificate
Insurer under the Insurance Agreement for the premium payable pursuant
thereto;
(vi) to the holders of the Class S Certificates, an amount equal
to the related Class Interest Distribution for such Distribution Date;
(vii) to the holders of the Class A Certificates, an amount equal
to the related Class Interest Distribution for such Distribution Date;
(viii) to the holders of the Class A Certificates, until the Class
A Principal Balance is reduced to zero, the Class A Principal Distribution
(other than the portion thereof constituting the Distributable Excess Spread)
for such Distribution Date;
(ix) to the Certificate Insurer, amounts owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws made
on the Policy (with interest thereon at the rate specified in the Insurance
Agreement);
(x) to the holders of the Class A Certificates, until the Class A
Principal Balance is reduced to zero, Distributable Excess Spread, if any,
for such Distribution Date;
(xi) to the holders of the Class A Certificates, until the Class
A Principal Balance is reduced to zero, the Class A Guaranteed Principal
Distribution Amount (as defined herein), if any, for such Distribution Date;
(xii) to the Certificate Insurer, any other amounts owing to the
Certificate Insurer under the Insurance Agreement;
(xiii) to any successor Master Servicer, such fees and expenses
reimbursable to such Master Servicer pursuant to the Agreement, if any, for
such Distribution Date in addition to the Master Servicer Fee paid pursuant
to (ii) above;
(xiv) payments in respect of certain fees and other amounts to the
persons entitled thereto pursuant to the Agreement; and
(xv) to the Class R Certificateholders, any remaining amounts.
The "Trustee Fee" as of each Distribution Date will be the greater of
(a) one-twelfth of the product of 0.05% and the Aggregate Loan Balance as of
the beginning of the calendar month preceding the month of such Distribution
Date (or, in the case of the first Distribution Date, the Cut-Off Date
Aggregate Loan Balance) and (b) $9,000.
See "Collection and Other Servicing Procedures on Loans; Claims
Administration" below for a discussion of Foreclosure Advances.
INTEREST
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Distributions,"
interest will be distributed to holders of each class of Senior Certificates
in an amount equal to the related Class Interest Distribution. For each
Distribution Date and each class of Senior Certificates, the "Class Interest
Distribution" is the sum of (a) one month's interest at the related Pass-
Through Rate on the Class A Principal Balance or the Class S Notional Amount,
as applicable, for such Distribution Date (the "Class Monthly Interest
Amount") and (b) any Class Interest Shortfall for such class of Senior
Certificates for such Distribution Date. As to any Distribution Date and
class of Senior Certificates, Class Interest Shortfall is the sum of (a) the
excess of the related Class Monthly Interest Amount for the preceding
Distribution Date and any outstanding Class Interest Shortfall with respect
to such class on such preceding Distribution Date, over the amount in respect
of interest that is actually distributed to holders of such class on such
preceding Distribution Date and (b) interest on such excess, to the extent
permitted by law, at the related Pass-Through Rate from such preceding
Distribution Date through the current Distribution Date. Notwithstanding the
foregoing, the Class Monthly Interest Amount for any Distribution Date and
class will be reduced by such class's pro rata share (based on the interest
such class would otherwise be entitled to receive in the absence of the
shortfalls specified below) of (x) any Prepayment Interest Shortfalls to the
extent not covered by the Servicing Fee or the portion of any Excess Spread
otherwise distributable in respect of the Class R Certificates and (y) any
Civil Relief Act Interest Shortfalls for such Distribution Date. Neither
Prepayment Interest Shortfalls nor Civil Relief Act Interest Shortfalls will
be covered by payments under the Policy. See "Risk Factors--Civil Relief Act
Shortfalls" herein and in the Prospectus and "Certain Legal Aspects of the
Loans" in the Prospectus. Distributions of the related Class Interest
Distribution to the Class S Certificates will be made prior to the
distribution of the Class Interest Distribution to the Offered Certificates.
PRINCIPAL
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Distributions,"
principal will be distributed to the holders of Offered Certificates in an
amount equal to the lesser of (a) the Class A Principal Balance and (b) the
Class A Principal Distribution for such Distribution Date. The "Class A
Principal Distribution" means, with respect to any Distribution Date, the sum
of the Class A Monthly Principal Amount for such Distribution Date and any
outstanding Class A Principal Shortfall as of the close of business on the
preceding Distribution Date, provided that on the Distribution Date in
August 2017, the "Class A Principal Distribution" will equal the Class A
Principal Balance.
"Class A Monthly Principal Amount" means, with respect to any
Distribution Date, the amount equal to the sum of the following amounts
(without duplication) with respect to the immediately preceding Due Period
(as defined below): (i) that portion of all payments received on Loans
allocable to principal, including all full and partial principal prepayments,
(ii) the Loan Balance as of the end of the immediately preceding Due Period
of each Loan that became a Defaulted Loan for the first time during such Due
Period, (iii) the portion of the Purchase Price allocable to principal of all
Defective Loans with respect to such Due Period, (iv) any Substitution
Adjustments received on or prior to the previous Determination Date and not
yet distributed, and (v) the amount of Distributable Excess Spread, if any,
in respect of such Distribution Date.
"Class A Principal Shortfall" means with respect to any Distribution
Date, the excess of the sum of the Class A Monthly Principal Amount for the
preceding Distribution Date and any outstanding Class A Principal Shortfall
on such preceding Distribution Date over the amount in respect of principal
that is actually distributed to the holders of the Offered Certificates on
such preceding Distribution Date.
If on any Distribution Date the required level of overcollateralization
is reduced below the then existing amount of overcollateralization (described
below) or a full distribution of the Class A Monthly Principal Amount would
cause the amount of overcollateralization to exceed the required level, the
amount of the Class A Monthly Principal Amount distributed on the Class A
Certificates will be correspondingly reduced by the amount of such reduction
or by the amount necessary such that the overcollateralization will not
exceed the required level of overcollateralization after giving effect to the
distribution in respect of principal to be made on such Distribution Date.
"Class A Guaranteed Principal Distribution Amount" means, with respect
to a Distribution Date, the amount, if any, by which (i) the Class A
Principal Balance exceeds (ii) the Aggregate Loan Balance at the end of the
previous Due Period (after giving effect to all amounts distributable and
allocable to principal on the Offered Certificates on such Distribution
Date); provided, however, that with respect to the Distribution Date in
August 2017, the Class A Guaranteed Principal Distribution Amount will be
equal to the amount specified in clause (i) for such Distribution Date.
A "Defaulted Loan" is a Loan with respect to which: (i) a claim has been
paid or rejected pursuant to the Contract of Insurance, (ii) the related
Mortgaged Property has been repossessed and sold or, (iii) any portion of
a payment on a Loan is more than 150 days past due (without giving effect to
any grace period).
"Distributable Excess Spread" means, with respect to any Distribution
Date, the portion (not greater than 100%) of Excess Spread, if any, required
to be distributed on such Distribution Date to satisfy the
overcollateralization requirement in effect for such Distribution Date as
specified in the Agreement.
"Due Period" means, with respect to any Determination Date or
Distribution Date, the calendar month immediately preceding such
Determination Date or Distribution Date, as the case may be.
"Excess Spread" means, with respect to any Distribution Date, the
positive excess, if any, of (x) the sum of the amounts deposited into the
Distribution Account as described in clauses (i) through (vii) under "--
Payments on Loans; Collection Account and Distribution Account" above with
respect to such Distribution Date over (y) the amount required to be
distributed pursuant to priorities (i) through (ix) above under "--
Distributions" on such Distribution Date.
An "Insurer Default" will occur in the event the Certificate Insurer
fails to make a payment required under the Policy or if certain events of
bankruptcy or insolvency occur with respect to the Certificate Insurer.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust's existence:
August 1, 1996 or in the case
of Loans originated thereafter,
the date of origination . . . . Cut-Off Date.
August 1 to August 31, 1996 (A) Initial Due Period. The Servicer receives
(x) scheduled payments of principal
and interest and (y) Principal
Prepayments and interest thereon to
the date of such prepayment. For
succeeding Distribution Dates, the Due
Period will commence on the first day
of the preceding calendar month and end
on the last day of such month.
August 30, 1996 . . . . . . . . (B) Record Date (the last Business Day of the
month preceding the month of the related
Distribution Date).
September 18, 1996. . . . . . . (C) Determination Date (the fifth Business Day
preceding such Distribution Date).
September 25, 1996. . . . . . . (D) Distribution Date.
Succeeding monthly periods follow the pattern of (A) through (D).
___________________
(A) Principal payments received during this period will be distributed to
holders of the Offered Certificates on September 25, 1996. When a Loan is
prepaid in full, interest on the amount prepaid is collected only from the
last scheduled Due Date to the date of prepayment.
(B) Distributions of principal and interest on September 25, 1996 will be
made to holders of the Certificates of record as of the close of business on
the Record Date.
(C) Determination Date. No later than each Determination Date, the Trustee
will determine the amount of principal and interest (including the amount,
if any, of Interest Advances to be made by the Master Servicer) which will
be passed through to holders of the Certificates. The Trustee will be
obligated to distribute on the related Distribution Date all scheduled
payments due during the related Due Period and all Principal Prepayments, in
each case to the extent actually received on Loans during the related Due
Period. In the event a shortfall in the interest resulting from Principal
Prepayments in full occurs during such Due Period, the Servicing Fee
otherwise payable to the Servicer for such month shall, to the extent of such
shortfall, be paid to the holders of the Certificates on September 25, 1996
(together, if necessary to cover such shortfall, with any amounts otherwise
distributable in respect of the Class R Certificates on such date).
(D) The Trustee will make distributions to holders of the Certificates on
the 25th day of the month following the month in which the related Due Period
ends, or if such day is not a Business Day, on the next Business Day.
WEIGHTED AVERAGE LIFE
The timing of changes in the rate of Principal Prepayments may
significantly affect an investor's actual yield to maturity, even if the
average rate of Principal Prepayments is consistent with such investor's
expectation. In general, the earlier a Principal Prepayment on a Loan
occurs, the greater the effect of such Principal Prepayment on an investor's
yield to maturity. The effect on an investor's yield of Principal
Prepayments occurring at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of the
Offered Certificates may not be offset by a subsequent like decrease (or
increase) in the rate of Principal Prepayments.
The weighted average life of an Offered Certificate refers to the
average amount of time that will elapse from the date of issuance to the date
each dollar of principal of such Certificate is repaid to the investor. The
weighted average life of the Offered Certificates will be influenced by the
rate at which principal payments on the Loans are paid, which may be in the
form of scheduled amortization, accelerated amortization or prepayments (for
this purpose, the term "prepayment" includes liquidations due to default).
Prepayments on loans are commonly measured relative to a prepayment standard
or model.
The model used in this Prospectus Supplement (the "Constant Prepayment
Rate" or "CPR") represents an assumed annualized rate of prepayment relative
to the then outstanding principal balance on a pool of new mortgage loans.
The percentages and weighted average life in the following table were
determined, assuming that: (i) all distributions with respect to the Senior
Certificates will be made at the scheduled times as described below under
"Description of the Certificates--Distributions"; (ii) the Loans will prepay
at the indicated constant CPR percentages and all prepayments will include
thirty days' interest thereon; (iii) the Pass-Through Rates for the Class A
Certificates and Class S Certificates are as set forth on the cover hereof;
(iv) no Loan is ever delinquent; (v) neither the Master Servicer nor Mego
will exercise its right of early termination of the Trust as described below
under "Description Of The Certificates--Termination; Retirement of the
Certificates"; (vi) there is no substitution or repurchase of a Loan; (vii)
the Loans consist of three pools of Loans with Cut-Off Date Loan Balances,
Loan Rates and original and remaining terms to maturity as set forth below
under "Assumed Loan Characteristics," (viii) the Closing Date for the Offered
Certificates occurs on August 15, 1996, (ix) interest on each class of Senior
Certificates in respect of any Distribution Date will accrue from the first
day of the month preceding such Distribution Date through the last day of the
month preceding such Distribution Date on the basis of a 360-day year
consisting of twelve 30-day months, (x) the Original Class A Principal
Balance is $48,537,000, and (xi) the initial overcollateralization level (the
excess of the Cut-Off Date Aggregate Loan Balance over the Original Class A
Principal Balance) is 0.5% and thereafter is subject to decreases and
increases in accordance with the provision of the Agreement.
ASSUMED LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
Remaining
Term to Original Term
Loan Balance as Loan Maturity to Maturity
Pool of Cut-Off Date Rate (Months) (Months)
- -------- ----------------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
1 $ 5,620,173.53 13.7638% 106 109
2 $16,173,555.23 14.0017% 175 178
3 $26,987,676.68 14.0778% 237 239
</TABLE>
Based upon the foregoing assumptions, some or all of which are unlikely
to reflect actual experience, the following table indicates the projected
weighted average life of the Offered Certificates, and set forth the
percentages of the Original Class A Principal Balance that would be
outstanding after each of the dates shown, at various CPR percentages. As
used in the table, 15% indicates prepayments at an annual rate of 15%; 16%
indicates prepayments at an annual rate of 16% and so on.
There is no assurance that prepayments will occur, or, if they do occur,
that they will occur at any constant CPR percentage. Neither the CPR model
nor any other prepayment model or assumption purports to be an historical
description of prepayment experience or a prediction of the anticipated rate
of prepayment of any pool or mortgage loans, including the Loans in the
Trust. Variations in the actual prepayment experience and balance of the
Loans that prepay may occur even if the average prepayment experience of all
such Loans equals any of the specified CPR percentages.
Since the table was prepared on the basis of the assumptions set forth
above, there are discrepancies between characteristics of the actual Loans
and the characteristics of the Loans assumed in preparing the table. Any
such discrepancy may have an effect upon the percentages of the Original
Class A Principal Balance outstanding and weighted average life of the
Offered Certificates set forth in the table. In addition, since the actual
Loans in the Trust have characteristics which differ from those assumed in
preparing the table set forth below, the distributions of principal on the
Certificates may be made earlier or later than as indicated on the table.
CLASS A
PERCENTAGE OF ORIGINAL CLASS A PRINCIPAL BALANCE OUTSTANDING(1)
<TABLE>
<CAPTION>
Distribution
Dates 0% CPR 12% CPR 14% CPR 15% CPR 16% CPR 18% CPR
--------------------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100%
August 25, 1997 95% 83% 81% 80% 79% 77%
August 25, 1998 93% 71% 68% 66% 64% 61%
August 25, 1999 90% 60% 56% 54% 52% 48%
August 25, 2000 87% 51% 46% 44% 42% 38%
August 25, 2001 83% 43% 38% 36% 34% 30%
August 25, 2002 79% 36% 31% 29% 27% 23%
August 25, 2003 75% 30% 25% 23% 21% 18%
August 25, 2004 69% 24% 20% 18% 17% 14%
August 25, 2005 63% 20% 16% 14% 13% 10%
August 25, 2006 59% 16% 13% 11% 10% 8%
August 25, 2007 53% 13% 10% 9% 7% 5%
August 25, 2008 47% 10% 7% 6% 5% 4%
August 25, 2009 41% 7% 5% 4% 4% 2%
August 25, 2010 33% 5% 3% 3% 2% 1%
August 25, 2011 27% 3% 2% 2% 1% 0%
August 25, 2012 23% 2% 1% 1% 0% 0%
August 25, 2013 18% 1% 0% 0% 0% 0%
August 25, 2014 12% 0% 0% 0% 0% 0%
August 25, 2015 5% 0% 0% 0% 0% 0%
August 25, 2016 0% 0% 0% 0% 0% 0%
Weighted Average Life 11.07 5.30 4.79 4.55 4.34 3.95
Years
</TABLE>
_______________
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of the Offered Certificates is determined by
(i) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the Original Class A Principal Balance.
OVERCOLLATERALIZATION PROVISIONS
The provisions of the Agreement provide for limited
overcollateralization as of the Closing Date and for a limited acceleration
of principal payments on the Offered Certificates relative to the
amortization of the Loans in the early months of the transaction. The
acceleration of principal payments on the Offered Certificates is achieved
by distributing Distributable Excess Spread as principal to the Offered
Certificates. This acceleration feature creates overcollateralization (i.e.,
the excess of the Aggregate Loan Balance over the Class A Principal Balance),
in addition to the overcollateralization in effect on the Closing Date. Once
the required level of overcollateralization is reached and subject to the
provisions described in the next paragraph, the acceleration feature will
cease, unless necessary to maintain the required level of
overcollateralization specified in the Agreement.
The Agreement provides that, subject to certain floors, caps and
triggers, the required level of overcollateralization may increase or
decrease over time. Any decrease in the required level of
overcollateralization beyond that which is specified in the Agreement will
only occur at the sole discretion of the Certificate Insurer. Any such
decrease will have the effect of reducing the rate of principal payments on
the Offered Certificates relative to the rate that would otherwise have
occurred.
PASS-THROUGH RATE
The "Pass-Through Rate" for the Offered Certificates is the applicable
per annum rate set forth on the cover page hereof. Notwithstanding the
foregoing, in no event will the Pass-Through Rate for the Offered
Certificates on any Distribution Date exceed a rate equal to the quotient of
(a) the excess of (i) interest due on the Loans during the preceding Due
Period net of the portion thereof allocable to Master Servicing Fees and
Servicing Fees over (ii) the aggregate of the amounts described in
subparagraphs (i), (iv)-(vi) under "--Distributions" herein required to be
paid or distributed by the Trust on such Distribution Date and (b) one-
twelfth of the Class A Principal Balance on such Distribution Date (prior to
giving effect to distributions made on such date). Interest on each class of
Senior Certificates in respect of any Distribution Date will accrue from the
first day of the month preceding such Distribution Date through the last day
of the month preceding such Distribution Date on the basis of a 360-day year
consisting of twelve 30-day months.
The "Pass-Through Rate" with respect to the Class S Certificates on any
Distribution Date is 1.0% per annum.
FHA INSURANCE PREMIUM ACCOUNT
A separate account (the "FHA Premium Account") will be established by
the Trustee into which an initial deposit of $6,470 (the "Initial FHA Premium
Account Deposit") will be made on the Closing Date. No later than the second
Business Day preceding each Distribution Date, the Trustee will deposit into
the FHA Premium Account FHA insurance premiums received from Obligors on
Invoiced Loans (as defined below). The Trustee will also deposit into the FHA
Premium Account, to the extent of funds available therefor in the
Distribution Account, an amount equal to the greater of (i) 0.75% of the
Aggregate Loan Balance, (determined without including the Loan Balances of
any Invoiced Loans), divided by 12 and (ii) the positive excess, if any, of
(A) the amount of premium and other charges due under the Contract of
Insurance for the next succeeding Due Period over (B) the balance in the FHA
Premium Account as of the related Determination Date (the "FHA Premium
Account Deposit"). "Invoiced Loans" are Loans with respect to which the
related obligor is required to pay the premium on FHA Insurance as a separate
amount with respect to such Loan.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to Certificateholders, the Trustee
will forward to each Certificateholder and the Certificate Insurer a
statement setting forth as to each class of Certificates among other items:
(i) the aggregate amount of the distribution to each class of
Certificateholders on the Distribution Date set forth above;
(ii) the amount of distribution set forth in paragraph (i) above
in respect of interest and the amount thereof in respect of any Class
Interest Shortfall for each class, and the amount of any Class Interest
Shortfall remaining;
(iii) with respect to the Offered Certificates, the distribution
amount set forth in paragraph (i) above in respect of principal, the amount
thereof in respect of the Class A Principal Shortfall, and any remaining
Class A Principal Shortfall;
(iv) the amount of Distributable Excess Spread paid as principal
in respect of the Offered Certificates;
(v) the Class A Guaranteed Principal Distribution Amount (if
applicable);
(vi) the amount paid in respect of each class of Certificates
under the Policy for such Distribution Date on account of the Class Interest
Distribution of each such class and the portion of the Class A Guaranteed
Principal Distribution Amount paid on the Offered Certificates;
(vii) the Master Servicing Fee and the Servicing Fee;
(viii) the Aggregate Loan Balance as of the close of business on
the last day of the preceding Due Period;
(ix) the Class A Principal Balance of the Offered Certificates
after giving effect to payments allocated to principal in paragraph (iii)
above;
(x) the amount of overcollateralization required by the Agreement
for such Distribution Date and the amount of overcollateralization as of the
close of business on the Distribution Date, after giving effect to
distributions of principal on such Distribution Date;
(xi) the Class S Notional Amount for such Distribution Date;
(xii) the aggregate amount of claims filed, paid and rejected
under the FHA Insurance for the related Due Period and cumulative as of the
date of the statement;
(xiii) the Loan Balance of each Defaulted Loan and delinquent Loan
and the aggregate amount of Defaulted Loans and delinquent Loans for the
related Due Period; and
(xiv) the number and aggregate Loan Balance of Loans that have
been repurchased by the Seller for the related Due Period.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with
a $1,000 denomination.
COLLECTION AND OTHER SERVICING PROCEDURES ON LOANS; CLAIMS ADMINISTRATION
The Master Servicer has agreed to manage, service, administer and make
collections on the Loans, and perform the other actions required by the
Master Servicer under the Agreement. In performing such obligations, the
Master Servicer is required to act in good faith in a commercially reasonable
manner and in accordance with all requirements of the FHA applicable to the
servicing of the Loans, and to service and administer such Loans in
accordance with the Title I Program, the terms of the Agreement and the
respective Loans. The obligations of the Master Servicer under the Agreement
are expected to be performed by the Servicer pursuant to the Servicing
Agreement. The Master Servicer has full power and authority, acting alone
and/or through the Servicer subject only to the specific requirements and
prohibitions of the Title I Program, the Agreement and the respective Loans,
to do any and all things in connection with such servicing and administration
which are consistent with the manner in which it services similar types of
loans owned by the Master Servicer or any of its affiliates or serviced by
the Master Servicer for others and which are consistent with the ordinary
practices of prudent mortgage lending institutions.
If any payment due under any Loan is not paid when the same becomes due
and payable, or if the related Obligor fails to perform any other covenant
or obligation under the Loan and such failure continues beyond any applicable
grace period, the Master Servicer must take such action (consistent with
Title I, including efforts to cure the default of such Loan) as it shall deem
to be in the best interest of the Trust. With respect to the Loans, if the
maturity of the related note or obligation has been accelerated pursuant to
the requirements of Title I following the Master Servicer's efforts to cure
the default of such Loan (and such Loan is not required to be purchased
pursuant to the Agreement) and (i) if the Trust Designated Insurance Amount
has not been depleted at that time, the Claims Administrator shall initiate,
on behalf of the Trust and the Contract of Insurance Holder, a claim under
the Contract of Insurance for reimbursement for loss on such Loan pursuant
to Title I or, (ii) if the Trust Designated Insurance Amount has been
depleted at that time (an "FHA Insurance Coverage Insufficiency"), the Master
Servicer shall determine within 90 days whether or not to proceed against the
property securing the Loan pursuant to the provisions of the Agreement. If,
upon foreclosure of the property securing the Loan, an FHA Insurance Coverage
Insufficiency does not exist and the claim period has not expired, the Master
Servicer may notify the Claims Administrator to seek approval of the
Secretary of HUD to submit a claim under the Contract of Insurance with
respect to such Loan.
In the event that in accordance with clause (ii) above the Master
Servicer determines not to proceed against the Mortgaged Property, on or
before the Determination Date following such determination the Master
Servicer shall determine if in good faith in accordance with customary
mortgage loan servicing practices all amounts which it expects to receive
with respect to such Loan have been received. If the Master Servicer makes
such a determination, it shall include such information in its records.
If the FHA rejects or refuses to pay any claim made under the Contract
of Insurance (including a rejection of a previously paid claim and a demand
by the FHA of a previously paid claim amount for such Loan) for a Loan (other
than a refusal or rejection for clerical error in computing the claim amount
or due to an exhaustion of the Combined FHA Insurance Amount), upon receipt
of the FHA's rejection notice and determination by the Claims Administrator
that the rejection was not due to clerical error, then (i) the Claims
Administrator must promptly notify the Trustee (if the Trustee shall not
initially have received such notice) and the Certificate Insurer of such
fact, and (ii) if the FHA indicates rejection for other than a failure to
service such Loan in accordance with Title I or the exhaustion of the
Combined FHA Insurance Amount, the Seller shall be liable on or before the
last day of the calendar month next following the date of such notice from
the Claims Administrator to repurchase such Loan for the Purchase Price
thereof. In connection with its rejection or refusal to pay a claim, if the
FHA shall have indicated in writing, or if the FHA does not indicate in
writing the reason for its rejection or refusal and it is otherwise evident
that such rejection or refusal is due to a failure to service such Loan in
accordance with Title I, the Claims Administrator shall notify the Seller,
the Master Servicer and the Certificate Insurer of such determination, and
the Master Servicer shall on or before the later to occur of (i) the last day
of the calendar month next succeeding the date of such rejection and (ii) ten
Business Days from the date on which such rejection notice is received by the
Claims Administrator from the FHA, either directly or from the Seller or the
Trustee, repurchase such Loan for the Purchase Price.
The Trustee will deposit in the Distribution Account on the day of
receipt all amounts received from the FHA or any other Person with respect
to the Loans or any other assets of the Trust.
If prior to the liquidation of the last asset of the Trust pursuant to
the Agreement, the FHA rejects an insurance claim, in whole or part, under
the Contract of Insurance after previously paying such insurance claim and
the FHA demands that the Contract of Insurance Holder repurchase such Loan
from the FHA, the Claims Administrator will pursue such appeals with the FHA
as are reasonable. If the FHA continues to demand that the Contract of
Insurance Holder repurchase such Loan from the FHA after the Claims
Administrator exhausts such administrative appeals as are reasonable, then
notwithstanding that the Seller, the Claims Administrator or any other person
is required to repurchase such Loan, the Claims Administrator must notify the
Contract of Insurance Holder of such fact and the Contract of Insurance
Holder shall cause the Trust to repurchase such Loan from funds available in
the Distribution Account.
The Seller will reimburse the Contract of Insurance Holder for any
amounts paid by the Contract of Insurance Holder to the FHA in order to
repurchase Loans for which the FHA has rejected an insurance claim for any
reason other than a failure to comply with FHA servicing requirements or the
exhaustion of the Combined FHA Insurance Amount. The Master Servicer will
reimburse the Contract of Insurance Holder for any amounts paid by the
Contract of Insurance Holder to FHA in order to repurchase Loans for which
the FHA has rejected an insurance claim as a result of a failure to service
such Loan in accordance with Title I.
In addition, with respect to any Loan, the Master Servicer is required
to advance funds for the payment of certain expenses in connection with the
foreclosure of a Mortgaged Property (the "Foreclosed Property") relating to
insurance, taxes, property protection, maintenance, third party expenses and
similar expenses ("Foreclosure Advances"). The Master Servicer must advance
the Foreclosure Advances but only if it has approved the foreclosure in
writing and the Master Servicer would make such an advance if it or an
affiliate held the affected Loan or Foreclosed Property for its own account
and, in the Master Servicer's good faith judgment, such amounts will be
recoverable from the related proceeds. In making such assessment with respect
to the institution of foreclosure proceedings, the Master Servicer shall not
advance funds with respect to a Loan unless the appraised value of the
related Mortgaged Property exceeds the sum of (i) with respect to any Loan,
the amounts necessary to satisfy any liens prior to the Mortgage and (ii) the
reasonably anticipated costs of foreclosure or similar proceedings.
The Master Servicer may modify any provision of any Loan if, in the
Master Servicer's good faith judgment, such modification (i) would minimize
the loss that might otherwise be experienced with respect to such Loan and
complies with the requirements of Title I or (ii) is required by Title I and,
in either case, only in the event of a payment default with respect to such
Loan or in the event that a payment default with respect to such Loan is
reasonably foreseeable by the Master Servicer. The Master Servicer will agree
to subordinate the position of the security interest in the Mortgaged
Property which secures any Loan upon the Master Servicer's receipt of written
approval of the Secretary of HUD to such subordination and provided such
subordination (i) would permit the borrower to refinance a senior lien to
take advantage of a lower interest rate or (ii) would permit the borrower to
extend the term of the senior lien.
INSURANCE
FHA regulations require borrowers to maintain flood insurance with
respect to the Mortgaged Property securing a Loan where the Mortgaged
Property securing the Loan is located in an area that has been identified by
the Federal Emergency Management Agency ("FEMA") as having special flood
hazards in accordance with FHA regulations. The amount of such insurance
shall be at least equal to the outstanding Loan Balance of the Loan and the
insurance must be maintained by the borrower for the full term of the Loan
or until the Mortgaged Property is either repossessed or foreclosed by the
Master Servicer. The Master Servicer will cause to be maintained flood
insurance with respect to each Mortgaged Property located in any such area
as having been identified by FEMA as having special flood hazards in
accordance with FHA regulations in an amount equal to the outstanding Loan
Balance of the related Loan.
FHA Regulations do not require hazard insurance to be maintained on the
Mortgaged Properties and the Master Servicer will not require such insurance
to be maintained on the Mortgaged Properties.
REALIZATION UPON DEFAULTED LOANS
In general, only in the event the Trust Designated Insurance Amount is
depleted will the Master Servicer institute foreclosure proceedings,
exercise any power of sale to the extent permitted by law, obtain a deed in
lieu of foreclosure, or otherwise acquire possession of or title to any
Mortgaged Property, by operation of law or otherwise, and only in the event
that in the Master Servicer's reasonable judgment such action is likely to
result in a positive economic benefit to the Trust by creating net
liquidation proceeds (after reimbursement of all amounts owed with respect
to such Loan to the Master Servicer or the Servicer) and provided that prior
to taking title to any Mortgaged Property, the Master Servicer has requested
that the Trustee obtain, and the Trustee shall have obtained, a review to be
performed on the Mortgaged Property by a company having appropriate
experience and otherwise reasonably acceptable to the Trustee and the
Certificate Insurer, the scope of which is limited to the review of public
records and documents for information regarding whether such Mortgaged
Property has on it, under it or is near, hazardous or toxic material or
waste. If such review reveals that the Mortgaged Property has on it, under
it or is near hazardous or toxic material or waste or reveals any other
environmental problem, the Trustee shall provide a copy of the related report
to the Master Servicer and the Certificate Insurer and title shall be taken
to such Mortgaged Property only after obtaining the written consent of the
Master Servicer and the Certificate Insurer.
In connection with any such foreclosure proceeding, power of sale, deed
in lieu of foreclosure or other acquisition of a Mortgaged Property, the
Master Servicer shall comply with the requirements under Title I, the REMIC
regulations and the Agreement, shall follow such practices and procedures in
a manner which is consistent with the Master Servicer's procedure for
foreclosure and operation of the foreclosed property with respect to Title
I Loans held in the Master Servicer's portfolio for its own account or, if
there are no such loans, such loans serviced by the Master Servicer for
others, giving due consideration to accepted servicing practices of prudent
lending institutions, and shall sell or liquidate the Loan or Mortgaged
Property. Notwithstanding the foregoing with respect to any Defaulted Loan,
assuming the Trust Designated Insurance Amount has not been depleted, the
Claims Administrator will make a claim under the Contract of Insurance prior
to initiating any foreclosure proceedings on the related Mortgaged Property.
Concurrently with the filing of any such insurance claim, the Trust will
assign its entire interest in the Loan to the United States of America.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, the Master Servicer will receive from
interest payments in respect of the Loans a portion of such interest payments
as a monthly master servicing fee (the "Master Servicing Fee") in the amount
equal to 0.08% per annum ("Master Servicing Fee Rate") on the Principal
Balance of each Loan as of the first day of each such Due Period (or as of
the Cut-Off Date, with respect to the first Due Period) as to which such
payment was made. The Servicer will receive from payments in respect of
interest on the Loans a monthly servicing fee (the "Servicing Fee") in the
amount equal to 1.00% per annum (the "Servicing Fee Rate") on the Loan
Balance of each Loan as of the first day of each such Due Period (or as of
the Cut Off-Date, with respect to the first Due Period) as to which such
payment was made, subject to reduction as a result of interest shortfalls on
Loans due to prepayments thereof in full. All assumption fees, late payment
charges, prepayment penalties and other fees and charges, to the extent
collected from borrowers, will be retained by the Servicer as additional
servicing compensation.
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID LOANS
When an Obligor prepays a Loan in full between scheduled monthly payment
dates ("Due Dates"), the Obligor pays interest on the amount prepaid only to
the date of prepayment. In order to mitigate the effect of any such
shortfall in interest distributions to holders of the Offered Certificates
on any Distribution Date (a "Prepayment Interest Shortfall"), the amount of
the Servicing Fee otherwise payable to the Servicer for such month shall, to
the extent of such shortfall, be reduced. However, any such reduction in the
Servicing Fee will be made only to the extent of the Servicing Fee otherwise
payable to the Servicer with respect to payments on the Loans received during
the Due Period to which such Distribution Date relates. See "Description of
the Certificates--Example of Distributions" herein. Any excess of the
Prepayment Interest Shortfall over the related Servicing Fee will be covered
by the portion of any Excess Spread otherwise distributable in respect of the
Class R Certificates, but will not be covered by the Policy.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee, the Certificate
Insurer and the Rating Agencies of an annual statement signed by an officer
of the Master Servicer to the effect that the Master Servicer has fulfilled
its obligations under the Agreement throughout the preceding year, except as
specified in such statement.
Each year (within 150 days following the end of the Master Servicer's
fiscal year), beginning in 1997, the Master Servicer will furnish a report
prepared by a firm of nationally recognized independent public accountants
(who may also render other services to the Master Servicer or the Depositor)
to the Trustee and the Certificate Insurer to the effect that such firm has
examined certain documents and the records relating to servicing of the Loans
as specified in the Agreement and such firm's conclusion that the Master
Servicer is in compliance with respect thereto.
The Master Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND SERVICER
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder except (i) with the consent of the
Certificate Insurer and the Rating Agencies or (ii) upon determination that
by reason of a change in legal requirements the performance of its duties
under the Agreement would cause it to be in violation of such legal
requirements in a manner which would result in a material adverse effect on
the Master Servicer, and the Certificate Insurer (so long as an Insurer
Default shall not have occurred and be continuing) does not elect to waive
the obligations of the Master Servicer to perform the duties which render it
legally unable to act or to delegate those duties. Any such determination
permitting the resignation of the Master Servicer by reason of a change in
such legal requirements shall be evidenced by an opinion of counsel to such
effect delivered and acceptable to the Trustee and the Certificate Insurer
(unless an Insurer Default shall have occurred and be continuing). No
resignation of the Master Servicer shall become effective until the Trustee
or a successor master servicer acceptable to the Certificate Insurer shall
have assumed the Master Servicer's servicing responsibilities and
obligations.
The Master Servicer has agreed not to merge or consolidate with any
other company or permit any other company to become the successor to the
Master Servicer's business unless, after the merger or consolidation, the
successor or surviving entity (i) shall be an Eligible Servicer (as defined
in the Agreement), (ii) shall be capable of fulfilling the duties of the
Master Servicer contained in the Agreement and (iii) shall have a long-term
debt rating which is at least investment grade from each of the Rating
Agencies. Any company into which the Master Servicer may be merged or
consolidated, shall execute an agreement of assumption to perform every
obligation of the Master Servicer under the Agreement and, shall be the
successor to the Master Servicer under the Agreement.
The Master Servicer will enter into the Servicing Agreement with the
Servicer. The Servicing Agreement will not relieve the Master Servicer of any
of its duties and obligations to the Trustee on behalf of Certificateholders
with respect to the servicing and administration of the Loans. The Master
Servicer will be obligated with respect thereto to the same extent and under
the same terms and conditions as if it alone were performing all duties and
obligations in connection with the servicing and administration of such
Loans.
The Master Servicer will be required to verify that the Servicer is
collecting and appropriately accounting for Obligor payments of premium on
FHA Insurance on Invoiced Loans, otherwise to monitor the performance by the
Servicer under the Servicing Agreement and will be liable for the deposit by
the Servicer of payments on the Loans into the Collection Account to the same
extent as if such amounts were received or collected directly by the Master
Servicer.
The Certificate Insurer and the Master Servicer have various rights to
terminate the Servicing Agreement upon the occurrence of a Servicer
Termination Event, as defined in the Servicing Agreement. The Master Servicer
is required to perform the obligations of the Servicer in the event the
Servicer fails to perform its duties and obligations under the Servicing
Agreement.
The Agreement provides that neither the Master Servicer nor any of its
directors, officers, employees or agents shall be under any liability to the
Trust or to the Certificateholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Agreement, or for
errors in judgment, unless liability would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in performing or failing to
perform duties.
EVENTS OF MASTER SERVICING TERMINATION
"Events of Master Servicing Termination" will consist of, among other
things: (i) (A) any failure by the Master Servicer to make any required
Interest Advance or (B) any other failure of the Master Servicer to deposit
or cause the Servicer to deposit in the Collection Account any amount
required to be deposited under the Agreement, which failure continues
unremedied for two Business Days or (C) any failure by the Master Servicer
to pay when due any amount payable by it under the Agreement and such failure
results in a drawing under the Policy or (D) any failure by the Master
Servicer to pay when due any amount payable by it under the Insurance
Agreement, which failure continues unremedied for two Business Days; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Agreement, which
failure continues unremedied for thirty Business Days after notice; (iii) the
Master Servicer's failure to maintain a long-term debt rating of at least BBB
and Baa2 by Standard & Poor's and Moody's respectively; (iv) the loss and
delinquency experience with respect to the Loans exceeds certain levels as
specified in the Agreement; or (v) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
relating to the Master Servicer and certain actions by the Master Servicer
indicating insolvency, reorganization or inability to pay its obligations (an
"Insolvency Event") or the Master Servicer shall dissolve or liquidate, in
whole or part, in any material respect.
If an Event of Master Servicing Termination shall occur and be
continuing, the Certificate Insurer (or, if an Insurer Default shall have
occurred and be continuing, the Trustee at the direction of the
Certificateholders), by notice given in writing to the Master Servicer (and
to the Trustee if given by the Certificate Insurer or the Certificateholders)
may terminate all of the rights and obligations of the Master Servicer under
the Agreement. On or after the receipt by the Master Servicer of such written
notice, and the appointment of and acceptance by a successor Master Servicer,
all authority, power, obligations and responsibilities of the Master Servicer
under the Agreement shall become obligations and responsibilities of the
successor Master Servicer. After the Master Servicer receives a notice of
termination or upon the resignation of the Master Servicer, the Trustee shall
be the successor in all respects to the Master Servicer in its capacity as
master servicer under the Agreement.
Any successor Master Servicer shall be entitled to such compensation
(whether payable out of the Distribution Amount or otherwise) as the Master
Servicer would have been entitled to under the Agreement if the Master
Servicer had not resigned or been terminated hereunder. The Certificate
Insurer and a successor Master Servicer may agree on additional compensation
to be paid to such successor Master Servicer. In addition, any successor
Master Servicer shall be entitled to reasonable transition expenses incurred
in acting as successor Master Servicer.
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Master
Servicer, the Depositor and the Trustee as specified in this paragraph and
with the consent of the Certificate Insurer, provided that any amendment be
accompanied by an opinion of counsel to the Trustee to the effect that such
amendment complies with the provisions of the Agreement. If the purpose of
the amendment (as detailed therein) is to correct any mistake, eliminate any
inconsistency, cure any ambiguity or deal with any matter not covered (i.e.
to give effect to the intent of the parties, and if applicable, the
expectations of the Certificateholders), it shall not be necessary to obtain
the consent of any Certificateholder, but the Trustee shall be furnished with
a letter from the Rating Agencies that the amendment will not result in the
downgrading or withdrawal of the ratings then assigned to the Senior
Certificates. If the purpose of the amendment is to prevent the imposition
of any federal or state taxes at any time that any Certificates are
outstanding (i.e. technical in nature), it shall not be necessary to obtain
the consent of any Certificateholder, but the Trustee shall be furnished with
an opinion of counsel that such amendment is necessary or helpful to prevent
the imposition of such taxes and is not materially adverse to any
Certificateholder. If the purpose of the amendment is to add or eliminate or
change any provision of the Agreement other than as contemplated in the prior
two sentences, the amendment shall require the consent of the holders of
Certificates evidencing at least 51% of the Percentage Interest of each class
affected thereby, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, payments on or payments
received which are required to be made on any Certificate without the consent
of the related Certificateholder or (ii) reduce the aforesaid percentage
required to consent to any such amendment, without the consent of the holders
of all Senior Certificates then outstanding. It shall not be necessary for
the consent of the Certificateholders to approve the particular form of any
proposed amendment, but it shall be sufficient if such consent approves the
substance thereof.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later
of (A) payment in full of all amounts owing to the Certificate Insurer unless
the Certificate Insurer shall otherwise consent and (B) the earliest of (i)
the Distribution Date on which the Class A Principal Balance has been reduced
to zero, (ii) the final payment or other liquidation of the last Loan in the
Trust, (iii) the optional purchase by the Master Servicer or the Seller of
the Loans, as described below and (iv) the Distribution Date in August 2017,
on which date the Policy will be available to pay the outstanding Class A
Principal Balance.
At its option, either the Master Servicer or Mego, each with the consent
of the Certificate Insurer if such purchase would result in a claim under the
Policy, may each purchase from the Trust all (but not fewer than all)
remaining Loans and other property acquired by foreclosure, deed in lieu of
foreclosure, or otherwise then constituting property of the Trust, and
thereby effect early retirement of the Certificates, on any Distribution Date
when the Aggregate Loan Balance is less than 10% of the Aggregate Loan
Balance as of the Cut-Off Date. The purchase price will be equal to the
Aggregate Loan Balance (subject to reductions as provided in the Agreement
if the purchase price is based in part on the appraised value of any
Foreclosed Property included in the Trust and such appraised value is less
than the Loan Balance of the related Loan) and accrued and unpaid interest
thereon at the weighted average of the Loan Rates through the day preceding
the final Distribution Date together with all amounts due and owing to the
Certificate Insurer.
The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations and the status of the Trust
as a REMIC.
THE TRUSTEE
First Trust of New York, National Association, a national banking
association, has been named Trustee pursuant to the Agreement. The
commercial bank or trust company serving as Trustee may have normal banking
relationships with the Depositor and the Master Servicer.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor may also remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
THE CERTIFICATE GUARANTY INSURANCE POLICY
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the certificate guaranty insurance policy (the
"Policy"), relating to the Mego Mortgage FHA Title I Loan Trust 1996-2, FHA
Title I Loan Asset-Backed Certificates, Series 1996-2, Class A and Class S
(collectively, the "Obligations"), will unconditionally and irrevocably
guarantee to any Owner (as described below) that an amount equal to each full
and complete Insured Payment (as described below) will be received by First
Trust of New York, National Association, or its successor, as trustee for the
Owners (the "Trustee"), on behalf of the Owners, from the Certificate Insurer
for distribution by the Trustee to each Owner of each Owner's proportionate
share of the Insured Payment. The Certificate Insurer's obligations under
the Policy with respect to a particular Insured Payment shall be discharged
to the extent funds equal to the applicable Insured Payment are received by
the Trustee from the Certificate Insurer, whether or not such funds are
properly applied by the Trustee. Insured Payments shall be made only at the
time set forth in the Policy and no accelerated Insured Payments shall be
made regardless of any acceleration of the Obligations, unless such
acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust, any REMIC or
the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day by
the Fiscal Agent (as described below) of (i) a certified copy of the order
requiring the return of such Preference Amount, (ii) an opinion of counsel
satisfactory to the Certificate Insurer that such order is final and not
subject to appeal, (iii) an assignment in such form as is reasonably required
by the Certificate Insurer, irrevocably assigning to the Certificate Insurer
all rights and claims of the Owner relating to or arising under the
Obligations against the debtor which made such preference payment or
otherwise with respect to such preference payment, and (iv) appropriate
instruments to effect the appointment of the Certificate Insurer as agent for
such Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Certificate Insurer, provided
that if such documents are received after 12:00 noon New York City time on
such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee
in bankruptcy named in the final order of the court exercising jurisdiction
on behalf of the Owner and not to any Owner directly unless such Owner has
returned principal or interest paid on the Obligations to such receiver or
trustee in bankruptcy, in which case such payment shall be disbursed to such
Owner.
The Certificate Insurer will pay any other amount payable under the
Policy no later than 12:00 noon New York City time on the later of the
Distribution Date on which the related Insured Payment is due or the second
Business Day following receipt in New York, New York on a Business Day by
State Street Bank and Trust Company, N.A., as Fiscal Agent for the
Certificate Insurer or any successor fiscal agent appointed by the
Certificate Insurer (the "Fiscal Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City time
on such Business Day, it will be deemed to be received on the following
Business Day. If any such Notice received by the Fiscal Agent is not in
proper form or is otherwise insufficient for the purpose of making claims
under the Policy it shall be deemed not to have been received by the Fiscal
Agent for purposes of this paragraph, and the Certificate Insurer or the
Fiscal Agent, as the case may be, shall promptly so advise the Trustee and
the Trustee may submit an amended Notice.
Insured payments due under the Policy unless otherwise stated herein
will be disbursed by the Fiscal Agent to the Trustee on behalf of the Owners
by wire transfer of immediately available funds in the amount of the Insured
Payment less, in respect of Insured Payments related to Preference Amounts,
any amount held by the Trustee for the payment of such Insured Payment and
legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Aggregate Senior Interest Distribution" means, as to any Distribution
Date, the aggregate of the Class Interest Distributions for each class of
outstanding Senior Certificates.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in the City of New York City or in the city in
which the corporate trust office of the Trustee under the Agreement is
located or the city which the Master Servicer's or Servicer's servicing
operations are located are authorized or obligated by law, executive order
or government decree to be closed.
"Deficiency Amount" means, as to any Distribution Date, an amount equal
to the sum of (a) the amount by which the Aggregate Senior Interest
Distribution exceeds the amount on deposit in the Distribution Account
available to be distributed therefor on such Distribution Date and (b) the
Class A Guaranteed Principal Distribution Amount for such Distribution Date.
"Insured Payment" means (i) on each Distribution Date, an amount equal
to the Deficiency Amount and (ii) any unpaid Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy substantially in the form of Exhibit A to the Policy,
the original of which is subsequently delivered by registered or certified
mail, from the Trustee specifying the Insured Payment which shall be due and
owing on the applicable Distribution Date.
"Owner" means each Certificateholder (other than the Master Servicer,
Depositor or Trustee) (as defined in the Agreement) who, on the applicable
Distribution Date, is entitled under the terms of the applicable Obligation
to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner
on the Obligations that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with
a final nonappealable order of a court having competent jurisdiction.
Any notice under the Policy or service of process on the Fiscal Agent
of the Certificate Insurer may be made at the address listed below for the
Fiscal Agent of the Certificate Insurer or such other address as the
Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or
such other address as the Fiscal Agent shall specify to the Trustee in
writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason including payment, or provision being made
for payment, prior to maturity of the Obligations.
THE CERTIFICATE INSURER
The information set forth in this section and in the financial
statements of MBIA Insurance Corporation (the "Certificate Insurer") set
forth in Annex I hereto have been provided by the Certificate Insurer. No
representation is made by the Seller, the Master Servicer, the Depositor or
any of their affiliates as to the accuracy or completeness of any such
information.
The Certificate Insurer, formerly known as Municipal Bond Investors
Assurance Corporation, is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company. MBIA Inc. is not obligated to pay
the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the
United States and the territory of Guam. The Certificate Insurer has one
European branch in the Republic of France.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities ("SAP")
as well as generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
-------------------------------------------------------------
DECEMBER 31 MARCH 31
1995 1996
(Audited) (Unaudited)
---------------------- -----------------------
(in millions)
<S> <C> <C>
Admitted Assets $3,814 $3,989
Liabilities 2,540 2,672
Capital and Surplus 1,274 1,317
</TABLE>
<TABLE>
<CAPTION>
GAAP
-------------------------------------------------------------
DECEMBER 31 MARCH 31
1995 1996
(Audited) (Unaudited)
---------------------- -----------------------
(in millions)
<S> <C> <C>
Admitted Assets $4,463 $4,548
Liabilities 1,937 2,006
Shareholder's Equity 2,526 2,542
</TABLE>
Audited financial statements of the Certificate Insurer as of December 31,
1995 and 1994 and for each of the three years in the period ended December
31, 1995 are included herein as Appendix I. Unaudited financial statements
of the Certificate Insurer for the three-month period ended March 31, 1996
are included herein as Appendix I. Such financial statements have been
prepared on the basis of generally accepted accounting principles. Copies
of the Certificate Insurer's 1995 year-end audited financial statements
prepared in accordance with statutory accounting practices are available from
the Certificate Insurer. A copy of the Annual Report on Form 10-K is
available from the Securities and Exchange Commission. The address of the
Certificate Insurer is 113 King Street, Armonk, New York 10504.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of the information regarding the Policy and the Certificate
Insurer set forth under the headings "The Certificate Guaranty Insurance
Policy", "The Certificate Insurer" and in Annex I.
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa".
Standard & Poor's Rating Services rates the claims paying ability of the
Certificate Insurer "AAA".
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability
to pay claims on its policies of insurance. Any further explanation as to
the significance of the above ratings may be obtained only from the
applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Offered Certificates, and such ratings may be subject to revision or
withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the
market price of the Offered Certificates. The Certificate Insurer does not
guaranty the market price of the Offered Certificates nor does it guaranty
that the ratings on the Offered Certificates will not be revised or
withdrawn.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered
Certificates will be applied by the Depositor towards the purchase of the
Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes. The Offered
Certificates and the Class S Certificates will constitute "regular interests"
in the REMIC and the Class R Certificates will constitute the sole class of
"residual interests" in the REMIC.
ORIGINAL ISSUE DISCOUNT
The Offered Certificates may be issued with original issue discount for
federal income tax purposes. For purposes of determining the amount and rate
of accrual of original issue discount and market discount, the Depositor
intends to assume that there will be prepayments on the Loans at a rate equal
to 15% CPR. No representation is made as to whether the Loans will prepay at
that rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" herein and "Certain Material Federal Income Tax Consequences"
in the Prospectus.
The Offered Certificates may be treated as being issued at a premium.
In such case, the holders of the Certificates may elect under Section 171 of
the Code to amortize such premium under the constant yield method and to
treat such amortizable premium as an offset to interest income on the Offered
Certificates. Such election, however, applies to all the Certificateholder's
debt instruments acquired on or after the first taxable year in which the
election is first made, and should only be made after consulting with a tax
adviser.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
holder of a Certificate, such holder will be permitted to offset such amounts
only against the respective future income, if any, from such Certificate.
Although the tax treatment is uncertain, a holder of a Certificate may be
permitted to deduct a loss to the extent that such holder's respective
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such holder is entitled, assuming no further Principal
Prepayments of the Loans are received. Although the matter is not free from
doubt, any such loss might be treated as a capital loss.
SPECIAL TAX ATTRIBUTES OF THE OFFERED CERTIFICATES
As is described more fully under "Certain Material Federal Income Tax
Consequences" in the Prospectus, the Offered Certificates will represent
qualifying assets under Sections 593(d), 856(c)(5)(A) and 7701(a)(19)(C)(v)
of the Code, and net interest income attributable to the Offered Certificates
will be "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, to the extent the
assets of the Trust are assets described in such sections. The Offered
Certificates will represent qualifying assets under Section 860G(a)(3) if
acquired by a REMIC within the prescribed time periods of the Code.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Loan, the receipt of income from a source other
than a Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Loans for temporary investment pending distribution
on the Certificates. It is not anticipated that the Trust will engage in any
prohibited transactions in which it would recognize a material amount of net
income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of
its interests could result in the imposition of a tax on the trust fund equal
to 100% of the value of the contributed property (the "Contributions Tax").
The Trust will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also
be subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable
to real estate investment trusts. "Net income from foreclosure property"
generally means gain from the sale of a foreclosure property other than
qualifying rents and other qualifying income for a real estate investment
trust. It is not anticipated that the Trust will recognize net income from
foreclosure property subject to federal income tax.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Material Federal
Income Tax Consequences--REMIC Certificates" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the
tax laws of any state. Investors considering an investment in the
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an
employee benefit plan subject to ERISA and/or a plan or other arrangement
subject to the excise tax provisions set forth under Section 4975 of the Code
(each of the foregoing, a "Plan") from engaging in certain transactions
involving such Plan and its assets unless a statutory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes
certain excise taxes on prohibited transactions involving plans described
under that Section; ERISA authorizes the imposition of civil penalties for
prohibited transactions involving plans not covered under Section 4975 of the
Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Offered Certificates should consult with its counsel with respect to the
potential consequences under ERISA and the Code of the Plan's acquisition and
ownership of such Certificates. See "ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets
of such plans may be invested in the Offered Certificates without regard to
the ERISA considerations described herein and in the Prospectus, subject to
the provisions of other applicable federal and state law. Any such plan which
is qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code may nonetheless be subject to the prohibited transaction rules set forth
in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments
be made in accordance with the documents governing the Plan. A fiduciary
which decides to invest the assets of a Plan in the Offered Certificates
should consider, among other factors, the extreme sensitivity of the
investments to the rate of principal payments (including prepayments) on the
Loans.
The U.S. Department of Labor has granted to Greenwich Capital Markets,
Inc. an administrative exemption (Prohibited Transaction Exemption 90-59;
Exemption Application No. D-8374) (the "Exemption") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions
of Section 4975 of the Code with respect to the initial purchase, the holding
and the subsequent resale by Plans of certificates in pass-through trusts
that consist of certain receivables, loans and other obligations that meet
the conditions and requirements of the Exemption. The Exemption applies to
loans such as the Loans in the Trust.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party;
(2) the rights and interest evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
(3) the certificates acquired by the Plan have received a rating
at the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Rating Services ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("DCR")
or Fitch Investors Service, L.P. ("Fitch");
(4) the trustee must not be an affiliate of any other member of
the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the seller
pursuant to the assignment of the loans to the trust fund represents not more
than the fair market value of such loans; the sum of all payments made to and
retained by the servicer and any other servicer represents not more than
reasonable compensation for such person's services under the agreement
pursuant to which the loans are pooled and reimbursements of such person's
reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of S&P, Moody's, Fitch
or D&P for at least one year prior to the Plan's acquisition of certificates;
and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/
conflict of interest prohibited transactions that may occur when the Plan
fiduciary causes a Plan to acquire certificates in a trust as to which the
fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent (50%) of each class of certificates in which Plans have
invested is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five percent
(5%) or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not
exceed twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of the Plan
with respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Underwriter, the Trustee, the Servicer, any obligor with respect to
Loans included in the Trust constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust, or any
affiliate of such parties (the "Restricted Group").
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Offered Certificates by Plans and that all
conditions of the Exemption other than those within the control of the
investors will be met. In addition, as of the date hereof, there is no single
Obligor that is the obligor on five percent (5%) of the Loans included in the
Trust by aggregate unamortized principal balance of the assets of the Trust.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment prudence and diversification,
an investment in the Offered Certificates is appropriate for the Plan, taking
into account the overall investment policy of the Plan and the composition
of the Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Offered
Certificates. Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. In connection with the
sale of the Offered Certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but has no obligation to do so.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue.
The Depositor is an affiliate of the Underwriter.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Offered Certificates
will be rated in the highest rating category of the Rating Agencies, the
Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"),
because not all of the mortgages securing the Loans are first mortgages.
Accordingly, many institutions with legal authority to invest in comparably
rated securities based on first mortgage loans may not be legally authorized
to invest in the Offered Certificates, which because they evidence interests
in a pool that includes junior mortgage loans are not "mortgage related
securities" under SMMEA.
LEGAL MATTERS
Certain legal matters will be passed upon on behalf of the Seller by
Brown & Wood LLP, New York, New York and by Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, Miami, Florida; on behalf of the Depositor and the
Underwriter by Brown & Wood LLP, New York, New York; and on behalf of the
Certificate Insurer by Kutak Rock, Omaha, Nebraska.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Offered Certificates receive ratings of "AAA" by Standard & Poor's Rating
Services, ("S&P") and "Aaa" by Moody's Investors Service, Inc. ("Moody's" and
together with S&P, each a "Rating Agency").
A securities rating addresses the likelihood of the receipt by Offered
Certificateholders of distributions on the Loans. The rating takes into
consideration the characteristics of the Loans and the structural, legal and
tax aspects associated with the Offered Certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Loans or the possibility that
Offered Certificateholders might realize a lower than anticipated yield due
to prepayments.
The ratings assigned to the Offered Certificates will depend primarily
upon the creditworthiness of the Certificate Insurer. Any reduction in a
rating assigned to the claims-paying ability of the Certificate Insurer below
the ratings initially assigned to the Offered Certificates may result in a
reduction of one or more of the ratings assigned to the Offered Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
ANNEX I
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 MEGO MORTGAGE FHA TITLE I
Supplement and the Prospectus do LOAN TRUST 1996-2
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 $48,537,000, CLASS A
solicitation would 7.275% PASS-THROUGH RATE
be unlawful. Neither the
delivery of this Prospectus
Supplement and the Prospectus nor FINANCIAL ASSET
any sale made hereunder shall, SECURITIES CORP.
under (DEPOSITOR)
any circumstances, create any
implication that the information
contained herein is correct as of
any time subsequent to their
respective date.
_________________
-------------------
TABLE OF CONTENTS
PAGE PROSPECTUS SUPPLEMENT
PROSPECTUS SUPPLEMENT
-------------------
Summary of Terms . . . . . . S-4
Risk Factors . . . . . . . . S-16
Property of the Trust . . . . S-20
Mego Mortgage Corporation . . S-20
The Title I Loan Program and the
Contract of Insurance . . . . S-27 GREENWICH CAPITAL
The Master Servicer . . . . . S-32 M A R K E T S, I N C.
Description of the Loans . . S-33
Description of the
Certificates . . . . . . . . S-38
The Certificate Guaranty Insurance
Policy . . . . . . . . . . . S-59
The Certificate Insurer . . . S-61 AUGUST 14, 1996
Use of Proceeds . . . . . . . S-63
Certain Federal Income Tax
Consequences . . . . . . . . S-63
State Taxes . . . . . . . . . S-64
ERISA Considerations . . . . S-64
Method of Distribution . . . S-66
Legal Investment Matters . . S-67
Legal Matters . . . . . . . . S-67
Ratings . . . . . . . . . . . S-67
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 Considerations . . . . . . 68
State Tax Considerations . . . 88
ERISA Considerations . . . . . 88
Legal Investment . . . . . . . 91
Method of Distribution . . . . 92
Legal Matters . . . . . . . . . 92
Financial Information . . . . . 93
Rating . . . . . . . . . . . . 93
ANNEX 1
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the 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 consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND
New York, New York
January 22, 1996
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- ----------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $3,428,986 and
$3,123,838 $3,652,621 3,051,906
Short-term investments, at amortized cost
(which approximates fair value) 198,035 121,384
Other investments 14,064 11,970
------------ ------------
Total investments 3,864,720 3,185,260
Cash and cash equivalents 2,135 1,332
Accrued investment income 60,247 55,347
Deferred acquisition costs 140,348 133,048
Prepaid reinsurance premiums 200,887 186,492
Goodwill (less accumulated amortization of
$37,366 and $32,437) 105,614 110,543
Property and equipment, at cost (less accumulated
depreciation of $12,137 and $9,501) 41,169 39,648
Receivable for investments sold 5,729 945
Other assets 42,145 46,552
------------ ------------
TOTAL ASSETS $4,462,994 $3,759,167
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves 42,505 40,148
Deferred income taxes 212,925 97,828
Payable for investments purchased 10,695 6,552
Other liabilities 54,682 46,925
------------ ------------
TOTAL LIABILITIES 1,937,122 1,703,664
------------ ------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,021,584 953,655
Retained earnings 1,341,855 1,134,061
Cumulative translation adjustment 2,704 427
Unrealized appreciation (depreciation) of investments,
net of deferred income tax provision (benefit)
of $78,372 and $(25,334) 144,729 (47,640)
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gross premiums written $349,812 $361,523 $479,390
Ceded premiums (45,050) (49,281) (47,552)
---------- ---------- ----------
Net premiums written 304,762 312,242 431,838
Increase in deferred premium revenue (88,365) (93,226) (200,519)
---------- ---------- ----------
Premiums earned (net of ceded
premiums of $30,655
$33,340 and $41,409) 216,397 219,016 231,319
Net investment income 219,834 193,966 175,329
Net realized gains 7,777 10,335 8,941
Other income 2,168 1,539 3,996
---------- ---------- ----------
Total revenues 446,176 424,856 419,585
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Underwriting and operating expenses 41,812 41,044 38,006
---------- ---------- ----------
Total expenses 73,734 70,982 71,307
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes 372,442 353,874 348,278
Provision for income taxes 81,748 77,125 86,684
---------- ---------- ----------
Income before cumulative effect of
accounting changes 290,694 276,749 261,594
Cumulative effect of accounting changes --- --- 12,923
---------- ---------- ----------
Net income $290,694 $276,749 $274,517
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Appreciation
Common Stock Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- -------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- --- (50,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840
------- -------- ---------- ---------- ---------- ------------
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640)
------- -------- ---------- ---------- ---------- ------------
Exercise of stock options --- --- 5,403 --- --- ---
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,726 --- --- ---
======= ======== ========== ========== ========== ============
Balance, December 31, 1995 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
======= ======== ========== ========== ========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $290,694 $276,749 $274,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,900) (3,833) (5,009)
Increase in deferred acquisition costs (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143)
Increase in deferred premium revenue 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation 2,676 1,607 1,259
Amortization of goodwill 4,929 4,961 5,001
Amortization of bond (discount) premium, net (2,426) 621 (743)
Net realized gains on sale of investments (7,778) (10,335) (8,941)
Deferred income taxes 11,391 19,082 7,503
Other, net 29,080 (8,469) 15,234
----------- ------------ ------------
Total adjustments to net income 117,738 90,709 213,015
----------- ------------ ------------
Net cash provided by operating activities 408,432 367,458 487,532
----------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of
receivable for investments sold 473,352 515,548 205,342
Redemption of fixed maturity securities,
net of receivable for investments redeemed 83,448 128,274 225,608
(Purchase) sale of short-term investments, net (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net (692) 87,456 (37,777)
Capital expenditures, net of disposals (4,228) (3,665) (3,601)
----------- ------------ ------------
Net cash used in investing activities (377,529) (328,873) (437,399)
----------- ------------ ------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 52,800 --- ---
Dividends paid (82,900) (38,000) (50,000)
----------- ------------ ------------
Net cash used by financing activities (30,100) (38,000) (50,000)
----------- ------------ ------------
Net increase in cash and cash equivalents 803 585 133
Cash and cash equivalents - beginning of year 1,332 747 614
----------- ------------ ------------
Cash and cash equivalents - end of year $2,135 $1,332 $747
=========== ============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 50,790 $ 53,569 $ 52,967
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
o MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the insurance
company to Municipal Bond Investors Assurance Corporation. In April 1995, the
name was again changed to MBIA Insurance Corp. Prior to the acquisition, all of
the obligations of this company were reinsured and/or indemnified by the former
owner.
o Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA Inc.'s
reinsurance obligations were then assumed by MBIA Corp. The participation of
these four members aggregated approximately 89% of the net insurance in force of
the Association. The net assets transferred from the predecessor included the
cash transferred in connection with the reinsurance agreements, the related
deferred acquisition costs and contingent commissions receivable, net of the
related unearned premiums and contingent commissions payable. The deferred
income taxes inherent in these assets and liabilities were recorded by MBIA
Corp. Contingent commissions receivable (payable) with respect to premiums
earned prior to the effective date of the reinsurance agreements by the
Association in accordance with statutory accounting practices, remained as
assets (liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company
of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
-6-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"),
a wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth member of
the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp. ("SECO"), to provide fixed-income investment management services for MBIA
Inc.'s municipal cash management service businesses. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to SECO; the management of the balance of this portfolio was
transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
-7-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp., MBIA
Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany
balances have been eliminated. Certain amounts have been reclassified in prior
years' financial statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial Accounting
Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS 115, MBIA Corp. reclassified its entire
investment portfolio ("Fixed-maturity securities") as "available-for-sale."
Pursuant to SFAS 115, securities classified as available-for-sale are required
to be reported in the financial statements at fair value, with unrealized gains
and losses reflected as a separate component of shareholder's equity. The
cumulative effect of MBIA Corp.'s adoption of SFAS 115 was a decrease in
shareholder's equity at December 31, 1994 of $46.8 million, net of taxes. The
adoption of SFAS 115 had no effect on MBIA Corp.'s earnings.
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. MBIA Corp. records dividends from its investment in marketable
equity securities and its share of limited partnerships and mutual funds as a
-8-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
component of investment income. In addition, MBIA Corp. records its share of the
unrealized gains and losses on these investments, net of applicable deferred
income taxes, as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in marketing, underwriting
and policy issuance functions, certain rating agency fees, state premium taxes
and certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. For business assumed from the Association, such
costs were comprised of management fees, certain rating agency fees and
marketing and legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of expected payments, including
loss and LAE associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves. Management of
MBIA Corp. periodically evaluates its estimates for losses and LAE and any
resulting adjustments are reflected in current earnings. Management believes
-9-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that the reserves are adequate to cover the ultimate net cost of claims, but the
reserves are necessarily based on estimates, and there can be no assurance that
the ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the Association's
reinsurers under various reinsurance treaties and are accrued as the related
premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA
Inc. The tax provision for MBIA Corp. for financial reporting purposes is
determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result
of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected
directly in shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the statutory contingency
reserve, subject to certain limitations. The tax benefits obtained from such
deductions must be invested in non-interest bearing U. S. Government tax and
loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to taxable income
when the contingency reserve is released, at which time MBIA Corp. may present
the tax and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment and
MBIA Assurance's furniture, fixtures and equipment, which are recorded at cost
and, exclusive of land, are depreciated on the straight-line method over their
estimated service lives ranging from 4 to 31 years. Maintenance and repairs are
charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
-10-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o premiums are earned only when the related risk has expired
rather than over the period of the risk;
o acquisition costs are charged to operations as incurred rather
than as the related premiums are earned;
o a contingency reserve is computed on the basis of statutory requirements and
reserves for losses and LAE are established, at present value, for specific
insured issues which are identified as currently or likely to be in default.
Under GAAP reserves are established based on MBIA Corp.'s reasonable estimate
of the identified and unidentified losses and LAE on the insured obligations
it has written;
o Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
-11-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
As of December 31
-----------------
(In thousands) 1995 1994 1993
-------------- ---- ---- ----
GAAP shareholder's equity ... $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition . (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses ... (223,635) 71,932 --
Contingent commissions ...... (1,645) (1,706) (1,880)
Contingency reserve ......... (743,510) (620,988) (539,103)
Loss and loss adjustment
expense reserves ........... 28,024 18,181 26,262
Deferred income taxes ....... 205,425 90,328 99,186
Tax and loss bonds .......... 70,771 50,471 25,771
Goodwill .................... (105,614) (110,543 (115,503)
Other ....................... (12,752) (13,568 (11,679)
------------ ----------- -----------
Statutory capital
and surplus ......... $ 1,274,138 1,110,038 $ 977,736
=========== ========= ===========
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995,
1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high-quality investments with adequate liquidity. MBIA
Corp.'s investment policies limit the amount of credit exposure to any one
-12-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuer. The fixed-maturity portfolio is comprised of high-quality (average
rating Double-A) taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands
December 31, 1995
Taxable bonds
United States Treasury
and Government Agency .. $ 6,742 $ 354 -- $ 7,096
Corporate and other
obligations ............ 592,604 30,536 (212) 622,928
Mortgage-backed .......... 389,943 21,403 (932) 410,414
Tax-exempt bonds municipal
Obligations .............. 2,637,732 175,081 (2,595) 2,810,218
--------- ------- ------ ---------
Total fixed-
maturities $3,627,021 $ 227,374 (3,739) $3,850,656
========== ========== ====== ==========
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
Taxable bonds
United States Treasury
and Government Agency $ 15,133 -- (149) $ 14,984
Corporate and other ...
obligations ......... 461,601 2,353 (23,385) 440,569
Mortgage-backed ......... 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal
obligations ........... 2,450,928 36,631 (77,998) 2,409,561
--------- ------ ------- ---------
Total fixed-
maturities ......... $3,245,222 $ 42,030 $ (113,962) $3,173,290
========== ========== ========== ==========
Fixed-maturity investments carried at fair value of $8.1 million and
$7.4 million as of December 31, 1995 and 1994, respectively, were on deposit
with various regulatory authorities to comply with insurance laws.
-13-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
(In thosands Cost Value
Maturity
Within 1 year ....................... $ 178,328 $ 178,256
Beyond 1 year but within 5 years .... 448,817 477,039
Beyond 5 years but within 10 years .. 1,133,527 1,211,645
Beyond 10 years but within 15 years . 742,790 804,421
Beyond 15 years but within 20 years . 686,871 730,030
Beyond 20 years ..................... 46.745 38,851
-------- --------
3,237,078 3,440,242
Mortgage-backed ..................... 389,943 410,414
------- -------
Total fixed-maturities and short-term
investments ....................... $3,627,021 $3,850,656
========== ==========
6. Investment Income and Gains and Losses
Investment income consists of:
Years ended December 31
-----------------------
(In thousands) ................ 1995 1994 1993
- ------------------------------- ---- ---- ----
Fixed-maturities .............. $ 216,653 $ 193,729 $ 173,070
Short-term investments ...... 6,008 3,003 2,844
Other investments ............. 17 12 2,078
-- -- -----
Gross investment income ..... 222,678 196,744 177,992
Investment expenses ........... 2,844 2,778 2,663
----- ----- -----
Net investment income ....... 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains..................... 9,941 9,635 9,070
Losses................ .. (2,537) (8,851) (744)
------ ------ ----
Net..................... 7,404 784 8,326
Other investments:
Gains................... 382 9,551 615
Losses................... (9) -- --
---- ------ ----
Net....................... 373 9,551 615
--- ----- ---
Net realized gains .......... 7,777 10,335 8,941
----- ------ -----
Total investment income ....... $ 227,611 $ 204,301 $ 184,270
=========== =========== ===========
-14-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains (losses) consist of:
As of December 31
-----------------
(In thousands) .................. 1995 1994
- --------------------------------- ---- ----
Fixed-maturities:
Gains ......................... $ 227,374 $ 42,030
Losses ........................ (3,739) (113,962)
Net .......................... 223,635 (71,932)
Other investments:
Gains ......................... 287 --
Losses ........................ (821) (1,042)
------- ------
Net ........................... (534) (1,042)
------ ------
Total ........................... 223,101 (72,974)
Deferred income tax (benefit) ... 78,372 (25,334)
------ -------
Unrealized gains (losses) - net $ 144,729 $ (47,640)
========= =========
The deferred taxes in 1995 and 1994 relate primarily to unrealized
gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected
in shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s
adoption of SFAS 115.
The change in net unrealized gains (losses) consists of:
Years ended December 31
-----------------------
In thousands 1995 1994 1993
- ------------ ---- ---- ----
Fixed-maturities ............... $ 295,567 $(289,327) $ 101,418
Other investments .............. 508 (8,488) 3,842
--- ------ -----
Total ........................ 296,075 (297,815) 105,260
Deferred income taxes (benefit) 103,706 (27,940) 1,381
------- ------- -----
Unrealized gains (losses), net $ 192,369 $(269,875) $ 103,879
========= ========= =========
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
-15-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect on tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
(In thousands) ................................ 1995 1994
- ----------------------------------------------- ---- ----
Deferred tax assets
Tax and loss bonds .......................... $ 71,183 $ 50,332
Unrealized losses ........................... -- 25,334
Alternative minimum tax credit carry forwards 39,072 22,391
Loss and loss adjustment expense reserves ... 9,809 6,363
Other ....................................... 954 3,981
--- -----
Total gross deferred tax assets ............. 121,018 108,401
======= =======
Deferred tax liabilities
Contingency reserve ......................... 131,174 91,439
Deferred premium revenue .................... 64,709 54,523
Deferred acquisition costs .................. 49,122 48,900
Unrealized gains ............................ 78,372 --
Contingent commissions ...................... 7,158 4,746
Other ....................................... 3,408 6,621
----- -----
Total gross deferred tax liabilities ........ 333,943 206,229
------- -------
Net deferred tax liability .................. $212,925 $ 97,828
======== ========
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in the
tax provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
-----------------------
(In thousands) .................. 1995 1994 1993
- --------------------------------- ---- ---- ----
Current ......................... $70,357 $58,043 $66,086
Deferred ........................ 11,391 19,082 20,598
------ ------ ------
Total ......................... $81,748 $77,125 $86,684
======= ======= =======
-16-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31
-----------------------
1995 1994 1993
---- ---- ----
Income taxes computed on pre-tax
financial income at statutory rates .......... 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest ........................ (12.5) (12.0) (10.6)
Amortization of goodwill ................... 0.5 0.5 0.5
Other ...................................... (1.1) (1.7) --
---- ---- ----
Provision for income taxes ......... 21.9% 21.8% 24.9%
==== ==== ====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Corp. had approximately $44 million
available for the payment of dividends as of December 31, 1995. In 1995, 1994
and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and
$50 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Illinois may pay a dividend only with
prior approval as of December 31, 1995.
-17-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650 million
with a group of major banks to provide loans to MBIA Corp. after it has incurred
cumulative losses (net of any recoveries) from September 30, 1995 in excess of
the greater of $500 million and 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding under
these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to bondholders.
The creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
-18-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1995, insurance in force, net of cessions to reinsurers,
has a range of maturity of 1-43 years. The distribution of net insurance in
force by geographic location and type of bond, including $2.7 billion and $1.5
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1995 and 1994, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
-----------------
($ in billions) 1995 1994
- --------------- ---- ----
Net Number % of Net Net Number % of Net
Georgraphic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- -------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
California .. $ 51.2 3,122 14.8 $ 43.9 2,832 14.3%
New York .... 30.1 4,846 8.7 25.0 4,447 8.2
Florida ..... 26.9 1,684 7.7 25.4 1,805 8.3
Texas ....... 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey .. 16.4 1,730 4.7 15.0 1,590 4.9
Illinois .... 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio ........ 9.1 1,017 2.6 8.3 996 2.7
Michigan .... 7.9 1,012 2.3 5.7 972 1.9
--- ----- --- --- --- ---
Subtotal .... 206.0 19,745 59.4 184.7 19,055 60.4
Other ....... 135.6 11,147 39.1 118.8 10,711 38.8
----- ------ ---- ----- ------ ----
Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2
International 5.1 53 1.5 2.5 18 0.8
--- -- --- --- -- ---
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
======== ====== ===== ======== ====== =====
</TABLE>
-19-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
-----------------
1995 1994
---- ----
($ in billions) Net Number % of Net Net Number % of Net
Insurance of Issues nsurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------ -------- ----------- -------- -------- ----------- --------
MUNICIPAL
<S> <C> <C> <C> <C> <C> <C>
General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities ........ 60.3 4,931 17.4 56.0 5,087 18.3
Health Care ...... 51.9 2,458 15.0 50.6 2,670 16.5
Transportation ... 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue .. 24.4 1,445 7.0 22.7 1,291 7.4
Industrial
development and
pollution control
revenue 17.2 924 5.0 15.1 1,016 4.9
Housing .......... 15.8 2,671 4.5 13.6 2,663 4.5
Higher education . 15.2 1,261 4.4 14.0 1,208 4.6
======= ======= ====== ======= ======= =====
Other ............ 7.3 134 2.1 3.8 124 1.2
309.2 26,831 89.2 281.3 26,574 91.9
======= ======= ======= ======= ======= =====
Non-municipal
Asset/mortgage-
backed 20.2 256 5.8 12.8 151 4.2
Investor-owned
utilities 6.4 3,559 1.8 5.7 2,918 1.9
International .... 5.1 53 1.5 2.5 18 0.8
Other ............ 5.8 246 1.7 3.7 123 1.2
--- --- --- --- --- ---
37.5 4,114 10.8 24.7 3,210 8.1
---- ----- ---- ---- ----- ---
$346.7 30,945 100.0% $306.0 29,784 100.0%
======= ======= ======= ====== ======= =====
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6
-20-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
billion, at December 31, 1995 and 1994, respectively. The distribution of ceded
insurance in force by geographic location and type of bond is set forth in the
tables below:
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ------------------- -------- -------- -------- --------
California ......... $ 8.8 17.5% $ 7.5 17.6%
New York ........... 5.7 11.4 4.9 11.5
New Jersey ......... 3.1 6.1 2.0 4.7
Texas .............. 2.8 5.6 2.5 5.9
Pennsylvania ....... 2.7 5.4 2.6 6.1
Florida ............ 2.3 4.6 2.1 4.9
Illinois ........... 2.2 4.5 2.3 5.4
District of Columbia 1.5 3.0 1.6 3.8
Washington ......... 1.4 2.7 1.2 2.8
Puerto Rico ........ 1.3 2.6 1.1 2.6
Massachusetts ...... 1.1 2.1 0.9 2.1
Ohio ............... 1.0 2.1 0.9 2.1
--- --- --- ---
Subtotal ........... 33.9 67.6 29.6 69.5
Other .............. 14.4 28.8 12.3 28.9
---- ---- ---- ----
Total U. S ..... 48.3 96.4 41.9 98.4
International ...... 1.8 3.6 0.7 1.6
--- --- --- ---
$ 50.1 100.0% $42.6 100.0%
======= ===== ===== =====
-21-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ------------ -------- -------- -------- --------
Municipal
General obligation ... $ 11.7 23.3% $ 9.7 22.8%
Utilities ............ 9.0 18.0 8.5 20.0
Health care .......... 6.6 13.1 6.5 15.3
Transportation ....... 5.5 11.0 4.5 10.6
Special revenue ...... 3.2 6.4 2.7 6.3
Industrial development
and pollution
control revenue 3.0 6.0 2.9 6.8
Housing .............. 1.4 2.8 1.0 2.3
Higher education ..... 1.2 2.4 1.2 2.8
Other ................ 2.4 4.8 1.5 3.5
--- --- --- ---
44.0 87.8 38.5 90.4
==== ==== ==== ====
Non-municipal
Asset-/mortgage-backed 3.6 7.2 2.7 6.3
International ........ 1.8 3.6 0.7 1.6
Other ................ 0.7 1.4 0.7 1.7
--- --- --- ---
6.1 12.2 4.1 9.6
--- ---- --- ---
$ 50.1 100.0% $ 42.6 100.0%
======== ===== ======== =====
Included in gross premiums written are assumed premiums from other
insurance companies of $11.7 million, $6.3 million and $20.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The percentages of
the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995,
1994 and 1993, respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in
1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded
by the Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
-22-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
-23-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously ceded
its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4
million of deferred premium revenue relating to one of the trusts which was
previously ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
-24-
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in other assets at December 31, 1995 and 1994 is $1.1 million
and $14.5 million of net receivables from MBIA Inc. and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
As of December 31,
------------------
1995 1994
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
ASSETS:
Fixed-maturity securuities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term investments.. 198,035 198,035 121,384 121,384
Other investments ...... 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance
premiums .............. 200,887 174,444 186,492 159,736
Receivable for
investments sold ...... 5,729 5,729 945 945
LIABILITIES:
Deferred premium
revenue ............. 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment
expense reserves ..... 42,505 42,505 40,148 40,148
Payable for investments
purchased ........... 10,695 10,695 6,552 6,552
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums ---- 235,371 --- 176,944
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED MARCH 31, 1996 AND 1995
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
Consolidated Balance Sheets -
March 31, 1996 (Unaudited) and December 31, 1995 (Audited) ............. 3
Consolidated Statements of Income -
Three months ended March 31, 1996 and 1995 (Unaudited) ................. 4
Consolidated Statement of Changes in Shareholder's Equity -
Three months ended March 31, 1996 (Unaudited) .......................... 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 (Unaudited) ................. 6
Notes to Consolidated Financial Statements (Unaudited) ..................... 7
-2-
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
March 31, 1996 December 31, 1995
--------------- ------------------
(Unaudited) (Audited)
ASSETS
Investments:
Fixed-maturity securities
held as available-for-sale
at fair value
(amortized cost $3,664,571
and $3,428,986) .................. $3,784,836 $3,652,621
Short-term investments, at
amortized cost
(which approximates fair value) .. 135,428 198,035
Other investments .................. 13,374 14,064
---------- ----------
TOTAL INVESTMENTS .............. 3,933,638 3,864,720
Cash and cash equivalents .............. 2,499 2,135
Accrued investment income .............. 60,462 60,247
Deferred acquisition costs ............. 140,919 140,348
Prepaid reinsurance premiums ........... 206,383 200,887
Goodwill (less accumulated amortization
of $38,590 and $37,366) ............ 104,390 105,614
Property and equipment, at cost
(less accumulated
depreciation of $12,822 and $12,137) 41,771 41,169
Receivable for investments sold ........ 6,501 5,729
Other assets ........................... 51,534 42,145
---------- ----------
TOTAL ASSETS ................... $4,548,097 $4,462,994
========== ==========
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue ........... $1,666,945 $1,616,315
Loss and loss adjustment
expense reserves .................. 46,376 42,505
Deferred income taxes .............. 180,843 212,925
Payable for investments purchased .. 15,715 10,695
Other liabilities .................. 96,600 54,682
---------- ----------
TOTAL LIABILITIES .............. 2,006,479 1,937,122
---------- ----------
Shareholder's Equity:
Common stock, par value $150
per share; authorized,
issued and outstanding -
100,000 shares .................... 15,000 15,000
Additional paid-in capital ......... 1,025,591 1,021,584
Retained earnings .................. 1,423,157 1,341,855
Cumulative translation
adjustment ........................ 330 2,704
Unrealized appreciation
of investments,
net of deferred income tax
provision of $42,114 and $78,372 .. 77,540 144,729
---------- ----------
TOTAL SHAREHOLDER'S EQUITY ..... 2,541,618 2,525,872
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY ......... $4,548,097 $4,462,994
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
------------------------
1996 1995
--------- ---------
Revenues:
Gross premiums written ...................... $ 121,011 $ 71,112
Ceded premiums .............................. (14,715) (7,080)
--------- ---------
Net premiums written .................... 106,296 64,032
Increase in deferred premium revenue ........ (45,532) (12,680)
--------- ---------
Premiums earned (net of ceded
premiums of $9,220 and $7,839) ...... 60,764 51,352
Net investment income ....................... 59,003 53,065
Net realized gains .......................... 2,692 1,724
Other income ................................ 969 908
--------- ---------
Total revenues .......................... 123,428 107,049
--------- ---------
Expenses:
Losses and loss adjustment expenses ......... 3,178 2,033
Policy acquisition costs, net ............... 5,900 5,140
Underwriting and operating expenses ......... 10,549 9,752
--------- ---------
Total expenses .......................... 19,627 16,925
--------- ---------
Income before income taxes ....................... 103,801 90,124
Provision for income taxes ....................... 22,499 19,476
--------- ---------
Net income ....................................... $ 81,302 $ 70,648
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the three months ended March 31, 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Unrealized
------------------------- Paid-In Retained Translation Appreciation
Shares Amount Capital Earnings Adjustment of Investments
---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ............... 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $ 144,729
Exercise of stock options .............. -- -- 1,179 -- -- --
Net income ............................. -- -- -- 81,302 -- --
Change in foreign
currency transactions ................ -- -- -- -- (2,374) --
Change in unrealized
appreciation of
investment net of change
in deferred income taxes
of $36,258 ........................... -- -- -- -- -- (67,189)
Tax reduction related to
tax sharing agreement
with MBIA Inc. ....................... -- -- 2,828 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 1996 ................ 100,000 $ 15,000 $1,025,591 $1,423,157 $ 330 $ 77,540
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31
-----------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net income ....................................... $ 81,302 $ 70,648
Adjustments to reconcile net
income to net cash provided
by operating activities:
(Increase) decrease in accrued
investment income ............................ (215) 960
Increase in deferred acquisition costs ......... (571) (1,634)
(Increase) decrease in prepaid
reinsurance premiums .......................... (5,496) 758
Increase in deferred premium revenue ........... 51,028 11,922
Increase in loss and loss adjustment
expense reserves .............................. 3,871 1,885
Depreciation ................................... 719 630
Amortization of goodwill ....................... 1,224 1,232
Amortization of bond discount, net ............. (1,014) (358)
Net realized gains on sale of investments ...... (2,692) (1,724)
Deferred income taxes .......................... 4,176 3,782
Other, net ..................................... 34,288 19,601
--------- ---------
Total adjustments to net income ................ 85,318 37,054
--------- ---------
Net cash provided by operating activities ...... 166,620 107,702
--------- ---------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased ........... (329,252) (182,603)
Sale of fixed-maturity securities, net of
receivable for investments sold ................ 146,729 92,890
Redemption of fixed-maturity securities,
net of receivable for investments redeemed ..... 32,644 16,717
Purchase of short-term investments, net .......... (15,259) (9,908)
Sale (purchase) of other investments, net ........ 215 (863)
Capital expenditures, net of disposals ........... (1,333) (817)
--------- ---------
Net cash used in investing activities .......... (166,256) (84,584)
--------- ---------
Cash flows from financing activities:
Dividends paid ................................... -- (22,500)
--------- ---------
Net cash used by financing activities .......... -- (22,500)
--------- ---------
Net increase in cash and cash equivalents .......... 364 618
Cash and cash equivalents - beginning of period .... 2,135 1,332
--------- ---------
Cash and cash equivalents - end of period .......... $ 2,499 $ 1,950
========= =========
Supplemental cash flow disclosures:
Income taxes paid ................................ $ 1,161 $ 1
The accompanying notes are an integral part of the consolidated
financial statements.
-6-
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- ------------------------
The accompanying consolidated financial statements are unaudited and
include the accounts of MBIA Insurance Corporation and its Subsidiaries (the
"Company"). The statements do not include all of the information and disclosures
required by generally accepted accounting principles. These statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the year ended December 31, 1995. The accompanying
consolidated financial statements have not been audited by independent
accountants in accordance with generally accepted auditing standards but in the
opinion of management such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations. The results of
operations for the three months ended March 31, 1996 may not be indicative of
the results that may be expected for the year ending December 31, 1996. The
December 31, 1995 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
2. Dividends Declared
- ---------------------
No dividends were declared by the Company during the three months ended
March 31, 1996.
-7-
PROSPECTUS
Asset Backed Securities
(Issuable in Series)
FINANCIAL ASSET SECURITIES CORP.
Depositor
_________________
This Prospectus relates to the issuance of Asset Backed Certificates
(the "Certificates") and the Asset Backed Notes (the "Notes" and, together
with the Certificates, the "Securities"), which may be sold from time to time
in one or more series (each, a "Series") by Financial Asset Securities Corp.
(the "Depositor") on terms determined at the time of sale and described in
this Prospectus and the related Prospectus Supplement. The Securities of a
Series will evidence beneficial ownership of a trust fund (a "Trust Fund").
As specified in the related Prospectus Supplement, the Trust Fund for a
Series of Securities will include certain assets (the "Trust Fund Assets")
which will primarily consist of (i) closed-end and/or revolving home equity
loans (the "Home Equity Loans") secured primarily by subordinate liens on
one- to four-family residential properties, (ii) home improvement installment
sales contracts and installment loan agreements (the "Home Improvement
Contracts") that are either unsecured or secured primarily by subordinate
liens on one- to four-family residential properties, or by purchase money
security interests in the home improvements financed thereby (the "Home
Improvements") and/or (iii) Private Asset Backed Securities (as defined
herein). The Home Equity Loans and the Home Improvement Contracts are
collectively referred to herein as the "Loans". The Trust Fund Assets will
be acquired by the Depositor, either directly or indirectly, from one or more
institutions (each, a "Seller"), which may be affiliates of the Depositor,
and conveyed by the Depositor to the related Trust Fund. A Trust Fund also
may include insurance policies, reserve accounts, reinvestment income,
guaranties, obligations, agreements, letters of credit or other assets to the
extent described in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right of
payment to one or more other classes of Securities of such Series. One or
more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof prior to one
or more other classes of Securities of such Series or after the occurrence
of specified events, in each case as specified in the related Prospectus
Supplement.
Distributions to Securityholders will be made monthly, quarterly, semi-
annually or at such other intervals and on the dates specified in the related
Prospectus Supplement. Distributions on the Securities of a Series will be
made from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Securityholders as specified in the related
Prospectus Supplement.
The related Prospectus Supplement will describe any insurance or
guarantee provided with respect to the related Series of Securities
including, without limitation, any insurance or guarantee provided by the
Department of Housing and Urban Development, the United States Department of
Veterans' Affairs or any private insurer or guarantor. The only obligations
of the Depositor with respect to a Series of Securities will be to obtain
certain representations and warranties from each Seller and to assign to the
Trustee for the related Series of Securities the Depositor's rights with
respect to such representations and warranties. The principal obligations
of the Master Servicer named in the related Prospectus Supplement with
respect to the related Series of Securities will be limited to obligations
pursuant to certain representations and warranties and to its contractual
servicing obligations, including any obligation it may have to advance
delinquent payments on the Trust Fund Assets in the related Trust Fund.
The yield on each class of Securities of a Series will be affected by,
among other things, the rate of payments of principal (including prepayments)
on the Trust Fund Assets in the related Trust Fund and the timing of receipt
of such payments as described herein and in the related Prospectus
Supplement. A Trust Fund may be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be
made to treat the related Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. See "Certain Material Federal Income Tax Consequences."
_________________
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 12.
THE CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS IN, AND
THE NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, THE RELATED TRUST
FUND ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, ANY SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE
EXTENT DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES NOR THE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, EXCEPT
TO THE EXTENT DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
_________________
Prior to issuance there will have been no market for the Securities of
any Series and there can be no assurance that a secondary market for any
Securities will develop, or if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of Securities of any Series
unless accompanied by a Prospectus Supplement. Offers of the Securities may
be made through one or more different methods, including offerings through
underwriters, as more fully described under "Method of Distribution" herein
and in the related Prospectus Supplement. All Securities will be distributed
by, or sold by underwriters managed by:
_________________
GREENWICH CAPITAL
MARKETS, INC.
August 14, 1996
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities and the Pass-Through Rate or method of
determining the rate or the amount of interest, if any, to be passed through
to each such class; (ii) the aggregate principal amount and Distribution
Dates relating to such Series and, if applicable, the initial and final
scheduled Distribution Dates for each class; (iii) information as to the
assets comprising the Trust Fund, including the general characteristics of
the Trust Fund Assets included therein and, if applicable, the insurance
policies, surety bonds, guaranties, letters of credit or other instruments
or agreements included in the Trust Fund or otherwise, and the amount and
source of any reserve account; (iv) the circumstances, if any, under which
the Trust Fund may be subject to early termination; (v) the method used to
calculate the amount of principal to be distributed with respect to each
class of Securities; (vi) the order of application of distributions to each
of the classes within such Series, whether sequential, pro rata, or
otherwise; (vii) the Distribution Dates with respect to such Series; (viii)
additional information with respect to the method of distribution of such
Securities; (ix) whether one or more REMIC elections will be made and
designation of the regular interests and residual interests; (x) the
aggregate original percentage ownership interest in the Trust Fund to be
evidenced by each class of Securities; (xi) information as to the Trustee;
(xii) information as to the nature and extent of subordination with respect
to any class of Securities that is subordinate in right of payment to any
other class; and (xiii) information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 14 or 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") prior to the termination of the
offering of Securities evidencing interests therein. Upon request by any
person to whom this Prospectus is delivered in connection with the offering
of one or more classes of Securities, the Depositor will provide or cause to
be provided without charge a copy of any such documents and/or reports
incorporated herein by reference, in each case to the extent such documents
or reports relate to such classes of Securities, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by
reference in such documents). Requests to the Depositor should be directed
in writing to: Charles A. Forbes, Jr., Financial Asset Securities Corp., 600
Steamboat Road, Greenwich, Connecticut 06830, telephone number (203) 625-5673.
The Depositor has determined that its financial statements are not material to
the offering of any Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of
the Commission. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Securities offered hereby and thereby nor an offer of the Securities to any
person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under an Agreement to be forwarded to
Securityholders. However, such reports will neither be examined nor reported
on by an independent public accountant. See "Description of the Securities--
Reports to Securityholders".
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities Asset Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together with the Certificates, the
"Securities"), which are issuable in Series.
Depositor Financial Asset Securities Corp., a Delaware
corporation, an indirect limited purpose finance subsidiary of The Long-Term
Credit Bank of Japan, Limited and an affiliate of Greenwich Capital Markets,
Inc. See "The Depositor" herein.
Trustee The trustee (the "Trustee") for each Series of
Securities will be specified in the related Prospectus Supplement. See
"The Agreements" herein for a description of the Trustee's rights and
obligations.
Master Servicer The entity or entities named as Master Servicer
(the "Master Servicer") will be specified in the related Prospectus
Supplement. See "The Agreements--Certain Matters Regarding the Master
Servicer and the Depositor".
Trust Fund Assets Assets of the Trust Fund for a Series of Securities
will include certain assets (the "Trust Fund Assets") which will primarily
consist of (a) Loans or (b) Private Asset Backed Securities, together with
payments in respect of such Trust Fund Assets and certain other accounts,
obligations or agreements, in each case as specified in the related
Prospectus Supplement. The Loans will be collected in a pool (each, a "Pool")
as of the first day of the month of the issuance of the related Series of
Securities or such other date specified in the Prospectus Supplement (the
"Cut-off Date"). Trust Fund assets also may include insurance policies, cash
accounts, reinvestment income, guaranties, letters of credit or other assets
to the extent described in the related Prospectus Supplement. See "Credit
Enhancement". In addition, if the related Prospectus Supplement so provides,
the related Trust Funds' assets will include the funds on deposit in an
account (a "Pre-Funding Account") which will be used to purchase additional
Loans during the period specified in the related Prospectus Supplement. See
"The Agreements--Pre-Funding Accounts".
A. Loans The Loans will consist of (i) closed-end loans
(the "Closed-End Loans") and/or revolving home equity loans or certain
balances therein (the "Revolving Credit Line Loans", together
with the Closed-End Loans, the "Home Equity Loans"), and (ii) home
improvement installment sales contracts and installment loan agreements (the
"Home Improvement Contracts"). The Home Equity Loans and the Home
Improvement Contracts are collectively referred to herein as the "Loans".
All Loans will have been purchased by the Depositor, either directly or
through an affiliate, from one or more Sellers.
As specified in the related Prospectus Supplement, the Home Equity
Loans will, and the Home Improvement Contracts may, be secured by mortgages
or deeds of trust or other similar security instruments creating a lien on
a mortgaged property (the "Mortgaged Property"), which may be subordinated
to one or more senior liens on the Mortgaged Property, as described in the
related Prospectus Supplement. As specified in the related Prospectus
Supplement, Home Improvement Contracts may be unsecured or secured by
purchase money security interests in the Home Improvements financed thereby.
The Mortgaged Properties and the Home Improvements are collectively referred
to herein as the "Properties".
B. Private Asset-
Backed Securities Private Asset Backed Securities may include (a)
pass-through certificates representing beneficial interests in certain loans
and/or (b) collateralized obligations secured by such loans. Private Asset
Backed Securities may include stripped securities representing an undivided
interest in all or a part of either the principal distributions (but not the
interest distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain loans. Although
individual loans underlying a Private Asset Backed Security may be insured
or guaranteed by the United States or an agency or instrumentality thereof,
they need not be, and the Private Asset Backed Securities themselves will not
be so insured or guaranteed. Payments on the Private Asset Backed Securities
will be distributed directly to the Trustee as registered owner of such
Private Asset Backed Securities. See "The Trust Fund--Private Asset Backed
Securities".
Description of
the Securities Each Security will represent a beneficial ownership
interest in a Trust Fund created by the Depositor pursuant to an Agreement
among the Depositor, the Master Servicer and the Trustee for the related
Series. The Securities of any Series may be issued in one or more classes
as specified in the related Prospectus Supplement. A Series of Securities
may include one or more classes of senior Securities (collectively, the
"Senior Securities") and one or more classes of subordinate Securities
(collectively, the "Subordinated Securities"). Certain Series or classes
of Securities may be covered by insurance policies or other forms of
credit enhancement, in each case as described herein and in the related
Prospectus Supplement.
One or more classes of Securities of each Series (i) may be entitled to
receive distributions allocable only to principal, only to interest
or to any combination thereof; (ii) may be entitled to receive
distributions only of prepayments of principal throughout the lives of the
Securities or during specified periods; (iii) may be subordinated in the
right to receive distributions of scheduled payments of principal,
prepayments of principal, interest or any combination thereof to one or more
other classes of Securities of such Series throughout the lives of the
Securities or during specified periods; (iv) may be entitled to receive such
distributions only after the occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to receive distributions in
accordance with a schedule or formula or on the basis of collections from
designated portions of the assets in the related Trust Fund; (vi) as to
Securities entitled to distributions allocable to interest, may be entitled
to receive interest at a fixed rate or a rate that is subject to change from
time to time; and (vii) as to Securities entitled to distributions allocable
to interest, may be entitled to distributions allocable to interest only
after the occurrence of events specified in the related Prospectus Supplement
and may accrue interest until such events occur, in each case as specified
in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes, over time, or otherwise as
specified in the related Prospectus Supplement.
Distributions on
the Securities Distributions on the Securities entitled thereto
will be made monthly or at such other intervals and on the dates specified
in the related Prospectus Supplement (each, a "Distribution Date") out of the
payments received in respect of the assets of the related Trust Fund or Funds
or other assets pledged for the benefit of the Securities as specified in the
related Prospectus Supplement. The amount allocable to payments of principal
and interest on any Distribution Date will be determined as specified in the
related Prospectus Supplement. Allocations of distributions among
Securityholders of a single class shall be set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
the aggregate original principal balance of the Securities will not exceed
the aggregate distributions allocable to principal that such Securities will
be entitled to receive. If specified in the related Prospectus Supplement,
the Securities will have an aggregate original principal balance equal to the
aggregate unpaid principal balance of the Trust Fund Assets as of the first
day of the month of creation of the Trust Fund and will bear interest in the
aggregate at a rate equal to the interest rate borne by the underlying Loans
(the "Loan Rate") and/or Private Asset Backed Securities, net of the
aggregate servicing fees and any other amounts specified in the related
Prospectus Supplement (the "Pass-Through Rate"). If specified in the related
Prospectus Supplement, the aggregate original principal balance of the
Securities and interest rates on the classes of Securities will be determined
based on the cash flow on the Trust Fund Assets.
The rate at which interest will be passed through to holders of
each class of Securities entitled thereto may be a fixed rate or a rate that
is subject to change from time to time from the time and for the periods, in
each case as specified in the related Prospectus Supplement. Any such rate
may be calculated on a loan-by-loan, weighted average, notional amount or
other basis, in each case as described in the related Prospectus Supplement.
Compensating
Interest If so specified in the related Prospectus Supplement,
the Master Servicer will be required to remit to the Trustee, with respect
to each Loan in the related Trust Fund as to which a principal prepayment in
full or a principal payment which is in excess of the scheduled monthly
payment and is not intended to cure a delinquency was received during any Due
Period, an amount, from and to the extent of amounts otherwise payable to the
Master Servicer as servicing compensation, equal to (i) the excess, if any,
of (a) 30 days' interest on the principal balance of the related Loan at the
Loan Rate net of the per annum rate at which the Master Servicer's servicing
fee accrues, over (b) the amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's servicing fee or (ii)
such other amount as described in the related Prospectus Supplement. See
"Description of the Securities--Compensating Interest".
Credit Enhancement The assets in a Trust Fund or the Securities of one
or more classes in the related Series may have the benefit of one or more
types of credit enhancement as described in the related Prospectus
Supplement. The protection against losses afforded by any such credit
support may be limited. The type, characteristics and amount of credit
enhancement will be determined based on the characteristics of the Loans
and/or Private Asset Backed Securities underlying or comprising the Trust
Fund Assets and other factors and will be established on the basis of
requirements of each Rating Agency rating the Securities of such Series.
See "Credit Enhancement."
A. Subordination The rights of the holders of the Subordinated
Securities of a Series to receive distributions with respect to the assets
in the related Trust Fund will be subordinated to such rights of the holders
of the Senior Securities of the same Series to the extent described in the
related Prospectus Supplement. This subordination is intended to enhance the
likelihood of regular receipt by holders of Senior Securities of the full
amount of monthly payments of principal and interest due them. The
protection afforded to the holders of Senior Securities of a Series by means
of the subordination feature will be accomplished by (i) the preferential
right of such holders to receive, prior to any distribution being made in
respect of the related Subordinated Securities, the amounts of interest
and/or principal due them on each Distribution Date out of the funds
available for distribution on such date in the related Security Account and,
to the extent described in the related Prospectus Supplement, by the right
of such holders to receive future distributions on the assets in the related
Trust Fund that would otherwise have been payable to the holders of
Subordinated Securities; (ii) reducing the ownership interest of the related
Subordinated Securities; (iii) a combination of clauses (i) and (ii) above;
or (iv) as otherwise described in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, subordination may apply only
in the event of certain types of losses not covered by other forms of credit
support, such as hazard losses not covered by standard hazard insurance
policies, losses due to the bankruptcy or fraud of the borrower. The related
Prospectus Supplement will set forth information concerning, among other
things, the amount of subordination of a class or classes of Subordinated
Securities in a Series, the circumstances in which such subordination will
be applicable, and the manner, if any, in which the amount of subordination
will decrease over time.
B. Reserve Account One or more reserve accounts (each, a "Reserve
Account") may be established and maintained for each Series. The related
Prospectus Supplement will specify whether or not such Reserve Accounts will
be included in the corpus of the Trust Fund for such Series and will also
specify the manner of funding the related Reserve Accounts and the conditions
under which the amounts in any such Reserve Accounts will be used to make
distributions to holders of Securities of a particular class or released from
the related Reserve Account.
C. Special Hazard Insurance
Policy Certain classes of Securities may have the benefit of
a Special Hazard Insurance Policy. Certain physical risks that
are not otherwise insured against by standard hazard insurance policies
may be covered by a Special Hazard Insurance Policy or Policies. Each Special
Hazard Insurance Policy will be limited in scope and will cover losses
pursuant to the provisions of each such Special Hazard Insurance Policy as
described in the related Prospectus Supplement.
D. Bankruptcy Bond One or more bankruptcy bonds (each a "Bankruptcy
Bond") may be obtained covering certain losses resulting from action which
may be taken by a bankruptcy court in connection with a Loan. The level
of coverage and the limitations in scope of each Bankruptcy
Bond will be specified in the related Prospectus Supplement.
E. Loan Pool
Insurance Policy A mortgage pool insurance policy or policies may be
obtained and maintained for Loans relating to any Series, which shall be
limited in scope, covering defaults on the related Loans in an initial amount
equal to a specified percentage of the aggregate principal balance of all
Loans included in the Pool as of the Cut-off Date.
F. FHA Insurance If specified in the related Prospectus Supplement,
(i) all or a portion of the Loans in a Pool may be insured by the Federal
Housing Administration (the "FHA") and/or (ii) all or a portion of the Loans
may be partially guaranteed by the Department of Veterans' Affairs (the
"VA"). See "Certain Legal Considerations--Title I Program".
G. Cross-Support If specified in the related Prospectus Supplement,
the beneficial ownership of separate groups of assets included in a Trust
Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Securities evidencing a beneficial ownership
interest in other asset groups within the same Trust Fund.
If specified in the related Prospectus Supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two
or more separate Trust Funds. If applicable, the related Prospectus
Supplement will identify the Trust Funds to which such credit support relates
and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust
Funds.
H. Other Arrangements Other arrangements as described in the related
Prospectus Supplement including, but not limited to, one or more letters of
credit, surety bonds, other insurance or third-party guarantees may be used
to provide coverage for certain risks of defaults or various types of losses.
Advances The Master Servicer and, if applicable, each mortgage
servicing institution that services a Loan in a Pool on behalf of the Master
Servicer (a "Sub-Servicer") may be obligated to advance amounts (each, an
"Advance") corresponding to delinquent interest and/or principal payments on
such Loan until the date, as specified in the related Prospectus Supplement,
following the date on which the related Property is sold at a foreclosure
sale or the related Loan is otherwise liquidated. Any obligation to make
Advances may be subject to limitations as specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, Advances
may be drawn from a cash account available for such purpose as described in
such Prospectus Supplement.
Any such obligation of the Master Servicer or a Sub-Servicer to make Advances
may be supported by the delivery to the Trustee of a support
letter from an affiliate of the Master Servicer or such Sub-Servicer or an
unaffiliated third party (a "Support Servicer") guaranteeing the payment of
such Advances by the Master Servicer or Sub-Servicer, as the case may be, as
specified in the related Prospectus Supplement.
In the event the Master Servicer, Support Servicer or Sub-Servicer
fails to make a required Advance, the Trustee may be obligated to advance
such amounts otherwise required to be advanced by the Master Servicer,
Support Servicer or Sub-Servicer. See "Description of the Securities--
Advances."
Optional Termination The Master Servicer or the party specified in
the related Prospectus Supplement, including the holder of the residual
interest in a REMIC, may have the option to effect early retirement of a
Series of Securities through the purchase of the Trust Fund Assets and other
assets in the related Trust Fund under the circumstances and in the manner
described in "The Agreements--Termination; Optional Termination" herein and
in the related Prospectus Supplement.
Legal Investment The Prospectus Supplement for each series of
Securities will specify which, if any, of the classes of Securities offered
thereby constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Classes of
Securities that qualify as "mortgage related securities" will be legal
investments for certain types of institutional investors to the extent
provided in SMMEA, subject, in any case, to any other regulations which may
govern investments by such institutional investors. Institutions whose
investment activities are subject to review by federal or state authorities
should consult with their counsel or the applicable authorities to determine
whether an investment in a particular class of Securities (whether or not
such class constitutes a "mortgage related security") complies with
applicable guidelines, policy statements or restrictions. See "Legal
Investment."
Certain Material
Federal Income Tax
Consequences The material federal income tax consequences to
Securityholders will vary depending on whether one or more elections are made
to treat the Trust Fund or specified portions thereof as a real estate
mortgage investment conduit ("REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). The Prospectus Supplement for
each Series of Securities will specify whether such an election will be made.
See "Certain Material Federal Income Tax Consequences".
ERISA Considerations A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the Code should
carefully review with its legal advisors whether the purchase or holding of
Securities could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. See "ERISA Considerations". Certain
classes of Securities may not be transferred unless the Trustee and the
Depositor are furnished with a letter of representation or an opinion of
counsel to the effect that such transfer will not result in a violation of
the prohibited transaction provisions of ERISA and the Code and will not
subject the Trustee, the Depositor or the Master Servicer to additional
obligations. See "Description of the Securities-General" and "ERISA
Considerations".
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of
such Series.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the
Trust Fund for any other Series. There will be no recourse to the Depositor
or any other person for any failure to receive distributions on the
Securities. Further, at the times set forth in the related Prospectus
Supplement, certain Trust Fund Assets and/or any balance remaining in the
Security Account immediately after making all payments due on the Securities
of such Series, after making adequate provision for future payments on
certain classes of Securities and after making any other payments specified
in the related Prospectus Supplement, may be promptly released or remitted
to the Depositor, the Servicer, any credit enhancement provider or any other
person entitled thereto and will no longer be available for making payments
to Securityholders. Consequently, holders of Securities of each Series must
rely solely upon payments with respect to the Trust Fund Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of
such Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The
only obligations, if any, of the Depositor with respect to the Trust Fund
Assets or the Securities of any Series will be pursuant to certain
representations and warranties. The Depositor does not have, and is not
expected in the future to have, any significant assets with which to meet any
obligation to repurchase Trust Fund Assets with respect to which there has
been a breach of any representation or warranty. If, for example, the
Depositor were required to repurchase a Loan, its only sources of funds to
make such repurchase would be from funds obtained (i) from the enforcement
of a corresponding obligation, if any, on the part of the Seller or
originator of such Loan, or (ii) from a Reserve Account or similar credit
enhancement established to provide funds for such repurchases. The Master
Servicer's servicing obligations under the related Agreement may include its
limited obligation to make certain advances in the event of delinquencies on
the Loans, but only to the extent deemed recoverable. To the extent
described in the related Prospectus Supplement, the Depositor or Master
Servicer will be obligated under certain limited circumstances to purchase
or act as a remarketing agent with respect to a convertible Loan upon
conversion to a fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof,
the amount of such credit enhancement will be limited, as set forth in the
related Prospectus Supplement, and may decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders may suffer losses. Moreover,
such credit enhancement may not cover all potential losses or risks. For
example, credit enhancement may or may not cover fraud or negligence by a
loan originator or other parties. See "Credit Enhancement".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans and, in the case of Private Asset Backed Securities,
the underlying loans related thereto, comprising the Trust Fund, which
prepayments may be influenced by a variety of factors, (ii) the manner of
allocating principal and/or payments among the classes of Securities of a
Series as specified in the related Prospectus Supplement, (iii) the exercise
by the party entitled thereto of any right of optional termination and (iv)
the rate and timing of payment defaults and losses incurred with respect to
the Trust Fund Assets. Prepayments of principal may also result from
repurchases of Trust Fund Assets due to material breaches of the Depositor's
or the Master Servicer's representations and warranties, as applicable. The
yield to maturity experienced by a holder of Securities may be affected by
the rate of prepayment of the Loans comprising or underlying the Trust Fund
Assets. See "Yield and Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate. See
"Description of the Securities - Distributions of Interest".
BALLOON PAYMENTS
Certain of the Loans as of the Cut-off Date may not be fully amortizing
over their terms to maturity and, thus, will require substantial principal
payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Property.
The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
rates at the time of sale or refinancing, the borrower's equity in the
related Property, the financial condition of the borrower and tax laws.
NATURE OF MORTGAGES
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loans, together
with any senior financing on the Properties, if applicable, would equal or
exceed the value of the Properties. Among the factors that could adversely
affect the value of the Properties are an overall decline in the residential
real estate market in the areas in which the Properties are located or a
decline in the general condition of the Properties as a result of failure of
borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods.
In the case of Home Equity Loans, such decline could extinguish the value of
the interest of a junior mortgagee in the Property before having any effect
on the interest of the related senior mortgagee. If such a decline occurs,
the actual rates of delinquencies, foreclosures and losses on all Loans could
be higher than those currently experienced in the mortgage lending industry
in general.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on
a Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a
default by a borrower, these restrictions, among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted loan having a small remaining principal balance
as it would in the case of a defaulted loan having a large remaining
principal balance, the amount realized after expenses of liquidation would
be smaller as a percentage of the outstanding principal balance of the small
loan than would be the case with the defaulted loan having a large remaining
principal balance. Since the mortgages and deeds of trust securing the Home
Equity Loans will be primarily junior liens subordinate to the rights of the
mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to any senior mortgage, in which case it must either pay the entire
amount due on any senior mortgage to the related senior mortgagee at or prior
to the foreclosure sale or undertake the obligation to make payments on any
such senior mortgage in the event the mortgagor is in default thereunder.
The Trust Fund will not have any source of funds to satisfy any senior
mortgages or make payments due to any senior mortgagees.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the origination, servicing and collection of the Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Loans, may entitle the borrower to a refund
of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See "Certain Legal Aspects
of the Loans".
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition under the laws of some
states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable,
as an "owner" or "operator", for costs of addressing releases or threatened
releases of hazardous substances that require remedy at a property, if agents
or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether the environmental damage
or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of the related property. See "Certain Legal Aspects of the
Loans--Environmental Risks".
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit experience; and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of
1994. These provisions impose additional disclosure and other requirements
on creditors with respect to non-purchase money mortgage loans with high
interest rates or high upfront fees and charges. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and
may affect the enforceability of the related loans. In addition, any
assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including,
without limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission
and other similar federal and state statutes and regulations (collectively,
the "Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the
obligor to withhold payment if the work does not meet the quality and
durability standards agreed to by the homeowner and the contractor. The
Holder in Due Course Rules have the effect of subjecting any assignee of the
seller in a consumer credit transaction to all claims and defenses which the
obligor in the credit sale transaction could assert against the seller of the
goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. See "Certain Legal Aspects of the Loans".
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities that
they be rated in one of the four highest rating categories by the Rating
Agency identified in the related Prospectus Supplement. Any such rating
would be based on among other things, the adequacy of the value of the Trust
Fund Assets and any credit enhancement with respect to such class and will
respect such Rating Agency's assessment solely of the likelihood that holders
of a class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute
an assessment of the likelihood that principal prepayments on the related
Loans will be made, the degree to which the rate of such prepayments might
differ from that originally anticipated or the likelihood of early optional
termination of the Series of Securities. Such rating shall not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. Such rating
will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn, among other reasons, because of an adverse change in
the financial or other condition of a credit enhancement provider or a change
in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of similar loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of similar loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that the values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that
such losses are not covered by credit enhancement, such losses will be borne,
at least in part, by the holders of one or more classes of the Securities of
the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the liquidity
of the Securities in the secondary trading market since investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Securities can be effected only through
the Depository Trust Company ("DTC"), participating organizations
("Participants"), Financial Intermediaries and certain banks, the ability of
a Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of
such Securities, may be limited due to lack of a physical certificate
representing the Securities.
In addition, Securityholders may experience some delay in their receipt
of distributions of interest and principal on the Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Participants
which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial
Intermediaries. See "Description of the Securities--Book-Entry Registration
of Securities".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing Date
the Depositor will deposit an amount (the "Pre-Funded Amount") specified in
such Prospectus Supplement into the Pre-Funding Account. In no event shall
the Pre-Funded Amount exceed 25% of the initial aggregate principal amount
of the Certificates and/or Notes of the related Series of Securities. The
Pre-Funded Amount will be used to purchase Loans ("Subsequent Loans") in a
period from the Closing Date to a date not more than three months after the
Closing Date (such period, the "Funding Period") from the Depositor (which,
in turn, will acquire such Subsequent Loans from the Seller or Sellers
specified in the related Prospectus Supplement). To the extent that the
entire Pre-Funded Amount has not been applied to the purchase of Subsequent
Loans by the end of the related Funding Period, any amounts remaining in the
Pre-Funding Account will be distributed as a prepayment of principal to
Certificateholders and/or Noteholders on the Distribution Date immediately
following the end of the Funding Period, in the amounts and pursuant to the
priorities set forth in the related Prospectus Supplement.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or
any other assets of a Series will at any time be equal to or greater than the
principal amount of the Securities of such Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the
Agreement for a Series and a sale of the assets in the Trust Fund or upon a
sale of the assets of a Trust Fund for a Series of Securities, the Trustee,
the Master Servicer, the credit enhancer, if any, and any other service
provider specified in the related Prospectus Supplement generally will be
entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement
prior to distributions to Securityholders. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on
the Securities of such Series.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets
of the related Trust Fund, and the Notes of each Series will be secured by
the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case
as specified in the related Prospectus Supplement./F1/ 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.
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/F1/ 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.
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.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will
be to obtain certain representations and warranties from the Sellers and to
assign to the Trustee for such Series of Securities the Depositor's rights
with respect to such representations and warranties. See "The Agreements--
Assignment of Trust Fund Assets". The obligations of the Master Servicer
with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation
to enforce the obligations of the Sub-Servicers or Sellers, or both, as more
fully described herein under "Loan Program--Representations by Sellers;
Repurchases" and "The Agreements--Sub-Servicing of Loans", "--Assignment of
Trust Fund Assets") and its obligation, if any, to make certain cash advances
in the event of delinquencies in payments on or with respect to the Loans in
the amounts described herein under "Description of the Securities--Advances".
The obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust
Fund Assets is not known at the time the related Series of Securities
initially is offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to the
Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule
of the Trust Fund Assets relating to such Series will be attached to the
Agreement delivered to the Trustee upon delivery of the Securities.
THE LOANS
General. For purposes hereof, "Home Equity Loans" includes "Closed-End
Loans" and "Revolving Credit Line Loans". The real property which secures
repayment of the Loans is referred to as "Properties". Unless otherwise
specified in the related Prospectus Supplement, the Loans will be secured by
mortgages or deeds of trust or other similar security instruments creating
a lien on a Property, which may be subordinated to one or more senior liens
on the related Properties, each as described in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement,
the Loans may be "conventional" loans or loans that are insured or guaranteed
by a governmental agency such as the FHA or VA.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments,
and certain other dwelling units ("Single Family Properties") or Small Mixed-
Used Properties (as defined herein) which consist of structures of not more
than three stories which include one- to four-family residential dwelling
units and space used for retail, professional or other commercial uses. Such
Properties may include vacation and second homes, investment properties and
leasehold interests. The Properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory
of the United States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features, all as
described above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time or
under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Loans may provide for
the payment of interest at a rate lower than the specified interest rate
borne by such Mortgage (the "Loan Rate") for a period of time or for the life
of the Loan, and the amount of any difference may be contributed from funds
supplied by the Seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the original
term to maturity or on an interest rate that is different from the interest
rate on the Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ("balloon payment"). Principal may include interest that
has been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic increases
or decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and may
be prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire loan in connection
with the sale or certain transfers of the related Property. Other loans
may be assumable by persons meeting the then applicable underwriting standards
of the Seller.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on
the average daily outstanding principal balance of such Loan. Principal
amounts on a Revolving Credit Line Loan may be drawn down (up to a maximum
amount as set forth in the related Prospectus Supplement) or repaid under
each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. The full amount
of a Closed-End Loan is advanced at the inception of the loan and generally
is repayable in equal (or substantially equal) installments of an amount to
fully amortize such loan at its stated maturity. Except to the extent
provided in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loan will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End
Loan, a borrower may choose an interest only payment option and is obligated
to pay only the amount of interest which accrues on the loan during the
billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance
of the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
basis for a representation that a given percentage of the Loans is secured
by Single Family Property that is owner-occupied will be either (i) the
making of a representation by the borrower at origination of the Loan either
that the underlying Property will be used by the borrower for a period of at
least six months every year or that the borrower intends to use the Property
as a primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having terms
to maturity of up to 30 years and secured by first-lien mortgages originated
on Properties containing one to four residential units and no more than three
income producing non-residential units ("Small Mixed-Use Properties"). At
least 50% of the units contained in a Small Mixed-Use Property will consist
of residential units. Income from such non-residential units will not
exceed 40% of the adjusted gross income of the related borrower. The maximum
Loan-to-Value Ratio on Small Mixed-Use Properties will not exceed 65%. Small
Mixed-Use Properties may be owner occupied or investor properties and the
loan purpose may be a refinancing or a purchase.
Home Improvement Contracts. The Trust Fund Assets for a Series may
consist, in whole or part, of home improvement installment sales contracts
and installment loan agreements (the "Home Improvement Contracts") originated
by a home improvement contractor, a thrift or a commercial mortgage banker
in the ordinary course of business. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or
secured by the Mortgages primarily on Single Family Properties which are
generally subordinate to other mortgages on the same Property, or secured by
purchase money security interest in the Home Improvements financed thereby.
Except as otherwise specified in the related Prospectus Supplement, the Home
Improvement Contracts will be fully amortizing and may have fixed interest
rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts will include, but are not limited to, replacement windows, house
siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling goods and solar heating panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the Depositor, with respect to the Loans contained
in the related Pool, including (i) the aggregate outstanding principal
balance and the average outstanding principal balance of the Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Loan (e.g.,
one- to four-family houses, individual units in condominium apartment
buildings, vacation and second homes or other real property), (iii) the
original terms to maturity of the Loans, (iv) the largest principal balance
and the smallest principal balance of any of the Loans, (v) the earliest
origination date and latest maturity date of any of the Loans, (vi) the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable, of the
Loans, (vii) the Loan Rates or annual percentage rates ("APR") or range of
Loan Rates or APR's borne by the Loans, and (viii) the geographical location
of the Loans on a state-by-state basis. If specific information respecting
the Loans is not known to the Depositor at the time the related Securities
are initially offered, more general information of the nature described above
will be provided in the related Prospectus Supplement, and specific
information will be set forth in the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement, the
"Combined Loan-to-Value Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal
balance of the Loan (or, in the case of a Revolving Credit Line Loan, the
maximum amount thereof available) and (b) the outstanding principal balance
at the date of origination of the Loan of any senior mortgage loan(s) or, in
the case of any open-ended senior mortgage loan, the maximum available line
of credit with respect to such mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the Loan, to (ii) the
Collateral Value of the related Property. Except as otherwise specified in
the related Prospectus Supplement, the "Collateral Value" of the Property,
other than with respect to certain Loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "Refinance Loan"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Loan and (b) the sales price for such
Property. In the case of Refinance Loans, the "Collateral Value" of the
related Property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
General. Private Asset Backed Securities may consist of (a) pass-
through certificates or participation certificates evidencing an undivided
interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home
improvement loans. Private Asset Backed Securities may include stripped
asset backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions)
or the interest distributions (but not the principal distributions) or in
some specified portion of the principal and interest distributions (but not
all of such distributions) on certain home equity or home improvement loans.
Private Asset Backed Securities will have been issued pursuant to a pooling
and servicing agreement, an indenture or similar agreement (a "PABS
Agreement"). The seller/servicer of the underlying Loans will have entered
into the PABS Agreement with the trustee under such PABS Agreement (the "PABS
Trustee"). The PABS Trustee or its agent, or a custodian, will possess the
loans underlying such Private Asset Backed Security. Loans underlying a
Private Asset Backed Security will be serviced by a servicer (the "PABS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PABS Servicer. Except as otherwise specified in the
related Prospectus Supplement, the PABS Servicer will be a FNMA or FHLMC
approved servicer and, if FHA Loans underlie the Private Asset Backed
Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts and selling beneficial interests in such
trusts. The PABS Issuer shall not be an affiliate of the Depositor. The
obligations of the PABS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
the related trust. Except as otherwise specified in the related Prospectus
Supplement, the PABS Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Asset Backed Securities
issued under the PABS Agreement. Additionally, although the loans underlying
the Private Asset Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Asset Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest
distributions. Principal and interest distributions will be made on the
Private Asset Backed Securities by the PABS Trustee or the PABS Servicer.
The PABS Issuer or the PABS Servicer may have the right to repurchase assets
underlying the Private Asset Backed Securities after a certain date or under
other circumstances as specified in the related Prospectus Supplement.
Underlying Loans. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment loans, buydown loans, adjustable
rate loans, or loans having balloon or other special payment features. Such
loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a cooperative and the
related shares issued by such cooperative. Except as otherwise specified in
the related Prospectus Supplement, the underlying loans will have the
following characterizations: (i) no loan will have had a Loan-to-Value Ratio
at origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii)
each loan will have had an original term to stated maturity of not less than
5 years and not more than 40 years, (iv) no loan that was more than 89 days
delinquent as to the payment of principal or interest will have been eligible
for inclusion in the assets under the related PABS Agreement, (v) each loan
(other than a cooperative loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each loan
(other than a cooperative loan or a contract secured by a manufactured home)
will be covered by a title insurance policy.
Credit Support Relating to Private Asset Backed Securities. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety
bonds, insurance policies or other types of credit support may be provided
with respect to the loans underlying the Private Asset Backed Securities
themselves.
Rating of Private Asset Backed Securities. The PABS upon their issuance
will have been assigned a rating in one of the four highest rating categories
by at least one nationally recognized statistical rating agency.
Additional Information. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private Asset
Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the loans which comprise the underlying assets for the
Private Asset Backed Securities including (A) the payment features of such
loans, (B) the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the loans, and (D)
the minimum and maximum stated maturities of the underlying loans at
origination, (iii) the maximum original term-to-stated maturity of the
Private Asset Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Asset Backed Securities, (v) the pass-through or
certificate rate of the Private Asset Backed Securities, (vi) the weighted
average pass-through or certificate rate of the Private Asset Backed
Securities, (vii) the PABS Issuer, the PABS Servicer (if other than the PABS
Issuer) and the PABS Trustee for such Private Asset Backed Securities, (viii)
certain characteristics of credit support, if any, such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties relating
to the loans underlying the Private Asset Backed Securities or to such
Private Asset Backed Securities themselves, (ix) the term on which the
underlying loans for such Private Asset Backed Securities may, or are
required to, be purchased prior to their stated maturity or the stated
maturity of the Private Asset Backed Securities, (x) the terms on which loans
may be substituted for those originally underlying the Private Asset Backed
Securities and (xi) to the extent provided in a periodic report to the
Trustee in its capacity as holder of the PABS, certain information regarding
the status of the credit support, if any, relating to the PABS.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used
by the Depositor for general corporate purposes. The Depositor expects to
sell Securities in Series from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the
volume of Trust Fund Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Trust Fund Assets and selling interests therein or
bonds secured thereby. It is an indirect, limited purpose finance subsidiary
of The Long-Term Credit Bank of Japan, Limited and an affiliate of Greenwich
Capital Markets, Inc. The Long-Term Credit Bank of Japan, Limited is a bank
organized under the laws of Japan conducting commercial banking, corporate
finance, capital markets and financial advisory services on a global basis.
Greenwich Capital Markets, Inc. is a registered broker-dealer engaged in the
United States government securities and related capital markets business.
The Depositor maintains its principal office at 600 Steamboat Road,
Greenwich, Connecticut 06830. Its telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure
or guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination for similar types
of loans. As to any Loan insured by the FHA or partially guaranteed by the
VA, the Seller will represent that it has complied with underwriting policies
of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Property as collateral. In general, a prospective
borrower applying for a Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history with respect to any
senior mortgage, if any, which, unless otherwise specified in the related
Prospectus Supplement, the borrower's income will be verified by the Seller.
As part of the description of the borrower's financial condition, the
borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports the
length of employment with that organization, the current salary, and whether
it is expected that the borrower will continue such employment in the future.
If a prospective borrower is self-employed, the borrower may be required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the
borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral,
an appraisal will generally be made of each property considered for
financing. The appraiser is generally required to inspect the property,
issue a report on its condition and, if applicable, verify that construction,
if new, has been completed. The appraisal is based on the market value of
comparable homes, the estimated rental income (if considered applicable by
the appraiser) and the cost of replacing the home. The value of the property
being financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on
the basis of the monthly payments due in the year of origination) and other
expenses related to the property (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards applied
by Sellers, particularly with respect to the level of loan documentation and
the mortgagor's income and credit history, may be varied in appropriate cases
where factors such as low Combined Loan-to-Value Ratios or other favorable
credit exist.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans
of the type contained in the related Pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities
to originate and service those loans. Unless otherwise specified in the
related Prospectus Supplement, each Seller will be a seller/servicer approved
by either FNMA or FHLMC.
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series
of Securities. Except as otherwise specified in the related Prospectus
Supplement, such representations and warranties include, among other things:
(i) that title insurance (or in the case of Properties located in areas where
such policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy (or certificate of title as
applicable) remained in effect on the date of purchase of the Loan from the
Seller by or on behalf of the Depositor; (ii) that the Seller had good title
to each such Loan and such Loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any buydown
agreement described herein may forgive certain indebtedness of a borrower;
(iii) that each Loan constituted a valid lien on the Property (subject only
to permissible liens disclosed, if applicable, title insurance exceptions,
if applicable, and certain other exceptions described in the Agreement) and
that the Property was free from damage and was in acceptable condition; (iv)
that there were no delinquent tax or assessment liens against the Property;
(v) that no required payment on a Loan was more than thirty days' delinquent;
and (vi) that each Loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and regulations in all
material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made
not as of the Cut-off Date but as of the date on which such Seller sold the
Loan to the Depositor or one of its affiliates. Under such circumstances,
a substantial period of time may have elapsed between such date and the date
of initial issuance of the Series of Securities evidencing an interest in
such Loan. Since the representations and warranties of a Seller do not
address events that may occur following the sale of a Loan by such Seller,
its repurchase obligation described below will not arise if the relevant
event that would otherwise have given rise to such an obligation with respect
to a Loan occurs after the date of sale of such Loan by such Seller to the
Depositor or its affiliates. However, the Depositor will not include any
Loan in the Trust Fund for any Series of Securities if anything has come to
the Depositor's attention that would cause it to believe that the
representationes and warranties of a Seller will not be accurate and complete
in all material respects in respect of such Loan as of the date of initial
issuance of the related Series of Securities. If the Master Servicer is also
a Seller of Loans with respect to a particular Series, such representations
will be in addition to the representations and warranties made by the Master
Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially
and adversely affects the interests of the Securityholders in such Loan.
Unless otherwise specified in the related Prospectus Supplement, if such
Seller cannot cure such breach within 90 days following notice from the
Master Servicer or the Trustee, as the case may be, then such Seller will be
obligated either (i) to repurchase such Loan from the Trust Fund at a price
(the "Purchase Price") equal to 100% of the unpaid principal balance thereof
as of the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the Loan Rate (less any
Advances or amount payable as related servicing compensation if the Seller
is the Master Servicer) or (ii) to substitute for such Loan a replacement
loan that satisfies certain requirements set forth in the Agreement. If a
REMIC election is to be made with respect to a Trust Fund, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any such
repurchase or substitution and the Trustee must have received a satisfactory
opinion of counsel that such repurchase or substitution will not cause the
Trust Fund to lose its status as a REMIC or otherwise subject the Trust Fund
to a prohibited transaction tax. The Master Servicer may be entitled to
reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of
the Securities--General". Except in those cases in which the Master Servicer
is the Seller, the Master Servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its
good faith business judgment were it the owner of such Loan. This repurchase
or substitution obligation will constitute the sole remedy available to
holders of Securities or the Trustee for a breach of representation by a
Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan
if a Seller defaults on its obligation to do so, and no assurance can be
given that Sellers will carry out their respective repurchase or substitution
obligations with respect to Loans. However, to the extent that a breach of a
representation and warranty of a Seller may also constitute a breach of a
representation made by the Master Servicer, the Master Servicer may have a
repurchase or substitution obligation as described below under "The
Agreements--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each Series of Notes will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the entity
named in the related Prospectus Supplement as trustee (the "Trustee") with
respect to such Series. A form of Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. A Series
may consist of both Notes and Certificates. Each Agreement, dated as of the
related Cut-off Date, will be among the Depositor, the Master Servicer and
the Trustee for the benefit of the holders of the Securities of such Series.
The provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will
describe any provision of the Agreement relating to such Series that mainly
differs from the description thereof contained in this Prospectus. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreement for
each Series of Securities and the applicable Prospectus Supplement. The
Depositor will provide a copy of the Agreement (without exhibits) relating
to any Series without charge upon written request of a holder of record of
a Security of such Series addressed to Financial Asset Securities Corp., 600
Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed Finance
Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be
entitled to payments in respect of the assets included in any other Trust
Fund established by the Depositor. The Securities will not represent
obligations of the Depositor or any affiliate of the Depositor. Certain of
the Loans may be guaranteed or insured as set forth in the related Prospectus
Supplement. Each Trust Fund will consist of, to the extent provided in the
Agreement, (i) the Trust Fund Assets, as from time to time are subject to the
related Agreement (exclusive of any amounts specified in the related
Prospectus Supplement ("Retained Interest")), including all payments of
interest and principal received with respect to the Loans after the Cut-off
Date (to the extent not applied in computing the Cut-off Date Principal
Balance); (ii) such assets as from time to time are required to be deposited
in the related Security Account, as described below under "The Agreements--
Payments on Loans; Deposits to Security Account"; (iii) property which
secured a Loan and which is acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure and (iv) any insurance policies
or other forms of credit enhancement required to be maintained pursuant to
the related Agreement. If so specified in the related Prospectus Supplement,
a Trust Fund may also include one or more of the following: reinvestment
income on payments received on the Trust Fund Assets, a Reserve Account, a
mortgage pool insurance policy, a Special Hazard Insurance Policy, a
Bankruptcy Bond, one or more letters of credit, a surety bond, guaranties or
similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to
payment to one or more other classes of Securities of such Series. One or
more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made
prior to one or more other classes, after the occurrence of specified events,
in accordance with a schedule or formula, on the basis of collections from
designated portions of the Trust Fund Assets in the related Trust Fund or on
a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among
classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee
on each Distribution Date (i.e., monthly or at such other intervals and on
the dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions
will be made to the persons in whose names the Securities are registered at
the close of business on the dates specified in the related Prospectus
Supplement (each, a "Record Date"). Distributions will be made in the manner
specified in the Prospectus Supplement to the persons entitled thereto at the
address appearing in the register maintained for holders of Securities (the
"Security Register"); provided, however, that the final distribution in
retirement of the Securities will be made only upon presentation and
surrender of the Securities at the office or agency of the
Trustee or other person specified in the notice to Securityholders of such
final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange
or transfer of Securities of any Series but the Trustee may require payment
of a sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code may result in prohibited transactions within the meaning
of ERISA and the Code. See "ERISA Considerations". Unless otherwise
specified in the related Prospectus Supplement, the transfer of Securities
of such a class will not be registered unless the transferee (i) represents
that it is not, and is not purchasing on behalf of, any such plan, account
or arrangement or (ii) provides an opinion of counsel satisfactory to the
Trustee and the Depositor that the purchase of Securities of such a class by
or on behalf of such plan, account or arrangement is permissible under
applicable law and will not subject the Trustee, the Master Servicer or the
Depositor to any obligation or liability in addition to those undertaken in
the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus
Supplement will specify whether a REMIC election is to be made.
Alternatively, the Agreement for a Series may provide that a REMIC election
may be made at the discretion of the Depositor or the Master Servicer and may
only be made if certain conditions are satisfied. As to any such Series, the
terms and provisions applicable to the making of a REMIC election, as well
as any material federal income tax consequences to Securityholders not
otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a Series, one of
the classes will be designated as evidencing the sole class of "residual
interests" in the related REMIC, as defined in the Code. All other classes
of Securities in such a Series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each Series with respect to
which a REMIC election is to be made, the Master Servicer or a holder of the
related residual certificate will be obligated to take all actions required
in order to comply with applicable laws and regulations and will be obligated
to pay any prohibited transaction taxes. The Master Servicer, to the extent
set forth in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the Trust Fund or from
any holder of the related residual certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type
of credit support, if any, that is used with respect to such Series. See
"Credit Enhancement". Set forth below are descriptions of various methods
that may be used to determine the amount of distributions on the Securities
of a particular Series. The Prospectus Supplement for each Series of
Securities will describe the method to be used in determining the amount of
distributions on the Securities of such Series.
Distributions allocable to principal and interest on the Securities will
be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "Reserve Account"). As between Securities of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions to any class of Securities will be made pro rata to all
Securityholders of that class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement
and specified in the Agreement. Unless otherwise provided in the related
Prospectus Supplement, "Available Funds" for each Distribution Date will
equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and interest
on the Loans in the related Trust Fund (including Liquidation Proceeds and
Insurance Proceeds and amounts drawn under letters of credit or other credit
enhancement instruments as permitted thereunder and as specified in the
related Agreement) received by the Master Servicer after the Cut-off Date and
on or prior to the day of the month of the related Distribution Date
specified in the related Prospectus Supplement (the "Determination Date")
except
(a) all payments which were due on or before the Cut-off
Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Loan purchased by the
Depositor, Master Servicer, any Sub-Servicer or any Seller pursuant to the
Agreement that were received after the prepayment period specified in the
related Prospectus Supplement and all related payments of interest
representing interest for any period after the interest accrual period;
(c) all scheduled payments of principal and interest due on
a date or dates subsequent to the Due Period relating to such Distribution
Date;
(d) amounts received on particular Loans as late payments of
principal or interest or other amounts required to be paid by borrowers, but
only to the extent of any unreimbursed advance in respect thereof made by the
Master Servicer (including the related Sub-Servicers, Support Servicers or
the Trustee);
(e) amounts representing reimbursement, to the extent
permitted by the Agreement and as described under "Advances" below, for
advances made by the Master Servicer, Sub-Servicers, Support Servicers or the
Trustee that were deposited into the Security Account, and amounts
representing reimbursement for certain other losses and expenses incurred by
the Master Servicer or the Depositor and described below;
(f) that portion of each collection of interest on a
particular Loan in such Trust Fund which represents servicing compensation
payable to the Master Servicer or Retained Interest which is to be retained
from such collection or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Loans purchased pursuant to the
Agreement;
(ii) the amount of any advance made by the Master Servicer, Sub
Servicer, Support Servicer or Trustee as described under "Advances" below and
deposited by it in the Security Account;
(iii) if applicable, amounts withdrawn from a Reserve Account;
(iv) if applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party guaranties; and
(v) if applicable, the amount of prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security
Principal Balance (or, in the case of Securities (i) entitled only to
distributions allocable to interest, the aggregate notional principal balance
or (ii) which, under certain circumstances, allow for the accrual of interest
otherwise scheduled for payment to remain unpaid until the occurrence of
certain events specified in the related Prospectus Supplement) of each class
of Securities entitled to interest from the date, at the Pass-Through Rate
(which may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement) and for the periods specified in such Prospectus Supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of Securities entitled to interest (other than
a class of Securities that provides for interest that accrues, but is not
currently payable, referred to hereafter as "Accrual Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Security Principal Balance of the Securities
of such class has been distributed in full or, in the case of Securities
entitled only to distributions allocable to interest, until the aggregate
notional principal balance of such Securities is reduced to zero or for the
period of time designated in the related Prospectus Supplement. The original
Security Principal Balance of each Security will equal the aggregate
distributions allocable to principal to which such Security is entitled.
Unless otherwise specified in the related Prospectus Supplement,
distributions allocable to interest on each Security that is not entitled to
distributions allocable to principal will be calculated based on the notional
principal balance of such Security. The notional principal balance of a
Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing
the calculation of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at par)
to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Security
Principal Balance of such class of Securities on that Distribution Date.
Distributions of interest on any class of Accrual Securities will commence
only after the occurrence of the events specified in the related Prospectus
Supplement. Prior to such time, the beneficial ownership interest of such
class of Accrual Securities in the Trust Fund, as reflected in the aggregate
Security Principal Balance of such class of Accrual Securities, will increase
on each Distribution Date by the amount of interest that accrued on such
class of Accrual Securities during the preceding interest accrual period but
that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Securities will thereafter accrue interest
on its outstanding Security Principal Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Security Principal Balance of
any class of Securities entitled to distributions of principal generally will
be the aggregate original Security Principal Balance of such class of
Securities specified in such Prospectus Supplement, reduced by all
distributions reported to the holders of such Securities as allocable to
principal and, (i) in the case of Accrual Securities, increased by all
interest accrued but not then distributable on such Accrual Securities and
(ii) in the case of adjustable rate Securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes
of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in such Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securityholders will
have the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by other Securities in the Trust Fund.
Increasing the interests of the other Securities relative to that of certain
Securities allocated by the principal prepayments is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement--Subordination".
Unscheduled Distributions. The Securities will be subject to receipt
of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Trust Fund Assets, the Trustee or
the Master Servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any Reserve Account,
may be insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with
respect to Securities of the same class, unscheduled distributions of
principal will be made on the same basis as such distributions would have
been made on the next Distribution Date on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or Support Servicers or
funds held in the Security Account for future distributions to the holders
of such Securities), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date and
were not advanced by any Sub-Servicer, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In
addition, to the extent provided in the related Prospectus Supplement, a cash
account may be established to provide for Advances to be made in the event
of certain Trust Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances
are made by the Master Servicer from cash being held for future distribution
to Securityholders, the Master Servicer will replace such funds on or before
any future Distribution Date to the extent that funds in the applicable
Security Account on such Distribution Date would be less than the amount
required to be available for distributions to Securityholders on such date.
Any Master Servicer funds advanced will be reimbursable to the Master
Servicer out of recoveries on the specific Loans with respect to which such
Advances were made (e.g., late payments made by the related borrower, any
related Insurance Proceeds, Liquidation Proceeds or proceeds of any Loan
purchased by a Sub-Servicer or a Seller under the circumstances described
hereinabove). Advances by the Master Servicer (and any advances by a
Sub-Servicer or a Support Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer or a Support Servicer) from cash otherwise
distributable to Securityholders (including the holders of Senior Securities)
to the extent that the Master Servicer determines that any such Advances
previously made are not ultimately recoverable as described above. To the
extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Funds
so advanced are reimbursable to the Master Servicer to the extent permitted
by the Agreement. The obligations of the Master Servicer to make advances
may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"Support Agreement") with a Support Servicer pursuant to which the Support
Servicer agrees to provide funds on behalf of the Master Servicer or Sub-
Servicer in connection with the obligation of the Master Servicer or Sub-
Servicer, as the case may be, to make Advances. The Support Agreement will
be delivered to the Trustee and the Trustee will be authorized to accept a
substitute Support Agreement in exchange for an original Support Agreement,
provided that such substitution of the Support Agreement will not adversely
affect the rating or ratings then in effect on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make
a required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it
will be entitled to be reimbursed for such Advance to the same extent and
degree as the Master Servicer, a Sub-Servicer or a Support Servicer is
entitled to be reimbursed for Advances. See "Description of the
Securities--Distributions on Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan
in the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to the excess, if any, of (a) 30
days' interest on the principal balance of the related Loan at the Loan Rate
net of the per annum rate at which the Master Servicer's servicing fee
accrues, over (b) the amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments and
any applicable prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b) withdrawn
from the Reserve Fund, if any, that is included in the amounts distributed
to the Senior Securityholders;
(v) the outstanding principal balance or notional principal
balance of such class after giving effect to the distribution of principal
on such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which such class will be entitled to receive on the
following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained
or withdrawn from the Security Account by the Master Servicer, and the amount
of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60 days, (2) 61 to
90 days and (3) 91 or more days and (B) in foreclosure and delinquent (1) 31
to 60 days, (2) 61 to 90 days and (3) 91 or more days, as of the close of
business on the last day of the calendar month preceding such Distribution
Date;
(x) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of payments
of interest on the Loans in the related Pool, the Pass-Through Rate, if
adjusted from the date of the last statement, of the Loans expected to be
applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve
Account at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail
to each Securityholder of record at any time during such calendar year a
report (a) as to the aggregate of amounts reported pursuant to (i) and (ii)
above for such calendar year or, in the event such person was a
Securityholder of record during a portion of such calendar year, for the
applicable portion of such year and (b) such other customary information as
may be deemed necessary or desirable for Securityholders to prepare their tax
returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States,
or CEDEL or Euroclear (in Europe) if they are participants ("Participants")
of such systems, or indirectly through organizations which are Participants
in such systems. The Book-Entry Securities will be issued in one or more
certificates which equal the aggregate principal balance of the Securities
and will initially be registered in the name of Cede & Co., the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as
depositary for CEDEL and the Brussels, Belgium branch of Morgan Guarantee
Trust Company of New York ("Morgan") will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no Security Owner will
be entitled to receive a physical certificate representing such Security (a
"Definitive Security"). Unless and until Definitive Securities are issued,
it is anticipated that the only "Securityholders" of the Securities will be
Cede & Co., as nominee of DTC. Security Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Security Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the Security Owner's Financial Intermediary is not a
Participant and on the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect
to the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Security Owners have accounts with respect to
Securities are similarly required to make book-entry transfers and receive
and transmit such distributions on behalf of their respective Security
Owners. Accordingly, although Security Owners will not possess certificates,
the Rules provide a mechanism by which Security Owners will receive
distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not Participants may transfer
ownership of Securities only through Participants and indirect participants
by instructing such Participants and indirect participants to transfer
Securities, by book-entry transfer, through DTC for the account of the
purchasers of such Securities, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Securities will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear or CEDEL Participants on such business
day. Cash received in CEDEL or Euroclear as a result of sales of securities
by or through a CEDEL Participant (as defined herein) or Euroclear
Participant (as defined herein) to a DTC Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL
or Euroclear cash account only as of the business day following settlement
in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear
Participants will occur in accordance with their respective rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will,
if the transaction meets its settlement requirements, deliver instructions
to the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations
("CEDEL Participants") and facilitates the clearance and settlement of
securities transactions between CEDEL Participants through electronic
book-entry changes in accounts of CEDEL Participants, thereby eliminating the
need for physical movement of certificates. Transactions may be settled in
CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces
with domestic markets in several countries. As a professional depository,
CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL
participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan, under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by Morgan, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed
by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis
without attribution of specific certificates to specific securities clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only
on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with
respect to Securities held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by
the Relevant Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Material Federal Income Tax Consequences--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of Notes--Backup Withholding"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a beneficial owner to pledge Book-Entry Securities to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Securities, may be limited due to the
lack of physical certificates for such Book-Entry Securities. In addition,
issuance of the Book-Entry Securities in book-entry form may reduce the
liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot
obtain physical certificates.
Monthly and annual reports on the Trust will be provided to CEDE, as
nominee of DTC, and may be made available by CEDE to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
DTC accounts the Book-Entry Securities of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of
the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect such actions on its behalf through DTC.
DTC may take actions, at the direction of the related Participants, with
respect to some Securities which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued
at any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made
on account of beneficial ownership interests of the Book-Entry Securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the Trust Fund Assets in the
related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named in the related Prospectus
Supplement, the subordination of one or more classes of the Securities of
such Series, the establishment of one or more Reserve Accounts, the use of
a cross-support feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract or another
method of credit enhancement described in the related Prospectus Supplement,
or any combination of the foregoing. Unless otherwise specified in the
related Prospectus Supplement, credit enhancement will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance of the Securities and interest thereon. If losses occur
which exceed the amount covered be credit enhancement or which are not
covered by the credit enhancement, Securityholders will bear their allocable
share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities of
a Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series
(the "Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders of Subordinated Securities under the
circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior
Securities of a Series by: (i) reducing the ownership interest of the related
Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. Delays in receipt of scheduled payments on the Loans
and losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives
of the Securities or at any time, the aggregate losses in respect of
defaulted Loans which must be borne by the Subordinated Securities by virtue
of subordination and the amount of the distributions otherwise distributable
to the Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement,
holders of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may
be made on each Distribution Date, for specified periods or until the balance
in the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through
a cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence
of events, or (iv) otherwise, in each case as specified in the related
Prospectus Supplement. As between classes of Subordinated Securities,
payments to holders of Senior Securities on account of delinquencies or
losses and payments to any Reserve Account will be allocated as specified in
the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate Special Hazard Insurance Policy may be obtained for the Pool
and issued by the insurer (the "Special Hazard Insurer") named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject
to limitations described below, protect holders of the related Securities
from (i) loss by reason of damage to Properties caused by certain hazards
(including earthquakes and, to a limited extent, tidal waves and related
water damage or as otherwise specified in the related Prospectus Supplement)
not insured against under the standard form of hazard insurance policy for
the respective states in which the Properties are located or under a flood
insurance policy if the Property is located in a federally designated flood
area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Agreements-Hazard
Insurance". Each Special Hazard Insurance Policy will not cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
or chemical reactions, flood (if the Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will
be specified in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and,
if applicable, flood insurance on the Property securing the Loan have been
kept in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in
the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed
Loan (title to which has been acquired by the insured) and to the extent such
damage is not covered by the hazard insurance policy or flood insurance
policy, if any, maintained by the borrower or the Master Servicer, the
Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the Property to the
Special Hazard Insurer, the unpaid principal balance of such Loan at the time
of acquisition of such Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the Master Servicer with respect to such
Property. If the unpaid principal balance of a Loan plus accrued interest
and certain expenses is paid by the Special Hazard Insurer, the amount of
further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the Property.
Any amount paid as the cost of repair of the Property will further reduce
coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit
or any other instrument acceptable to each Rating Agency rating the
Securities of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Special Hazard
Insurance Policy. The amount of any Special Hazard Insurance Policy or of
the deposit to the special trust account relating to such Securities in lieu
thereof may be reduced so long as any such reduction will not result in a
downgrading of the rating of such Securities by any such Rating Agency.
BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from
a reduction by a bankruptcy court of scheduled payments of principal and
interest on a Loan or a reduction by such court of the principal amount of
a Loan and will cover certain unpaid interest on the amount of such a
principal reduction from the date of the filing of a bankruptcy petition.
The required amount of coverage under each Bankruptcy Bond will be set forth
in the related Prospectus Supplement. The Master Servicer may deposit cash,
an irrevocable letter of credit or any other instrument acceptable to each
Rating Agency rating the Securities of the related Series in a special trust
account to provide protection in lieu of or in addition to that provided by
a Bankruptcy Bond. Coverage under a Bankruptcy Bond may be cancelled or
reduced by the Master Servicer if such cancellation or reduction would not
adversely affect the then current rating or ratings of the related
Securities. See "Certain Legal Aspects of the Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided
by the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit,
demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the related Prospectus Supplement, (ii) by the
deposit therein from time to time of certain amounts, as specified in the
related Prospectus Supplement to which the Subordinate Securityholders, if
any, would otherwise be entitled or (iii) in such other manner as may be
specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument
deposited therein will name the Trustee, in its capacity as trustee
for the holders of the Securities, as beneficiary and will be issued
by an entity acceptable to each Rating Agency that rates the Securities.
Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("Pool Insurance Policy") may be
obtained for the Pool and issued by the insurer (the "Pool Insurer") named
in the related Prospectus Supplement. Each Pool Insurance Policy will,
subject to the limitations described below, cover loss by reason of default
in payment on Loans in the Pool in an amount equal to a percentage specified
in such Prospectus Supplement of the aggregate principal balance of such
Loans on the Cut-off Date which are not covered as to their entire
outstanding principal balances by Primary Mortgage Insurance Policies. As
more fully described below, the Master Servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the
holders of the Securities. The Pool Insurance Policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Loans and only upon satisfaction of certain
conditions precedent described below. Unless otherwise specified in the
related Prospectus Supplement, the Pool Insurance Policies will not cover
losses due to a failure to pay or denial of a claim under a Primary Mortgage
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for
the defaulted Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in
either case net of certain amounts paid or assumed to have been paid under
the related Primary Mortgage Insurance Policy. If any Property securing a
defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient
to permit recovery under the Pool Insurance Policy, the Master Servicer
will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) such restoration will increase the
proceeds to securityholders on liquidation of the Loan after reimbursement
of the Master Servicer for its expenses and (ii) such expenses will be
recoverable by it through proceeds of the sale of the Property or proceeds
of the related Pool Insurance Policy or any related Primary Mortgage
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the
originator or persons involved in the origination thereof, or (ii) failure
to construct a Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result
in a breach of the related Seller's representations described above, and, in
such events might give rise to an obligation on the part of such Seller to
purchase the defaulted Loan if the breach cannot be cured by such Seller.
No Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Loan occurring when
the servicer of such Loan, at the time of default or thereafter, was not
approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims
paid may include certain expenses incurred by the Master Servicer as well as
accrued interest on delinquent Loans to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Pool Insurance Policy
reach the original policy limit, coverage under that Pool Insurance Policy
will be exhausted and any further losses will be borne by the
Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing
Act of 1934, as amended. In addition to the Title I Program of the FHA, see
"Certain Legal Considerations -- Title I Program", certain Loans will be
insured under various FHA programs including the standard FHA 203(b) program
to finance the acquisition of one- to four-family housing units and the FHA
245 graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible,
into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or, other than Loans originated under the Title I
Program of the FHA, beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD
may provide relief by making payments to the Master Servicer or any Sub-
Servicer in partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting assignment
of the loan from the Master Servicer or any Sub-Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan, and HUD must have rejected any request for relief from the
mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued
in satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount
equal to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the borrower's first uncorrected failure
to perform any obligation to make any payment due under the mortgage and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan
guarantee by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program
has no mortgage loan limits, requires no down payment from the purchaser and
permits the guarantee of mortgage loans of up to 30 years' duration.
However, no Loan guaranteed by the VA will have an original principal amount
greater than five times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage
loan, as further described in 38 United States Code Section 1803(a), as
amended. As of January 1, 1990, the maximum guarantee that may be issued by
the VA under a VA guaranteed mortgage loan of more than $144,000 is the
lesser of 25% of the original principal amount of the mortgage loan and
$46,000. The liability on the guarantee is reduced or increased pro rata
with any reduction or increase in the amount of indebtedness, but in no event
will the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee,
make full payment to a mortgage holder of unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance of the Loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only
to the extent that such amounts have not been recovered through liquidation
of the Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in other asset groups within the
same Trust Fund. The related Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled
to receive amounts deposited in various accounts held by the Trustee upon the
terms specified in such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will
be affected primarily by the amount and timing of principal payments received
on or in respect of the Trust Fund Assets included in the related Trust Fund.
With respect to a Trust Fund which includes Private Asset Backed Securities,
the possible effects of the amount and timing of principal payments received
with respect to the underlying mortgage loans will be described in the
related Prospectus Supplement. The original terms to maturity of the Loans
in a given Pool will vary depending upon the type of Loans included therein.
Each Prospectus Supplement will contain information with respect to the type
and maturities of the Loans in the related Pool. Unless otherwise specified
in the related Prospectus Supplement, Loans may be prepaid without penalty
in full or in part at any time. The prepayment experience on the Loans in
a Pool will affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary
borrower prepayments could cause rates of principal payments lower than, or
similar to, those of traditional fully-amortizing first mortgages. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and the frequency and amount of any future draws on any Revolving
Credit Line Loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying
senior mortgage loans, and the use of first mortgage loans as long-term
financing for home purchase and subordinate mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans
for federal income tax purposes may further increase the rate of prepayments
of the Loans. The enforcement of a "due-on-sale" provision (as described
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses". The yield to an
investor who purchases Securities in the secondary market at a price other
than par will vary from the anticipated yield if the rate of prepayment on
the Loans is actually different than the rate anticipated by such investor
at the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period
for certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make the required periodic payments. In addition,
collections on the Loans may vary due to seasonal purchasing and the payment
habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreements-Collection Procedures" and "Certain
Legal Aspects of the Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain
at or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may
experience a lower prepayment rate than if prevailing rates remain at or
below such Loan Rates. However, there can be no assurance that such will be
the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number
of days in the month actually elapsed up to the date of the prepayment,
rather than for a full month. Unless the Master Servicer remits amounts
otherwise payable to it as servicing compensation, see "Description of the
Securities-Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan
so prepaid will be paid only to the date of prepayment. Partial prepayments
in a given month may be applied to the outstanding principal balances of the
Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce
the amount of interest passed through in such month. Unless otherwise
specified in the related Prospectus Supplement, neither full nor partial
prepayments will be passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on
a Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the remaining principal
balance of the small mortgage loan than would be the case with the other
defaulted mortgage loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws,
public policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to
the origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to
damages and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis,
disproportionate principal prepayments among Loans with different Loan Rates
will affect the yield on such Securities. In most cases, the effective yield
to Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of
Securities. See "The Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Securities. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be
no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions
or terms used in the Agreements are referred to, such provisions or terms are
as specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The
provisions of an Agreement with respect to a Trust Fund which consists of or
includes Private Asset Backed Securities may contain provisions similar to
those described herein but will be more fully described in the related
Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of
a Series, the Depositor will cause the Loans comprising the related Trust
Fund to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the
related Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Securities to the Depositor in exchange for the
Loans. Each Loan will be identified in a schedule appearing as an exhibit
to the related Agreement. Such schedule will include information as to the
outstanding principal balance of each Loan after application of payments due
on or before the Cut-off Date, as well as information regarding the Loan Rate
or APR, the current scheduled monthly payment of principal and interest, the
maturity of the Loan, the Combined Loan-to-Value Ratios at origination and
certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies
of documents and instruments related to each Home Improvement Contract and,
other than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order
to give notice of the right, title and interest of Securityholders to the
Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the
Trustee as the secured party and identifying all Home Improvement Contracts
as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trustee. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "Certain Legal Aspects of the Loans--The Home
Improvement Contracts."
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to
the custodian hereinafter referred to) as to each Home Equity Loan, among
other things, (i) the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording
office, in which case the Depositor will deliver or cause to be delivered a
copy of such Mortgage together with a certificate that the original of such
Mortgage was delivered to such recording office), (iii) an assignment of the
Mortgage to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, and (iv) such other security documents,
including those relating to any senior interests in the Property, as may be
specified in the related Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public
office for real property records, except in states in which, in the opinion
of counsel acceptable to the Trustee, such recording is not required to
protect the Trustee's interest in such Loans against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents
in trust for the benefit of the Securityholders. Unless otherwise specified
in the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer
will notify the related Seller. If the Seller cannot cure the omission or
defect within a specified number of days after receipt of such notice (or
such other period as may be specified in the related Prospectus Supplement),
the Seller will be obligated either (i) to purchase the related Loan from the
Trust at the Purchase Price or (ii) to remove such Loan from the Trust Fund
and substitute in its place one or more other Loans. There can be no
assurance that a Seller will fulfill this purchase or substitution
obligation. Although the Master Servicer may be obligated to enforce such
obligation to the extent described above under "Loan Program-Representations
by Sellers; Repurchases", neither the Master Servicer nor the Depositor will
be obligated to purchase or replace such Loan if the Seller defaults on its
obligation, unless such breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Depositor, as the
case may be. Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation constitutes the sole remedy available
to the Securityholders or the Trustee for omission of, or a material defect
in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Securityholders in a Loan, the Master Servicer will be obligated
either to cure the breach in all material respects or to purchase or replace
the Loan at the Purchase Price. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure, purchase or substitute
constitutes the sole remedy available to the Securityholders or the Trustee
for such a breach of representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated
Private Asset Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund-Private Asset Backed Securities" herein. Each
Private Asset Backed Security will be identified in a schedule appearing as
an exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual pass-
through rate or interest rate and maturity date and certain other pertinent
information for each Private Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a
Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing Agreement
(as defined below under "-Sub-Servicing of Loans") will establish and
maintain an account (the "Sub-Servicing Account") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-
Servicing Account must be established with a Federal Home Loan Bank or with a
depository institution (including the Sub-Servicer itself) whose accounts are
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")) of the FDIC. If a Sub-Servicing Account
is maintained at an institution that is a Federal Home Loan Bank or an
FDIC-insured institution and, in either case, the amount on deposit in the
Sub-Servicing Account exceeds the FDIC insurance coverage amount, then such
excess amount must be remitted to the Master Servicer within one business day
of receipt. In addition, the Sub-Servicer must maintain a separate account for
escrow and impound funds relating to the Loans. Each Sub-Servicer is required
to deposit into its Sub-Servicing Account on a daily basis all amounts
described below under "-Sub-Servicing of Loans" that are received by it in
respect of the Loans, less its servicing or other compensation. On or before
the date specified in the Sub-Servicing Agreement, the Sub-Servicer will remit
or cause to be remitted to the Master Servicer or the Trustee all funds held
in the Sub-Servicing Account with respect to Loans that are required to be so
remitted. The Sub-Servicer may also be required to advance on the scheduled
date of remittance an amount corresponding to any monthly installment of
interest and/or principal, less its servicing or other compensation, on any
Loan for which payment was not received from the mortgagor. Unless otherwise
specified in the related Prospectus Supplement, any such obligation of the
Sub-Servicer to advance will continue up to and including the first of the
month following the date on which the related Property is sold at a
foreclosure sale or is acquired on behalf of the Securityholders by deed in
lieu of foreclosure, or until the related Loan is liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") must be either (i)
maintained with a depository institution the debt obligations of which (or
in the case of a depository institution that is the principal subsidiary of
a holding company, the obligations of which) are rated in one of the two
highest rating categories by the Rating Agency or Rating Agencies that rated
one or more classes of the related Series of Securities, (ii) an account or
accounts the deposits in which are fully insured by either the BIF or SAIF,
(iii) an account or accounts the deposits in which are insured by the BIF or
SAIF (to the limits established by the FDIC), and the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Securityholders have a claim with respect to the funds in the Security
Account or a perfected first priority security interest against any
collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Security Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts
in the Security Account is limited to United States government securities and
other high-quality investments ("Permitted Investments"). A Security Account
may be maintained as an interest bearing account or the funds held therein may
be invested pending each succeeding Distribution Date in Permitted
Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive
any such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security
Account the amount of any loss immediately as realized. The Security Account
may be maintained with the Master Servicer or with a depository institution
that is an affiliate of the Master Servicer, provided it meets the standards
set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent
applicable and provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured Expenses") incurred,
and unreimbursed advances made, by the related Sub-Servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with liquidation
or foreclosure ("Liquidation Expenses") and unreimbursed advances made, by
the related Sub-Servicer, if any) received and retained in connection with
the liquidation of defaulted Loans, by foreclosure or otherwise ("Liquidation
Proceeds"), together with any net proceeds received on a monthly basis with
respect to any properties acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Seller as described under "Loan Program--Representations by Sellers;
Repurchases" or "-Assignment of Trust Fund Assets" above and all proceeds of
any Loan repurchased as described under "-Termination; Optional Termination"
below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer
in connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor
will deposit the Pre-Funded Amount on the related Closing Date. The Pre-
Funded Amount will not exceed 25% of the initial aggregate principal amount
of the Certificates and Notes of the related Series. The Pre-Funded Amount
will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. The Funding Period,
if any, for a Trust Fund will begin on the related Closing Date and will end
on the date specified in the related Prospectus Supplement, which in no event
will be later than the date that is three months after the Closing Date. Any
amounts remaining in the Pre-Funding Account at the end of the Funding Period
will be distributed to the related Securityholders in the manner and priority
specified in the related Prospectus Supplement, as a prepayment of principal
of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the Sub-
Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely
between the Master Servicer and the Sub-Servicer, the Agreement pursuant to
which a Series of Securities is issued will provide that, if for any reason
the Master Servicer for such Series of Securities is no longer the Master
Servicer of the related Loans, the Trustee or any successor Master Servicer
must recognize the Sub-Servicer's rights and obligations under such Sub-
Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer
will remain obligated under the related Sub-Servicing Agreement. Each Sub-
Servicer will be required to perform the customary functions of a servicer
of mortgage loans. Such functions generally include collecting payments from
mortgagors or obligors and remitting such collections to the Master Servicer;
maintaining hazard insurance policies as described herein and in any related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any
such settlement; maintaining escrow or impoundment accounts of mortgagors or
obligors for payment of taxes, insurance and other items required to be paid
by the mortgagor or obligor pursuant to the related Loan; processing
assumptions or substitutions, although, the Master Servicer is generally
required to exercise due-on-sale clauses to the extent such exercise is
permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Properties under certain circumstances; maintaining accounting
records relating to the Loans; and, to the extent specified in the related
Prospectus Supplement, maintaining additional insurance policies or credit
support instruments and filing and settling claims thereunder. A Sub-
Servicer will also be obligated to make advances in respect of delinquent
installments of interest and/or principal on Loans, as described more fully
above under "-Payments on Loans; Deposits to Security Account", and in
respect of certain taxes and insurance premiums not paid on a timely basis
by mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under
the Agreement. The Master Servicer may purchase the servicing of Loans if
the Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "-Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. Each Sub-Servicer will be required to maintain a
fidelity bond and an errors and omissions policy with respect to its
officers, employees and other persons acting on its behalf or on behalf of
the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-
Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be
a Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an
assumption will occur. In the event of such an assumption, the Master
Servicer may in the exercise of its business judgment release the terminated
Sub-Servicer from liability in respect of such representations and
warranties. Any amendments to a Sub-Servicing Agreement or new Sub-Servicing
Agreements may contain provisions different from those which are in effect
in the original Sub-Servicing Agreement. However, each Agreement will provide
that any such amendment or new agreement may not be inconsistent with or
violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to loans that are comparable to the
Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Loan and (ii) to the extent not inconsistent with the
coverage of such Loan by a Pool Insurance Policy, Primary Mortgage Insurance
Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or alternative
arrangements, if applicable, arrange with a borrower a schedule for the
liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Both the Sub-Servicer and the Master
Servicer may be obligated to make Advances during any period of such an
arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such
rights is permitted by applicable law. If these conditions are not met or
if the Master Servicer reasonably believes it is unable under applicable law
to enforce such due-on-sale clause, or the Master Servicer will enter into
or cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant
to which such person becomes liable for repayment of the Loan and, to the
extent permitted by applicable law, the mortgagor remains liable thereon.
Any fee collected by or on behalf of the Master Servicer for entering into
an assumption agreement will be retained by or on behalf of the Master
Servicer as additional servicing compensation. See "Certain Legal Aspects
of the Loans-Due-on-Sale Clauses". In connection with any such assumption,
the terms of the related Loan may not be changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage
of the standard form of fire insurance policy with extended coverage
customary for the type of Property in the state in which such Property is
located. All amounts collected by the Master Servicer under any hazard
policy (except for amounts to be applied to the restoration or repair of the
Property or released to the mortgagor or obligor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the
related Security Account. In the event that the Master Servicer maintains a
blanket policy insuring against hazard losses on all the Loans comprising
part of a Trust Fund, it will conclusively be deemed to have satisfied its
obligation relating to the maintenance of hazard insurance. Such blanket
policy may contain a deductible clause, in which case the Master Servicer
will be required to deposit from its own funds into the related Security
Account the amounts which would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical
terms and conditions, the basic terms thereof are dictated by respective
state laws, and most such policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mud flows), nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all inclusive. If the Property securing a Loan is
located in a federally designated special flood area at the time of
origination, the Master Servicer will require the mortgagor or obligor to
obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time
to carry insurance of a specified percentage of the full replacement value
of the insured property in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, then
the insurer's liability in the event of partial loss will not exceed the
larger of (i) the actual cash value (generally defined as replacement cost
at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance
the Master Servicer may cause to be maintained on the improvements securing
the Loans declines as the principal balances owing thereon decrease, and
since improved real estate generally has appreciated in value over time in
the past, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the
damaged property. If specified in the related Prospectus Supplement, a
special hazard insurance policy will be obtained to insure against certain
of the uninsured risks described above. See "Credit Enhancement-Special
Hazard Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such
restoration will increase the proceeds to Securityholders on liquidation of
the Loan after reimbursement of the Master Servicer for its expenses and (ii)
that such expenses will be recoverable by it from related Insurance Proceeds
or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will
realize a loss in the amount of such difference plus the aggregate of expenses
incurred by the Master Servicer in connection with such proceedings and which
are reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
Master Servicer of its expenses, in excess of the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan and, unless otherwise specified in the related Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added
to any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan. In the event that the Master Servicer has expended its own
funds to restore the damaged Property and such funds have not been reimbursed
under the related hazard insurance policy, it will be entitled to withdraw
from the Security Account out of related Liquidation Proceeds or Insurance
Proceeds in an amount equal to such expenses incurred by it, in which event
the Trust Fund may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Master Servicer, no such payment or recovery will result in
a recovery to the Trust Fund which exceeds the principal balance of the
defaulted Loan together with accrued interest thereon. See "Credit
Enhancement".
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a
Primary Mortgage Insurance Policy with regard to each Loan for which such
coverage is required. The Master Servicer will not cancel or refuse to renew
any such Primary Mortgage Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with
an insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid
principal amount of the covered Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary
Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in
the origination of the Loans; (ii) failure to construct the Property subject
to the Loan in accordance with specified plans; (iii) physical damage to the
Property; and (iv) the related Master Servicer or Sub-servicer not being
approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary
and approved in advance by the Primary Insurer, (1) real estate property
taxes, (2) all expenses required to maintain the related Property in at least
as good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees; (ii) in the event of any physical loss
or damage to the Property, to have the Property restored and repaired to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to the Primary Insurer good and merchantable title to and possession of the
Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the Sub-
Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be deposited
in the Sub-Servicing Account. In all other cases, the Master Servicer, on
behalf of itself, the Trustee and the Securityholders, will present claims
to the insurer under each Primary Mortgage Insurance Policy, and will take
such reasonable steps as are necessary to receive payment or to permit recovery
thereunder with respect to defaulted Loans. As set forth above, all
collections by or on behalf of the Master Servicer under any Primary Mortgage
Insurance Policy and, when the Property has not been restored, the hazard
insurance policy, are to be deposited in the Security Account, subject to
withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the
related Primary Mortgage Insurance Policy, if any, the Master Servicer is not
required to expend its own funds to restore the damaged Property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause
to be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. In the unlikely event that any such proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Master Servicer will
be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation with respect to such Loan and,
except as otherwise specified in the Prospectus Supplement, amounts
representing the balance of such excess, exclusive of any amount required by
law to be forwarded to the related borrower, as additional servicing
compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified
in the related Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage
of the outstanding principal balance of each Loan, such amounts will decrease
as the Loans amortize. In addition to primary compensation, the Master
Servicer or the Sub-Servicers may be entitled to retain all assumption fees
and late payment charges, to the extent collected from borrowers, and, if so
provided in the related Prospectus Supplement, any prepayment penalties and
any interest or other income which may be earned on funds held in the
Security Account or any Sub-Servicing Account. Unless otherwise specified
in the related Prospectus Supplement, any Sub-Servicer will receive a portion
of the Master Servicer's primary compensation as its sub-servicing
compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay
from its servicing compensation certain expenses incurred in connection with
its servicing of the Loans, including, without limitation, payment of any
premium for any insurance policy, guaranty, surety or other form of credit
enhancement as specified in the related Prospectus Supplement, payment of the
fees and disbursements of the Trustee and independent accountants, payment
of expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC,
the servicing by or on behalf of the Master Servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans
or Private Asset Backed Securities by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance
with the Uniform Single Audit Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for FHLMC (rendered within one year of such
statement) of firms of independent public accountants with respect to the
related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law.
The Master Servicer may, however, be removed from its obligations and duties
as set forth in the Agreement. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Agreement, or for errors
in judgment; provided, however, that neither the Master Servicer, the
Depositor nor any such person will be protected against any liability which
would otherwise be imposed by reason of wilful misfeasance or gross
negligence in the performance of duties thereunder or by reasons of reckless
disregard of obligations and duties thereunder. To the extent provided in
the related Agreement, the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor may be
entitled to indemnification by the related Trust Fund and may be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Securities, other than any
loss, liability or expense related to any specific Loan or Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In
addition, each Agreement will provide that neither the Master Servicer
nor the Depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Depositor
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Agreement and the rights and
duties of the parties thereto and the interests of the Securityholders
thereunder. In such event, the legal expenses and costs of such action and
any liability resulting therefrom will be expenses, costs and liabilities of
the Trust Fund and the Master Servicer or the Depositor, as the case may be,
will be entitled to be reimbursed therefor out of funds otherwise
distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer
to distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Securities of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced
by such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or to
the Master Servicer, the Depositor and the Trustee by the holders of
Securities of any class evidencing not less than 25% of the aggregate
Percentage Interests constituting such class; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will
be sold only under the circumstances and in the manner specified in the
related Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities of any class evidencing not less than 51% of the aggregate
Percentage Interests constituting such class and under such other
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of its rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Trust Fund Assets,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the Master Servicer under the Agreement, including, if
specified in the related Prospectus Supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee
and any such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect
to or affecting such Series having been incorrect in a material respect as
of the time made, and such breach is not cured within sixty (60) days after
notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of the Depositor or the Trust Fund; or (v) any
other Event of Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series have
a Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of more than 50% of the Percentage Interests of
the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and
to continue to apply distributions on such collateral as if there had been
no declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes
of such Series as they would have become due if there had not been such a
declaration. In addition, the Trustee may not sell or otherwise liquidate
the collateral securing the Notes of a Series following an Event of Default,
other than a default in the payment of any principal or interest on any Note
of such Series for thirty (30) days or more, unless (a) the holders of 100%
of the Percentage Interests of the Notes of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding
Notes of such Series at the date of such sale or (c) the Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes
had not been declared due and payable, and the Trustee obtains the consent
of the holders of 662/3% of the Percentage Interests of the Notes of such
Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in
the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Trustee will have a prior lien on the proceeds
of any such liquidation for unpaid fees and expenses. As a result, upon the
occurrence of such an Event of Default, the amount available for distribution
to the Noteholders would be less than would otherwise be the case. However,
the Trustee may not institute a proceeding for the enforcement of its lien
except in connection with a proceeding for the enforcement of the lien of the
Indenture for the benefit of the Noteholders after the occurrence of such an
Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
holders of a majority of the then aggregate outstanding amount of the Notes
of such Series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the
Notes of such Series, and the holders of a majority of the then aggregate
outstanding amount of the Notes of such Series may, in certain cases, waive
any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of
the Indenture that cannot be modified without the waiver or consent of all
the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided
that such action will not adversely affect in any material respect the
interests of any Securityholder. In addition, to the extent provided in the
related Agreement, an Agreement may be amended without the consent of any of
the Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is necessary
or helpful to maintain such qualification. Except as otherwise specified in
the related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer and the Trustee with consent of holders of
Securities of such Series evidencing not less than 66% of the aggregate
Percentage Interests of each class affected thereby for the purpose of adding
any provisions to or changing in an manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related Securities; provided, however, that no such amendment
may (i) reduce in any manner the amount of or delay the timing of, payments
received on Loans which are required to be distributed on any Security
without the consent of the holder of such Security, or (ii) reduce the
aforesaid percentage of Securities of any class of holders which are required
to consent to any such amendment without the consent of the holders of all
Securities of such class covered by such Agreement then outstanding. If a
REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will
not cause such Trust Fund to fail to qualify as a REMIC.
TERMINATIONS; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling
and Servicing Agreement and Trust Agreement for each Series of Securities
will terminate upon the payment to the related Securityholders of all amounts
held in the Security Account or by the Master Servicer and required to be
paid to them pursuant to such Agreement following the later of (i) the final
payment of or other liquidation of the last of the Trust Fund Assets subject
thereto or the disposition of all property acquired upon foreclosure of any
such Trust Fund Assets remaining in the Trust Fund and (ii) the purchase by
the Master Servicer or, if REMIC treatment has been elected and if specified
in the related Prospectus Supplement, by the holder of the residual interest
in the REMIC (see "Certain Material Federal Income Tax Consequences" below),
from the related Trust Fund of all of the remaining Trust Fund Assets and all
property acquired in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option
of the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to
so purchase is subject to the principal balance of the related Trust Fund
Assets being less than the percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Trust Fund Assets at the
Cut-off Date for the Series. The foregoing is subject to the provision that
if a REMIC election is made with respect to a Trust Fund, any repurchase
pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4)
of the Code.
Indenture. The Indenture will be discharged with respect to a Series
of Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee
of funds sufficient for the payment in full of all of the Notes of such
Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such Series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such Series, to replace stolen, lost or mutilated Notes of
such Series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of and each installment of interest on the Notes of such Series
on the last scheduled Distribution Date for such Notes and any installment
of interest on such Notes in accordance with the terms of the Indenture and
the Notes of such Series. In the event of any such defeasance and discharge
of Notes of such Series, holders of Notes of such Series would be able to
look only to such money and/or direct obligations for payment of principal
and interest, if any, on their Notes until maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Depositor, the Master
Servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect
the laws of any particular state, nor to encompass the laws of all states in
which the security for the Loans is situated. The summaries are qualified
in their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property subject to the loan is located.
A mortgage creates a lien upon the real property encumbered by the mortgage,
which lien is generally not prior to the lien for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two
parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid,
in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure
an underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed
or deed to secure debt are governed by law and, with respect to some deeds
of trust, the directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-
judicial sale under a specific provision in the deed of trust
which authorizes the trustee to sell the property at public auction upon any
default by the borrower under the terms of the note or deed of trust. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In general, the borrower, or any other person having
a junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, the borrower or junior lienholder no longer has the right to reinstate
the loan and must pay the loan in full to prevent the scheduled foreclosure
sale. If the deed of trust is not reinstated, a notice of sale must be
posted in a public place and, in most states, published for a specific period
of time in one or more newspapers. In addition, some state laws require that
a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of
the parties. When the mortgagee's right to foreclosure is contested, the
legal proceedings necessary to resolve the issue can be time consuming.
After the completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
court officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided
in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure
in which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such judgment is
available. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burden of ownership, including obtaining hazard insurance and making such
repairs at its own expense as are necessary to render the property suitable
for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage guaranty insurance
proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of
the borrower's defaults under the loan documents. Some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. For the
most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust does not
involve sufficient state action to afford constitutional protection to the
borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees".
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states,
contamination of a property may give risks to a lien on the property to
assure the payment of the costs of clean-up. In several states such a lien
has priority over the lien of an existing mortgage against such property.
In addition, under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the United States
Environmental Protection Agency ("EPA") may impose a lien on property where
EPA has incurred clean-up costs. However, a CERCLA lien is subordinate to
pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that
a lender may be held liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a prior owner or operator. CERCLA imposes liability on any and all
"responsible parties" (which includes, inter alia, the property owner and
operator) for the cost of clean-up of releases of hazardous substances.
However, CERCLA excludes from the definition of "owner or operator" secured
creditors who hold indicia of ownership for the purpose of protecting their
security interest, but "without participating in the management of the
facility". That exclusion was substantially narrowed by a May 1990 decision
of the United States Court of Appeals for the Eleventh Circuit in United
States v. Fleet Factors Corp., which held that a lender need not have
involved itself in the day-to-day operations of the facility or participated
in decisions relating to hazardous waste management in order to be liable;
rather, liability could attach to the lender if its involvement with the
management of the facility is broad enough to support the inference that the
lender could affect hazardous waste management practices if it so chose. The
court added that a lender's capacity to influence such decisions could be
inferred from the extent of its involvement in the facility's financial
management. In response to Fleet Factors, EPA promulgated regulations
designed to clarify the range of activities a lender may engage in without
losing the benefit of the statutory exclusion. Under the regulations, which
took effect in April 1992, a lender is permitted to monitor the borrower's
environmental practices in order to determine if the facility is in compliance
with applicable law, and to require the borrower to take measures necessary to
achieve or maintain compliance or conduct necessary clean-ups. The lender may
not, however, exercise control over or assume responsibility for the
borrower's environmental practices. Such actions would be considered
"participation in the management of the facility". Also, if the lender takes
title to or possession of the property, it might be deemed to have obviated the
security interest exclusion and to be liable for clean-up costs pursuant to
CERCLA. The EPA regulations allow lenders to take certain actions with respect
to foreclosure without losing the benefit of the statutory exclusion.
Essentially, the regulations allow the lender to take actions consistent with
protecting its security interest, but not actions which demonstrate an intent
to exercise long-term ownership interest in the property. While the EPA
regulations offer some protection to lenders, it must be noted that such
protection may not be available under applicable state law. Furthermore, the
regulations are binding only on EPA with respect to EPA's enforcement powers
and cost recovery rights. It has not yet been determined whether the federal
courts will apply the regulations in cost recovery actions brought against
lenders by other responsible parties, although the regulations may well be
considered persuasive by the courts. (Two judicial challenges have been
brought against the EPA regulations in the United States Court of Appeals for
the District of Columbia Circuit. The challenges both allege that the
regulations are inconsistent with the statutory requirements of CERCLA and,
therefore, should be invalidated. The challenges were filed on July 28, 1992
and are still pending.) If a lender is or becomes liable, it can bring an
action for contribution against any other "responsible parties",
including a previous owner or operator, who created the environmental hazard.
However, such persons or entities may be bankrupt or otherwise judgment proof
and the costs associated with environmental clean-up may be substantial.
Therefore, it is conceivable that such remedial costs arising from the
circumstances set forth above would become a liability of the Trust Fund and
occasion a loss to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, at
the time the Loans were originated, no environmental assessment or a very
limited environmental assessment of the Properties was conducted.
The Agreement will provide that the Master Servicer, acting on behalf
of the Trust Fund, may not acquire title to a multifamily residential
property or mixed residential/commercial property underlying a Loan or take
over its operation unless the Master Servicer has previously determined,
based upon a report prepared by a person who regularly conducts environmental
audits, that the Property is in compliance with applicable environmental laws
and regulations or that such acquisition would not be more detrimental than
beneficial to the value of the Properties and the interests therein of the
Securityholders.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale.
In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure.
In other states, redemption may be authorized if the former borrower pays
only a portion of the sums due. The effect of a statutory right of
redemption would defeat the title of any purchaser from the lender subsequent
to foreclosure or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to retain the property
and pay the expenses of ownership until the redemption period has run. In
some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under
a deed of trust or certain other foreclosure proceedings. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the fair market value
of the real property sold at the foreclosure sale. Other statutes
require the beneficiary or mortgagee to exhaust the security afforded under
a deed of trust or mortgage by foreclosure in an attempt to satisfy the full
debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect
of the election requirement, when applicable, is that lenders will usually
proceed first against the security rather than bringing a personal action
against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids
at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state
laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon its security. For example,
in a proceeding under the federal Bankruptcy Code, a lender may not foreclose
on the Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is
not the debtor's principal residence and the court determines that the value
of the Property is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the Property as of
the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the
monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to
any automatic stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the aggregate
amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien
of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of loans secured
by Single Family Properties. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act,
Fair Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal and state laws impose specific
statutory liabilities upon lenders who fail to comply with the provisions of
the law. In some cases, this liability may affect assignees of the loans or
contracts.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will provide that
if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. The
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act"), subject to certain exceptions, preempts state constitutional,
statutory and case law prohibiting the enforcement of due-on-sale clauses.
As a result, due-on-sale clauses have become generally enforceable except in
those states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain
Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St. Germain
Act sets forth nine specific instances in which a mortgagee covered by the
Act may not exercise its rights under a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. The inability
to enforce a due-on-sale clause may result in transfer of the related
Property to an uncreditworthy person, which could increase the likelihood of
default or may result in a mortgage bearing an interest rate below the
current market rate being assumed by a new home buyer, which may affect the
average life of the Loans and the number of Loans which may extend to
maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also
limit the amounts that a lender may collect from a borrower as an additional
charge if the loan is prepaid. Late charges and prepayment fees are
typically retained by servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue
of whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that, in some cases involving the sale by
a trustee under a deed of trust or by a mortgagee under a mortgage having a
power of sale, there is insufficient state action to afford constitutional
protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Federal Home Loan Bank
Board (the "FHLBB") prohibit the imposition of a prepayment penalty or
equivalent fee in connection with the acceleration of a loan by exercise of
a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to Loans having higher
mortgage rates, may increase the likelihood of refinancing or other early
retirements of the Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of
Thrift Supervision, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1993
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real
estate (such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the Uniform Commercial Code (the
"UCC"). Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under
the related Agreement, the Depositor will transfer physical possession of the
contracts to the Trustee or a designated custodian or may retain possession
of the contracts as custodian for the Trustee. In addition, the Depositor
will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the
contracts. Unless otherwise specified in the related Prospectus Supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the Depositor to the Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured
by the Home Improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such Home Improvements to
secure all or part of the purchase price of such Home Improvements and
related services. A financing statement generally is not required to be
filed to perfect a purchase money security interest in consumer goods. Such
purchase money security interests are assignable. In general, a purchase
money security interest grants to the holder a security interest that has
priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral
subject to a purchase money security interest becomes a fixture, in order for
the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In
general, a security interest does not exist under the UCC in ordinary building
material incorporated into an improvement on land. Home Improvement Contracts
that finance lumber, bricks, other types of ordinary building material or
other goods that are deemed to lose such characterization upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the
Home Improvement has not become subject to the real estate law, a creditor
can repossess a Home Improvement securing a contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10 to 30
days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of
the unit that the debtor may redeem at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit
or delay the ability of a lender to repossess and resell collateral or
enforce a deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder.
The effect of this rule is to subject the assignee of such a contract to
all claims and defenses which the debtor could assert against the seller of
goods. Liability under this rule is limited to amounts paid under a contract;
however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trustee against such
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure
to comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"),
provides that, subject to the following conditions, state usury limitations
shall not apply to any contract which is secured by a first lien on certain
kinds of consumer goods. The contracts would be covered if they satisfy
certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law
to adopt a provision limiting discount points or other charges on loans
covered by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an
installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the
property and enters into an agreement with the purchaser hereinafter referred
to in this section as the "borrower") for the payment of the purchase price,
plus interest, over the term of such contract. Only after full performance
by the borrower of the contract is the lender obligated to convey title to
the property to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the Installment Contract, the borrower is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender
in such a situation does not have to foreclose in order to obtain title to
the property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may
be required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the Installment
Contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment
in the property under an Installment Contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is
repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the Master Servicer to collect full amounts of interest on certain of the
Loans. Any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the Securityholders. The Relief
Act also imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Loan during the borrower's period of
active duty status. Moreover, the Relief Act permits the extension of a
Loan's maturity and the re-adjustment of its payment schedule beyond the
completion of military service. Thus, in the event that such a Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other
lenders or institutional investors, the rights of the Trust Fund (and
therefore the Securityholders), as mortgagee under any such junior mortgage,
are subordinate to those of any mortgagee under any senior mortgage. The
senior mortgagee has the right to receive hazard insurance and condemnation
proceeds and to cause the property securing the Loan to be sold upon default
of the mortgagor, thereby extinguishing the junior mortgagee's lien unless
the junior mortgagee asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure such default and bring the senior loan current,
in either event adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the mortgage or deed of trust,
no notice of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage, in such order as the mortgagee may
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken
by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with
the condemnation and to apply the same to the indebtedness secured by the
senior mortgages. Proceeds in excess of the amount of senior mortgage
indebtedness, in most cases, may be applied to the indebtedness of a junior
mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage.
Upon a failure of the mortgagor to perform any of these obligations, the
mortgagee is given the right under certain mortgages to perform the obligation
itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor.
All sums so expended by the mortgagee become part of the indebtedness secured
by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the
beneficiary or lender are to be secured by the deed of trust or mortgage.
Any amounts so advanced after the Cut-off Date with respect to any mortgage
will not be included in the Trust Fund. The priority of the lien securing
any advance made under the clause may depend in most states on whether the
deed of trust or mortgage is called and recorded as a credit line deed of
trust or mortgage. If the beneficiary or lender advances additional amounts,
the advance is entitled to receive the same priority as amounts initially
advanced under the trust deed or mortgage, notwithstanding the fact that
there may be junior trust deeds or mortgages and other liens which intervene
between the date of recording of the trust deed or mortgage and the date of
the future advance, and notwithstanding that the beneficiary or lender had
actual knowledge of such intervening junior trust deeds or mortgages and
other liens at the time of the advance. In most states, the trust deed or
mortgage lien securing mortgage loans of the type which includes home equity
credit lines applies retroactively to the date of the original recording of
the trust deed or mortgage, provided that the total amount of advances under
the home equity credit line does not exceed the maximum specified principal
amount of the recorded trust deed or mortgage, except as to advances made
after receipt by the lender of a written notice of lien from a judgment lien
creditor of the trustor.
THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered
to insure qualified lending institutions against losses on eligible loans.
The Title I Program operates as a coinsurance program in which the FHA
insures up to 90% of certain losses incurred on an individual insured loan,
including the unpaid principal balance of the loan, but only to the extent
of the insurance coverage available in the lender's FHA insurance coverage
reserve account. The owner of the loan bears the uninsured loss on each
loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan
means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes single
family improvement loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan,
the borrower makes application directly to a lender without any assistance
from a dealer, which application may be filled out by the borrower or by a
person acting at the direction of the borrower who does not have a financial
interest in the loan transaction, and the lender may disburse the loan
proceeds solely to the borrower or jointly to the borrower and other parties
to the transaction. With respect to a dealer loan, the dealer, who has a
direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower
in obtaining the loan from the lender. The lender may disburse proceeds
solely to the dealer or the borrower or jointly to the borrower and the
dealer or other parties to the transaction. With respect to a dealer Title
I Loan, a dealer may include a seller, a contractor or supplier of goods or
services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually where a borrower has an irregular flow of income.
The first or last payments (or both) may vary in amount but may not exceed
150% of the regular installment payment, and the first payment may be due no
later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest
rate must be negotiated and agreed to by the borrower and the lender and must
be fixed for the term of the loan and recited in the note. Interest on an
insured loan must accrue from the date of the loan and be calculated
according to the actuarial method. The lender must assure that the note and
all other documents evidencing the loan are in compliance with applicable
federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must
determine whether the borrower's income will be adequate to meet the
periodic payments required by the loan, as well as the borrower's
other housing and recurring expenses, which determination must be
made in accordance with the expense-to-income ratios published by the
Secretary of HUD unless the lender determines and documents in the loan file
the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with
other federal loan programs). If, after a loan has been made and reported
for insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the
FHA. In such case, provided that the validity of any lien on the property
has not been impaired, the insurance of the loan under the Title I Program
will not be affected unless such material misstatements of fact or misuse of
loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable
fees and charges allowed under the Title I Program; provided that such
maximum amount does not exceed $25,000 (or the current applicable amount) for
a single family property improvement loan. Generally, the term of a Title
I Loan may not be less than six months nor greater than 20 years and 32 days.
A borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding balance
of all Title I Loans in the same property does not exceed the maximum loan
amount for the type of Title I Loan thereon having the highest permissible
loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property,
a lease thereof for a term expiring at least six months after the final
maturity of the Title I Loan or a recorded land installment contract for the
purchase of the real property. In the case of a Title I Loan with a total
principal balance in excess of $15,000, if the property is not occupied by
the owner, the borrower must have equity in the property being improved at
least equal to the principal amount of the loan, as demonstrated by a current
appraisal. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or
deed of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary
of HUD has published a list of items and activities which cannot be financed
with proceeds from any Title I Loan and from time to time the Secretary of
HUD may amend such list of items and activities. With respect to any dealer
Title I Loan, before the lender may disburse funds, the lender must have in
its possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender
is required to obtain, promptly upon completion of the improvements but not
later than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower.
The lender is required to conduct an on-site inspection on any Title I Loan
where the principal obligation is $7,500 or more, and on any direct Title I
Loan where the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program the FHA establishes
an insurance coverage reserve account for each lender which has been granted
a Title I insurance contract. The amount of insurance coverage in this
account is a maximum of 10% of the amount disbursed, advanced or expended by
the lender in originating or purchasing eligible loans registered with FHA
for Title I insurance, with certain adjustments. The balance in the
insurance coverage reserve account is the maximum amount of insurance claims
the FHA is required to pay. Loans to be insured under the Title I Program
will be registered for insurance by the FHA and the insurance coverage
attributable to such loans will be included in the insurance coverage reserve
account for the originating or purchasing lender following the receipt and
acknowledgment by the FHA of a loan report on the prescribed form pursuant
to the Title I regulations. The FHA charges a fee of 0.50% per annum of the
net proceeds (the original balance) of any eligible loan so reported and
acknowledged for insurance by the originating lender. The FHA bills the
lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured
loan is prepaid during the year, FHA will not refund or abate the insurance
premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount
of the FHA insurance claims approved for payment relating to such insured
loans and (ii) the amount of insurance coverage attributable to insured loans
sold by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. The balance of the lender's FHA
insurance coverage reserve account will be further adjusted as required under
Title I or by the FHA, and the insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest
to do so. Originations and acquisitions of new eligible loans will
continue to increase a lender's insurance coverage reserve account
balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer
insurance coverage between insurance coverage reserve accounts with
earmarking with respect to a particular insured loan or group of insured
loans when a determination is made that it is in the Secretary's interest to
do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever
is less). However, under the Title I Program not more than $5,000 in
insurance coverage shall be transferred to or from a lender's insurance
coverage reserve account during any October 1 to September 30 period without
the prior approval of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after
the lender or its agent has contacted the borrower in a face-to-face meeting
or by telephone to discuss the reasons for the default and to seek its cure.
If the borrower does not cure the default or agree to a modification
agreement or repayment plan, the lender will notify the borrower in writing
that, unless within 30 days the default is cured or the borrower enters into
a modification agreement or repayment plan, the loan will be accelerated and
that, if the default persists, the lender will report the default to an
appropriate credit agency. The lender may rescind the acceleration of
maturity after full payment is due and reinstate the loan only if the
borrower brings the loan current, executes a modification agreement or agrees
to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance.
If the lender chooses to proceed against the property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
property), the lender may file an insurance claim only with the prior
approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender
has properly filed proofs of claims, where the borrower is bankrupt or
deceased. Generally, a claim for reimbursement for loss on any Title I Loan
must be filed with the FHA no later than 9 months after the date of default
of such loan. Concurrently with filing the insurance claim, the lender shall
assign to the United States of America the lender's entire interest in the
loan note (or a judgment in lien of the note), in any security held and in
any claim filed in any legal proceedings. If, at the time the note is
assigned to the United States, the Secretary has reason to believe that the
note is not valid or enforceable against the borrower, the FHA may deny the
claim and reassign the note to the lender. If either such defect is
discovered after the FHA has paid a claim, the FHA may require the lender to
repurchase the paid claim and to accept a reassignment of the loan note. If
the lender subsequently obtains a valid and enforceable judgment against the
borrower, the lender may resubmit a new insurance claim with an assignment
of the judgment. Although the FHA may contest any insurance claim and make
a demand for repurchase of the loan at any time up to two years from the date
the claim was certified for payment and may do so thereafter in the event of
fraud or misrepresentation on the part of the lender, the FHA has expressed
an intention to limit the period of time within which it will take such
action to one year from the date the claim was certified for payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the
purposes hereof, the "Claimable Amount" means an amount equal to 90% of the
sum of: (a) the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with adjustments thereto
if the lender has proceeded against property securing such loan; (b) the
interest on the unpaid amount of the loan obligation from the date of default
to the date of the claim's initial submission for payment plus 15 calendar
days (but not to exceed 9 months from the date of default), calculated at the
rate of 7% per annum; (c) the uncollected court costs; (d) the attorney's
fees not to exceed $500; and (e) the expenses for recording the assignment
of the security to the United States.
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation
Z, which requires certain disclosures to the borrowers regarding the terms
of the Loans; (ii) the Equal Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and (iii) the Fair Credit
Reporting Act, which regulates the use and reporting of information related
to the borrower's credit experience. Violations of certain provisions of
these federal laws may limit the ability of the Sellers to collect all or
part of the principal of or interest on the Loans and in addition could
subject the Sellers to damages and administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel
to the Depositor (in such capacity, "Tax Counsel"). The summary is based
upon the provisions of the Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code. Prospective investors may
wish to consult their own tax advisers concerning the federal, state, local
and any other tax consequences as relates specifically to such investors in
connection with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii)
an election is made to treat the Trust Fund relating to a particular Series
of Securities as a real estate mortgage investment conduit ("REMIC") under
the Internal Revenue Code of 1986, as amended (the "Code"); (iii) the
Securities represent an ownership interest in some or all of the assets
included in the Trust Fund for a Series; or (iv) an election is made to treat
the Trust Fund relating to a particular Series of Certificates as a
partnership. The Prospectus Supplement for each Series of Securities will
specify how the Securities will be treated for federal income tax
purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests
in a REMIC ("Regular Interest Securities") or represent interests in a
grantor trust, Tax Counsel is of the opinion that: (i) Securities held by
a mutual savings bank or domestic building and loan association will
represent interests in "qualifying real property loans" within the meaning
of Code section 593(d); (ii) Securities held by a domestic building and loan
association will constitute "loans... secured by an interest in real
property" within the meaning of Code section 7701(a)(19)(C)(v); and (iii)
Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c)(5)(A) and interest
on Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the
meaning of Code section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to holders in the same
manner as evidences of indebtedness issued by the REMIC. Stated interest on
the Regular Interest Securities will be taxable as ordinary income and taken
into account using the accrual method of accounting, regardless of the
holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be
includible in income by holders thereof in accordance with their usual
methods of accounting. Securities characterized as debt for federal income
tax purposes and Regular Interest Securities will be referred to hereinafter
collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at
a discount may, be issued with "original issue discount" ("OID"). The
following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations
issued thereunder on February 2, 1994 (the "OID Regulations"). A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero
if it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than
a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The
issue price of a Debt Security also includes the amount paid by an initial
Debt Security holder for accrued interest that relates to a period prior to
the issue date of the Debt Security. The stated redemption price at maturity
of a Debt Security includes the original principal amount of the Debt
Security, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payment. Certain Debt
Securities may provide for default remedies in the event of late payment or
nonpayment of interest. In the opinion of Tax Counsel, the interest on such
Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments will be included in the Debt Security's stated redemption
price at maturity and taxed as OID. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Debt Securities with
respect to which deferred interest will accrue, will not constitute qualified
stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Debt Security is either longer or shorter than
the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included
in the stated redemption price at maturity and tested under the de minimis
rule described below. In the case of a Debt Security with a long first
period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period
will be included in the stated redemption price at maturity and the Debt
Security will generally have OID. Holders of Debt Securities should consult
their own tax advisors to determine the issue price and stated redemption
price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the
Debt Security is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue
date until each distribution in reduction of stated redemption price at
maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Debt Security and the denominator of which is the stated
redemption price at maturity of the Debt Security. Holders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the Debt Security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as
well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i)
such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating
rate," an "objective rate," or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates or defers
interest payments on such Debt Security. In the case of Compound Interest
Securities, certain Interest Weighted Securities, and certain of the other
Debt Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will
be included in the stated redemption price.
The Internal Revenue Services (the "IRS") recently issued proposed
regulations (the "Proposed Contingent Regulations") governing the calculation
of OID on instruments having contingent interest payments. The Proposed
Contingent Regulations, although not effective until 60 days after finalized,
represent the only guidance regarding the views of the IRS with respect to
contingent interest instruments and specifically do not apply for purposes
of calculating OID on debt instruments subject to Code Section 1272(a)(6),
such as the Debt Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the Trustee intends to base its
computation on Code Section 1272(a)(6) and the OID Regulations as
described in this Prospectus. However, because no regulatory guidance
currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount.
The amount of OID includible in income by a holder will be computed by
allocating to each day during a taxable year a pro rata portion of the
original issue discount that accrued during the relevant accrual period. In
the case of a Debt Security that is not a Regular Interest Security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the Loans, the amount of OID includible in income of a holder
for an accrual period (generally the period over which interest accrues on
the debt instrument) will equal the product of the yield to maturity of the
Debt Security and the adjusted issue price of the Debt Security, reduced by
any payments of qualified stated interest. The adjusted issue price is the
sum of its issue price plus prior accruals or OID, reduced by the total
payments made with respect to such Debt Security in all prior periods, other
than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject
to acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account
the anticipated rate of prepayments assumed in pricing the debt instrument
(the "Prepayment Assumption"). The amount of OID that will accrue during an
accrual period on a Pay-Through Security is the excess (if any) of the sum
of (a) the present value of all payments remaining to be made on the
Pay-Through Security as of the close of the accrual period and (b) the
payments during the accrual period of amounts included in the stated
redemption price of the Pay-Through Security, over the adjusted issue price
of the Pay-Through Security at the beginning of the accrual period. The
present value of the remaining payments is to be determined on the basis of
three factors: (i) the original yield to maturity of the Pay-Through
Security (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period), (ii)
events which have occurred before the end of the accrual period and (iii) the
assumption that the remaining payments will be made in accordance with the
original Prepayment Assumption. The effect of this method is to increase the
portions of OID required to be included in income by a holder to take into
account prepayments with respect to the Loans at a rate that exceeds the
Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of original issue discount required to be included in income by
a holder of a Pay-Through Security to take into account prepayments with
respect to the Loans at a rate that is slower than the Prepayment
Assumption. Although original issue discount will be reported to
holders of Pay-Through Securities based on the Prepayment Assumption, no
representation is made to holders that Loans will be prepaid at that rate or
at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that
it believes to be appropriate, to take account of realized losses on the
Loans, although the OID Regulations do not provide for such adjustments. If
the Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the
related Prospectus Supplement, the Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but such a holder who purchases such Debt Security for
an amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
holders will be required to report income with respect to the related
Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Loans, except possibly to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a holder of such a Security in any period could significantly
exceed the amount of cash distributed to such holder in that period. The
holder will eventually be allowed a loss (or will be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is deduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own
tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities
(as defined under "--Tax Status as a Grantor Trust; General" herein) the
payments on which consist solely or primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC or on Loans
underlying Pass-Through Securities ("Interest Weighted Securities"). The
Issuer intends to take the position that all of the income derived from an
Interest Weighted Security should be treated as OID and that the amount and
rate of accrual of such OID should be calculated by treating the Interest
Weighted Security as a Compound Interest Security. However, in the case of
Interest Weighted Securities that are entitled to some payments of principal
and that are Regular Interest Securities the Internal Revenue Service could
assert that income derived from an Interest Weighted Security should be
calculated as if the Security were a security purchased at a premium equal
to the excess of the price paid by such holder for such Security over its
stated principal amount, if any. Under this approach, a holder would be
entitled to amortize such premium only if it has in effect an election under
Section 171 of the Code with respect to all taxable debt instruments held by
such holder, as described below. Alternatively, the Internal Revenue Service
could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. Such treatment may
be more likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "--Tax Status as a Grantor Trust--
Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i)
the yield to maturity of such Debt Securities and (ii) in the case of
Pay-Through Securities, the present value of all payments remaining to be
made on such Debt Securities, should be calculated as if the interest index
remained at its value as of the issue date of such Securities. Because the
proper method of adjusting accruals of OID on a variable rate Debt Security
is uncertain, holders of variable rate Debt Securities should consult their
own tax advisers regarding the appropriate treatment of such Securities for
federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of Sections 1276-1278
of the Code. A Holder that acquires a Debt Security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of
the principal amount of the Debt Security over the purchaser's purchase
price) will be required to include accrued market discount in income as
ordinary income in each month, but limited to an amount not exceeding the
principal payments on the Debt Security received in that month and, if the
Securities are sold, the gain realized. Such market discount would accrue
in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either
(i) on the basis of a constant yield (in the case of a Pay-Through Security,
taking into account a prepayment assumption) or (ii) in the ratio of (a) in
the case of Securities (or in the case of a Pass-Through Security, as set
forth below, the Loans underlying such Security) not originally issued with
original issue discount, stated interest payable in the relevant period to
total stated interest remaining to be paid at the beginning of the period or
(b) in the case of Securities (or, in the case of a Pass-Through Security,
as described below, the Loans underlying such Security) originally issued at
a discount, OID in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
underlying Loans) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in
which such interest expense was incurred. In general, the deferred portion
of any interest expense will be deductible when such market discount is
included in income, including upon the sale, disposition, or repayment of the
Security (or in the case of a Pass-Through Security, an underlying Loan).
A holder may elect to include market discount in income currently as it
accrues, on all market discount obligations acquired by such holder during
the taxable year such election is made and thereafter, in which case the
interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium,
which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
Although no regulations addressing the computation of premium accrual on
securities similar to the Securities have been issued, the legislative
history of the 1986 Act indicates that premium is to be accrued in the same
manner as market discount. Accordingly, it appears that the accrual of
premium on a class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such class. If a holder makes an
election to amortize premium on a Debt Security, such election will apply to
all taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to
accrue all interest, discount (including de minimis market or original issue
discount) and premium in income as interest, based on a constant yield method
for Debt Securities acquired on or after April 4, 1994. If such an election
were to be made with respect to a Debt Security with market discount, the
holder of the Debt Security would be deemed to have made an election to
include in income currently market discount with respect to all other debt
instruments having market discount that such holder of the Debt Security
acquires during the year of the election or thereafter. Similarly, a holder
of a Debt Security that makes this election for a Debt Security that is
acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such holder owns or acquires. The election to accrue interest,
discount and premium on a constant yield method with respect to a Debt
Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as
all of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the
opinion of Tax Counsel (i) Securities held by a mutual savings bank or
domestic building and loan association will represent interests in
"qualifying real property loans" within the meaning of Code Section 593(d)
(assuming that at least 95% of the REMIC's assets are "qualifying real
property loans"); (ii) Securities held by a domestic building and loan
association will constitute "a regular or a residual interest in a REMIC"
within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at least
95% of the REMIC's assets consist of cash, government securities, "loans
secured by an interest in real property," and other types of assets described
in Code Section 7701(a)(19)(C)); and (iii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Code Section 856(c)(6)(B), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section
856(c)(3)(B) (assuming, for both purposes, that at least 95% of the REMIC's
assets are qualifying assets). If less than 95% of the REMIC's assets
consist of assets described in (i), (ii) or (iii) above, then a Security will
qualify for the tax treatment described in (i), (ii) or (iii) in the
proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses
of a REMIC will be taken into account by holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses
will be allocated, under Treasury regulations, among the holders of the
Regular Interest Securities and the holders of the Residual Interest
Securities on a daily basis in proportion to the relative amounts of income
accruing to each holder on that day. In the case of a holder of a Regular
Interest Security who is an individual or a "pass-through interest holder"
(including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder,
exceed 2% of such Holder's adjusted gross income. In addition, for taxable
years beginning after December 31, 1990, the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted
gross income exceeds the applicable amount (which amount will be adjusted for
inflation for taxable years beginning after 1990) will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable
for such taxable year. The reduction or disallowance of this deduction may
have a significant impact on the yield of the Regular Interest Security to
such a holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is
similar to such a trust and which is structured with the principal purpose
of avoiding the single class REMIC rules. Unless otherwise specified in the
related Prospectus Supplement, the expenses of the REMIC will be allocated
to holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with
certain adjustments. In general, the taxable income or net loss will be the
difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any original issue discount or market discount
on loans and other assets, and (ii) deductions, including stated interest and
original issue discount accrued on Regular Interest Securities, amortization
of any premium with respect to Loans, and servicing fees and other expenses
of the REMIC. A holder of a Residual Interest Security that is an individual
or a "pass-through interest holder" (including certain pass-through entities,
but not including real estate investment trusts) will be unable to deduct
servicing fees payable on the loans or other administrative expenses of the
REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such holder's other miscellaneous itemized deductions for
that year, do not exceed two percent of such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). That aggregate basis will be allocated among the assets of the
REMIC in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through
Securities accrue original issue discount (i.e., under the constant yield
method taking into account the Prepayment Assumption). The REMIC will deduct
OID on the Regular Interest Securities in the same manner that the holders
of the Regular Interest Securities include such discount in income, but
without regard to the de minimis rules. See "Taxation of Debt Securities"
above. However, a REMIC that acquires loans at a market discount must
include such market discount in income currently, as it accrues, on a
constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the
life of the loans (taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding
recovery of premium attributable to loans originated on or before such date,
it is possible that such premium may be recovered in proportion to payments
of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In
general, prohibited transactions include: (i) subject to limited exceptions,
the sale or other disposition of any qualified mortgage transferred to the
REMIC; (ii) subject to a limited exception, the sale or other disposition of
a cash flow investment; (iii) the receipt of any income from assets not
permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt
of any fees or other compensation for services rendered by the REMIC. It is
anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition,
subject to a number of exceptions, a tax is imposed at the rate of 100%
on amounts contributed to a REMIC after the close of the
three-month period beginning on the Startup Day. The holders of Residual
Interest Securities will generally be responsible for the payment of any such
taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will
be allocated pro rata to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the holder of a Certificate representing
a residual interest (a "Residual Interest Security") will take into account
the "daily portion" of the taxable income or net loss of the REMIC for each
day during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on
such day) of the Residual Interest Securities in proportion to their
respective holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest
Security must report its proportionate share of the taxable income of the
REMIC whether or not it receives cash distributions from the REMIC
attributable to such income or loss. The reporting of taxable income without
corresponding distributions could occur, for example, in certain REMIC issues
in which the loans held by the REMIC were issued or acquired at a discount,
since mortgage prepayments cause recognition of discount income, while the
corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC Regular Interests issued without any
discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable
income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond
or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to
the holder's adjusted basis at the end of the calendar quarter in which such
loss arises. A holder's basis in a Residual Interest Security will initially
equal such holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased
(but not below zero) by the amount of distributions made and the amount of
the REMIC's net loss allocated to the holder. Any disallowed loss may be
carried forward indefinitely, but may be used only to offset income of the
REMIC generated by the same REMIC. The ability of holders of Residual
Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which such holders should consult their tax
advisers.
Distributions. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result
of prepayments) will generally not result in any additional taxable income
or loss to a holder of a Residual Interest Security. If the amount of such
payment exceeds a holder's adjusted basis in the Residual Interest Security,
however, the holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the
amount realized and such holder's adjusted basis in the Residual Interest
Security at the time of such sale or exchange. Except to the extent provided
in regulations, which have not yet been issued, any loss upon disposition of
a Residual Interest Security will be disallowed if the selling holder
acquires any residual interest in a REMIC or similar mortgage pool within six
months before or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a holder of a Residual Interest Security consisting
of "excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such holder's federal income tax return.
An exception applies to organizations to which Code Section 593 applies
(generally, certain thrift institutions); however, such exception will not
apply if the aggregate value of the Residual Interest Securities is not
considered to be "significant," as described below. Further, if
the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by
Code Section 511, such holder's excess inclusion income will be treated
as unrelated business taxable income of such holder. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust, a
regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity)
would be treated as excess inclusion income. If a Residual Security is owned
by a foreign person excess inclusion income is subject to tax at a rate of
30% which may not be reduced by treaty, is not eligible for treatment as
"portfolio interest" and is subject to certain additional limitations. See
"Tax Treatment of Foreign Investors." Regulations provide that a Residual
Interest Security has significant value only if (i) the aggregate issue price
of the Residual Interest Security is at least 2% of the aggregate of the
issue prices of all Regular Interest Securities and Residual Interest
Securities in the REMIC and (ii) the anticipated weighted average life of the
Residual Interest Securities is at least 20% of the weighted average life of
the REMIC.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period
allocable to a Residual Interest Security, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a Residual Interest at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a holder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable
arrangements must be made to prevent the ownership of a REMIC residual
interest by any "Disqualified Organization." Disqualified Organizations
include the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity
exempt from the tax imposed by Sections 1-1399 of the Code, if such entity
is not subject to tax on its unrelated business income. Accordingly, the
applicable Pooling and Servicing Agreement will prohibit Disqualified
Organizations from owning a Residual Interest Security. In addition, no
transfer of a Residual Interest Security will be permitted unless the
proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization
nor an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a
Disqualified Organization holds an interest in a pass-through entity after
March 31, 1988 (including, among others, a partnership, trust, real estate
investment trust, regulated investment company, or any person holding as
nominee), that owns a Residual Interest Security, the pass-through entity
will be required to pay an annual tax on its allocable share of the excess
inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is
a "noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. If a transfer of a Residual
Interest is disregarded, the transferor would be liable for any Federal
income tax imposed upon taxable income derived by the transferee from the
REMIC. The REMIC Regulations provide no guidance as to how to determine if
a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain
transfers of residual interests by foreign persons to United States persons.
See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently released proposed
regulations (the "Proposed Mark-to-Market Regulations") which provide that
a REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. The Proposed Mark-to-Market Regulations change the
temporary regulations discussed below which allowed a REMIC Residual Interest
Security to be marked-to-market provided that it was not a "negative value"
residual interest and did not have the same economic effect as a "negative
value" residual interest. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The temporary regulations
released on December 28, 1993 (the "Temporary Mark to Market Regulations")
provided that for purposes of this mark-to-market requirement, a "negative
value" REMIC residual interest is not treated as a security and thus may not
be marked to market. In addition, a dealer was not required to identify such
REMIC Residual Interest Security as held for investment. In general, a REMIC
Residual Interest Security has negative value if, as of the date a taxpayer
acquires the REMIC Residual Interest Security, the present value of the tax
liabilities associated with holding the REMIC Residual Interest Security
exceeds the sum of (i) the present value of the expected future distributions
on the REMIC Residual Interest Security, and (ii) the present value of the
anticipated tax savings associated with holding the REMIC Residual Interest
Security as the REMIC generates losses. The amounts and present values of
the anticipated tax liabilities, expected future distributions and
anticipated tax savings were all to be determined using (i) the prepayment
and reinvestment assumptions adopted under Section 1272(a)(6), or that would
have been adopted had the REMIC's regular interests been issued with OID,
(ii) any required or permitted clean up calls, or required qualified
liquidation provided for in the REMIC's organizational documents and (iii)
a discount rate equal to the "applicable Federal rate" (as specified in
Section 1274(d)(1)) that would have applied to a debt instrument issued on
the date of acquisition of the REMIC Residual Interest Security.
Furthermore, the Temporary Mark to Market Regulations provided the IRS with
the authority to treat any REMIC Residual Interest Security having
substantially the same economic effect as a "negative value" residual
interest. The IRS could issue subsequent regulations, which could apply
retroactively, providing additional or different requirements with respect
to such deemed negative value residual interests. Prospective purchasers of
a REMIC Residual Interest Security should consult their tax advisors
regarding the possible application of the Proposed Mark to Market
Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS
in a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to
a Series of Securities will be classified for federal income tax purposes as
a grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not
as an association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of
the principal and interest payments on the Loans. In such circumstances, a
holder will be considered to have purchased a pro rata undivided interest in
each of the Loans. In other cases ("Stripped Securities"), sale of the
Securities will produce a separation in the ownership of all or a portion of
the principal payments from all or a portion of the interest payments on the
Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "Servicing Fee")), at the same time and in
the same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and
paid directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the
case of Stripped Securities, such income will consist of a pro rata share of
the income derived from each stripped bond or stripped coupon in which the
holder owns an interest. The holder of a Security will generally be entitled
to deduct such Servicing Fees under Section 162 or Section 212 of the Code
to the extent that such Servicing Fees represent "reasonable" compensation
for the services rendered by the Trustee and the Servicer (or third parties
that are compensated for the performance of services). In the case of a
noncorporate holder, however, Servicing Fees (to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such holder's regular tax liability only to the
extent that such fees, when added to other miscellaneous itemized
deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative
minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount (which amount will be adjusted for inflation
in taxable years beginning after 1990) will be reduced by the lesser of (i)
3% of the excess of adjusted gross income over the applicable amount or (ii)
80% of the amount of itemized deductions otherwise allowable for such taxable
year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values,
determined as of the time of purchase of the Securities. In the typical
case, the Trustee (to the extent necessary to fulfill its reporting
obligations) will treat each Loan as having a fair market value proportional
to the share of the aggregate principal balances of all of the Loans that it
represents, since the Securities, unless otherwise specified in the related
Prospectus Supplement, will have a relatively uniform interest rate and other
common characteristics. To the extent that the portion of the purchase price
of a Pass-Through Security allocated to a Loan (other than to a right to
receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance
of the Loan allocable to the Security, the interest in the Loan allocable to
the Pass-Through Security will be deemed to have been acquired at a discount
or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a
Security will be required to report as interest income in each taxable year
its share of the amount of OID that accrues during that year in the manner
described above. OID with respect to a Loan could arise, for example, by
virtue of the financing of points by the originator of the Loan, or by virtue
of the charging of points by the originator of the Loan in an amount greater
than a statutory de minimis exception, in circumstances under which the
points are not currently deductible pursuant to applicable Code provisions.
Any market discount or premium on a Loan will be includible in income,
generally in the manner described above, except that in the case of Pass-
Through Securities, market discount is calculated with respect to the Loans
underlying the Certificate, rather than with respect to the Security. A
holder that acquires an interest in a Loan originated after July 18, 1984
with more than a de minimis amount of market discount (generally, the excess
of the principal amount of the Loan over the purchaser's allocable purchase
price) will be required to include accrued market discount in income in the
manner set forth above. See "--Taxation of Debt Securities; Market Discount"
and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to
be included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to Section 1286 of
the Code, the separation of ownership of the right to receive some or all of
the interest payments on an obligation from ownership of the right to receive
some or all of the principal payments results in the creation of "stripped
bonds" with respect to principal payments and "stripped coupons" with respect
to interest payments. Section 1286 of the Code applies the OID rules to
stripped bonds and stripped coupons. For purposes of computing original
issue discount, a stripped bond or a stripped coupon is treated as a debt
instrument issued on the date that such stripped interest is purchased with
an issue price equal to its purchase price or, if more than one stripped
interest is purchased, the ratable share of the purchase price allocable to
such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to
apply to Stripped Securities and other Pass-Through Securities. Under the
method described above for Pay-Through Securities (the "Cash Flow Bond
Method"), a prepayment assumption is used and periodic recalculations are
made which take into account with respect to each accrual period the effect
of prepayments during such period. However, the 1986 Act does not, absent
Treasury regulations, appear specifically to cover instruments such as the
Stripped Securities which technically represent ownership interests in the
underlying Loans, rather than being debt instruments "secured by" those
loans. Nevertheless, it is believed that the Cash Flow Bond Method is a
reasonable method of reporting income for such Securities, and it is
expected that OID will be reported on that basis unless otherwise
specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat
all payments to be received by a holder with respect to
the underlying Loans as payments on a single installment obligation. The IRS
could, however, assert that original issue discount must be calculated
separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a holder's recognition of income. If, however, the Loans prepay
at a rate slower than the Prepayment Assumption, in some circumstances the
use of this method may decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income
to Security holders as OID, in the manner described above for Interest
Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest
in Loans and an installment obligation consisting of stripped principal
payments; (ii) the non-Interest Weighted Securities are subject to the
contingent payment provisions of the Proposed Regulations; or (iii) each
Interest Weighted Stripped Security is composed of an unstripped undivided
ownership interest in Loans and an installment obligation consisting of
stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character
of the Securities, for federal income tax purposes, will be the same as the
Loans. The IRS could take the position that the Loans character is not
carried over to the Securities in such circumstances. Pass-Through
Securities will be, and, although the matter is not free from doubt,
Stripped Securities should be considered to represent
"qualifying real property loans" within the meaning of Section
593(d) of the Code, "real estate assets" within the meaning of Section
856(c)(6)(B) of the Code, and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest
income attributable to the Securities should be considered to represent
"interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code. Reserves or funds underlying the Securities may cause a proportionate
reduction in the above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, in the opinion of Tax Counsel, a holder's tax
basis in its Security is the price such holder pays for a Security, plus
amounts of original issue or market discount included in income and reduced
by any payments received (other than qualified stated interest payments) and
any amortized premium. Gain or loss recognized on a sale, exchange, or
redemption of a Security, measured by the difference between the amount
realized and the Security's basis as so adjusted, will generally be capital
gain or loss, assuming that the Security is held as a capital asset. In the
case of a Security held by a bank, thrift, or similar institution described
in Section 582 of the Code, however, gain or loss realized on the sale or
exchange of a Regular Interest Security will be taxable as ordinary income
or loss. In addition, gain from the disposition of a Regular Interest
Security that might otherwise be capital gain will be treated as ordinary
income to the extent of the excess, if any, of (i) the amount that would have
been includible in the holder's income if the yield on such Regular Interest
Security had equaled 110% of the applicable federal rate as of the beginning
of such holder's holding period, over the amount of ordinary income actually
recognized by the holder with respect to such Regular Interest Security. For
taxable years beginning after December 31, 1993, the maximum tax rate on
ordinary income for individual taxpayers is 39.6% and the maximum tax rate
on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than
a holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to
distributions or the proceeds of a sale of certificates to or
through brokers that represent interest or original issue discount
on the Securities. This withholding generally applies if the holder
of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails
to provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its
correct number and that the holder is not subject to backup withholding.
Backup withholding will not apply, however, with respect to certain payments
made to holders, including payments to certain exempt recipients (such as
exempt organizations) and to certain Nonresidents (as defined below).
Holders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining the
exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the
Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including
OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted
in the United States by a nonresident alien individual, foreign partnership
or foreign corporation ("Nonresidents"), in the opinion of Tax Counsel, such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the
capital or profits interest in the issuer, or (ii) the recipient is a
controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of obligations to
withhold tax from such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate (unless such rate were reduced
or eliminated by an applicable tax treaty) on, among other things, interest
and other fixed or determinable, annual or periodic income paid to
Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to
the extent that the Loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States
business conducted by the holder. They will, however,
generally be subject to the regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess
inclusion income, a holder of a Residual Interest Security will not be
entitled to an exemption from or reduction of the 30% (or lower treaty rate)
withholding tax rule. If the payments are subject to United States
withholding tax, they generally will be taken into account for withholding
tax purposes only when paid or distributed (or when the Residual Interest
Security is disposed of). The Treasury has statutory authority, however, to
promulgate regulations which would require such amounts to be taken into
account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution
of cash in the case of Residual Interest Securities that do not have
significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest
Security to a Nonresident will be disregarded for all Federal tax purposes.
A Residual Interest Security has tax avoidance potential unless, at the time
of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal
at least 30% of each excess inclusion, and that such amounts will be
distributed at or after the time at which the excess inclusions accrue and
not later than the calendar year following the calendar year of accrual. If
a Nonresident transfers a Residual Interest Security to a United States
person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and
the transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. See "--
Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that (1) the
Trust Fund will not have certain characteristics necessary for a business
trust to be classified as an association taxable as a corporation and (2) the
nature of the income of the Trust Fund will exempt it from the rule that
certain publicly traded partnerships are taxable as corporations
or the issuance of the Certificates has been structured as a private
placement under an IRS safe harbor, so that the Trust Fund will not
be characterized as a publicly traded partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available
to make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes
is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue
price) does not exceed a de minimis amount (i.e., 0.25% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID regulations. If these conditions are not
satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the applicable
Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except
as discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon
will be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's method of tax accounting. Under
the OID regulations, a holder of a Note issued with a de minimis amount of
OID must include such OID in income, on a pro rata basis, as principal
payments are made on the Note. It is believed that any prepayment premium
paid as a result of a mandatory redemption will be taxable as contingent
interest when it becomes fixed and unconditionally payable. A purchaser who
buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject
to special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a
cash basis holder of a Short-Term Note reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Note
until the taxable disposition of the Short-Term Note. A cash basis taxpayer
may elect under Section 1281 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note
to a particular Noteholder will equal the holder's cost for the Note,
increased by any market discount, acquisition discount, OID and gain
previously included by such Noteholder in income with respect to the Note and
decreased by the amount of bond premium (if any) previously amortized and by
the amount of principal payments previously received by such Noteholder with
respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation
or other non-United States person (a "foreign person") generally will be
considered "portfolio interest", and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or the
Seller (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or
the Seller is a "related person" within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an
appropriate statement (on Form W-8 or a similar form), signed under penalties
of perjury, certifying that the beneficial owner of the Note is a foreign
person and providing the foreign person's name and address. If a Note is
held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by
the foreign person that owns the Note. If such interest is not portfolio
interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will
be required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust
Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized
as equity). Alternatively, and most likely in the view of Tax Counsel, the
Trust Fund might be treated as a publicly traded partnership that would not
be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such
a publicly traded partnership could have adverse tax consequences to
certain holders. For example, income to certain tax-exempt entities
(including pension funds) would be "unrelated business taxable income",
income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct
their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust Fund as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However,
the proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions
are not satisfied with respect to any given Series of Certificates,
additional tax considerations with respect to such Certificates will be
disclosed in the applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned
on the Loans (including appropriate adjustments for market discount, OID
and bond premium) and any gain upon collection or disposition of Loans. The
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations
and the partnership agreement (here, the Trust Agreement and related
documents). The Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for
each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to
any excess of the principal amount of the Certificates over their initial
issue price (iii) prepayment premium payable to the Certificateholders for
such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the
Depositor. Based on the economic arrangement of the parties, in the opinion
of Tax Counsel, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can
be given that the IRS would not require a greater amount of income to be
allocated to Certificateholders. Moreover, in the opinion of Tax Counsel,
even under the foregoing method of allocation, Certificateholders may be
allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders
will in effect be required to report income from the Certificates on the
accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay
such taxes. In addition, because tax allocations and tax reporting will be
done on a uniform basis for all Certificateholders but Certificateholders may
be purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable
income that is greater or less than the amount reported to them by the Trust
Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to
a Certificateholder that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to such
a holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might
be disallowed to the individual in whole or in part and might result in such
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Loan, the Trust
Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase.
If so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently
as it accrues over the life of the Loans or to offset any such premium
against interest income on the Loans. As indicated above, a portion of such
market discount income or premium deduction may be allocated to
Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section
708 of the Code, the Trust Fund will be deemed to terminate for federal
income tax purposes if 50% or more of the capital and profits interests in
the Trust Fund are sold or exchanged within a 12-month period. If such a
termination occurs, the Trust Fund will be considered to distribute its
assets to the partners, who would then be treated as recontributing those
assets to the Trust Fund as a new partnership. The Trust Fund will not
comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust Fund may be subject
to certain tax penalties and may incur additional expenses if it is required
to comply with those requirements. Furthermore, the Trust Fund might not be
able to comply due to lack of data.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an
amount equal to the difference between the amount realized and the seller's
tax basis in the Certificates sold. A Certificateholder's tax basis in a
Certificate will generally equal the holder's cost increased by the holder's
share of Trust Fund income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both
the tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Receivables would generally
be treated as ordinary income to the holder and would give rise to special
tax reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus,
to avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day of such month. As a result,
a holder purchasing Certificates may be allocated tax items (which will
affect its tax liability and tax basis) attributable to periods before the
actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have
a higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to
reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the
administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Trust Fund will not make such election. As a result,
Certificateholders might be allocated a greater or lesser amount of Trust
Fund income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and
the fiscal year of the Trust will be the calendar year. The Trustee will
file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust Fund and will report each Certificateholder's
allocable share of items of Trust Fund income and expense to holders and the
IRS on Schedule K-1. The Trust Fund will provide the Schedule K-l
information to nominees that fail to provide the Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies .
Under Section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required
to furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A
of the Exchange Act is not required to furnish any such information statement
to the Trust Fund. The information referred to above for any calendar year
must be furnished to the Trust Fund on or before the following January 31.
Nominees, brokers and financial institutions that fail to provide the Trust
Fund with the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for
representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute
of limitations for partnership items does not expire before three years after
the date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the Trust Fund by the
appropriate taxing authorities could result in an adjustment of the returns
of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Trust Fund. An adjustment could also result
in an audit of a Certificateholder's returns and adjustments of items not
related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust Fund would be engaged in a trade or business in
the United States for such purposes, the Trust Fund will withhold as if it
were so engaged in order to protect the Trust Fund from possible adverse
consequences of a failure to withhold. The Trust Fund expects to withhold
on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust to change its
withholding procedures. In determining a holder's withholding status, the
Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust on Form W-8 in order to assure appropriate crediting
of the taxes withheld. A foreign holder generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust
Fund taking the position that no taxes were due because the Trust Fund was
not engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments
are properly characterized as guaranteed payments, then the interest
will not be considered "portfolio interest." As a result, Certificateholders
will be subject to United States federal income tax and withholding tax at
a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a foreign holder would only be entitled to claim a
refund for that portion of the taxes in excess of the taxes that should be
withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law
may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences
of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to
ERISA and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Generally, ERISA applies to investments made by
Plans. Among other things, ERISA requires that the assets of Plans be held
in trust and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions
not here relevant). Certain employee benefit plans, such as governmental
plans (as defined in ERISA Section 3(32)) and, if no election has been made
under Section 410(d) of the Code, church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA requirements. Accordingly,
assets of such plans may be invested in Securities without regard to
the ERISA considerations described above and below, subject to the
provisions of applicable state law. Any such plan which is qualified and
exempt from taxation under Code Sections 401(a) and 501(a), however, is
subject to the prohibited transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain
other entities in which a Plan makes an "equity" investment could be deemed
for purposes of ERISA to be assets of the investing Plan in certain
circumstances. However, the regulation provides that, generally, the assets
of a corporation or partnership in which a Plan invests will not be deemed
for purposes of ERISA to be assets of such Plan if the equity interest
acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in the Labor Reg. Section 2510.3-101,
is a security that is widely held, freely transferable and registered under
the Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because
the Loans may be deemed Plan assets of each Plan that purchases Securities,
an investment in the Securities by a Plan might be a prohibited transaction
under ERISA Sections 406 and 407 and subject to an excise tax under Code
Section 4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation
of residential mortgage pool investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties
in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage
pool pass-through certificates representing an interest in such mortgage
pools by Plans. If the general conditions (discussed below) of PTE 83-1
are satisfied, investments by a Plan in Securities that represent
interests in a Pool consisting of Loans ("Single Family Securities")
will be exempt from the prohibitions of ERISA Sections 406(a) and 407
(relating generally to transactions with Parties in Interest
who are not fiduciaries) if the Plan purchases the Single Family Securities
at no more than fair market value and will be exempt from the prohibitions
of ERISA Sections 406(b)(1) and (2) (relating generally to transactions with
fiduciaries) if, in addition, the purchase is approved by an independent
fiduciary, no sales commission is paid to the pool sponsor, the Plan does not
purchase more than 25% of all Single Family Securities, and at least 50% of
all Single Family Securities are purchased by persons independent of the pool
sponsor or pool trustee. PTE 83-1 does not provide an exemption for
transactions involving Subordinate Securities. Accordingly, unless otherwise
provided in the related Prospectus Supplement, no transfer of a Subordinate
Security or a Security which is not a Single Family Security may be made to
a Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The Depositor believes that, for purposes of
PTE 83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single class of
Securities; and (ii) Securities issued in a Series in which there is only one
class of Trust Securities; provided that the Securities in the case of clause
(i), or the Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments (greater
than 0%) and a specified percentage (greater than 0%) of future principal
payments on the Loans. It is not clear whether a class of Securities that
evidences the beneficial ownership in a Trust Fund divided into Loan groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a class of Securities entitled to receive payments of interest
and principal on the Loans only after payments to other classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions
in pass-through payments due to property damage or defaults in loan payments
in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal
balance of the largest covered pooled mortgage loan; (ii) the
existence of a pool trustee who is not an affiliate of the pool sponsor;
and (iii) a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not more than
adequate consideration for selling the mortgage loans plus reasonable
compensation for services provided by the pool sponsor to the Pool. The
Depositor believes that the first general condition referred to above will
be satisfied with respect to the Securities in a Series issued without a
subordination feature, or the Securities only in a Series issued with a
subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described herein (such subordination, pool insurance or
other form of credit enhancement being the system of insurance or other
protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the Loans or the principal balance of the
largest Loan. See "Description of the Securities" herein. In the absence
of a ruling that the system of insurance or other protection with respect to
a Series of Securities satisfies the first general condition referred to
above, there can be no assurance that these features will be so viewed by the
DOL. The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc.,
an individual exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374, 55 Fed. Reg. 36724) (the "Underwriter Exemption")
which applies to certain sales and servicing of "certificates" that are
obligations of a "trust" with respect to which Greenwich Capital Markets,
Inc. is the underwriter, manager or co-manager of an underwriting syndicate.
The Underwriter Exemption provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an
expanded definition of "certificate" which includes an interest which
entitles the holder to pass-through payments of principal, interest
and/or other payments. The Underwriter Exemption contains an
expanded definition of "trust" which permits the trust corpus to
consist of secured consumer receivables. The definition of "trust", however,
does not include any investment pool unless, inter alia, (i) the investment
pool consists only of assets of the type which have been included in other
investment pools, (ii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at
least one year prior to the Plan's acquisition of certificates pursuant to
the Underwriter Exemption, and (iii) certificates in such other investment
pools have been rated in one of the three highest generic rating categories
of the four credit rating agencies noted below. Generally, the Underwriter
Exemption holds that the acquisition of the certificates by a Plan must be
on terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with
an unrelated party. The Underwriter Exemption requires that the rights and
interests evidenced by the certificates not be "subordinated" to the rights
and interests evidenced by other certificates of the same trust. The
Underwriter Exemption requires that certificates acquired by a Plan have
received a rating at the time of their acquisition that is in one of the
three highest generic rating categories of Standard & Poor's Corporation,
Moody's Investors Service, Inc., Duff & Phelps Inc. or Fitch Investors
Service, Inc. The Underwriter Exemption specifies that the pool trustee must
not be an affiliate of the pool sponsor, nor an affiliate of the Underwriter,
the pool servicer, any obligor with respect to mortgage loans included in the
trust constituting more than five percent of the aggregate unamortized
principal balance of the assets in the trust, or any affiliate of such
entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the certificates must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission
under the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities that
qualify as "mortgage related securities" will be legal investments
for persons, trusts, corporations, partnerships, associations,
business trusts, and business entities (including depository
institutions, life insurance companies and pension funds) created pursuant
to or existing under the laws of the United States or of any state (including
the District of Columbia and Puerto Rico) whose authorized investments are
subject to state regulations to the same extent as, under applicable law,
obligations issued by or guaranteed as to principal and interest by the
United States or any such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities", securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein.
Approximately twenty-one states adopted such legislation prior to the October
4, 1991 deadline. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in securities, or require the sale or
other disposition of securities, so long as such contractual commitment was
made or such securities were acquired prior to the enactment of such
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the
applicable federal authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration ("NCUA")
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No.
108, which includes guidelines to assist federal credit unions in making
investment decisions for mortgage related securities and the NCUA's
regulation "Investment and Deposit Activities" (12 C.F.R. Part 703), which
sets forth certain restrictions on investment by federal credit unions in
mortgage related securities.
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
the Securities Activities (to the extent adopted by their respective
regulators) (the "Policy Statement") setting forth, in relevant part, certain
securities trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on) investing in
mortgage derivative products, including "mortgage related securities",
which are "high-risk mortgage securities" as defined in the Policy Statement.
According to the Policy Statement such "high-risk mortgage securities"
include securities such as Securities not entitled to distributions allocated
to principal or interest, or Subordinated Securities. Under the Policy
Statement, it is the responsibility of each depository institution to
determine, prior to purchase (and at stated intervals thereafter), whether
a particular mortgage derivative product is a "high-risk mortgage security",
and whether the purchase (or retention) of such a product would be consistent
with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions which may restrict or prohibit
investment in securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to
purchase Securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Securities constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices to be determined at the
time of sale or at the time of commitment therefor. If so specified in the
related Prospectus Supplement, the Securities will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Greenwich Capital Markets, Inc. ("GCM") acting as
underwriter with other underwriters, if any, named therein. In such event,
the related Prospectus Supplement may also specify that the underwriters will
not be obligated to pay for any Securities agreed to be purchased by
purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of the Securities, underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the
form of discounts, concessions or commissions. The related Prospectus
Supplement will describe any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased
or agreed to purchase. If GCM acts as agent in the sale of
Securities, GCM will receive a selling commission with respect to each
Series of Securities, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the related Trust Fund
Assets as of the Cut-off Date. The exact percentage for each Series of
Securities will be disclosed in the related Prospectus Supplement. To the
extent that GCM elects to purchase Securities as principal, GCM may realize
losses or profits based upon the difference between its purchase price and
the sales price. The Prospectus Supplement with respect to any Series
offered other than through underwriters will contain information regarding
the nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such Series.
The Depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933,
or will contribute to payments GCM and any underwriters may be required to
make in respect thereof.
In the ordinary course of business, GCM and the Depositor may engage in
various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's loans or private
asset backed securities, pending the sale of such loans or private asset
backed securities, or interests therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer
or sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, One World Trade Center, New York,
New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect
to such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the related Loans will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Series of
Securities. Such rating should not be deemed a recommendation to purchase,
hold or sell Securities, inasmuch as it does not address market price or
suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor purchasing a Security at a significant premium might fail
to recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn among other reasons, because of an adverse change in the
financial or other condition of a credit enhancement provider or a change in
the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of mortgage loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of mortgage loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the
Loans in a particular Trust Fund and any secondary financing
on the related Properties become equal to or greater than
the value of the Properties, the rates of delinquencies, foreclosures
and losses could be higher than those now generally experienced in the
mortgage lending industry. In additional, adverse economic conditions (which
may or may not affect real property values) may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Loans and,
accordingly, the rates of delinquencies, foreclosures and losses with respect
to any Trust Fund. To the extent that such losses are not covered by credit
enhancement, such losses will be borne, at least in part, by the holders of
one or more classes of the Securities of the related Series.
